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International trade and institutional change: Medieval Venice’s response to globalization

International trade and institutional change: Medieval Venice’s response to globalization

By Diego Puga and Daniel Trefler

Discussion Paper, Centre for Economic Policy Research, 2012

Venice in 1565 - Venice, engraving by Hogenberg and Braun from the Civitates Orbis Terrarum

Abstract: International trade can have profound effects on domestic institutions. We examine this proposition in the context of medieval Venice circa 800-1350. We show that (initially exogenous) increases in long-distance trade enriched a large group of merchants and these merchants used their new-found muscle to push for constraints on the executive i.e., for the end of a de facto hereditary Doge in 1032 and for the establishment of a parliament or Great Council in 1172. The merchants also pushed for remarkably modern innovations in contracting institutions (such as the colleganza) that facilitated large-scale mobilization of capital for risky long-distance trade. Over time, a group of extraordinarily rich merchants emerged and in the almost four decades following 1297 they used their resources to block political and economic competition. In particular, they made parliamentary participation hereditary and erected barriers to participation in the most lucrative aspects of long-distance trade. We document this ‘oligarchization’ using a unique database on the names of 8,103 parliamentarians and their families’ use of the colleganza. In short, long-distance trade first encouraged and then discouraged institutional dynamism and these changes operated via the impacts of trade on the distribution of wealth and power.

Introduction: Venice has always presented two faces. As a great medieval trading centre its wealth was used to build not only beautiful architecture, but also remarkably modern institutions. This is nowhere more obvious than in the Doge’s palace, whose grand Sala Maggiore housed a parliament (established in 1172) composed of the rich merchants that monitored and constrained most of the Doge’s activities. But climb up to the top floor of the palace and one enters the clandestine rooms of the secret service. With each passing decade after its establishment in 1310, this secret service was used to buttress the powers of a smaller and smaller number of families whose spectacular wealth was fed by international trade. This paper tracks the evolution of Venice’s pre-1300 growth-enhancing institutional innovations and then Venice’s loss of institutional dynamism after 1300. Our main thesis is that both these developments were the outcome of a single shock, the rise of international trade. International trade led to an increased demand for growth-enhancing institutions, but trade also led to a shift in the distribution of income that allowed a group of increasingly rich and powerful merchants to derail institutional dynamism in their quest to capture the rents associated with international trade.

Two strands of the literature are particularly relevant to this thesis, one dealing with medieval European trade and the other with the Atlantic trade. Medieval Europe experienced a massive expansion of long-distance trade during the ‘Commercial Revolution’ of 950–1350 e.g., de Roover, Lopez and North and Thomas. At the same time, medieval Europe also embarked on a set of major institutional reforms that laid the groundwork for the Rise of the West. Greif establishes a causal connection between institutions and long-distance trade: Europe’s initial institutions facilitated the expansion of long-distance trade and, more importantly for our thesis, the resulting expansion of trade created a demand for novel trade- and growth-enhancing institutions. These included property-right protections that committed rulers not to prey on merchants, a nascent Western legal system that included a corpus of commercial law known as the Law Merchant, publicly provided monitoring and enforcement of commercial contracts, and self-governing bodies such as business corporations. All of these are hallmark institutions of the Rise of the West.

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