I was reading an article the other day by Douglas Allen (abstract here)* attempting to explain the bizarre institution of the English aristocracy, between about 1600 and 1900. I say bizarre because to be an aristocrat at that time was to accept on yourself a large list of restrictions that seem utterly mad to the modern ear.

Readers of Jane Austen or other Victoriana will tend to have a fuzzy image of the nobility. They clearly had a lot of money, but it wasn’t clear how. They had a lot of land, but a nobleman’s land holdings were as frequently a source of expense as they were a profit center. They had large estates away from the cities; why? Our wealthy class today typically likes to cluster around cities, not to build manor houses out in the middle of nowhere. What made the English different?

Aristocrats were expected to take large tracts of their land out of production and turn them into public walks. They were also expected to build massive homes which were open to visiting aristocrats at all times, and these homes were not merely away from the cities but even away from the local village. Why?

We see that noblemen were expected to go to the right schools. Less obvious was that these schools were remarkable in deliberately avoiding “practical” learning. Nobility were taught Latin, Greek, literature, and a whole host of topics which were utterly useless at making money. Furthermore, if a would-be aristocrat had made enough money to buy land and aspire to respectability, he was expected to immediately stop practicing his profession. For an aristocrat to engage in business was considered terribly shameful.

Allen’s paper goes on to list several other practices such as dueling or the encumbrance of land, all of them seeming to keep the noble class isolated from the larger society and totally unable to support itself commercially. Allen then proposes that all of this was by design. English nobles, he argues, deliberately made themselves hostages to a particular code of honor and class behavior, in order to transform themselves into the perfect servants of the king.

This takes some explanation. We are used to a world in which things can be measured and monitored. We buy rolls of toilet paper in the store secure in the expectation that they are all the same size and weight. We have soldiers in the battlefield equipped with cameras and radios so that their every move can be tracked. In short, it is very easy to monitor someone’s performance on the job, simply by monitoring the products of the work. The epitome of this is the bureaucracy, where everything is regimented and predictable.

But before the Industrial Revolution, it was hard or impossible to monitor anything. Bureaucracies did not exist. When you sent a ship across the world with trade goods, or when you sent an army of soldiers to the Continent, you had no control over what it did, and no way to be sure that your subordinates would actually work for your interests. In short, the pre-modern world was beset with vicious principal-agent problems.

In such a world, the most valuable resource is trust. You need to know that your subordinates are reliable. But how can you ensure such reliability? Economists will tell you to create a relationship framework in which your agent finds it far more valuable to stay in your good graces, than to betray your trust and profit in the short term. This can be done in a few ways. When possible, you can harshly punish offenders. Additionally, you can use repeated interactions to offer the lucrative carrot of future rewards to those who perform well now.

Allen argues that the nobility was a classic example of such a system. The important thing to know was that nobles made nearly all of their money from salaries, by serving as royal officials—which could earn them ten times as much as the most successful businessman, at the time. They served at the king’s pleasure, and could be dismissed for any reason. To give the threat of such dismissal teeth, noblemen were expected to dissipate their wealth through lavish social events and opulent dwellings. They were also expected to cut off all ties with the non-aristocratic world; that way, if you disgraced yourself and were shunned by “gentlemanly” society, you would be utterly alone.

The expensive educations in impractical subjects, the large homes away from the rest of society, all of these were “hostage capital” that displayed your willingness to play by the rules, because breaking the rules would be so very painful. Knowing Greek would be useless in commerce; it only had value within aristocratic society, so you needed to be sure to fit in.

The upshot was that the kings of England had access to a class of loyal servants—of uncertain ability at times, true, but whose dedication was nearly unquestioned. And it was this class of nobles that won England and Britain its empire.

What made the system of nobility break down? Indeed, at the end the aristocrats gave up power willingly, by passing laws allowing the common people to vote and hold offices, and by breaking up the aristocratic barriers to selling their ancestral lands. Allen argues that not only did the Industrial Revolution make the old problem of trust less of a problem, but it also made membership in the aristocracy less valuable. Now, instead of aristocrats earning far higher salaries than businessmen, it was the reverse; corporate titans bestrode the world, not the nobility. Given that, all the trouble of keeping up appearances simply wasn’t worth it. Far better to jump the aristocratic ship and become an industrialist.

So what’s the point of spending a thousand words talking about English toffs? First, I think it’s cool. Second, the whole episode illustrates the limitless ability of people to come up with social organizations to solve their problems. Third, it also illustrates how everything is dependent on context. Once the context shifts, old institutions become less relevant.

At the same time, though, the example of the English nobility remains for us to learn from. And who knows? There may come a time when the old problems become new again, and old wine can be poured into new glasses.

*Allen, Douglas. 2009. “A Theory of the Pre-Modern British Aristocracy.” Explorations in Economic History, Vol. 46: 299-313.