The Myth of the Merchant Guilds

It's been awhile since I've posted anything, but a book I just finished reading on merchant guilds by the Cambridge economic historian, Sheilagh Ogilvie, deserves some attention. With an insipid title like "Institutions and European Trade: Merchant Guilds, 1000-1800", one could be forgiven for overlooking such a gem, but don't let this one pass you by. It took me a number of weeks to creep through its pages, not because of its being convoluted, but rather because Ogilvie has provided such overwhelming and thorough historical evidence to support her claim.

What is her claim, exactly? It's that, contrary to popular opinion, merchant guilds were largely inefficient, monopolistic, rent-seeking organizations that only created benefits for its members and the heads of state that empowered them. Guilds often used their political privileges to muscle out or to penalize competitors offering cheaper alternatives or encroaching on a monopolized trade route and guilds would even use their privileges to limit the supply of their monopolized good in order to reap even greater profits at the expense of consumers. Now, I was already aware of the general economic hurt that was often imposed by merchant guilds on the overall economy, but to see such a comprehensive dismantling of a long-cherished, leftist shibboleth, as organized labor has become, left me astonished. This book provides a wealth of humiliating evidence of guild arrogance, ineptitude, and cruelty. Ogilvie impartially analyzes a historical record of roughly 800 years and spanning geographically from Spain to Byzantium to see if merchant guilds were helpful in alleviating six economic problems claimed by various theorists: state extortion, commercial insecurity, contract enforcement, principal-agent relationships, imperfect information, and economic volatility. None of these dilemmas were largely remedied by the merchant guilds. At best, Ogilvie found merchant guilds to be peripheral players in solving these economic problems.

In fact, she sums up the general lousiness of guilds quite nicely early on in the book:

"Merchant guilds secured legal privileges which gave their members the sole right to trade in particular sectors. Merchant guilds excluded most people from membership: they barred trade by women, Jews, immigrants, peasants, the poor, particular ethnic groups, different religions, and people their members simply didn't like. Merchant guilds regulated how their own members could do business, limiting competition, so customers had to pay higher prices. Guilds bribed and lobbied officials and rulers to enforce their privileged position. They engaged in bitter conflict--even violence--against individuals and other guilds who tried to infringe on their trading privileges. Merchant guilds thus had a dark side -- they used their social capital to seek 'rents' (monopoly profits) and distort markets in favour of their members. Monopolies, market distortions, and rent-seeking are not efficient: they reduce aggregate well-being and economic growth. Nor are they socially just: they redistribute resources from outsiders to insiders."(p. 3)

Some have asked why, then, were merchant guilds so prominent for so long if they were so inefficient. It was because the guilds provided kickbacks or offered services to rulers in exchange for privileges. Guilds did everything from giving their rulers cash transfers to assisting the rulers in enforcing and collecting trade taxes. Sometimes guilds provided loans on favorable terms as the Venetian merchants did to acquire their extensive monopoly when they gave the Byzantine Emperor, Alexius I, a tremendous military loan in 1082. The result of that loan was that Venetian merchant colonies were then excused from dealing with customs officials in most Byzantine ports, and thus excused from paying the usual 10% duties that merchants were required to pay.

As mentioned, another benefit that rulers occasionally gained from merchant guilds was military or naval assistance. Ogilvie says quite plainly that "Genoese, Pisan, Venetian, Catalan, Provencal, and Anconitan merchant colonies got monopolies, tax breaks, customs exemptions, trading compounds and other commercial privileges in the ports of Palestine and Syria from the eleventh to the thirteenth centuries in return for naval and military assistance to the Crusader authorities."(p. 179).

Of course, a vow of political support was persuasive too. Therefore, merchant guilds were so prominent of an institution throughout the centuries simply because they had a symbiotic relationship with the State, not because they were more efficient than all of the alternative mechanisms.

In maybe the most telling portion of the book, Ogilvie closes by suggesting that particularized institutions, like merchant guilds, did not generate trust between people as has been often assumed by sympathetic theorists. If anything, they they were a conservative hindrance to greater prosperity. It was the generalized institutions like the marketplace or a predictable and just legal framework, applicable to foreigners and locals alike, that led to greater trust amongst strangers and, thus, to the Commercial Revolution.

"This book has found that merchant guilds fostered a particularized, not a generalized, trust in persons. Members of a merchant guild trusted each other and were willing to transact with each other because of the personal attributes associated with membership in that guild, and because the guild itself penalized deviations from corporate norms…As Chapter 6 showed, merchant guilds fostered not only distrust of strangers but violence against them…Merchant guilds thus did not create a generalized trust in persons, encouraging transactions with strangers. If anything, they did the opposite." (p. 430)

So, if you want a book that thoroughly and impartially weighs the evidence concerning the economic and political impact of guilds as well as the history and development of guilds in Europe, then I strongly suggest this book. The material may seem dry but, thankfully, with direct and clear prose, Ogilvie's book has effectively become the new benchmark for guild history and it's one that carries profound implications on contemporary issues like the purported benefits society derives from labor unions. My guess is that those benefits have been grossly exaggerated and likely siphoned off to the union members at the expense of outsiders.