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

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