Free market capitalism first developed in northwestern Europe – from where it spread to other strongholds like North America and Australia. Even today, countries like the UK and the Netherlands are notably more market-orientated than other parts of Europe.
But why? In the early modern era, what was so special about cold, wet cities like Amsterdam, Hamburg and London? If new ideas about commerce were going to develop anywhere, why not the glorious cities of Renaissance Italy? Or the kingdoms of Spain and Portugal, which pioneered the Age of Exploration?
And yet it was on the shores of the North Sea, from the 15th century onwards, that a crucial development took place. In a brilliant paper for Vox, Prateek Raj takes up the story:
“Arguably the most important business organisations in medieval Europe were the merchant guilds… These associations of wholesale traders were networked, and were considered reliable, because they were:
- rich conduits of information,
- settings for repeated exchange, and
- avenues for collective action…
“In the medieval era there were no formal institutions like courts and police, and the methods of gaining information about new opportunities were limited. In such a setting, trade in impersonal settings beyond networks was risky and networked trade therefore dominated, especially trade based on relationships.”
The guilds served an important purpose, but they also abused their position:
“Merchant guilds dominated trade in Europe for much of the second millennium, given all the benefits they had in a medieval economy. While they began as voluntary associations of merchants, they eventually morphed into rent-seeking monopolies that enjoyed privileges from rulers and restricted entry…”
With the end of the Medieval era, there were some areas where the guilds lost their grip. Alternative systems of commerce took root – enabling strangers to trade with one another, without having to be part of a privileged in-group.
Prateek Raj shows how the cities where this took place where located within the overlap of two geographical areas. The first was the Atlantic coast (including the North Sea), which provided access to “new sea routes to Asia and the Americas” and therefore opportunities to do business with “unfamiliar traders”. The second area was that part of Europe where printing press technology was in common use:
“Improvements in information technology can reduce search costs and increase standardisation, which can reduce the high coordination costs of impersonal market based (and non-hierarchical) exchange… One such improvement at the end of the fifteenth century was the introduction of the printing press.”
In short, modern capitalism evolved in those cities where merchants had both the motive and the means to do business with strangers.
It’s become fashionable on the left to refer to capitalism in the 21st century as ‘late capitalism’ – clearly anticipating some kind of transition to a post-capitalist era. However, those who’d rather see capitalism reformed than replaced, can look to history for inspiration.
It’s not hard to see the parallels between the crony capitalism of our own era and the mercantilism of the late middle ages. Cosy relationships between monopolistic corporations, too-big-to-fail banks, lobbyists, regulators, officials and politicians, allow established players to stitch up the market as effectively as any medieval guild.
To renew capitalism, we must break the grip of the modern-day mercantilists.