Powers of Production Come Before Wealth Creation

Victorian Britain built the modern world, Elizabethan Britain has forgotten how it was done, and Friedrich List might offer a solution.

No society is born wealthy. The prerequisite to wealth is investment into the baseline needs for human existence: housing, healthcare, transport, energy, and other forms of critical infrastructure. This is the enabler of economic activity that produces wealth. This is the environment in which a society has general hopes and expectations for the future; an optimism in the continuation of human progress and flourishing. 

Today, Britain is miserly and miserable. Taxes are rising and standards are declining. Government seems not only interested in delivering poorly on economic outcomes but acting as social hall monitors intent on regulating the speech and actions of ordinary citizens. The stench of decay permeates the island and the only thing on the mind of the youth is escape from Prison Island.

In all cases, the conversation around ‘what is to be done?’ revolves around lower material analyses like the endless (re)distribution of our diminishing wealth. No wonder productivity is stagnant; no one in a decision-making capacity seems interested in wealth creation, or, at least where interest is feigned true understanding is clearly missing. 

The root cause is that the government has not been interested in long-term investment in fundamental infrastructure for a long time. In fact, the government has been ensuring that such investment does not happen. The recent Foundations essay is a deeply researched report on this phenomenon, with a particular focus on the need to deregulate housing, transport, and energy if we are to see both catch-up and long-term growth in Britain. It seems self-evident that long-term investment in fundamental economic infrastructure translates into greater productivity which in turn creates more material wealth. Yet successive governments and the civil service have implemented short-term ‘fiscal discipline’ by cutting long-term investment into the fundamental economic drivers identified in the Foundations essay.

The British state is penny wise and pound foolish. The result is an economy that seems unable to grow while systematically degrading what few areas of productivity it has left. Before long, those areas of productivity will be gone and so too will this country’s capacity to create wealth. 

Much of this is due to flaws in the reigning economic orthodoxy, a fear of more radical action to overhaul the economy, and institutional memory loss. However, the fundamental issue is that Britain has become so focused on what to do with its dwindling pool of wealth that it has forgotten how wealth is created in the first place: through long-term investment in the fundamental infrastructure that enables economic activity.

In the 19th century, the Victorians responded to the various challenges of industrialising society through the creation of an ‘enabler state’. Norms, laws, and institutions were founded by remarkable individuals to enable massive house building programs, transport infrastructure like roads, trams, and trains, nationwide healthcare and education programmes, and so on. The institutional ecosystem that arose out of this response went on to form the bedrock of the modern state. These Victorian-era founders understood something that modern Britain has forgotten: the difference between possessing wealth and the need to create the type of state and society which ensured wealth creation in the first place. Instead of emphasising mere material value and exchange, the Victorians came to understand that the creation of a highly educated, healthy, and happy society was not just important for the common good, but that out of this situation arose the capacity for the creation of material wealth. 

All this requires long-term investment stewarded by functional institutions. For a while, the Victorian institutional ecosystem did its job and did it well. Then these ‘enabling’ institutions were transformed in the post-war period into regulatory bodies that have progressively undermined Britain's productive capacity.

Britain’s “economic activity” now revolves around extractionary economic activity: ever-appreciating real estate assets, sizable pensions guaranteed by the wages of others’ children, fake ‘service’ jobs in marketing and outsourcing, all in a general mollified state of existence maintained by the interest harvested off the institutional foundations built by previous generations.

Now the debt is coming due, and what our institutions achieved in the 19th century cannot be achieved today, much to the chagrin of policy-makers who find themselves ‘pulling on the levers’ and finding that the capacity to enact the necessary change no longer exists. 

The British commentariat swings between the false dichotomy of “Marxist” or “capitalist” solutions in trying to get out of this quagmire where we no longer know how to create wealth and are trying to divide the existing ‘pie’ into ever smaller slices. But there is a third way, one articulated by Friedrich List, who arguably has had more real-world influence than either Karl Marx or Adam Smith.

List's theory of productive powers – which distinguishes between possessing wealth and the capacity to generate it – provides a crucial framework for understanding Britain's predicament and how to get out of it.

Friedrich List & the Theory of Productive Powers

“The prosperity of a nation is not…greater in the proportion in which it has amassed more wealth (i.e. values of exchange), but in the proportion in which it has more developed its powers of production.”
– Friedrich List, ‘The National System of Political Economy’

Friedrich List was a 19th century German-American economist whose thinking was crucial to economic development in Germany and America in the 19th century, and would cross over to East Asia in the 20th century where newly industrialising nations would take up his work on political economy with gusto. 

At the core of List’s ideas was his theory of productive powers articulated in ‘The National System of Political Economy’. List took aim primarily at the school of economic thought that Adam Smith represented and his theory of exchange: where Smith focused on the current state of exchangeable values - what wealth exists and how it might be traded - List emphasized productive powers: the capacity of a nation to generate wealth in the first place, based on cultural, legal, and political factors, among other things. 

“The causes of wealth are something totally different from wealth itself. A person may possess wealth, i.e. exchangeable value; if, however, he does not possess the power of producing objects of more value than he consumes, he will become poorer. A person may be poor; if he, however, possesses the power of producing a larger amount of valuable articles than he consumes, he becomes rich. The power of producing wealth is therefore infinitely more important than wealth itself; it insures not only the possession and the increase of what has been gained, but also the replacement of what has been lost.”
– Friedrich List, ‘The National System of Political Economy’

This distinction is not merely academic but gets to the heart of the systematic destruction of Britain's capacity to build and the ineffectiveness of our institutions. Britain possesses wealth if we define that wealth by exchangeable value, but no longer possesses the productive power to produce more than we consume. Over time, the consumption outruns the production. Debt accumulates, debts that will come due and we will be unable to repay.

List’s argument is fundamentally that long-term investment in areas that constitute ‘the productive powers’ of the nation mattered more than contemporary “GDPmaxxing” which mortgages the future to sustain the present. This theory covers everything from our issues with dwindling housing supply to spiralling energy costs, all caused by low investment for decades.

Take industrial decline, now all but complete, which has caused a severe degradation in Britain’s productive powers. The conventional narrative suggests this is a good thing as the economy is being subject to the ‘laws’ of market forces and comparative advantage. The government is saving money on increasingly uncompetitive assets!

From List’s perspective, the deliberate dismantling of productive powers has led to the degradation of Britain’s economic foundations: the breaking of chains of industrial knowledge, the loss of construction expertise and planning capacity, and the sociological destruction that occurs as industries that support entire regions fade to never be replaced again. The loss of these things has made Britain permanently poorer, and once lost are unlikely to ever return.

The good news is that Britain retains remarkable productive powers in other domains that we can yet reform. The bad news is that they too are under severe pressure. Britain maintains world-leading research universities but struggles to convert their discoveries into industrial strength; she hosts sophisticated financial markets but fails to channel capital into productive investment; and, she preserves the legal frameworks, i.e. the common law system, enabling past prosperity but cannot mobilise them to enable new development.

This dysfunction is a direct result of our decision-making apparatuses’ failure to understand the difference between contemporary material value and the long-term perspective of cultivating productive power.

The Victorians understood this, though. 

The Creation of the Victorian ‘Enabler State’ 

Much of Britain’s institutional heritage hails from the Victorian age whose statesmen and industrialists had a very different approach to wealth and its causes: they built with the intent to cultivate the productive power of Britain. A more educated, healthy, and happier workforce would create material prosperity and lead to a ‘virtuous cycle of growth’. They did the hard thing and put in long-term investment to build institutions and facilitate the development of this country’s once world-leading housing, transport, and energy infrastructure; institutions and infrastructure that we have failed to upgrade and instead preferred to coast on this inheritance expecting it to last forever – because it is the easy thing to do.

We can see the difference in approaches between the Victorians and modern Britain in the responses to the housing crises both eras shared. The ineffective response of policymakers today is to approach housing as a commodity whose price is determined by supply and demand and policies focused on marginal adjustments: tweaking planning rules, adjusting mortgage markets, fine-tuning housing benefits, etc. The Victorians saw housing differently: as a fundamental productive power that enables or constrains all other economic activity, and their response to urban housing challenges offers a perfect illustration of the cultivation of productive powers in action. 

The story begins with the Public Health Act 1848 which first established local Boards of Health with powers to regulate housing conditions. However, the true transformation came through the work of three key figures: Richard Cross, Joseph Chamberlain, and Lord Salisbury. As Home Secretary under Disraeli, Richard Cross' Artisans' Dwellings Act 1875 marked a crucial turning point as the Act gave local authorities the power to purchase and clear slum areas for redevelopment. For the first time, local governments could actively reshape their built environment. As Mayor of Birmingham, Joseph Chamberlain used this Act to pioneer the innovative Birmingham Improvement Scheme 1876 and what became known as "gas and water socialism." His administration purchased both the gas and water companies, using their profits to fund massive urban renewal. The Corporation of Birmingham cleared 93 acres of slums, replacing them with the Corporation Street development - a model of modern urban planning that influenced cities across Britain. Lord Salisbury's Housing of the Working Classes Act 1885 then consolidated and expanded these powers by creating the legal framework that enabled the massive expansion of Victorian workers' housing. George Peabody’s Peabody Trust (1862), James Cadbury's Bournville Village Trust (1900), and William Lever's Port Sunlight (1888) demonstrated how industrialists could create entire planned communities, with thousands of homes built to house tens of thousands of workers.

A new, institutional infrastructure enabled these massive advancements in housing and other areas of the economy like transport infrastructure. The Victorian state built the Private Bill system and processed thousands of private bills between 1820-1914, creating bespoke legal frameworks that granted infrastructure developers the specific powers they needed while ensuring public benefit. This enabling framework devolved significant powers to municipal government and turned cities into engines of development. The Metropolitan Board of Works (1855-1889) and its successor the London County Council (1889-1965) developed sophisticated mechanisms for financing and delivering housing at scale. The LCC's Housing of the Working Classes Branch (1893) became a model of efficient public administration, delivering high-quality housing while maintaining financial sustainability. The London and Birmingham Railway received its enabling bill in just three months in 1833, while the Manchester Ship Canal's powers were granted within six months in 1885. Glasgow developed an extensive municipal tram network. Leeds and Sheffield created integrated utility systems that served as models for urban development worldwide.

These weren't simply infrastructure projects – they were expressions of an institutional mindset combining public and private initiative to provide the long-term investment necessary to cultivate Britain’s productive power, i.e. its capacity to generate wealth.

“Adam Smith has on the whole recognised the nature of these powers so little, that he does not even assign a productive character to the mental labours of those who maintain laws and order, and cultivate and promote instruction, religion, science, and art. His investigations are limited to that human activity which creates material values. With regard to this, he certainly recognises that its productiveness depends on the 'skill and judgment' with which it is exercised; but in his investigations as to the causes of this skill and judgment, he does not go farther than the division of labour, and that he illustrates solely by exchange, augmentation of material capital, and extension of markets. His doctrine at once sinks deeper and deeper into materialism, particularism, and individualism. If he had followed up the idea 'productive power,' without allowing his mind to be dominated by the idea of 'value,' 'exchangeable value,' he would have been led to perceive that an independent theory of the 'productive power,' must be considered by the side of a 'theory of values' in order to explain the economical phenomena. “
– Friedrich List, ‘The National System of Political Economy’

The Post-War Regulatory State

Over the generations, institutional practices ossify and are mechanised, becoming less adaptable to novel scenarios and challenges. Less worthy successors largely operate these institutions on autopilot and mask decay behind the image of their founders. Those institutions are no longer capable of achieving what they used to achieve. The ever-dwindling returns on doing is trickling to a stop. 

Thus were the institutions built to cultivate the productive power of Britain cannibalised and put to contrary ends: rent extraction.

The achievements of the Victorians should have been extended throughout the post-war period. Instead, successive post-war governments put a stop to this, content instead to rest on what had already been built. When necessary, these governments have turned Victorian institutions into firewood for temporary warmth.

The Town and Country Planning Act 1947 marked this decisive shift with a fundamental reconceptualisation of the state's role. The Act nationalised development rights, created a complex permission system, established green belts, and crucially, removed compensation rights for refused permission. This last change meant that the state could now restrict development without cost to itself, fundamentally altering the balance between public control and private initiative. The regulatory transformation accelerated through the 1960s-70s with the creation of numerous regulatory bodies and the shift from specific Parliamentary approval to general regulatory frameworks.

Modern infrastructure projects bear the full weight of this accumulated regulatory burden. The Thames Tideway Tunnel spent a decade merely obtaining planning permission, requiring 50,000 pages of environmental assessment and £500 million in pre-construction costs. Hinkley Point C's planning application alone ran to 55,000 pages, with its environmental statement adding another 44,000 pages. Perhaps no project better illustrates this transformation than the Oxford-Cambridge Arc. Conceived in 2017 as a visionary development to connect Britain's two leading university cities with up to one million new homes, it has effectively died under the weight of regulatory complexity. Despite the project's clear national importance and strong economic rationale, the lack of a coherent delivery mechanism, multiple competing regulatory frameworks, and fragmented planning authorities have rendered it practically impossible.

The contrast with Victorian development is stark.

Where the Victorian state could grant all needed powers through a single parliamentary bill, modern projects must navigate multiple regulators with overlapping jurisdictions. The Victorians developed further institutional frameworks that enabled both public and private initiative for long-term investment. Local authorities gained the power to shape development, while private enterprise and charitable trusts had clear frameworks within which to operate. The result was a massive increase in housing stock that supported Britain's industrial expansion.

Today's housing crisis represents not just a market failure but a collapse of productive powers. Local authorities have lost the capacity to plan coherent development. The institutional knowledge of how to build beautiful, dense urban environments has been largely lost. ‘New build’ developments haemorrhage the landscape, providing sub-par housing quality in inferior numbers. The construction industry has consolidated into a few large firms optimized for gaming the planning system rather than efficient building.

Projects that once took months to approve now take years or decades. The main costs have shifted from actual construction to regulatory compliance, while the primary risks have moved from technical and financial challenges to regulatory and political uncertainties. Large projects become nearly impossible, forcing development into small, inefficient increments. Innovation is discouraged by regulatory complexity, while massive pre-construction costs drive up end prices. Perhaps most damagingly, Britain has lost crucial skills in major project delivery as technical expertise has been subordinated to regulatory compliance.

Despite having far greater financial resources, better technology, and more sophisticated construction methods than the Victorian era, Britain struggles to build at scale. The regulatory state has effectively criminalised the institutional methods that built Victorian Britain, replacing them with processes that prioritise control and ‘savings’ over enablement and long-term investment.

The paradox of modern Britain - sophisticated institutions alongside degraded productive capacity - can only be understood by the conscious unravelling of the sources of Britain’s productive powers built in the Victorian era, and the choice to live off the diminishing rents thereof until we are left with neither the ability to create wealth or wealth itself.

List saw the theory of exchange value versus the theory of productive powers as a choice between between temporary prosperity and lasting greatness; a nation either lives hoping its existing wealth will create more wealth, or it retains the sources of productive power that creates wealth as a by-product. We have chosen temporary and lasting impoverishment.