The Third Pillar - Raghuram Rajan

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on the amount of land anyone could own so that it would be distributed widely. The Roman Republic had an agrarian law that limited how much land any one person could own, which of course was breached as it progressed toward empire. In his treatise, Oceana, James Harrington, a writer in seventeenth-century England, argued that ownership of property was the source of all power, and the group that had the most property dominated government.13 Influenced by Harrington, Jefferson’s draft constitution for Virginia, written in 1776, required that each adult have fifty acres of land. The minimum limit would ensure that the owner would be reasonably prosperous and independent—if not quite a member of the gentry.14 Yet we have seen, it is not just how land is distributed, the efficiency of owners also makes a difference—the inefficient monasteries were not powerful while the gentry were. The vibrant land market had the dual effect of moving land into the hands of the efficient and, through their competition, eliminating the last vestiges of the feudal community such as the loyal but inefficient hereditary tenant.

      TOWNS, GUILDS, AND MONOPOLIES . . .

      Even as they were suppressing the landed magnates domestically, monarchs continued to face external threats, which was the source of their perennial problem, their need for funds. The competition with other European nations for political supremacy was bloody and never-ending. Whenever any state became strong enough to potentially acquire an enduring advantage, the other states banded together to defeat its quest for domination and achieve a new balance of power.15 Yet dreams of supremacy never faded.

      Any money the monarch could access to fund his military machine, whether through borrowing or tax revenues, ultimately was supported by economic production. So competition between states for supremacy, in the long run, would favor states that had stronger economies with which to sustain their war machines. Every country faced steady pressure from the outside to beef up its economic capabilities, else risk subjugation.

      It was not enough for the country to just produce more—the monarch had to be able to collect his share in taxes. The more he threatened to take in taxes, and the more unpredictable his behavior in doing so, the less his people would want to invest in, or put effort into, income-generating economic activity. Instead, they would focus on hiding their income and wealth. The monarch needed a mechanism to signal that he would tax reasonably, even in times of war when he might be tempted to levy huge taxes or expropriate property in order to preserve his reign. So the king had to create institutions that would limit his own ability to be arbitrary, thus convincing people that their taxes would not be used to extort yet more from them. The Church was one such institution, but as discussed in the last chapter, its power was fading. In most European countries, monarchs therefore committed to levy new taxes or raise old ones only if approved by the representatives of the rich and propertied. In England, for instance, these were seated in Parliament (and the Estates General in France and the Riksdag in Sweden). Given the difficulty of getting anyone to approve higher taxes on themselves, monarchs tried to find ways to not put the question to the representative bodies if they could find other ways of gathering revenues.

      The obvious alternative was to do cozy deals with the businessmen in the towns, which the emerging absolute monarchs of sixteenth- and seventeenth-century Europe proceeded to do. Europe’s first stab at a regime more tolerant of business resulted in a pro-business but not pro-enterprise economy. Government and business formed a closed community—or what would be called crony capitalism today. The towns were certainly not free markets.

      Taxing Towns

      As agriculture became more commercialized and prosperous, it could provide more taxable income. There were limits, though, on how much the powerful landed could be taxed—in France they were not, and in England, landowners colluded to pass laws in Parliament to avoid taxes.16 Moreover, the king needed every last bit of revenue for the new forms of mass warfare because, as Louis XIV declared, “after all it is the last Louis d’or which must win.”17 So the king looked to the towns and ports, where excise duties could be levied on goods like beer and bricks and customs duties could be charged on imports. In England, for instance, over two-thirds of government revenue from taxation came from Customs and Excise in the early eighteenth century.18

      In order to tax urban production, the monarch had to deal with town bodies like the guilds that had formed for different trades and crafts, as well as the emerging monopoly merchant companies. In the same way as the manorial community protected the peasant against the uncertainties of life lived at the economic margin, the guild in a town protected its members from competition, both from others within the guild and from outsiders. It fixed membership fees; hours of work; the prices the master craftsmen could charge, and the wages they could offer; the terms, number, and fees for apprenticeships; and it negotiated on behalf of its members with the monarch or with town leaders for restrictions to be placed on outside competitors. If the response from the authorities was inadequate, the guild was not above taking the law into its own hands. Some organized armed expeditions of their members to search out and destroy any competitor that tried to do business in the territory they had earmarked for themselves.

      The guild was effectively a cartel trying to ensure all its members got a decent living in an environment of weak economic growth, but also seeing to it that none was so energetic or entrepreneurial so as to put the others at a disadvantage. Like the manor, it aggregated the power of its members, a necessity in times when the law was weak, and might often right. It was also a social organization like the medieval manor, providing economic support to those in need and encouraging interactions between its members. A somewhat disapproving description of members of the merchant guild of the Dutch city of Tiel dating from 1024 comments that members “begin their drinking bouts at the crack of dawn, and the one who tells dirty jokes with the loudest voice, and raises laughter and induces the vulgar folk to drink, gains high praise among them.”19 Like the manor, it ensured stability and comradery, at the cost of innovation and efficiency.

      The Alliance of Town and Crown

      The interests of the towns were initially opposed to those of the landed nobility. For the peasant working in the lord’s fields, the town represented new opportunities. The efforts of towns to attract additional labor set them in opposition to the lords, who resented the attractive pull of the town on their field workers. Furthermore, while towns wanted cheap food for themselves and their workers, and thus preferred low tariffs on food imports (and high tariffs on manufactured goods), the landed nobility who produced food and consumed manufactured goods preferred the opposite. Also, the increasingly wealthy merchants and financiers were a challenge to the social status of the landed nobility.

      The alliance of the town and Crown was more than just a matter of befriending the enemy of the enemy. Each offered something important to the other. For the merchant or the craftsman, the king offered protection, not just from physical attack or intrusion from manorial or canon law, but also from competition—he endorsed the anticompetitive guild and its practices through a royal charter. The resulting monopoly profits were the rents that are so necessary to sustain relationships. It kept the guild members united, creating a tight-knit association that was a powerful defense against other predatory powers of the time. The guild shared some of those profits with the king through periodic fees or loans, thus fulfilling its side of the Faustian bargain.20

      Why Monopolies?

      Why could the king not tax his people directly, instead of leaving them to the tender mercies of the monopolist guilds? As we have seen, taxation required authorization by Parliament. Instead, the king could offer royal monopoly charters directly, thus bypassing Parliament. Royally licensed monopolies were less clearly offensive to the people, since high monopoly prices were an implicit concealed tax. So long as they were on a relatively few items, they would be borne with only a little grumbling.

      Equally important, the nation-states in their early incarnations had weak bureaucracies and therefore limited abilities to collect taxes, tolls, or custom duties. The king benefited far more by investing scarce revenue in an army of soldiers than in an army of tax collectors. Therefore, the guilds and the merchant companies essentially served as the king’s tax collectors, estimating and collecting what was owed from their members. They often paid directly to the treasury upfront for the monopoly privilege, which reduced the king’s need to borrow or rely on a costly corrupt bureaucracy to collect taxes.21 Moreover, monopoly profits

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