Unleashing growth: The decline of innovation-blocking institutions

Klaus Desmet, Stephen L. Parente, 18 May 2013

a

A

Two hundred years ago, during the Napoleonic Wars, the Luddite movement rocked the English industrial landscape. Dissatisfied with falling wages and increased competition from mills employing cheap rural labour, the Luddites broke into factories at night, smashing spinning frames and power looms.

Of course, the Luddites were by no means the first group to try to block innovation in Europe; in the Middle Ages the craft guilds were more often than not at the forefront of resisting labour-saving technology and limiting competition. Nor were the Luddites the most successful, either. For all their notoriety, the Luddite conflict ended a mere six years after it started when the British government ordered 12,000 troops to put down the riots. In contrast, many of the craft guilds successfully blocked the diffusion of new technology for much of the medieval period.

Ironically, although the Luddites have become the poster child of those opposing technological change, they more appropriately symbolise the end of wide-scale resistance by the craft guilds. In effect, they mark the end of a long historical period where these groups had the ability to block technology and limit competition. About half a century before the Luddite riots, this ability had begun to wane in Britain and other parts of Europe when governments began to rule against the craft guilds in their legal challenges to prevent the use of new machines in a variety of industries. The use of troops to quell the Luddite uprising completed this shift in power and influence.

The existence of innovation-blocking institutions should of course not come as a surprise, but what makes such institutions prevalent and effective in some periods and not in others? Among economic historians there is a growing consensus that guilds in Europe lost their ability to block new technology once society realised that innovation had a beneficial effect on humanity, and was thus not a zero-sum game. This shift in societal attitudes, led by a handful of enlightened thinkers of the day, is what Mokyr (2005) labels the Great Enlightenment, Jacob (1981) the Radical Enlightenment, McCloskey (2010) the Bourgeois Revaluation, and Goldstone (2002) the Engineering Culture. According to these scholars, the deathlike grip guilds had held on innovation ended once enlightened individuals of the period educated society about the marvels of technology, and with this realisation, human history was changed forever.

Market size and competition

In recent work we challenge this consensus view and offer a different explanation for the demise, as well as the rise, of guilds (Desmet and Parente 2013). In particular, we argue that two conditions were necessary for specialised workers to form a guild: first, switching to a new technology must be profitable for a would-be adopter, and second, profits should be insufficient to cover the cost of overcoming workers' resistance. For small markets where competition is weak, firms have no desire to change their production process as profits from technology adoption are negative. Hence workers have no incentive to organise into guilds. For intermediate-sized markets with modest competition, technology adoption is profitable in the sense of covering any fixed research-and-development cost, but not sufficiently so to be able to break the resistance of workers. Hence, guilds appear and block the introduction of cost-saving technologies in their industries. For large markets with intense competition, profits from technology adoption are sufficiently large to give firms enough firepower to either defeat guilds on their own or influence government policy in their favour. Consequently, guilds disappeared and more productive technology diffuses throughout the economy.

Well before decrees abolishing guilds were implemented in the late 18th and early 19th centuries in Europe, there is evidence that guilds were less influential in larger markets. In Lille, a town in northern France, the textile industry, faced with greater domestic competition in the late 17th century from rural unguilded Flemish weavers, relaxed guild training regulations, thus liberalising the labour market and reducing costs (Ogilvie 1994). Often, greater openness was the reason for expanding markets, tougher competition and the weakening of guilds. As in the case of the Luddites, the resistance to the scribbling machine in the west of England ended in 1795 in the wake of a trade boom (Randall 1991).

Evidence from Italian crafts guilds

A key implication of Desmet and Parente (2013) is that there exists a U-shaped relation between market size and technology-blocking institutions. This pattern is apparent in the data on Italian guilds that covers 55 cities from the 14th to the 19th century; Figure 1 plots the probability of having a guild as a function of city size (which is taken to be a proxy of market size). The blue dotted curve shows the predicted relation between market size and guild existence, whereas the small triangles show the actual shares of cities with guilds by size. Guilds were not likely to be present in either small or large cities.

Most of the Italian guilds were abolished by state decree. Whether guilds disbanded on their own accord or by legal means is not really important. The implementation of state-wide or national decrees outlawing guilds could simply have reflected the increasing societal cost of having guilds and the consequent expanding political and economic power of would-be adopters. What is important is that the overall benefits of innovation to society increase as the markets expand.

Figure 1. Relation between a city’s population and the probability of it having a guild in Italy between 14th and 19th century

Policies to unleash growth and innovation

The existence of innovation-blocking groups has been and continues to be an important barrier to riches. Some governments, such as the one led by Margaret Thatcher in the 1980s, have been able to reduce these institutions’ influence by tackling them head on, but this is not always easy, or common. A more indirect and pragmatic approach is to promote market integration, trade liberalisation and competition. Such policies are bound to endogenously weaken the influence of these groups, thus removing an important obstacle to innovation. What happened in the US iron-ore industry in recent decades is a case in point: after having suffered lacklustre growth in the 1970s and early 1980s, the US iron-ore industry rebounded when increased competition from Brazilian exporters led to concessions by unions in work practices, allowing productivity to take off (Schmitz 2005). Government of currently poor countries truly interested in improving their citizens’ welfare should take note of this.

References

Desmet, K and Parente, S (2013), “Resistance to Technology Adoption: The Rise and Decline of Guilds”, CEPR Discussion Paper 9439.

Epstein, S R (1998), “Craft Guilds, Apprenticeship, and Technological Change in Preindustrial Europe”, Journal of Economic History 58, 684-713.

Goldstone, J (2002), “Efflorescences and Economic Growth in World History: Rethinking the ‘Rise of the West’ and the Industrial Revolution”, Journal of World History 13, 323-89.

Jacob, MC (1981), The Radical Enlightenment: Pantheists, Freemasons, and Republicans, London, Allen and Unwin.

McCloskey, D (2010), Bourgeois Dignity: Why Economics Can't Explain the Modern World, Chicago and London, University of Chicago Press.

Mokyr, J (2005), “The Great Synergy: The European Enlightenment as a Factor in Modern Economic Growth”, Meetings of the Society for Economic Dynamics.

Ogilvie, S (2004), “Guilds, Efficiency, and Social Capital: Evidence from German Proto-Industry”, Economic History Review 57, 286-333.

Randall, A (1991), Before the Luddites: Custom, Community, and Machinery in the English Woollen Industry, 1776-1809, Cambridge, Cambridge University Press.

Schmitz, J A Jr (2005). “What Determines Productivity? Lessons from the Dramatic Recovery of the US and Canadian Iron Ore Industries Following Their Early 1980s Crisis”, Journal of Political Economy 115, 582-625.

Topics: Economic history, Productivity and Innovation
Tags: growth, guilds, institutions

Klaus Desmet
Professor of Economics, Universidad Carlos III and CEPR Research Affiliate
Associate Professor of Economics, University of Illinois