The Third Pillar: How Markets and the State are Leaving Communities Behind

The second task was to create an identity that would replace religion – since religion did not distinguish one nation-state from another in Europe. That identity had to give people a sense of larger purpose. Increasingly, an identity that suited many requirements, including the king’s need to lead a unified country, was identification with the nation.

Even after unifying the land under his power, the king faced external threats. Some European country was always trying to establish supremacy – first Spain, then France, and in modern times, Germany and Russia. Any European country risked subjugation if it was not militarily powerful. As his feudal vassals’ obligations to supply arms and men waned with the demise of feudalism, the king needed money to maintain a strong military to defend the country against these external threats. Much of the subsequent development of the state can be seen as a consequence of steps taken to enhance its ability to raise revenues – the third task.

The nation-state that emerged had somewhat contradictory powers. It was strong in its ability to defend itself against external enemies and defeat internal threats to the state, yet it was compelled to respect the private property rights of its citizens. The constitutionally limited state was an important milestone in the path towards free markets. The security of private property did away with the need for private players to protect themselves through anti-competitive medieval business associations, such as guilds. It allowed them to compete as individuals. Greater competition raised efficiency and output, increasing the economic power of the nation-state that could foster it. The markets pillar and the state pillar now fortified each other.

Since different nation-states went through these developments in different ways, and my intent is to illustrate, not be exhaustive, I will focus on the path England followed, primarily because it was the first large nation-state with a constitutionally limited government. The process of stabilising governance in the English nation-state took the Crown over two hundred years, spanned the reigns of two houses – the Tudors and the Stuarts – and involved substantial amounts of chance. Even though England’s path to constitutionally limited government and freer markets was unplanned and idiosyncratic, through war it imposed competitive pressures on other European countries to change if they wanted to survive. Eventually, many reached the same endpoint, albeit in their own ways.

THE DECLINE OF THE MAGNATES

As we have seen, the new military technologies required scale. At the outset of nation building, the monarch was not personally much wealthier than the most powerful of the landed aristocracy. He needed to build his own power as well as reduce theirs. In the process of eliminating the threat of the high aristocracy, the English king unleashed market forces that would help create entities that would eventually curtail his own freedom of action. Interestingly, as the king lost the ability to act willfully and outside the law, as his identity was submerged in the broader apparatus of the state, the state’s access to financing from its citizens increased. It could now expand in ways, such as maintaining a large army, which would earlier have raised public apprehension about the monarch’s intentions. Somewhat paradoxically, the limited state became strong and improved its capabilities even while bolstering the confidence of the citizenry in the security of their property. Let us see how this happened.1

Henry VII, the first Tudor monarch, was the last king of England to win his crown on the battlefield in 1485. There were others who had some right to the throne, so Henry’s claim to be monarch other than by ‘right of conquest’ was questionable, at best. From the outset, therefore, the Tudors had to dominate other aristocrats through sheer power. This was not a simple or quick task, and spanned the reigns of successive monarchs.

The monarch’s problem was complicated in two different ways. First, the landed aristocracy had built militias out of their armed servants, and could also summon their vassals and tenants to fight for them. Even as Henry VII passed a series of Acts asserting that the prime loyalty of every subject was first to the Crown and only then to his lord, feudal tradition militated otherwise.2 The monarch only had control over a small militia, and was otherwise reliant on conscription. This meant that in any emergency requiring a prompt response, such as an internal rebellion by one of the lords, he needed the help of the other lords to defeat it. Second, the king did not have a large bureaucracy to collect taxes. He depended on the high lords to collect and pass taxes on to the royal treasury. With the king so dependent on the aristocrats, he simply could not take them all on at the same time.

Time and infertility were on the king’s side. He had no need to create powerful new aristocrats, and indeed no dukes were created by the Tudors.3 Furthermore, because some lords did not have male children, which was not an infrequent occurrence, existing houses came to an end. Through such means, Henry VII doubled his revenues from Crown lands.4 Individual rebellious lords could also be picked off, convicted of treason, and executed, as was the duke of Buckingham by Henry’s son, Henry VIII, and their lands seized by the Crown. Nevertheless, what really clipped the wings of the landed aristocracy was more indirect and perhaps unintended – the dissolution of monasteries and the great price inflation of the sixteenth century.

THE DISSOLUTION OF THE MONASTERIES AND THE RISE OF THE GENTRY

The Tudors were hungry for land, and looked for easy targets. After Henry VIII broke with the Pope over his marriage to Anne Boleyn, he turned his attention to the Church’s wealth in its various monasteries, which had grown substantially since the Gregorian reforms. Monastery property had two attractions. First, it was unprotected by armed men, unlike the land of the magnates. Many monasteries had also grown complacent and neglected their duties toward the needy. As a result, they enjoyed only modest public support. Second, and perhaps more important, monastery land was poorly managed, which attracted the attention of the capable, who felt they could do a better job using the latest methods of agricultural management.5 So when Henry VIII seized monastery property, giving abbots and abbesses the choice between being accused of treason, convicted, and put to death cruelly (they needed to be convicted because only the property of traitors went legally to the Crown), or ceding property ‘voluntarily’ to the Crown, most made the obvious choice, and few among the public protested.

The seized property was soon sold, as the king needed funds to fight wars. Those who bought the land were primarily local moderately wealthy land owners – the local gentry. These were typically minor nobility, who did not have the vast land holdings the aristocracy had, but owned more land than well-to-do peasants. The landed high aristocracy were only a few dozen, while the gentry numbered in the thousands. The gentry had made their money managing their own properties well. They could bring their expertise to the new properties, especially because they knew local conditions and were closer to the land than the landed magnates. Since land ownership was the route to social status in those times, successful wealthy town-dwellers such as merchants and lawyers also bought land so that they could rise to the status of country gentlemen.

These men improved the management of the land they bought; including bringing unused land into cultivation; ending unproductive traditional techniques such as leaving one out of two fields fallow instead of one out of three; and appropriating customary-use common areas by enclosing them, and shifting them into more lucrative sheep rearing. Rather than continue with the feudal practice of demanding unpaid labour from tenants, which was anyway grudgingly given, these ‘new’ men instead hired labour directly for commercial wages. They raised rents on existing tenants commensurate with the commutation of labour obligations and the increased incomes from the more productive land. Not all were successful in making a go of land management, but the unsuccessful sold out to others who were more expert. At any rate, land management improved substantially, increasing agricultural output. Some economic historians argue that England’s prosperity in Elizabethan times was in substantial part due to higher national income growth resulting from the seized lands.6

Importantly, the successful country gentlemen, both old and new, went on to acquire more land. Some of the richer gentry came to own as much as the poorer aristocrats. Furthermore, because many of the high lords were not particularly good managers – after all, they and their ancestors had established their prowess on the battlefield, not in estate management – the incomes of the richer gentry far exceeded that of the poorer aristocracy. For crops that had a national market, the more efficient cheaper production from the gentry lowered prices and thus aristocratic incomes. The old guard was at risk of being blown away by the gales of competition.

The aristocracy, who no longer could distinguish themselves easily from lesser mortals based on land ownership or income, found new grounds for differentiation. What distinguished them from the nouveau-riche Calvinist gentry was their lavish entertainment and the liberal hospitality they showered on guests who passed their social threshold, their free-spending enjoyment of fashion, art, and architecture, and their sympathetic treatment of unproductive customary tenants paying low rents. These were exactly the wrong elements to distinguish themselves by as prices started rising.

THE GREAT INFLATION

The gold and silver flowing into Europe in the sixteenth century from its colonies in Africa and Asia first, then the Americas, raised prices of goods, as the growth in their production did not keep pace with the growth of coined precious metal. For the aristocracy, the tremendous increase in spending that was necessary to keep up their lifestyle and their army of retainers collided with the stagnant tenant rents that noblesse oblige demanded of them. Something had to give. For those who could not bring themselves to manage their lands commercially, it meant land sales and further decline – until some social-climbing wealthy merchant or member of the gentry could be persuaded to underwrite the aristocratic expenditure in return for a status-enhancing marriage alliance. For those who wanted to maintain their distance from the arrivistes, there was no alternative to moving to new techniques of agricultural production, raising rents on tenants who could cope, and terminating the tenancy of those who could not, for more capable ones who could.

The demands of the market – the competition from the gentry accentuated by the great inflation – thus killed the capacity of the aristocratic lord to look out for his tenant and see him through difficulty, the essence of the feudal obligation. At the same time, it also killed any loyalty the tenant might have had to his lord.7 Transactions were now on strictly commercial terms – the market, by competing away the rents on aristocratic estates, once again had eroded community ties. No longer would tenants flock to their lord’s banner in times of military need. For the monarch, this was a distinct relief, since his army was based far more on recruits drafted for a wage than on loyal feudal retainers.8

The king also undermined the landed aristocracy in matters of local governance. As the gentry grew more prominent, the monarchy appointed them as justices of peace to judge small claims and local cases, as sheriffs, and as tax and military draft commissioners. These positions were unpaid, but offered their occupants prestige and local influence. And they became essential to administering local justice as well as collecting taxes and administering services for the poor. As one historian put it, ‘the gentry were essential to the power of the king, but he was not essential to theirs.’9

THE POWER OF THE GENTRY

All this meant that even though the aristocracy had been undermined, as had the Church before it, the monarchy did not have absolute power; a new power, the gentry, now stood in the way. The king was vastly more powerful than any single member of the gentry, but he could not treat them like Henry VIII treated the monasteries. Unlike the poorly managed monastery land, the gentry used their superior knowledge of farming and the locality to manage their land productively. There were no unrealised bonanzas that could be obtained through expropriation.10 It made far more sense for the king to tax the gentry regularly than to expropriate some of them and risk upsetting an entire class. Ironically, one of the most infamous violations of property rights in history, the expropriation of the monasteries, had strengthened property rights by moving land into the most productive hands. With the markets having done much of the work, courts and their judgments soon established property rights over land more firmly, eliminating the last vestiges of feudal constraints on property ownership and transfers, while protecting contractual ownership and tenancy rights.11

The gentry also dominated the House of Commons in Parliament, an institution whose purpose we will describe shortly. It offered them a venue to coordinate their actions if they perceived any threat from the monarch such as moves toward expropriation or levying additional unapproved taxes. With their limited individual influence, they preferred an arm’s-length rule by law that would protect all of them. They were collectively wealthy – a peer ruefully noted in 1628 that the House of Commons could buy up the Lords thrice over – so together, they could influence the nature of those laws.12 And they were closer to their tenants than the great lords were, and thus could command more of the much-diminished sense of loyalty in their locality than either the great lord or the king. The gentry, not the landed magnates, thus became the primary source of possible opposition to the Stuart kings.

As an aside, the belief that widely distributed property leads to better security of property and stronger constraints on the state has a long tradition. Some societies set maximum limits 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 tenancy. Such arrangements were sustainable only when competition was muted.

THE 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 favour 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 just enough to 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 behaviour 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 who, in England for instance, 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 commercialised 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 manor-ial 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 organised 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 organisation 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 labour 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 authorisation by Parliament. Instead, the king could offer royal 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 came into the guild’s coffers as repayment for the advances it had made the king, so it did not have to stand in line outside the treasury for an uncertain repayment, unlike ordinary creditors. Finally, because the privileges came directly from the king for the most part (only some were authorised by Parliament), the guilds and monopolist companies became his loyal supporters, if nothing else because their continued fortunes depended on his survival. Every side benefited except the consumer who paid the higher cartelised prices!

The monopoly charter was not a secure form of property right. It was an easily transferred charter, not fortified by the competence of the holder – indeed, the longer the monopoly was held, the more inefficient the holder would get, and the easier it would be to expropriate, as was the case with the monastery land. What kept the monarch from large-scale taking-back-and-reselling of monopolies was probably concerns about the risk of angering a large group of merchants or craftsmen in the guilds or companies, as well as the loss of reputation and the damage it would do to the sale price of future monopolies. These were fragile supports on which to build large-scale investments, and typically such businesses invested little.