How Markets in Europe Opened Up as Guild Monopolies Declined in the Sixteenth Century
From the University of Chicago's Booth School of Business' ProMarket:
Markets don’t function well if they
are ridden with frictions like lack of information or lack of trust. A
new working paper finds that cities in the sixteenth century where
monopolies of densely networked merchant guilds declined had
significantly higher levels of printing, as they were early adopters of
printing technology. Additionally, these cities were found on the
Atlantic coast, where traders had the greatest incentives to form new
connections with unfamiliar traders.
״Portrait
of a Merchant,” painted c. 1530 by Jan Gossaert, depicts a Dutch
merchant writing in a ledger surrounded with tools of the trade.
In the sixteenth century, the Northwest
European region of England and the Low Countries underwent
transformational change. In this region, a bourgeois culture
emerged and cities like Antwerp, Amsterdam, and London became centers
of institutional and business innovation, whose accomplishments have
influenced the modern world.
For example, one of the first permanent
commodity bourses was established in Antwerp in 1531, the first stock
exchange emerged in Amsterdam in 1602, and joint stock companies became a
promising form of organizing business in London in the late sixteenth
century. The sixteenth century transformation was followed by the
seventeenth century Dutch Golden Age, and the eighteenth century English
Industrial Revolution. What made the Northwest region of Europe so
different? The question remains a central concern in social sciences,
with scholars from diverse fields (Weber, 1905;North, 1990; Padgett and Powell, 2012; McCloskey, 2016; Rubin, 2017) researching the subject.
The medieval power of merchant guildsMarkets don’t function well if they are
ridden with frictions like lack of information, lack of trust, or high
transaction costs. In the presence of frictions, business is often
conducted via relationships.
Until the end of the fifteenth century,
impartial institutions like courts and police that serve all parties
generally—so ubiquitous today in the developed world—weren’t well
developed in Europe. In such a world without impartial institutions,
trade often was (is) heavily dependent on relationships and conducted
through networks like merchant guilds. Such relationship-based trade
through dense networks of merchant guilds reduced concerns of
information access and reliability. Not surprisingly, because the
merchant guild system was an effective system in the absence of strong
formal institutions, it sustained in Europe for several centuries. In
developing countries like India, lacking in developed formal
institutions, networked institutions like castes still play an important
role in business.
Before the fourteenth century, merchant
guild networks were probably less hierarchical, more voluntary, and more
inclusive. But, with time, merchant guilds started to become exclusive
monopolies, placing high barriers to entry for outsiders, and they began to resemble cartels with close involvement in local politics. There were two reasons why these guilds erected such tough barriers to entry:
Repeated committed interaction
was the key to effectiveness of merchant guilds. Uncommitted outsiders
could behave opportunistically and undermine the reliability of the
system. Therefore, outsiders faced restrictions.
Outsiders
threatened the position of existing businessmen by increasing
competition. So, even genuinely committed outsiders could be restricted
to enter as they threatened the domination of existing members.
But, in the sixteenth century, the
merchant guild system began to lose its significance as more impersonal
markets, where traders could directly trade without the need of an
affiliation, began to emerge (see Region 1 of map in Figure I) and
rulers stopped granting privileges to merchant guilds. The traders began
to rely less on networked and collective institutions like merchant
guilds, and directly initiated partnerships with traders who they may
not have known well. For example, in Antwerp the domination of intermediaries (called hostellers)
who would connect foreign traders declined. Instead, the foreign
traders began to conduct such trades directly with each other in
facilities like bourses.
