Making the Market: Victorian Origins of Corporate Capitalism

Published by EH.NET (December 2010)

Paul Johnson, Making the Market: Victorian Origins of Corporate Capitalism. Cambridge: Cambridge University Press, 2010. x + 255 pp. $55 (hardcover), ISBN: 978-0-521-85783-3.

Reviewed for EH.Net by Robin Pearson, Department of History, University of Hull.

Does anyone really still believe in perfect competition and efficient markets as the apogee of modern capitalism? If there are some true believers, they should read this sparkling and incisive book by Paul Johnson, formerly of the London School of Economics, now Vice-Chancellor and President of La Trobe University, Melbourne. Johnson?s opening gambit is that we have relatively little understanding of how markets have been constructed, and thus, as in the financial crisis of 2008, we are surprised when they do not produce anticipated results. He sets out, in this work of ?synthesis, interpretation and speculation? (p. 22), to explore the processes by which the market was developed in Victorian England. The result is a study of the formal institutions of the market, but also of the market as a system of beliefs and norms of behavior.

The book is organized in three sections. Each chapter crackles with stories that are used to illustrate different aspects of market behavior and market perceptions. Part I looks at the interaction of working class individuals with the credit and labor markets. Johnson, drawing on his earlier work and also that of Margot Finn and others, discusses the process of contracting and recovering debt. He underlines the social inequality embodied in the law of debt. Poor debtors received disproportionately harsher treatment before the law than higher status bankrupts. The common assumption of the judiciary was that most workers defaulted on their debts deliberately, and were thus a burden on the honest trader. By contrast, bankrupts were deemed to be unfortunate victims of an uncertain commercial world. Thus deeply embedded moral judgments shaped the credit market.

Johnson also examines the tyranny of Victorian labor legislation: the extensive use of prosecution for breach of contract under the master and servant laws, especially during trade upswings as an alternative discipline to unemployment and as a means to restrict the free movement of labor. Echoing the views of many labor and social historians, the labor market, in Johnson?s view, was characterized as much by coercion and entrenched custom as by the forces of free supply and demand. His analysis of age-specific earnings helps illustrate the extent to which custom, not skill or effort, determined the stability of wage structures in several major industries between the 1830s and the 1930s. Labor markets, he argues, were locked into these wage structures so that differentials were perpetuated. Thus Victorian conceptions of competition based on freedom of contract and free labor were idealized and did not represent the reality of the market.

Part II consists of three chapters that examine the institutions of the corporate economy. Johnson describes the development of company law after 1844 and the liability advantages to owners of the new procedures for general incorporation. He explores the debate surrounding the introduction of limited liability legislation in 1855-56 and how it worked in practice afterwards. He rejects the idea that the joint stock company emerged simply as a functional response to the needs of a developing economy. His data on companies registered after 1856 shows that the need for large scale capital could not have been the primary reason for most new foundations. Using data from the life insurance industry in the 1890s, he demonstrates that, contrary to the assumption that the joint stock form advanced because of its greater efficiency, mutual life offices operated more cheaply and performed better than their joint stock counterparts. Organizational choice, Johnson concludes, is shaped by accidental advantages gained by particular interest groups, often rent-seeking directors and company promoters, rather than by a natural selection procedure determined by the competitive market.

Part III examines the information flows in the capital market. With the expansion of tradable financial securities in the second half of the century, shares became more accessible to sections of the lower middle class. Increasingly shares were regarded by investors as sources of dividend income rather than as instruments of part-ownership of an entity that required active participation. This development, however, ran contrary to the principle of the Gladstonian legislation of the 1840s, namely that good governance and efficient markets could be secured by information and publicity alone. After 1856 the laisser faire approach to company reporting and auditing limited the capacity of minority shareholders to monitor managerial performance. The growth of the financial press did little to help. Newspapers could be used to conceal the truth about a company?s affairs, as well as to reveal it. Johnson concludes that those who derived most benefit from the greater liquidity in the market for shares were the corporate insiders who used their privileged information to play the market.

By the decade before the First World War, a familiarity with insider dealing and corruption had bred cynicism about market morality. During the 1840s and 1850s the abdication of directorial responsibility, as in the Royal British Bank failure, could still be widely condemned. By the 1890s the final separation of corporate identity from ownership created ?a terrain of moral ambiguity? (p. 228) in which companies operated. In Johnson?s view, the history of the corporate economy of nineteenth-century Britain challenges rationalist models of institutional formation in which efficient structures emerge through a process of competition. The corporate capitalism of 2008, therefore, was a path-dependent, sometimes accidental, outcome of various specific historical conjunctures that could have taken different directions.

One can take issue with aspects of Johnson?s argument, for example the idea that modern corporate capitalism was built on Victorian foundations. The constitutional practices of 1000 plus stock companies established during the century before 1844 fundamentally shaped the legislation of the 1840s and 1850s. Stock companies were struggling with issues of shareholder power to monitor managerial behavior, the limitation of investors? liability, the right to hold assets and to sue and be sued in a corporate name, long before the Victorian years. Another, perhaps more obvious, point is that what Johnson describes in this book is really the making of multiple markets. The markets for petty credit and for labor appear on the face of it to bear little relation to the corporate economy in terms of their constraints and structures. Nor does Johnson carry out a sustained comparison between these different markets. These quibbles, however, do not detract from the compelling force of the principal argument, namely that all markets are constructed and contingent on specific historical forces, and that they are not necessarily conducted by the optimal institutions.

Robin Pearson is Professor of Economic History at the University of Hull, UK. He has written extensively on the insurance industry, and also on business networks, social capital and corporate governance. His latest book, Shareholder Democracies? Corporate Governance in Britain and Ireland before 1850, co-authored with Mark Freeman and James Taylor, is currently with the University of Chicago Press.

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