Emergence of Modern Impersonal Exchange: Role of Formalization in the Rise of Modern Capitalism

45 Pages Posted: 24 Jul 2017 Last revised: 15 Apr 2019

See all articles by Prateek Raj

Prateek Raj

Indian Institute of Management (IIMB), Bangalore; University of Chicago - George J. Stigler Center for the Study of the Economy and the State; University College London - School of Management

Date Written: April 11, 2019

Abstract

Business can be organized in multiple forms: as relations, hierarchies or markets. Of these, the dominance of markets in business is a modern and emerging phenomenon. What are the enabling conditions that give rise to markets, and the decline of other particularized forms of doing business? I study the question empirically by investigating the decline of merchant guilds and the rise of impersonal markets. For much of the second millennium, merchant guilds were the dominant organizational form in which trade was conducted in Europe. While merchant guilds persisted throughout Europe until the onset of the industrial revolution, they began to decline in Northwestern Europe in the sixteenth century. To explain the pattern, I hypothesize that networked institutions such as merchant guilds decline when an economy is exposed to trade and information shocks that reduce moral hazard and incomplete information, and reduce the need to rely on embedded institutions such as merchant guilds. I construct a dataset of medieval and early modern European cities and argue that merchant guilds declined and impersonal markets emerged in sixteenth century Northwestern Europe because the region benefited simultaneously from two revolutions: the commercial revolution at the Atlantic coast and Gutenberg’s printing revolution.

Keywords: Markets, Network structure, Organizational forms, Regression analysis, Historical analysis, Case study

JEL Classification: N13, N23, N43, N73, N93, Z13

Suggested Citation

Raj, Prateek, Emergence of Modern Impersonal Exchange: Role of Formalization in the Rise of Modern Capitalism (April 11, 2019). Available at SSRN: https://ssrn.com/abstract=2994833 or http://dx.doi.org/10.2139/ssrn.2994833

Prateek Raj (Contact Author)

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India
+918026993123 (Phone)

HOME PAGE: http://www.iimb.ac.in/profile/77

University of Chicago - George J. Stigler Center for the Study of the Economy and the State ( email )

Walker Hall
Chicago, IL 60637
United States

University College London - School of Management ( email )

Gower Street
London, WC1E 6BT
United Kingdom

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