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The Fountain of Privilege: Political Foundations of Markets in Old Regime France and England

University of California Press

Historically, participation in a market system was a politically allocated right. Markets often originated as grants to privileged individuals in the political hierarchy: not just anyone could open or participate in a market. In their unending search for funds, medieval governments banned all kinds of profitable activities and occupations in order to sell exemptions from those restrictions. A dominant theme of medieval politics was competition for licenses granting lucrative perquisites from which everyone else was excluded.1

When property rights are clearly specified, it should not matter to whom they were originally allocated. This simple proposition is a staple of contemporary economic thinking on the evolution of property rights. It is based on the assumption that, in a market system, those who can more effectively use a right will be able to bid for its acquisition. In other words, as long as markets exist that allow those who can realize the value of a right most effectively to obtain it from those to whom it was originally allocated, efficiency will result. Only when the transaction costs from the subsequent transfer of the right exceed the potential benefits of its exploitation will the original allocation prevent efficient utilization.

Observations of the historical evolution of markets suggest a different explanation of why the many privileges and liberties unequally distributed among the populations of early modern states were not freely traded. Usage rights, tax exemptions, judicial prerogatives, manufacturing monopolies, privately owned government offices, rights to buy and sell all kinds

See A. R. Bridbury, "Markets and Freedom in the Middle Ages," in The Market in History, ed. B. L. Anderson and A. J. H. Latham (London: Croom Helm, 1986), 79–121, and Henry Clifford Darby, An Historical Geography of England before A.D. 1800 (Cambridge: Cambridge University Press, 1936), 79–119.

of products and services, and rights to participate in the international economy were distributed as property by governments seeking revenue.2 Transaction costs were erected to reduce the range of possible exchanges to those that produced revenue for the state and its clients.

Bringing buyers and sellers together commonly requires the services of a market maker, and the history of investment banking in the twentieth century shows that when the costs of creating a market are high, the reputation of the market maker is crucial.3 The benefits of creating a market cannot always be captured by those who would bear the costs of collecting and classifying information about potential buyers and sellers and the monitoring expenses associated with market management. A market maker will not emerge unless assured of some profit.4 As a result, not all possible markets for property rights are created.

Moreover, contracts to assure payment for the transfer of rights are not always easy to write and enforce once an owner has agreed to give up a portion of the shares. If future income from the exercise of rights such as stewardship over the local market, feudal dues, or the liberation of slaves were to be surrendered, guarantees were needed that future payments would be maintained. Writing contracts to buy out present holders of rights could, therefore, be highly problematic.5

Premodern rulers often granted access to property rights in exchange for political loyalty. By contrast, open bidding for property rights might compromise the system of patronage, so rulers commonly restricted market access to their chosen clients regardless of considerations of efficiency

Property rights determine the way particular resources will be used and assign the resulting costs and benefits. Property rights—or what people believe to be the relevant rules of the game—determine how the process of supply and demand will work.

See, e.g., J. Bradford De Long, "Did J. P. Morgan's Men Add Value?" in Inside the Business Enterprise, ed. Peter Temin (Chicago: University of Chicago Press, 1991), 206–36.

"To explain the origins of rights ... we must look for self-interested motives for grantors as well as petitioners" (William H. Riker, "Civil Rights and Property Rights," in Liberty, Property, and the Future of Constitutional Development, ed. Ellen Frankel Paul and Howard Dickman [Albany: State University of New York Press, 1990], 49–64).

The French Revolution might have been avoided if a credible or enforceable contract could have been written allowing the monarchy to buy back the tax exemptions of privileged individuals. Similarly, the American Civil War might have been avoided if a contract could have been written allowing the North to reimburse the South for the liberation of slaves. Japan, Taiwan, and Korea, three of the great success stories of recent economic history, offer examples of the rights of traditional elites being bought out rather than confiscated. The traditional elites were given equity shares in the new regime, enlisting their cooperation in the modern economy.

in allocating and enforcing rights. In autocratic regimes, cronyism can be maintained because the rulers both allocate and enforce rights.6 If the legal system is not distinct from the political system, contracts may not be enforced. There is therefore little incentive for more efficient producers to attempt to outbid the ruler's cronies.

Dominating the distribution of rights allowed the French Crown to claim the loyalty of a large clientele.7 Although distribution of loyalty-based property rights helped create social support for the regime, economic inefficiencies resulted.8 The threat that loyalty-based property rights might be withdrawn limited their market to users favorable to the king, and the inability to trade them more widely reduced their liquidity. The economic value of such rights therefore declined, while the value of being a crony increased.

Since premodern rulers were likely to extend rights to individuals with whom they had multiple overlapping contracts, sanctions against the random diffusion of economic rights were available. Such sanctions included denying the original right holder future deals, denying the buyer adjacent rights or essential information, and refusing to buy goods or services from an unwanted interloper.

These limitations of loyalty rights became especially salient during periods of abrupt economic change. When shifts in wealth among individuals occur, those who benefit from the shift have no way of signaling their newly acquired ability.9

Rights holders in an absolute monarchy must always worry about confiscation. In Old Regime France, much routine economic activity was only

The common law has been an important component of England's institutional structure, providing incentives suited to long-term investment (see R. M. Hartwell, The Industrial Revolution and Economic Growth [London: Methuen, 1971], 244–61). Neither state-granted monopolies nor cartel agreements were sanctioned under common law, and competition, or new entrants into an industry, was not recognized as a tort. Freedom of contract under common law sanctions any terms of exchange that are mutually beneficial and...