Lecture 4:
Early Commerce
ECON 451
Fall 2012
Professor David Jacks
1
The main issue we will be exploring is what
explains the resurrection of domestic and
international trade in the medieval period.
The implicit issue being what role does this have
in long-run European economic growth.
Background: where we left off last week…
Rome.
Introduction
2
Remember that the Roman Empire reached its
peak from the late 1st Century to the early 3rd
Century (roughly 90-215 AD).
And that one of the most important aspects of
the Roman economy was the degree of
specialization and trade it was able to achieve.
The Roman Economy Redux
3
And the fall of Rome produced extreme political
fragmentation.
This resulted in:
1.) The creation of personal fiefdoms (involution
and “keeping them on the farm”).
2.)
The Roman Economy Redux
4
This is where we pick up the story…
Standard economic theory would probably stop
at considering the political and (maybe) physical
barriers to trade.
But there are some elements to be resolved:
1.) How does trade come about (or more
precisely, come about again)?
The Revival of Trade
5
To most economists, the personal gains from
trade would be enough to propel interested
parties to engage in quid pro quo behavior.
In one of the most influential narratives of this
time, North and Thomas’ (1971) argue along
these lines:
medieval population growth→migration→
differing factor endowments→
specialization→“trade was created”.
The Revival of Trade
6
But the real world does not work quite so
smoothly and automatically because time
elapses between the quid and the quo.
And this a world of slow transport and
communication.
Basically unchanged speeds of travel/ since
Rome, roughly 35 kilometers per day at best
E.g., Genoa to London, a route of roughly 2100
kilometers by sea, thus, roughly 60 days at sea.
The Revival of Trade
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Begs the question of how long-distance trade
could emerge and be sustained in the face of:
1.) Uncertainty over the actual arrival and time
of transit for itinerant merchants (opportunity
costs, profits, and price differentials)
The Revival of Trade
8
This condition is the fundamental problem of
exchange.
Individuals enter into mutually beneficial
relationships:
1.) only if they recognize them as such
The Revival of Trade
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Notice this implies a few critical elements:
1.) Information (but not necessarily perfect)
about the potential gains from trade and/or
market conditions.
2.)
The Revival of Trade
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Again, think about Europe in 1000 AD:
1.) Poor communication→limited information.
2.) Domestically, lack of strong governments to
enforce contractual obligations.
3.) Internationally, things appear even worse;
The Revival of Trade
11
At the same time, trade did emerge again, and
we are left with the question of how information
flowed and incentives were formed.
So, we will be looking at institutions that
governed the relations between:
1.) merchants and overseas agents (coalitions)
2.) foreign rulers and overseas merchants
(merchant guilds)
3.) among merchants (Law Merchant)
The Revival of Trade
12
What coalitions, guilds, and the Law Merchant
have in common is that they are all examples of
private-order institutions.
These are a set of constraints of rules for
interaction which individuals adopt to foster
“order”.
The Revival of Trade
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Law Merchant was simply a body of rules laid
down by merchants themselves to regulate their
dealings with one another.
Critically, it was an adaptive institution so that
these rules could change in nature and increase
in number, allowing the concept of precedence
to guide this evolution.
Basis of most commercial law in present-day
Europe and North America.
Law Merchant
14
Origins mainly stem from (or at least coincide)
with the heyday of the Champagne fairs in the
12th/13th century.
Champagne fairs were a circuit of six mercantile
fairs held roughly every two months.
The fairs acted as a central market for goods and
gave rise to sample trade.
Law Merchant
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Law Merchant
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The fairs also acted as a multi-lateral payments
clearing house.
Simple example of multi-lateral payments:
I owe Robbie $1000.
Robbie owes Danny $750.
Danny owes me $1250.
Individual payments total $3000.
Law Merchant
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This conservation of cash amounted to an
expansion of credit.
This expansion of credit in turn lead to:
1.) higher volumes of trade
2.) development of new financial instruments
Law Merchant
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