In a famous passage in An inquiry into the nature and causes of the wealth of nations, Adam Smith writes,
People of the same trade rarely get together, even for fun and entertainment, but the conversation ends in a conspiracy against the public, or some ploy to raise prices. It is indeed impossible to prevent such meetings, by a law which could either be carried out or would be in conformity with liberty and justice. But if the law cannot prevent people of the same profession from meeting sometimes, it should do nothing to facilitate such assemblies; much less to make them necessary. ??
In theory, however, guilds could have solved significant market failures. First, there is the asymmetric information problem where sellers know more about a good than buyers and where markets can crash as a result. Second, there are problems in the vocational training market because you cannot borrow from future human capital. Third, new ideas are public goods and, in theory, a decentralized market will provide too little. In European guilds: an economic analysisCambridge economic historian Sheilagh Ogilvie offers a detailed analysis based on data showing that guilds have not addressed these issues. Ogilvie presents her anti-guild case based on her study of two databases that she gathered and generously made public. Its quantitative database has more than five thousand observations and its qualitative database has more than twelve thousand. It turns out that Adam Smith was right after all. Guild members were conspiring to enrich themselves with their clients ?? expenditure, and at the very least, governments should do nothing to facilitate such assemblies; much less to make them necessary. ??
Guilds, in short, were rent seekers rather than market-making innovators. Brand names reduce transaction costs and allow people to distinguish different degrees of quality. The guild’s inspection and certification, however, was not as reliable. As a result, many customers have sought alternative quality control mechanisms, and some cities have established their own quality inspection operations. Guilds haven’t mended a broken market by providing information and certifications. Instead, they broke the market again by putting up barriers to entry.
Another argument in favor of guilds is that guilds and their learning systems provided crucial training that people would not otherwise have been able to obtain and thus increased medieval European economic growth. However, guild learnings are also suspect. First, some of the long learning demands (such as chimney sweeps) were disproportionate to the tasks. Second, there were a lot of ways for people to get learning outside of guilds. Third, many guilds have actively sold memberships granting the buyer a “master”? status without passing an exam or completing an apprenticeship. Guilds, according to Ogilvie, created and appropriated economic rents by controlling entry, not managing quality.
Another argument for market failure is that guilds have contributed to innovation in several ways. First, since people couldn’t compete by lowering prices, they had to (supposedly) compete by innovating. As Tyler Cowen and Alex Tabarrok explain, however, the innovation in response to airline price floors was a waste of what would have happened if prices had been free to change. Second, the monopoly profits attributable to the guild’s restrictions would have financed the innovation. Ogilvie notes, however, that there isn’t much evidence for this. For example, in the case of Dutch shipbuilding, she reports on page 444 that the industry did not introduce any major design improvements after around 1630, the golden urban shipbuilders moved from building new ships to repairing old ones, and almost all new ships were built in the Zaanstreek without a guild. ?? If there is any doubt about her conclusion, does she title a section “Guilds Directly Opposed Innovation”? (pp. 461ff) and cites a few guilds to this effect. For example, in 1604, the bakers of the Middle Rhine ?? the federation of guilds decreed, ?? White bakers completely abstain from any innovation in baking as it is usually practiced in the city ?? (cited at p. 438). The guilds were the enemies, not the friends, Bourgeois Affair.
The most interesting chapter in the book, in my opinion, is Chapter 5 on Guilds and Women. It shows the insider-outsider dynamic of a rent-seeking company at work. On the whole, the guilds did not accept women into their ranks, although they sometimes made exceptions for the wives and daughters of guild members. In the 1770s, for example, the Valencian guild of ropemakers, braiders and buttonmakers opposed the training of girls because they could then compete with men (p. 300). I remember the Illiberal reformers analyzed by Thomas C. Leonard (I review this book here): Many progressive-era labor market reforms aimed to isolate vested interests from competition. The guild’s regulations served the same purpose.
While Ogilvie does not discuss Bruce Yandle ?? s ??Smugglers and Baptists?? model explicitly, the model “or at least the rhetoric” was clearly in play. protect consumers. It appears, however, that corporations did not protect consumers from poor workmanship or unscrupulous producers but from themselves (cf. p. 353). As Ogilvie notes, it was clear that the ?? customers were willing to sacrifice quality for lower prices. Non-guild producers were willing to give them what they wanted rather than what the guild masters knew was best for them.
The guilds of course protected their income by “protecting”? consumers. This quote from the florists of Paris ?? guild ?? s softness notebook at the Estates General in 1789 was amusing in light of the work of the Institute for Justice on behalf of flower arrangers excluded from the market by Louisiana regulations: ?? Today, when everyone can sell flowers and make bouquets, their modest earnings are so divided that they can no longer earn a living ?? (p.83). There will always be victims of creative destruction, and any decent society will take care of them. In case of restrictions to preserve florists ?? incomes, however, we end up with a poorer and uglier world.
European guilds also informs how we understand the ?? dark side ?? of social capital. When economists talk about social capital, we are talking about networks of people. These social networks are ?? fat ?? it makes it easier to get things done. They are also the “social glue” that binds people together. Guilds kept people together and helped them get things done, but they impoverished their neighbors. The kind of social capital that Ogilvie documents has been a destructive factor.
With European guilds, Ogilvie wrote the definitive treatment on the subject. It is also a wealth of examples and illustrations that should help teachers transmit the power of economic thought. It’s a book every economist and historian should know, and I expect it to be the standard book on the subject for many years to come.