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Book Review: Conceptualizing Capitalism:Institutions, Evolution, Future by Geoffrey M.Hodgson

In Conceptualizing Capitalism: Institutions, Evolution,Future, Geoffrey M. Hodgson positions legal institutionalism atthe heart of his analysis of capitalism. By exploring theconstitutive role that law and the State have played in thehistorical emergence of capitalist systems, Hodgson addresses anumber of contemporary issues such as inequality. Although hewould have welcomed further analysis of the political economyaspects of legal institutionalism, Mehmet Kerem Coban praisesthe book for its rich traversal of capitalism in its myriaddimensions.

Conceptualizing Capitalism: Institutions, Evolution, Future.Geoffrey M. Hodgson. University of Chicago Press. 2015.

When someone mentions the concept ‘capitalism’, what do youthink? Is it only made up of markets or the private ownership ofthe means of production? Is it a system where state involvementis preferably less? Where do you locate labour in a capitalistsystem? Is capitalism only based on individual motivation, or isthere a role for social relations and social hierarchies? What isthe role of legal infrastructure and the State in a capitalist

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These are the overarchingquestions that readers will findanswers to in Geoffrey M.Hodgson’s ConceptualizingCapitalism: Institutions, Evolution,Future. The book visits almost alldimensions of capitalism as wemay think of it from employment,labour, firms, finance and propertyto the aspects that arguablyconstitute the core of this ground­breaking book: the role of the State and law.

To start with the concept of capitalism Hodgson presents, he firstvisits Karl Marx’s and Joseph Schumpeter’s definitions. ForHodgson, both agree on certain characteristics of capitalism.First, a legal system should support individual freedom andprovide free rights to own, sell and alienate private property.Second, there should be commodity exchange and markets thatdepend on the social institution of money. Third, privateownership of the means of production by firms that are seekingprofit in the conduct of business is required. Fourth, the majorityof production should be outside the home and the family. SinceMarx is labour­ and employment­oriented in his analysis ofcapitalism, Hodgson borrows wage labour and employmentcontracts from him. From Schumpeter, he takes the necessarycondition of finance and financial institutions that enable theallocation of credit and the circulation of money in the economy.Consequently, for Hodgson capitalism relies on sixcharacteristics: a legal system allowing individual rights andfreedom, widespread commodity exchange and markets wheremoney is involved in exchange, private ownership of the meansof production, production organised outside the household, wagelabour and employment contracts and a developed financialsystem (259).

Perhaps the most important achievement of the book is that

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Hodgson highlights the role of law and the State in the properfunctioning of capitalism as he introduces legal institutionalism,which locates legal infrastructure at the core of the capitalistsystem. In order to have a proper functioning capitalist system,we need a solid legal infrastructure, which depends on legislatorsand the State as the overarching institution that is capable ofpassing laws and implementing them. In comparison to otherinstitutionalisms that locate path dependency (historicalinstitutionalism), rational choice and utility­maximisation (rationalchoice institutionalism) or social and/or organisational dimensions(social institutionalism) at the core of their analyses, Hodgsonargues that the legal dimension should be central since legalinfrastructure determines how firms and individuals can operatein the market and how we exchange property rights as lawattributes the eligibility to own certain types of properties.

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While Hodgson has a legal­orientated understanding ofinstitutional analysis, he also observes that legal systems do notemerge by themselves; rather, they are the product of previousdisputes and how they were resolved. As these are resolved,Hodgson underlines the distributional effects and powerasymmetries that law creates or is itself influenced by. Here, itwould be much better for the reader to gain familiarity withHodgson’s reflections on the origins of legal systems. AlthoughHodgson has valid reason to argue that we should question as towho sets the rules and whose interests and preferences aretaken into consideration as the legal system evolves, we are leftwith more questions than answers in this regard.

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Hodgson provides a nuanced approach to capitalism as aparticular economic system that is neither exploitational per senor a universal solution to every problem insofar as thecorrectible power of markets and private ownership areconsidered. He rightly points out that the concept of capitalismhas been so extended that we now have notions of capitalsbesides capital in terms of money and physical assets. Hodgsonalso concentrates on today’s major social, economic and politicalchallenge: namely, inequality. For him, markets (i.e. capitalism)do not produce inequalities per se; rather, inequality is the resultof capital and what he calls differential collaterasability.

It is worth discussing the notion of differential collateralisability. While the rising level of inequalities is a well­known phenomenon,Hodgson provides another approach to make sense of inequalityand how to address it. Rather than conceive of the marketsystem as exploitational on its own, the ability to make use ofcollateral is what constitutes the difference between the capitalowner and the labourer. Whilst capital owners can enjoy thebenefit of returns from capital without their presence in theworkplace, the labourer cannot be separated from the work itself.As it is easier for the capital owner to enjoy those benefits, theycan also search for additional areas to invest in and make use ofmore capital by using their assets as collateral to obtain credit. Asthe labourer cannot detach themselves from the workplace, thisreduces the time to search for other sources of income.

In addition to this inability to separate the labourer from the workitself, because of the prohibition on slavery the labourer cannotpresent future earnings of physical or intellectual work ascollateral. Hodgson assumes that the labourer does not own anyother private property, except property to individuals’ own labour.Here, we should note that the problem of inequality presumablyhits the poorest segment of each society harder than others giventhe condition of no ownership of capital that could be alienated tomake use of that collateral. To address such concerns, Hodgsonoffers policies to fight the contemporary challenges capitalism isfacing (i.e. dynamism and the distribution of benefits), and brieflydiscusses the role of the welfare state, employee­ownership

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schemes and worker cooperatives.

The themes and concepts on which we have reflected here areonly the tip of the iceberg. The book is very rich in analysis ofwhat capital(ism) is. What Hodgson does not elaborate uponmuch are the political economy aspects of legal institutionalism.An understanding of the evolution of legal systems from politicaleconomy approaches is needed because the distributional effectsand the power of the law on the economy and individuals cannotbe well addressed if there is a lack of knowledge as to whoseinterests and preferences are more influential in the evolution oflegal systems.

Mehmet Kerem Coban is a PhD Candidate and Deputy Editor­in­Chief of the Asian Journal of Public Affairs at the Lee KuanYew School of Public Policy, National University of Singapore.His PhD thesis focuses on the political economy of financialregulation in emerging markets. He obtained his Master’s Degreein Development Studies at the Graduate Institute of Internationaland Development Studies, Geneva. His main research interestsare international political economy, the political economy ofdevelopment, financial liberalisation and regulation anddevelopment aid. Email: m.keremcoban[at]u.nus.edu.

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