The economic historian Professor Sheilagh Ogilvie is an intellectual heroine of modern classical liberalism. Her work on the operation of proto-industries such as woollens manufacture in sixteenth century Baden Wurttenburg may seem esoteric but its study has a remarkable amount to offer our understanding of modern political economy. Ogilvie’s latest book Institutions and European Trade, (Cambridge University Press: 2011) presents a magnificent history of the economic role of merchant guilds between 1000 and 1800. The guilds were legally privileged associations whose members secured from the state exclusive rights to trade in particular commodities or industrial sectors and were the forerunners of modern trades unions and the cartelised business associations found in ‘corporatist’ regimes. There are three themes that emerge from Ogilvie’s work to which all should pay heed.
First, Ogilvie documents the historic responsiveness of individuals to economic incentives. Using a vast array of sources she offers compelling evidence that serfs, peasant producers and early merchants were highly responsive to changes in relative prices and thus that ‘incentives matter’ when trying to understand what lead to or prevented economic development in different historical periods. By drawing attention to this evidence Ogilvie’s work drives yet another nail in the coffin of those who claim, a la Karl Polanyi (see my post last week ‘Down with Karl Polanyi’ on this) that price responsive behaviour is merely a ‘social construction’ reflecting the obsession of contemporary economists with rational actor modelling.
Second, while the response of self-interested agents to incentives is crucial, whether or not the pursuit of self-interest leads to beneficial outcomes is a function of the institutions which structure these incentives. Specifically, the privileges bestowed on merchant guilds by early European states were a form of highly developed rent-seeking which enriched guild members and state rulers who received political support in exchange for granting legal restrictive practices, while simultaneously blocking access to markets for most ordinary people and thus stifling the potential for wider economic development. As such, Ogilvie’s work directly contradicts the panglossian ‘whatever was, was efficient’ view that characterises some versions of neo-classical economic history. According to the latter, owing to the absence of viable alternative methods for contract enforcement, the provision of security to traders, and the minimisation of asymmetric information problems in quality control, the legal privileges granted to merchant guilds were an optimal form of economic organisation given the conditions of the age. Using a wide breadth of sources, however, Ogilvie demonstrates a) that alternative and potentially more efficient methods of organising trade and enforcing contracts (such as private arbitration) were in fact available; and b) that ordinary people who sought access to markets were prevented from using these methods as guild members used the power of the state to maintain monopolistic control.
In drawing these conclusions, Ogilvie’s work sides with the Virginia school of public choice theory and Douglas North’s institutional economics against the ‘myth of government failure’ perspective reflected in the work of Chicago school economists such as Donald Wittman. The former recognises the role that power structures play in preventing efficiency enhancing moves. That those who lose from such structures fail to mobilise effectively against them should not be taken as evidence of the absence of inefficiency any more than the fact that revolutions against oppressive regimes are rare should be taken as evidence that dictatorships are welfare enhancing. Though it may be in the collective interests of the ‘losers’ to bring about institutional reform it may not be individually rational to join such a mobilisation given the high costs and the miniscule chance that a personal contribution will decide the final outcome. Collective action problems of this nature are a major blockage to institutional reform.
Third, while guild institutions might seem to reflect a form of ‘social capital’ of the sort eulogised by the communitarian left and by ‘Red Tories’ such as Philip Blond, this was a thoroughly exclusive form of ‘solidarity’ which impeded wider progress. Solidarity was for guild members only. The corporatist structures enforced by the pre-industrial state stifled innovation and economic growth and contributed to the systematic exclusion of women, members of ethnic and religious minorities and other ‘outcast’ groups deemed not to conform to prevailing community norms. In contrast to countries such as Germany, where the guilds were at their most powerful, the more liberal economies of the Netherlands and England which did not enforce guild privileges were much more successful in the promotion of innovation and growth and provided superior employment and social opportunities for women and ‘un-conventionals’.
Though it delves into the mists of time Ogilivie’s work should resonate with a generation that inhabits an age of auto-bail-outs, state supervised banking cartels and public sector unionism. Her message is a thoroughly classical liberal or libertarian one. Beware of those who use the power of the state to protect ‘the community’ from ‘the market’. More often than not they seek privileges – which cannot be supplied to all.