1 - The Institutional Foundations of Pre-Modern Trade

Summary

Long-distance trade constituted the most dynamic sector of early modern economies. Commercial expansion increased the demand for goods, incentivizing the growth of the manufacturing and service sectors. The early modern Atlantic witnessed an unprecedented expansion of trade. It facilitated social mobility and brought prosperity in its wake. Trade increases on the scale experienced in this period require institutions that secure property rights and enforce contracts. Several influential scholars have credited the same institutions which developed to support pre-modern trade expansion with later facilitating the Industrial Revolution. The Industrial Revolution, in turn, constituted the immediate cause of global inequality, providing England with the means to become the first economy to achieve sustained economic growth. It provided western Europe with the technological and financial means to conquer and colonize much of the world. In other words, long-distance trade, and the institutions governing it, are at the root of global inequality. If we want to find out why some countries are poor, and others rich, we must ask, why did trade in some times and places expand, and not in others?

As trade in the Atlantic increased, London became the biggest port in the western hemisphere. It also became home to the largest single community of Quakers, a community that for almost 400 years has enjoyed a reputation for being disproportionately successful in trade. Quakers occupied a central place in business when Britain emerged as the world's leading trading nation because, so the story goes, they were Quakers.

Long-distance trade is characterized by a time lapse between the delivery of goods and the receipt of payment. Self-interest motivates agents to break contracts and deny payment for received goods. Identifying new agents to trade with in distant locations was difficult. Even more difficult was monitoring their behaviour and forcing them to keep promises. In order for trade to take place, institutions are necessary to prevent agents from cheating their principals. The costs incurred by this are summed up under the term transaction costs. They include the costs of monitoring agents’ behaviour, gathering information about trading partners and conditions, and enforcing agents’ compliance with agreements.