Aristocracy and Hostage Capital

Understanding the pre-modern aristocracy

There’s a conventional narrative by which the pre-20th century aristocracy was the “old corruption” where civil and military positions were distributed inefficiently due to nepotism until the system was replaced by a professional civil service after more enlightened thinkers prevailed. Orwell writes in 1941 (emphasis mine):

For long past there had been in England an entirely functionless class, living on money that was invested they hardly knew where, the ‘idle rich’, the people whose photographs you can look at in the Tatler and the Bystander, always supposing that you want to. The existence of these people was by any standard unjustifiable. They were simply parasites, less useful to society than his fleas are to a dog.

But this misses a key point about the pre-industrial world: it was difficult to monitor performance or even measure things in general. A modern bureaucracy can track hours worked, tasks completed, goods received, and so on. Not so in the pre-industrial period, where everything had a large random component:

• In the age of sail, and especially before there were devices to accurately measure position at sea, a ship might arrive at its destination weeks off of schedule, or float away from a battle.

• Manufactured goods wouldn’t be precisely identical, or would be routinely damaged at sea, or lost to pirates or highway robbers.

• A region’s tax revenue could be low due to poor harvest, floods, etc.

So it was difficult to distinguish bad luck from bad faith: to verify if a tax collector reported all revenues, or if a naval captain made an effort to actually engage the enemy, or if a customs official inspected cargo honestly.

The solution was to create a class of aristocratic families who were wealthy enough to effectively post massive fidelity bonds that the economist Douglass Allen calls hostage capital—assets that would become worthless if they lost royal favor. (The rest of this post largely summarizes the linked paper.) By investing in hostage capital, aristocrats could be trusted to administer public offices faithfully. A lot of odd behavior is explained by aristocrats deliberately handicapping themselves by investing in capital that had no value for trade, farming, or industry. In England they typically

1. Built isolated country estates that couldn’t be sold, divided, or used productively.

2. Maintained expensive social obligations through parties, hunts, charity, and local governance.

3. Avoided socializing or marrying within the merchant or professional classes.

4. Gained classical educations or military training but avoided learning practical or commercial skills. The focus was also on social ties (Allen: “in the last half of the eighteenth century 72% of peerage children [in England] attended either Eton, Westminster, Winchester, or Harrow [high schools]”).

All of these increased the costs to an aristocrat who, being caught in dishonesty, suffered social ostracism or the loss of patronage positions. In exchange for investing this hostage capital, they would profit from the large returns to patronage appointments.

A newly wealthy merchant would thus have a choice: to continue to generate returns through his business ventures or to make a play for the aristocracy by marrying out of the merchant class, building a country seat with legal restrictions on the land, and making sure his children gained aristocratic educations while avoiding business connections or skills. That way, he and his descendants could ascend the ranks of the aristocracy over time.

The aristocratic system gradually dissolved over the 19th century in England because of the Industrial Revolution and its consequences:

1. The returns to commercial activity increased dramatically, making the opportunity costs of hostage capital too high for many would-be aristocrats. Orwell again: “After 1832 the old land-owning aristocracy steadily lost power, but instead of disappearing or becoming a fossil they simply intermarried with the merchants, manufacturers and financiers who had replaced them.”

2. It became easier to directly monitor public officials and measure performance, reducing the need for trust-based governance.

An interesting note is that in every century we see Chesterton’s Fence-style confusion about this system, whether from Orwell or Adam Smith (1776) or J.S. Mill (1865):

[Regarding legal restrictions aristocrats put on their estates] … nothing can be more completely absurd. They are founded upon the most absurd of all suppositions ... Compare the present condition of these estates with the possessions of the small proprietors in their neighbourhood, and you will require no other argument to convince you how unfavorable such extensive property is to improvement.
— Adam Smith, The Wealth of Nations (1776)

The truth is that any very general improvement of land by the landlords is hardly compatible with a law or custom of primogeniture. When the land goes wholly to the heir, it generally goes to him severed from the pecuniary resources which would enable him to improve it …
— J.S. Mill, Principles of Political Economy (1865)