Between c. 1550^–₃₃₀1880_144ya, a small group of individuals ruled England and oversaw her transformation from a small country to the British Empire—and in the process they became exceedingly wealthy.

Known as aristocrats, their unusual lifestyles were the antithesis of modern secular values. Today aristocrats are often viewed as a hindrance to pre-modern growth and development because they appeared to operate so inefficiently.

This paper argues that the aristocrats efficiently provided the valuable service of “trustworthy servant”, by investing their wealth in hostage capital.

This theory explains terms of entry and exit out of the aristocracy, the strict family settlement, their education patterns, extravagant lifestyle, and their ultimate voluntary retreat from power.

…Because I want to explain the odd behavior of aristocrats, the focus here is on hostage capital, where the servant was required to invest enough in several sunk assets such that the value of the investment was at least as great as the value from cheating the patron.²⁶ This investment may be called hostage capital because it acts as a bond for good service. If there are a small number of patient players, and if there are strong information flows and signals of actions, then an equilibrium can be sustained where good trustworthy performance results.

The hypothesis proposed here is that the group of servants used to staff what we now call the public administration, were the aristocrats. Aristocrats made excellent servants to their patrons because they invested in sunk capital that was effectively held hostage by the society at large. As long as aristocrats cooperated with the rules laid down by the elite and Crown they were allowed to participate in society and government. Any failure of character, breach of trust, or outright noncooperation was met with a series of punishments ranging from social ostracization to death. All forms of punishment meant a loss of the aristocratic capital investment. The more an aristocrat invested in hostage capital, the more he could be trusted. Given that the rate of return to trust prior to the Industrial Revolution was so high, this most often meant that if it was worthwhile investing in hostage capital, then everything was invested. Aristocrats essentially devoted every major component of their life as a sunk investment to guarantee performance.

…The final outcome of any service or product prior to 1850, was characterized by large variability. To take a single example, consider a ship due at port on a certain date. Its actual arrival time could be weeks off on either side given the uncertainties of transport by sail. The cargo on the ship would arrive in various qualities, much of which might have depended on the length of voyage and the conditions at sea.²³ The natural elements at sea meant that it was extremely difficult to impute inputs from observing outputs. This impacted everyone employed with some relationship to the cargo, from the ship’s captain and lighthouse operator to the port authority and tax collector. Measuring anyone’s performance based on the quantity or quality of the cargo would have been unreliable. With the development of chronometers, steam power, turn-screw propellers, refrigeration, and iron-clad ships, merchant vessels were able to overcome many of the vagaries of nature, and this allowed for fine tuned scheduling and monitoring, and once again the effect was felt along the entire chain of related occupations. Prior to the Industrial Revolution, just about everything in life involved a large natural component—variance was everywhere, and this led to high variability in product and service quality. After the Industrial Revolution, the role of nature was reduced and meaningful measurement was possible…

It is beyond the scope of this paper to provide a series of examples, but consider the following. The officers of the Royal Navy during the age of sail was staffed by aristocratic patronage. As I argue in Allen2002 this was designed to police the problem of captains seeking out wealthy enemy merchant prizes rather than fighting naval battles. Propulsion by wind meant that failure to complete almost any duty could be blamed on nature. The British designed a complicated system, centered around aristocratic patronage, to deal with this. Once steam was introduced by the mid 19^th century into ships, the ability to measure the performance of captains increased dramatically. The efficiency wages, Articles of War, complicated promotions, spying, and aristocratic patronage all went. The same story could be told over again for virtually every public service. Measurement allowed for professionals to replace trust.

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