Thanks to the advances made in economic and social history over the past years, and the growing availability of historical datasets – including for periods far into the past – it is now possible to use the historical record to a greater extent than ever before. This enables us to empirically test assumptions and theories about economic and social development commonly held in the social sciences. Many of these assumptions, especially within economics, pertain to the development of markets. These are mostly assumed to have become predominant in the more recent past, starting in early-19th century England, and to have formed a main component in a process of modernization and thus to be intimately linked to the progress towards modern freedom and prosperity. My book, The Invisible Hand? (van Bavel, Reference van Bavel2016), employs the possibilities offered by the historical record, resulting in a qualification of these assumptions, based on an empirical analysis. It shows that markets for land, labour and capital, as well as financial markets, have already been dominant in several cases in the more distant past, making these into full-blown market economies, even according to the strictest definition. Instead of leading to freedom and modernity, all of these cases withered after about a century and a half, ending in a situation of economic stagnation and heightened inequality, both economically and politically.

The review article by Hodgson (Reference Hodgson2020) is lucid and contains many valuable thoughts on my book. The main critical issues the reviewer raises are that financial markets should be separated from factor markets, and further that financial markets and the possibility for collateralization, not factor markets, are the main culprit of possible instability and decline. Moreover, the decline of capitalist economies may not be endogenous but partly caused by exogenous events and changes. The review ends with a call not to discard capitalism but to reform it, most notably by regulating financial markets.

All these are valuable thoughts, and I accept the point of more clearly separating factor markets from financial markets. Also, I am happy to see that the reviewer is more in agreement with the main argument of the book than it seems at first sight. However, there are four important points that I raised in the book, and in other publications, where I think the review is incomplete, and these are relevant exactly for how we could understand developments in present-day market-based economies and the possibilities to reform capitalism.

The first point relates to the role played by the markets for land and natural resources, lease and labour, a role that the reviewer downsizes, as he privileges the role of financial markets. Unjustly so, I think. There are six cases throughout history, the recent era included, where markets were dominant in the allocation of inputs and outputs of the economy, and which in addition have left us enough sources to be properly analysed. In all of these cases, as is shown and extensively analysed throughout the book, this rise to market dominance started with the emergence of markets for land and landlease, followed by the gradual rise of labour markets. Land and labour thus became commodified and came to be predominantly allocated through market transactions there.

It is relevant to note that the allocation of land and labour in most societies is organized by way of other systems than the market, either coercive (feudal, manorial, plantation systems), associative, state-dominated, family, kin-based or community systems. In different compositions, these systems were dominant in most, or almost all, historical societies. The rise to dominance of markets in the allocation of land and labour is something extraordinary, and this even holds for the modern period. In my home country, the Netherlands, for instance, in the decades after the Second World War, almost all of the output of the economy was transacted in the market, but the vast majority of land, natural resources, real estate and labour was allocated by either the family, as within family-owned farms, shops and craft workshops, the rising welfare state or by associational organizations, including cooperative banks, insurance companies and housing corporations. Factor markets did exist, of course, but they were far from dominant. This to me, rather than the name ‘input’ or ‘factor’ market, is the main point. While goods and products, and often services too, are exchanged and allocated through the market in most societies in past and present, it is very exceptional for a society to allocate land, labour, as well as capital goods and money, by way of the market, as these were mostly embedded in other coordination and allocation systems.

The shift to allocating them by way of the market has large effects on the possibilities for the accumulation of wealth. Labour markets do play a role in this. First, because they allow a large share of the population to become property-less, much more so than in most other allocation systems, including even the manorial system, where labour retains shares of the bundle of property rights, especially to land. Second, labour markets offer the owners of land, natural resources and capital goods the opportunity to directly exploit this wealth and make it profitable, further pushing up accumulation. This accumulation of wealth in its turn is further facilitated by the commodification of land, natural resources and capital goods, and by the fact that property rights to these wealth components become more private, absolute and exclusive, aiding their transaction and accumulation. Additionally, in market economies, profit rates have been shown to rise with the size of wealth, as a result of relatively lower information costs and other transaction costs. Indeed, a resulting accumulation of wealth can be observed in all of these early market economies and – more importantly in the light of the critique by the reviewer – for a large part, it happened before the rise of extensive financial markets and formalized systems of collateralization. In the centre-north of Italy, for instance, wealthy burghers bought up the majority of land in the 13th to 15th centuries and exploited almost all of this by way of sharecropping leasing, and in the Italian towns already in the late-14th century two-thirds of the workers held no property (van Bavel, Reference van Bavel2016: 111–119 and 124–129). Financial markets had emerged in the 12th century but only in the towns, where they remained limited to trade and public debt and only became substantial from the 14th century, while the fully formalized mortgage in Italy was only introduced in the 16th century (De Luca and Lorenzini, Reference De Luca, Lorenzini, Briggs and Zuijderduijn2018).

This is not to say, of course, that within other coordination systems than the market accumulation or wealth disparities cannot grow, but due to the more limited transferability of wealth components perhaps less quickly so, while also, and more importantly, the other systems have rules and firm motives to prevent accumulation, as most conspicuously within the associational system (van Bavel, Reference van Bavel and Nigro2020). Moreover, the effects of this accumulation are especially large in the cases where markets became dominant, since the distribution of wealth at the start of the rise to dominance of markets was relatively equitable in these societies, and not coincidentally so, as I will further discuss below.

In each of the cases, financial markets started to develop in a very small-scale and mostly bottom-up fashion initially, and they were mainly demand-driven. The real, later push, however, was to a larger extent rather supply-driven, with the money supplied by large wealth owners who had accumulated this through the exploitation of landed property (by way of lease markets or surpluses generated by wage labourers having work the land) and capital goods (used by employing wage labour) and through long-distance trade. The chronology shows how financial markets especially grew in size after factor markets had generated the accumulation of wealth. To be sure, in all of these market economies, including those longer ago in history, financial markets developed too, accompanied by sophisticated financial instruments. The reviewer seems to equate aversion against usury with aversion against interest payments (Hodgson, Reference Hodgson2020: 2 and 9). Usury (making use of the distress of other people by requiring extraordinarily high interest rates) indeed was opposed, as many still disapprove of it nowadays, but this did not stand in the way of the rise of interest-bearing loans and extensive financial markets, for instance in 9th-century Islamic Iraq, where a main role was played by private bankers, money exchangers and other financial intermediaries – not by the state as suggested by the reviewer (van Bavel, Reference van Bavel2016: 59–60 and 74–76; van Bavel et al., Reference van Bavel, Campopiano and Dijkman2014). The same in catholic Italy and the Low Countries, where, despite canonical usury laws, all kinds of interest-bearing ‘sale and lease’ constructions were employed from the high Middle Ages, followed by extensive markets for private and public debts and, later, the introduction of the formalized mortgage (De Luca and Lorenzini, Reference De Luca, Lorenzini, Briggs and Zuijderduijn2018; Zuijderduijn, Reference Zuijderduijn2009: 139–182, 227–247). All of these institutions were thus not invented by modern capitalism.

Due to rights to land and capital goods becoming more private, absolute and exclusive it became possible to collateralize these wealth components. In the Low Countries, formalized systems of collateralization were organized in the 13th to 16th centuries (Zuijderduijn, Reference Zuijderduijn2009: 111–137, 183–225). This, indeed, gave the owners of wealth leverage to increase profit rates from wealth even more, a point rightly stressed by the reviewer and which I should have highlighted more in the book. However, even if instruments for collateralization further push up the accumulation process, this accumulation cannot be seen apart from the earlier rise to dominance of factor markets and the associated development of private property rights, and neither were they necessary for it, as shown for the cases of Iraq and Italy, where the mortgage was introduced only after the process in question.

The second main point is that the effects of this accumulation spill over from the economic sphere to the political one; a point that is mentioned too cursorily in the review, to my mind. In all of these cases, the owners of large wealth succeeded in using their economic wealth to, first, gain societal influence and, later, translating it into political leverage. This creates a feedback loop. Those who had become wealthy through dominant markets, now could influence the organization of the same markets by way of their political influence, or even outright power. Geoff Hodgson agrees with me that markets are not abstract, uniform playing fields but very specific, depending on their institutional make-up, and therefore have specific outcomes. But the question he does not address is: who then is forming and upholding these institutions, and to what end? As the historical analysis of these cases of dominant market economies shows, this is increasingly done by the elites generated by these markets. This is how the feedback loop leading to further economic and political inequality takes form. For present market economies, most notably the United States, components of this feedback have been highlighted in a host of recent studies. My book, by using history, can follow developments over a much longer period and thus show that this process is self-reinforcing and has no built-in correction mechanism. It thus suggests that it may be too naïve to think that the capitalist economy can be reformed without taking this socio-political mechanism into account; a point I will return to later.

To be sure, the analysis made in the book does not endorse a view against markets; not against markets for land, labour and capital goods, and not even against financial markets per se. In the early phases of market development, they have offered flexibility and freedom to ordinary people, have given them the opportunity to obtain credit in order to invest and helped them to enhance productivity and stimulate prosperity. This was the case, however, in a situation of relative equity, both economically and politically. The first phases of market development, in each of the cases of early market economies, are exactly characterized by the fact that ordinary, small-scale producers often participated in political decision-making, had access to the means of production and possessed some economic independency (van Bavel, Reference van Bavel2019).

This relative political equity ensured that the institutional organization of these markets would not be skewed towards the interests of a particular elite group, while the relative material equity allowed ordinary producers to use the market voluntarily and from a position of freedom, a situation akin to the one that Adam Smith envisaged when he argued for the beneficial effects that market involvement would have for all participants. When broadening the view to a longer period, including the phases before this market development, we can see, however, that in each of these cases, this situation of relative equity was not an automatic or natural one, but hard-fought for by ordinary people during a long period of social agitation, revolts and self-organization in guilds, commons, unions and other associational organizations (de Moor, Reference de Moor2008; van Bavel, Reference van Bavel2019: 8–10). These associations were rather seen with suspicion by Adam Smith, but a historical perspective shows they have been instrumental for ordinary people to break the non-economic grip the elite had over land and labour (and thus open the way for factor markets), gain access to political decision-making and protect their economic independency, as most clearly in medieval Italy, the late medieval Low Countries and 12th-century Western Europe. This observation also holds relevance for the crucial role of the socio-political context, to which I will return below.

The third issue is that of endogeneity. Even though the reviewer only passingly remarks that one could argue whether exogenous events did not play a role in the decline of these cases (Hodgson, Reference Hodgson2020: 14–15), this is a fundamental issue, since it touches the heart of the process. Again, however, it is an issue that can be addressed directly thanks to the advances in economic history. While earlier exogenous events and disasters always evoked the minds of people and were almost routinely held responsible for the downfall of societies, we now have much more material at our disposal, including reconstructions of labour productivity, real wages and GDP per capita, to test these ideas. Using these datasets and carefully reconstructing the chronology shows that the supposed causality cannot hold. The (relative) decline of the Dutch Republic is suggested by the reviewer to be related to the rise of mercantilism which hurt Dutch international trade (Hodgson, Reference Hodgson2020: 14–15). However, as the latest reconstructions of GDP per capita show, Dutch economic growth started to flatten around 1,620, and real wages had started to decline in the 16th century already (van Bavel, Reference van Bavel2016: 203–207; van Zanden and van Leeuwen, Reference van Zanden and van Leeuwen2012), whereas the rise of mercantilist policies and the demographic and military weight of larger, far more populous neighbouring countries made themselves felt only from the middle of the 17th century (Israel, Reference Israel1990: 339–346). Even more clearly, and contrary to the suggestion by the reviewer, the decline of Italy cannot have been the result of the Islamic expansion affecting Mediterranean trade. Islamic expansion in the Mediterranean started in the 8th century, far preceding the rise of Italy as a leading market economy, while economic decline of Italy set in at the beginning of the 15th century, as evidenced by the most recent reconstructions of labour productivity and real wages, and would proceed for centuries (Malanima, Reference Malanima2011).

These data also disprove a direct link of the Italian decline to the Black Death, the pandemic which struck around the middle of the 14th century. Rather, the case of the Black Death shows most clearly that the effects of an exogenous shock on economy and society hardly depend on the kind of shock itself, but rather on the social context at the moment the shock occurs, with the same exogenous shock often having very different divergent effects per society. The Black Death killed a similar share of the population in many European and Asian societies, from a third to half of the population, but in the longer run had divergent effects (van Bavel, Reference van Bavel and Nigro2020). In Northwestern Europe, the pandemic generally stimulated more freedom and higher wages and brought more equality, but only because the high degree of self-organization there gave ordinary people the societal and political leverage to benefit from the scarcity of labour and prevent an elite reaction. In Italy, however, even though wealth equality initially declined (Alfani and Murphy, Reference Alfani and Murphy2017), this did not co-occur with more freedom for ordinary people, as strict labour laws were enacted by urban elites as a response to labour shortages (Cohn, Reference Cohn2007). In the longer run, Italy rather saw economic inequality rise again, while later pandemics only would further push up wealth inequality (Alfani and Murphy, Reference Alfani and Murphy2017). Contrary to accounts which portray severe shocks as uniform levellers (Scheidel, Reference Scheidel2017), more in-depth research rather shows their divergent effects, depending on the institutional organization and social context in place. In the Italian case, this context was increasingly dominated by the urban elites which had first amassed economic wealth thanks to the vibrant markets and, next, acquired political leverage and employed it to adapt the organization of labour and lease markets, and inheritance rules, in order to better protect their wealth against shocks, thus in the longer run further widening wealth disparities. Even in the case of an exogenous shock, the effects on economy and society are thus mainly determined by societal characteristics, acting as a kind of prism, which rather reinforces the endogeneity of the process.

The fourth issue is what this all means for the present situation, that is, for ‘modern’ capitalism. The word modern is put between brackets, since its outward appearance may be different, especially as a result of technological changes, but its institutional organization and its extent (in shares of land, labour and capital exchanged through the market) are similar to the few earlier cases of market economies. In contrast to technological change, there is no incremental, cumulative development in the institutional organization of markets or their relative importance, and neither in the degree of access to economic decision-making of ordinary people, or in economic equity. The situation in the half century after the Second World War, in which many of us grew up, may have seduced us to view history in unilinear terms, as a march forward to modernity (van Bavel, Reference van Bavel2019: 3–4). Placing this period in a longer time perspective, however, rather highlights its exceptionality and the fragility of its achievements in freedom and equity, also within democratic market economies.

The fact that the historical market economies, despite the broad participation in political decision-making that all had, all underwent the endogenous process highlighted above, shows that the rise of markets to dominance cannot be considered a component in a linear progress towards the present. This observation makes the historical analysis more relevant for understanding the present. It also enables us to say more about what would follow after the process, a question posed by the reviewer. He mentions either barbarism or utopia, and states the book offers no answer (Hodgson, Reference Hodgson2020: 10). Actually, the book does, but as a historical, empirical study mainly for the past cases, and these show neither barbarism nor utopia. They do show, however, for each of the cases, how the economic elites who had acquired their wealth mainly through dynamic markets succeeded in translating their economic wealth into societal influence and eventually into political leverage. The societal and political leverage these elites acquired in the course of time enabled them to shield their interests through their influence on the organization of markets, fiscality and the judiciary. Alongside economic inequality, this process thus also bred political inequities, increasing skewedness of markets and a stagnation of economic growth, also because investment in rent-seeking became more profitable than investments in the real economy.

The resulting situation, therefore, is not one of barbarism or spectacular downfall, but of a stagnation of well-being of ordinary people and a gradual increase of economic and political inequities, especially when compared to the early phases of market development. In my book, I have extensively discussed this gradual process for the historical cases and more briefly indicated the symptoms in what is now the dominant case of a mature market economy, the United States. After having written the book, in the years 2012–15, these symptoms have become more acute, I think, and they can be most notably seen in the growing influence of a small group of super wealthy on the political process and a confluence of political and economic elites, accompanied by reductions of wealth taxation and attempts to influence the organization of markets. This creates a feedback loop; it is a self-reinforcing process. Geoff Hodgson ends with a kind of call to not discard modern capitalism but to reform it. This, however, requires a better understanding of why it is so difficult to do so and not much progress is made, even though present-day developments make sufficiently clear that reform is needed. The analysis made in the book, as well as recent work in the political sciences, makes clear why, and this is exactly because of the endogenous, self-reinforcing feedback loop discussed here. A too optimistic view does not necessarily bring these reforms closer.

The reviewer also requires an alternative to capitalism before discarding it. My book is based on the historical record, but still may offer some material. The most dynamic phases, during which prosperity grew and was widely distributed, were found at the beginning of the development of markets for land, lease and labour, as associations of ordinary people were strong. These enabled people to make use of the opportunities offered by these markets, while at the same time shielding their members from the corrosive effects of the markets (de Moor, Reference de Moor2008). These organizations also helped ordinary people to protect and retain their property rights to land and capital goods (van Bavel, Reference van Bavel and Nigro2020) and to shield shares of the surpluses against elite appropriation, thus stimulating investments (van Bavel et al., Reference van Bavel, Ansink and van Besouw2017), jointly enabling them to fully participate in economic activity and market exchange, as well as to reap the benefits of these developments. Moreover, associational organizations also offered these ordinary people the socio-political leverage to influence the organization of markets, including that of financial markets, ensuring that this institutional framework served the interests of broad groups in society rather than of a small elite. Only in a later phase of market dominance, as the political influence of wealthy market elites grew, the role of associations was reduced – often through deliberate government action – and with it the possibility of ordinary people to exert collective pressure on decision-making. Without attributing angelic qualities to associations, which can also promote narrow interests or serve rent-seeking purposes, it could be worthwhile, also for future research, to more systematically assess how the combination of different coordination systems (market, state, association, family), rather than the dominance of one of them –whether it is the market or the state– offers the most potential for not only generating but also sustaining broadly distributed prosperity.