What A 16th Century Guild Teaches Us About Competition : Planet Money Guilds set up a system of fines, wage ceilings, and public rebukes that would be the envy of a modern cartel.
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What A 16th Century Guild Teaches Us About Competition

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(SOUNDBITE OF FILM, "MONTY PYTHON AND THE HOLY GRAIL")

UNIDENTIFIED ACTOR: (As peasant) Didn't know we had a king. I thought we're an autonomous collective.

MICHAEL PALIN: (As Dennis) You're fooling yourself. We're living in a dictatorship, a self-perpetuating autocracy in which the working class...

UNIDENTIFIED ACTOR: (As peasant) There you go, bringing class into it again.

PALIN: (As Dennis) That's what it's all about.

(SOUNDBITE OF SONG, "WATCH N' LEARN")

RIHANNA: Oh, baby, baby. Oh, baby, baby. If you learn now, if you learn now, if you learn how, I’ll stay.

ADAM DAVIDSON, HOST:

Hello, and welcome to PLANET MONEY. I'm Adam Davidson.

ROBERT SMITH, HOST:

And I'm Robert Smith. Today is Tuesday, March 27, and that was "Monty Python And The Holy Grail" you heard at the top.

DAVIDSON: Today on the podcast, a fascinating tale of free-spirited, entrepreneurial economic activity in which women and minorities are able to work together and create an amazing economic flourishing, which is then crushed by economic monopoly, discrimination, sexism, anti-Semitism. It's an amazing tale, and it all takes place in a remote valley in southwest Germany in the 1500s. But, it is surprisingly relevant today. It's one of the most fascinating interviews I've done in a while. It's an exploration of guilds.

SMITH: But first, the PLANET MONEY Indicator with Jacob Goldstein.

JACOB GOLDSTEIN, BYLINE: Today's PLANET MONEY indicator, 3.8. Home prices fell by 3.8 percent over the past year. This is according to the latest numbers that are out today from the Case-Shiller Home Price Index. This decline, it means that we are now nearly six years into the housing bust at a new post-bubble low for home prices.

SMITH: This is so frustrating because it's like watching a guy fall off a cliff slowly. For six years, he has not yet hit the bottom. And, I've got to say, every month, I think, as we see signs of a little nascent recovery out there, I think, this is it - home prices are at the bottom, they're headed back up. And it just doesn't happen.

GOLDSTEIN: Yeah. It hasn't happened yet. And there are, in fact, all of these other housing indicators that are sort of more promising right now, right? We've seen that glut that I talked about a lot last year where there were too many homes for sale and not enough buyers. That's basically gone. Supply and demand is sort of back into its normal, healthy shape in the housing market. Homebuilders seem to be getting more optimistic and, you know, starting to build new homes again. The home-price-to-rental ratio, which is basically the way to think, well, are home prices overvalued, or are they about right? That's about normal. That looks about right now. So there are all these ways where you can look and say, yeah, it looks like the housing market is better now. Except what is probably the single most important housing-related indicator, the Case-Shiller Home Price Index, still tells us home prices are falling.

SMITH: Because you were telling us that there is a little bit of a lag here with Case-Shiller.

GOLDSTEIN: Yeah. So you and I were talking about that before, and there is that. So this Case-Shiller number, it's from January, but that actually is an average of November, December and January. Right? So yeah, sure. If you really want to think, well, shoot, maybe home prices are going up already and Case-Shiller just hasn't hasn't caught up to it yet, sure. You want to think that, that could be so.

SMITH: (Laughter) Thanks, Jacob.

GOLDSTEIN: Thanks.

SMITH: And now onto medieval guilds.

DAVIDSON: So, Robert, as you know, I am fascinated by economic history, and I have for years now been exploring this particular puzzle. You know, for all of human history, from the launch of cities in ancient Sumeria until sometime in the 1700s, life was pretty much stagnant. A farmer in ancient Sumer or ancient Egypt or ancient Rome had pretty much the same life as a farmer in 1600s England. And then all of a sudden in the 1700s, massive growth for good and ill. You know? We live longer, we're healthier, we have more options. Of course, the environment is one of the main problems we have, but also just the complete collapse of what came before. And economists don't understand exactly what happened. Why was there this sudden shift? But one of the keys is guilds. What were these things, these central forces that organized the economy of the pre-modern world? That is what I've wanted to know for a very long time. And finally I realized, hey, wait a second. We have this podcast here. I get to call, like, the leading economic historian of guilds and just ask her, hey, walk me through. What was a guild? And so I spoke with Sheilagh Ogilvie. She's an economic historian at Cambridge University in England, although, as you'll hear, she's Canadian. And she said, I have the perfect way to tell you about guilds.

SHEILAGH OGILVIE: When I was a graduate student working in the Black Forest of southern Germany, I found these little booklets. And there were about 160 of these tiny little booklets. And they were the annual accounts of a guild of rural and urban weavers which had sprung up in this remote valley in the 1590s and kept annual account books of everything they did until the 1760s. And I started to read these and found out about, in almost day-to-day detail, exactly what this guild was doing over a period of nearly two centuries. And, what they were was, they started out as about 80 men. Guilds were almost exclusively male in medieval and early modern Europe. And they got together in the 1590s because a new occupation had arisen, which was the weaving of something called worsteds, which were sort of a new form of woolen fabric. And they'd been doing it for about, like, I don't know, 15 or 20 years. But they had got worried because a lot of people from other occupations, other crafts or peasants, and even women, they complained, were moving into what they regarded as their craft. And so they got together and collected money door to door so that they could go to the capitol and lobby for a monopoly that would mean that only members of this group of 81 guys would be allowed to produce these worsteds anymore.

DAVIDSON: Was there - I mean, so the basic story about guilds, and the story we're going to get into, is that guilds, among other things, suppressed innovation. They kept innovation from happening. Do you see that? Is the pre-guild period, is there a wider variety of worsteds, a more quick adoption of innovative ways of - do you say worsting, or, what?

OGILVIE: Worsted weaving.

DAVIDSON: Worsted weaving. Yeah.

OGILVIE: Well, yes. If you - in fact, as I mentioned, this particular guild arose only after this industry had existed out in the remote countryside of southwest Germany for 15 or 20 years. So it arose in a completely unguilded environment out in the countryside. And it was initially extremely dynamic because it arose out of nowhere. There hadn't been worsted producing going on in this region before, and they produced all sorts of new types of fabric. They responded very quickly to changes in fashion and changes in demand. And so with the first couple of decades, they were extremely innovative. And, indeed, even after the guild was first formed, it took maybe a generation or so for the kind of constraints that the guild started imposing to begin to bite.

DAVIDSON: Take me to a guild meeting. You know, you've read all these minutes. Just what do you imagine? Is it at someone's house? Was there a guild hall? Was there a public meeting place?

OGILVIE: They went - they were - they went to their guild tavern. So, you know, this small town in the northern Black Forest called Wildbad (ph) had three or four taverns at the time. And the worsted weavers' guild adopted one of the town taverns as their place. And every year, actually, it was usually twice a year that they had their annual assembly, and they summoned everybody in, both from that little town, which had about, I don't know, 1,200 people in it, and then from all the surrounding villages 'cause the villagers who wanted to weave also had to be members of this guild.

DAVIDSON: So it's more than 81 all together?

OGILVIE: Yeah. In the end, it had a membership of about 200 weavers coming from half a dozen different communities. So you have to imagine a gathering in a pub in this small town.

DAVIDSON: So it's a big pub. I was picturing, like, a tiny little shack, but...

OGILVIE: No, no. It was quite a big pub. And in fact, if you go to Wildbad now, they have wonderful pubs. I can recommend it.

DAVIDSON: (Laughter) OK.

OGILVIE: (Laughter). But the ordinance of the craft was read out loud so that nobody had any excuse not to know what the rules were. And the rules would include things like, not paying your spinners higher than the agreed rate. So everybody - and this was a problem because there was a lot of competition for the labor of female spinners, who were not members of the guild. And so all the guild masters got together, and they agreed that they wouldn't pay above a certain level so that they wouldn't compete with one another for female spinning.

DAVIDSON: So a really good spinner got the same as a pretty bad spinner?

OGILVIE: Yes. And that was one of the real problems in increasing both - well, increasing quality in this industry, and also introducing innovations. Because as the 17th and 18th centuries passed, new innovative forms of worsted were invented, but they required very careful, much finer spinning. And, of course, if you aren't allowed to pay any spinner more than 8 koitze (ph) a pound of wool, her incentive is going to be to spin very fast because she's not going to get any more money for better yarn. And then, of course, the whole industry suffered, and the guild itself suffered in the long run because they could never prevail on their spinners to produce fine yarns. So it was...

DAVIDSON: And why couldn't - what was the barrier to solving that problem? Like, it seems like this is a perfect scenario where you have all the weavers in town, and they could just get together and say, you know what, guys? If we stop paying them by the pound and we start paying them by quality or, you know, we create an incentive plan where if your quality is over X, we'll, you know, you get a bonus or whatever, that the weavers as a group could get richer while still suppressing competition. So why didn't they do that?

OGILVIE: I think that the weavers could never get their act together and decide that it would be in all of their best interests to allow people to pay spinners more. Because I think the problem was that some of the products, some of the cloths that were produced were low quality, and you wanted coarse yarn. And you wanted to pay a low price for them. And some, a few, just a few weavers might have wanted to experiment with these finer cloth varieties. But that, of course, would have meant that there was inequality among the weavers. And I think one of the things about guilds was often that they - you know, you have to imagine these 200 guys getting together, and there was a lot of worry that if you allowed deviations from the guild rules, a few people would behave competitively and put the other ones out of business.

DAVIDSON: And I have to assume is - I mean, I'm picturing, you know, the more powerful people are the wealthier people, which sort of by definition means it's the people profiting the most from the current system. And so my guess would be the people who want to challenge the current system by creating higher-quality product and paying spinners more are probably the young upstarts. And so the people who are powerful, I could imagine, would say - would see zero incentive in creating a new system in which they, the older, more powerful, more established people, lose out to the younger hotshots. And so maybe as a group the weavers suffer, but the tiny elite get to maintain their elite status.

OGILVIE: Exactly. And that's - I mean, behind the facade of these very egalitarian entities known as guilds, we - everything we know suggests that they were actually very unequal, that there were all sorts of conflicts and fissions inside the guild. And you're quite right that younger, nimbler upstarts, or people who aren't doing so well under the existing system will think if the world changes, I can't possibly be worse off than I already am. Whereas the powerful guys who are really benefiting from the existing system won't want that system to change. Even if it could benefit everyone, it wouldn't necessarily benefit them.

DAVIDSON: And I have to say that there are analogues to our modern situation, as well, where you do see industries that are on the ropes in America do go to Washington and try and prevent new upstarts. In fact, many would argue that Hollywood and the music industry, their obsession right now with copyright protection, or the software industry, some of their obsession with patent protection, is this in practice? I mean, this is an argument that basically there are the young upstarts who see a completely different way of distributing music and movies or see a completely different way of creating software. And the old established ones who got rich off the old system, the last thing they want is to encourage the free movement of data and information around the Internet and, you know, because they were so successful and because they're so profitable on an old system, they don't have an incentive to really explore some new business model all that well. And that we're seeing, you know, certainly not the identical thing, but we're seeing a similar political economy right now.

OGILVIE: Exactly. And, I mean, I think it's one of the great challenges for any policymaker in any society - in medieval Europe, in early modern Europe, or during the Industrial Revolution or today - which is to try to ensure that the sort of creative destruction which we associate with a dynamic economy that's really good at inventing new things and responding flexibly to changes and satisfying consumers as well as producers, that that sort of creative destruction happens. Because if a firm or a business is producing in an inefficient way, it's using large amounts of inputs to produce not very much output and not very good output. And it's very important for the economy at large that that sort of business should actually be allowed to quietly stop being a business and stop using up resources so that those resources can be used more efficiently. It's sad for the existing producer, and I think that that's very much why guilds existed and why the kind of lobbying to, you know, prevent, you know, to prevent huge car companies, for example, that are not producing very efficiently anymore, there's always lobbying to stop them from going out of business.

DAVIDSON: Right. Capitalism requires failure as much as success. It's a central part of the system. And you lose the failure, and the whole system eventually becomes sclerotic and dies.

OGILVIE: Yes.

DAVIDSON: So all right. So we're in the bar, or, we're in the pub, and...

OGILVIE: Yes. And probably the next thing that would happen would be the punishments. Because perhaps in the course of the preceding year, someone had - one particular master had paid his spinner too much, or perhaps some master had produced a type of cloth that he had customers for but that didn't correspond to the guidelines on the kind of equipment you should use, or how wide your cloth should be or whatever it was that the guild ordinance said. And if he did that, he would be called up at the guild assembly, and his excuses would be heard and then he would probably be fined for doing something that was against the rules.

DAVIDSON: All right. So now let's just talk about an average guild member. Take me to their shop just on an average day. Is it in their house? Is it a separate building?

OGILVIE: It would be mainly in their houses. And although we have this sort of ideal picture of the medieval or early modern craft workshop as consisting of the master and a bunch of journeymen and apprentices, actually - at least, in this guild, and in many others that I've looked at - it was more unusual than standard to have a lot of guild servants. So you were - it was usually - the guild workshop was usually run by a married couple. And, in fact, married women were sort of tacitly allowed to do all of the work that the master, her husband, could, as well. So usually the work team was the master worsted weaver and his wife. Maybe their kids. And probably only about 1 in 10 workshops would have a journeyman or an apprentice.

DAVIDSON: And a journeyman is someone who's graduated apprenticeship, and...

OGILVIE: Yeah.

DAVIDSON: ...Is on their way to creating their own craft?

OGILVIE: Yes. So an apprentice would probably go into apprenticeship in his late teens, and the apprenticeship lasted for three to four years. And once he'd got his apprenticeship certificate he was legally obliged, at least, by this guild, and indeed by most guilds, to go on what was called a journeymanship period. Or it was sometimes called going on the tramp, on the (speaking German). So there was a long period of sort of working around in different workshops as a servant - a journeyman was a sort of servant - before you settled down.

DAVIDSON: Did you just go into your dad's profession, or were there cases of people whose dad was in one guild going into a different one, or were there sort of uneducated peasants who somehow made it to the city and learned how to - learned enough to get into a guild? Was there upward mobility in that way?

OGILVIE: Well, it depended on the particular regulations of that guild. In general, over time in German-speaking central Europe, guilds got more and more restrictive about whom they allowed in to become apprentices. And, of course, you couldn't become a master unless you had gone through a guild apprenticeship and then a journeymanship and then applied for admission as a master.

DAVIDSON: And the idea, again, is to limit the number of people producing the textiles so you could maximize the price of each textile.

OGILVIE: Yeah. So that you weren't seeing continual expansion in the number of producers, so that it was possible to run an effective cartel. Because what you wanted to do was to keep output down enough that you could charge a higher than competitive price and, you know, that is what every cartel wishes to do.

DAVIDSON: Do you think - I mean, we live in an age, you know, where economic growth is just embedded in our assumptions about the world. And, in fact, you know, just two or three years of stagnant or negative growth is unbearable. I mean, you know, it overturns presidents. And, you know, I know broadly speaking, the Middle Ages and early modern period are a time of anemic growth or even, you know, huge setbacks where whatever growth was gained is lost. Is part of this sort of more of a zero-growth universe mentality that these people did not experience the world as one in which two people in a transaction could both become richer and therefore they believed that, you know, freeing things up a bit will make us all better off? And, if I'm going to be richer, it's only because you're going to be poorer? Is that part of the issue here?

OGILVIE: Well, I think there were people who believed that, especially officials and bureaucrats and intellectuals at the time. If you read the economic manuals that the cameralists or the mercantilists wrote in 16th, 17th, 18th-century Germany, or indeed elsewhere in Europe, you do read those ideas that there's a sort of limited amount of economic activity to go around. There's a sort of limited amount of labor. And you know if you allow more people in, there won't be enough work to go around. Sort of, you know, the same attitude in Europe and in Britain at the moment about whether there should be compulsory retirement or not. And I've heard academics at the University of Cambridge say, well, if we don't have compulsory retirement, there won't be enough professorships to go around for the youngsters (laughter). So there is this very strong feeling, intuition. It's a sort of - it's one of those sort of human, probably fallacies that cause human beings in every economy to sometimes think about things, think about economic good things as being limited. But, for...

DAVIDSON: And I just want to - because I bet there's people listening now who are sort of thinking, well, yeah, I guess I do kind of think that. Like, when immigrants come to America, they take our jobs. And there's a few ways to refute this. One way that I do - it's relevant with immigrants and other categories - is people don't just supply labor, they also demand labor. So if there's an illegal immigrant who comes, yes, he's supplying labor and that might mean that there's someone else who isn't going to get the particular job that that immigrant is going to get. But that person, that immigrant is also going to buy food and get haircuts and buy cell phones and pay rent and become a part of the economy. And so since most people in America, for example, spend pretty much exactly what they earn, you know, the money that person quote-unquote "takes" from a native born or an earlier immigrant is transferred almost directly into the rest of the economy where it creates other jobs.

OGILVIE: A job.

DAVIDSON: Yeah.

OGILVIE: For the person who might have had the immigrant's job.

DAVIDSON: So there's a couple other parties to these transactions or these non-transactions. One is the customer. I don't need to buy the worsteds from those innovation-hating, you know, cost-inflating cartels in the Black Forest. How do they stay competitive?

OGILVIE: Well, it's a good question, and the answer seems to reside in the fact that markets were very highly segmented in the medieval and early modern period, partly simply by transport costs. So it was really - for example, even though there were these much more highly competitive, lower-cost, higher-quality worsted industries in the Netherlands and England, they were further away from many of the Central European markets than these guys in the Black Forest. So guys in the Black Forest had cost advantages simply because of distance or because they were upstream on a river that enabled them to reach particular markets, on top of which you have markets being segmented because of trade barriers, because of warfare. So there were all sorts of things which prevented multiple suppliers from turning up in the same place at the same time, and hence made it possible for these cartelistic arrangements to work in particular sort of market regions. And so I think that that was one of the things which enabled these cartelistic arrangements to exist for so long. And, of course...

DAVIDSON: Because the markets were so - had so much friction.

OGILVIE: Were so segmented.

DAVIDSON: 'Cause that - right. Now you think of Walmart. And whatever people think of Walmart, one thing that is just sort of shocking and remarkable is just this incredible global supply chain that just makes location of sourcing almost irrelevant, that, you know, this global supply chain that can very quickly get a product from China, or Bangladesh, or Honduras or anywhere else in the world and it basically creates a true global, as the economists say, law of one price, where I'm truly competing with everybody, everywhere, all the time, and there's just very little room for any kind of extra surplus. But what you're saying is in a much more chaotic market system, a much less efficient, more friction-y one, we've got - there's lots of those opportunities. And I'm guessing there might be periods of relative calm and stability where you are directly competing with the Italian guy, and you're not selling so well and business isn't going so great, but then something happens and the Italian guy can't reach the same market and you have a good few years.

OGILVIE: Yeah. And, or there might be some time when you can't reach his market, and so he can act as a monopolist for a bit. But even if you think about it even nowadays, there are barriers that stop there from always being a law of one price in force. For example, Walmart. If there's some sort of - if the U.S. places a trade barrier on textiles from Bangladesh, Walmart is going to have to source its textiles from somewhere else, and the price is going to have to be higher than it would be if there wasn't a trade barrier. Or, for example, Walmart might very well like to set up some retail outlets in India, but if existing lobbying groups of Indian retailers don't want outside retailers from coming in and undercutting them and stealing their customers, it could be quite difficult for Walmart to expand in India. So even nowadays we have a situation where it's possible, especially for the political authorities under pressure from lobbying interest groups, entrenched interest groups, to erect trade barriers.

DAVIDSON: So I feel like the consumers, they're just clearly - they get the bum side of this. I mean, obviously it seems clear that they'd have more products, more cheaply, without guilds, right? I mean, that...

OGILVIE: Well, it's - I mean, that's always the problem with the poor consumers. Because it's the consumers are very dispersed and very numerous. And so even if it's in their collective interest to lobby, to get together and put pressure on the authorities not to allow rent-seeking producer groups to do this sort of monopolistic thing, the per capita benefit for each consumer is very low. So it's not really in my interest as a consumer to try to make the market work better because the cost to me is very high, and I don't benefit that much. Whereas for, you know, for a member of a relatively small occupation, even if it's an occupation that has 80 or 200 people in it, it's really worth my while investing in lobbying for special privileges for legal monopolies because the monopoly profit I get is quite high. So it always seems to be the case that producer interest groups are much better at influencing the political system than consumer interest groups are. And it was - I mean, that was the case with the guilds, and unfortunately it's often the case in modern economies.

DAVIDSON: So in thinking about a modern-day equivalent, I mean, obviously unions come to mind. But unions are workers, and this is really sort of the owners of capital. The journeymen would be the workers, right? So unions are not a - they're not an exact parallel.

OGILVIE: No. I think that's a very important point to make, Adam, is that I think a lot of the people who feel very, very sympathetic toward guilds nowadays would be people who would describe themselves as coming perhaps more from the left side of the political spectrum. But actually that's a bit of a surprising attitude for them to take because I suspect that those exact people would absolutely hate it if cartels of businessmen were allowed to operate in their economies and keep women and Jews out and overcharge their customers and put down journeymen strikes. But, you know, so I think people don't always recognize that times have changed and we don't have guilds anymore, and that's good.

DAVIDSON: That was a deep read with Sheilagh Ogilvie, a professor of economic history at Cambridge University. We're going to put some links to her papers on medieval German history on our blog, npr.org/money. As always, we'd love to hear what you think of today's show, and PLANET MONEY in general and what issues you wish we were covering more. Email us. Planetmoney@npr.org. Or you can find us on Facebook, Twitter, Tumblr. I'm Adam Davidson. Thank you for listening.

(SOUNDBITE OF SONG, "WATCH N' LEARN")

RIHANNA: (Singing) It's your turn now. It's your turn now. It's your turn now. Watch n' learn now. Watch n' learn how.

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