Economic history is widely supposed to support the idea that successful economies do not require public order institutions – those associated with formal authorities such as states, rulers, and legal systems – because private order institutions – those formed through informal collective action by individuals – can substitute for them. This is taken to imply that modern poor economies can achieve sustained growth without well-functioning governments or legal systems, since private-order substitutes have a successful historical record of supporting growth (e.g. World Bank 2002; see also Dasgupta 2000, Helpman 2004, Dixit 2004, 2009). These claims are arresting, but the facts tell a different tale.
Public order institutions matter
History does hold lessons for economic development, and one of them is that public-order institutions are crucial – for good or ill.
The medieval Champagne fairs are regarded as the classic exemplars of beneficent historical institutions that hold important lessons for modern economic development. These trade fairs operated as the undisputed fulcrum of international exchange and financial settlements in Europe from c. 1180 to c. 1300 and were central to the ‘Commercial Revolution’, the huge growth in long-distance trade during the Middle Ages (Bautier 1970, Ogilvie 2011, Edwards and Ogilvie 2012).
The idea that the Champagne fairs succeeded because of private-order institutions has taken two distinct forms:
- First, Milgrom et al. (1990) argued that international trade grew at the Champagne fairs because of private order courts in which private judges kept records of traders’ behaviour.
By communicating merchants’ reputations, private judges enabled traders to boycott those who had previously defaulted on contracts. Private judges also levied fines for misconduct, it is claimed, which merchants paid because non-payment meant losing all future opportunities to trade at the fairs. Institutional arrangements combining private judges and individual reputations created incentives for all traders to fulfil contractual obligations, even though state enforcement was absent and repeated interactions were rare. From this portrayal of the Champagne fairs, Milgrom et al. concluded that medieval trade expanded through merchants’ developing “their own private code of laws”, employing private judges to apply these laws, and deploying private-order sanctions against offenders – all “without the benefit of state enforcement of contracts” (Milgrom et al. 1990).
In actual fact, however, there were no private judges at the Champagne fairs. On the contrary, the fairs were supported by a rich array of public order institutions (Bautier 1970, Terrasse 2005, Edwards and Ogilvie 2012). One was a dedicated public law court which operated throughout each fair. The fair wardens who decided the cases in this court were princely officials, not private judges. International merchants also used other levels of the princely justice system to enforce their contracts – the high tribunal of the ruler of Champagne, the courts of the ruler’s bailiffs, and the courts of the ruler’s district provosts (Edwards and Ogilvie 2012). The towns where the fairs were held operated their own municipal courts, and local abbeys operated special courts at the fairs – international merchants made use of both (Bourquelot 1839-40, Bourquelot 1865, Bautier 1952). The jurisdiction of these various legal tribunals which guaranteed property rights and contract enforcement at the Champagne fairs emanated not from the merchants, but from the public authorities, since even the municipal and abbey courts operated under devolved jurisdiction granted by the rulers of Champagne. Furthermore, there is no evidence that any of these tribunals applied a private, merchant-generated law code (Edwards and Ogilvie 2012). The Champagne fairs thus provide no support for the idea that private-order institutions can substitute for missing public order institutions in enabling economies to function successfully:
- A second claim about private order institutions at the Champagne fairs is that of Greif (2002, 2006a, 2006b), who argued that trade at the fairs was sustained by a “community responsibility system”, consisting of collective reprisals between corporative groups of businessmen.
In this portrayal, public law courts did exist in medieval Europe, but could not support long-distance trade because they were controlled by local interests and were biased against foreign merchants. Instead, it is claimed, a private order institution called the community responsibility system provided incentives for local courts to supply impartial justice.
According to this account, all long-distance traders were organised into communities or guilds. If a member of one community defaulted on a contract with a member of another and the defaulter’s local court did not provide compensation, the injured party’s local court would impose collective reprisals on all members of the defaulter’s community. The defaulter’s community could only avoid such sanctions by ceasing to trade with the injured party’s community. If this prospect was too costly, the defaulter’s community had an incentive to provide impartial justice. It is claimed that this combination of corporative justice and collective reprisals provided the institutional basis for long-distance trade in the early centuries of the Commercial Revolution, and that the Champagne fairs were a prime example of this private-order institution in operation. Specifically, the legal system of the Champagne fairs is supposed to have lacked jurisdiction over visiting merchants – the fair authorities “relinquished legal rights over the merchants once they were there. An individual was subject to the laws of his community – represented by a consul – not the laws of the locality in which a fair was held” (Greif 2006b). Enforcement of merchant contracts, according to this view, relied on the exclusion of defaulting debtors and their entire communities from the fairs. This threat of collective reprisals, it is argued, made merchants’ communal courts compel defaulters to fulfil their contracts (Greif 2002).
The historical evidence does not support these ideas
The rulers of Champagne did not relinquish jurisdiction over visiting merchants and never permitted them to be subject solely to the laws of their own communities. For the first 65 years during which the fairs were international trading centres (c. 1180–1245), all visiting merchants were subject to the public legal system prevailing at the fairs. In 1245, the count of Champagne issued a charter exempting a subset of visiting foreign merchants from judgement by his officials, but only by bringing them under his direct jurisdiction as ruler. The role of merchant communities at the Champagne fairs was quite minimal (Bautier 1953, Edwards and Ogilvie 2012). No merchants had community consuls at the fairs for the first 60 years of the fairs’ international importance, from c. 1180 to c. 1240. Many important groups of merchants at the fairs never had consuls or communities at all. And even the few groups of merchants that did have community consuls in later phases of the fairs’ existence (after c. 1240) could only use them for internal contract enforcement. To enforce contracts between their members and merchants of different communities, they relied on the public legal system (Edwards and Ogilvie 2012). The Champagne fairs flourished as the most important centre of international trade in Europe for 80 years with no recorded collective reprisals, which were only used, in a limited way, in the final phase of the Champagne fairs’ ascendancy, after c. 1260 (Bourquelot 1865, Bautier 1970, Edwards and Ogilvie 2012). The reprisal system was fully integrated into the public legal system – the right of reprisal required a series of formal legal steps in public law courts, and the enforcement of reprisals relied on state coercion (Ogilvie 2011, Edwards and Ogilvie 2012). The few merchant communities at the Champagne fairs played no observable role in implementing reprisals. The Champagne fairs provide no evidence that private order collective reprisals underpinned long-distance trade in the absence of public order institutions.
The lessons from the Champagne fairs
The Champagne fairs do, however, provide positive lessons for economic development.
- One major lesson is that the policies and actions undertaken by the public authorities are crucial (Ogilvie 2011, Edwards and Ogilvie 2012).
The courts of Champagne are a vivid example of the importance of well-functioning political authorities in providing the minimal requirements for market-based economic activity to flourish. They guaranteed security, property rights and contract enforcement, they built infrastructure, they regulated weights and measures, they supported foreign merchant lenders against politically powerful debtors, and they ensured equal treatment of foreign merchants and locals (Edwards and Ogilvie 2012).
- A second major lesson is that economic success is better guaranteed by ‘generalised’ institutions which are accessible to all economic agents, not ‘particularised’ institutions such as communities or guilds which guarantee property rights and contract enforcement only to members of privileged networks (Ogilvie 2011, Ogilvie and Carus 2014).
The distinguishing characteristic of all the institutional services that supported international trade at the Champagne fairs was that the rulers provided them not as privileges granted to specific merchant guilds or communities, but rather as generalised guarantees issued “to all merchants, merchandise, and all manner of persons coming to the fair” (Alengry 1915).
The Champagne fairs declined when the French regime that took over the fairs after 1285 ceased to provide the generalised institutional mechanisms that had attracted and sustained international trade. Security of property rights, contract enforcement, and access to commercial infrastructure were no longer guaranteed as generalised services but rather became particularised ‘privileges’ offered (and denied) to specific merchant communities in order to serve the short-term interests of French royal policy. The public authorities no longer offered a level playing field to all merchants, but granted privileges that favoured particular interest groups and discriminated against others. Merchants moved to cities with more generalized institutions (Edwards and Ogilvie 2012).
The Champagne fairs do hold lessons for economic development. They show that the public authorities were crucial – for good or ill. Private order institutions did not guarantee contract enforcement, property rights, or commercial infrastructure. When rulers provided these as generalised institutional services to everyone, the fairs flourished. When they granted them to privileged groups and denied them to others, trade declined and business moved elsewhere.
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