Such papers on economic history just stump you. The paper is by Diego Puga of CEPR and Daniel Trefler of University of Toronto.
It looks at couple of things:
- First how international trade was done during the Medieval era
- How Venice because of its geographical advantage became a great choice to take advantage of rising international trade
- How Venetians formed institutions (mainly contracts) to realise the geographical advantage
- How the institutions led to incomes becoming increasingly polarized to top traders
- The top traders tried to limit competition leading to protests
- This also led to overall decline of Venice…
The authors says:
In order to deepen our understanding of the impacts of longdistance trade, via income distribution, on longrun institutional dynamics, we turn to a detailed historical and statistical examination of Venice during the Commercial Revolution. The broad outlines of Venetian history that we use to support our thesis are as follows. Through a series of fortunate events in the ninth century, Venice became politically independent. This, together with Venice’s fortunate geography, uniquely positioned it to benefit from rising trade between Western Europe and the Levant. These two factors combined to enrich Venetian merchants, who used their newfound economic muscle to push for institutional change.
The two key dates for improvements in property rights institutions are 1032, which marks the end of a de facto hereditary Dogeship and 1172, which marks the establishment of a Venetian parliament that was the ultimate source of political legitimacy. Contracting institutions also displayed extraordinary dynamism during the Commercial Revolution, in part to deal with the commitment and enforcement problems that come with doing business abroad (Milgrom et al., 1990; Greif et al., 1994; Greif, 2006a), but also to deal with the unique demands placed on capital markets by longdistance, seaborne trade. This risky trade required large capital outlays that literally sailed out of sight and this in turn led to the development of new business forms and legal innovations that supported the mobilization and allocation of capital. One particularly famous innovation was the limited liability partnership known as the colleganza in Venice and the commenda elsewhere in Europe. It was the direct precursor of the great joint stock companies of a later period. Importantly for our thesis, it allowed even relatively poor merchants — who had neither capital nor collateral — to engage in longdistance trade.
This led to two things:
These institutional improvements made Venice wealthier overall, but also led to substantial changes in the Venetian distribution of income. For one, the riskiness of trade together with the widespread involvement of Venetians in this trade, created a great deal of income churning — mostly rags to riches but also some riches to rags. For another, a small group of merchant families grew spectacularly wealthy.
This brings us to the great puzzle of Venetian history: its remarkable institutional dynamism fell off sharply during the period 1297–1323. This defining epoch in Venetian history, known as the Serrata or ‘closure,’ brought Venetian politics under the control of a tightly knit cabal of the richest families. It was, in Norwich’s (1977) words, the triumph of the oligarchs. Further, by the early 1330s this political closure had spilled over into an economic closure that excluded poorer families from participation in the most lucrative aspects of international trade. Venetian property right institutions had taken one large step backwards and her contracting institutions had lost their dynamism.
An amazing paper mixing so many things.
I could not help but see huge similarities with current times as well. Financial globalization of 1970s led to few people (the 1 percenters) prospering over others. As financial globalization was centered around the international financial centres, they took advantage and incomes in these regions grew sharply. And with growing incomes, their influence in government rose sharply as well. Just like you saw then, heads of key Wall Street firms joined the government (and vice-versa). The whole thing became hugely politicised.
Now with financial crisis and occupy wall street protests, we see these high income groups are being pressurised. There is a lot of resistance to let go off their powers and massive lobbying is happening to thwart financial regulation. So far NY, London etc has avoided the Venetian route, but who knows..Let’s see how this whole thing unravels going ahead.
Fascinating paper. Again econ history tells you how time is never really different..