A History of Wealth and Poverty: Why a Few Nations are Rich and Many Poor, by John P. Powelson.


Compromise in Northwestern Europe

Europe was far from a compromising, negotiating society in the tenth century. From ancient times to at least the fifteenth century, quarrels produced more violence than reconciliation; war was endemic; power was a dominant value, intransigence the regular order. Indeed, violence and the quest for power were among the principal forces deterring European economic development. By the twelfth century, changes were evident, although many of these qualities have remained in some parts, even to the present day.

But it is necessary to explain the candles, not the darkness. This chapter summarizes in five short sections the major historical experiences in negotiation and compromise that occurred from the Middle Ages to the present day: in economics and trade, taxation, jurisdiction and power, religion, and intellectual discourse. Northwestern Europe moved from a position of intransigence and violence toward one of negotiation and compromise in all these areas. Finally, we will summarize the power-diffusion process and explore possible reasons for its occurrence only in northwestern Europe and Japan.

Economics and Trade

European traders were already cooperating with each other by the twelfth century. Merchant vessels were owned by "companions," each with his own space on board. "The little community would decide on the voyage and the sailing date, each member being responsible for stowing his own goods, helping or being helped by his neighbour." [1]

In England, the first part of Edward I's reign (1272-92) was a golden age for compromise and negotiation among king, barons, ecclesiastics, and burghers, undertaken through the Parliament, which was becoming institutionalized. During this period, major legislation was enacted to compromise between the new commercial attitude that land should be freely sold and the old feudal custom of a vassal holding unalienable land of a lord. I have described this more fully in a previous work. [2] The rights of merchants and traders, as well as those of barons (landowners), negotiated in Magna Carta of 1215, were renegotiated and reconfirmed throughout the thirteenth century. Among other things, safe conduct was provided for foreign merchants in England, even those from enemy countries, provided that English merchants received equivalent protection in their lands. [3] In his studies of medieval charters for artisan businesses, Epstein found a wide range of negotiations and compromises not fully evident in the charters themselves, [4] a testimony to a free market in institutions.

By the twelfth century in France, judicial proceedings involving merchants were decided by their peers. Town administrations were more concerned for compromise solutions than for punishment or vengeance. [5] Peace was recognized as important to the welfare of the town.

In choosing between guild monopolies and privileges on the one hand and free competition on the other, medieval guilds often sought a middle way: regulated competition to reward effort without threatening established houses excessively. "Even the most restrictive guild practices prescribed rules for competition rather than abolish it. Throughout Europe groups of artisans chose this middle way that granted a measure of security and at the same time rewarded individual effort." [6] This compromise tended toward the free market, even though merchants were far from fully ready for it.

Cooperation in medieval European villages is a much-repeated theme. The following are only a few examples from a vast literature. The strip system in feudal agriculture made it "in each man's interest to work in cooperation with his neighbour." [7] Also, "it was natural that the spread and development of the village community should make the farmers cooperate more and more." [8] Earlier, cooperation had been essential to defense, not only against Viking, Magyar, and Saracen invasions, but also against depredations by neighboring lords or their tenants. [9]

Trade agreements incorporating reciprocal rights were drafted in German cities at least since the thirteenth century. The "bargaining" was not always peaceful: the Hanseatic League raised an army and defeated Denmark in 1380. Reciprocal arrangements were negotiated among cities to protect the rights of nationals, both commercial and legal. In the fifteenth century, the Merchant Adventurers of England negotiated trading arrangements with Amsterdam and later with Hamburg and towns in the Netherlands. In the sixteenth century, the British negotiated agreements for their companies to operate in other countries, notably Russia and Turkey.

In the early eighteenth century, it was commonly believed that to destroy the trade of one's neighbor was one way to gain trade for oneself. "Yet already before the end of the [Seven Years'] war there was evidence that the merchant interest was less confident of the virtues of war as an instrument of policy." [10] Lenient terms to France after the war, and the ensuing British prosperity, helped lead to the concept that the prosperity of another nation is to the advantage of one's own.

The most-favored-nation principle was incorporated into trade agreements as early as the seventeenth century, but the nineteenth was the century for major liberalization, notably with the Cobden treaty between England and France in 1860 and the Franco-Prussian (Zollverein) treaty of 1862, each of which reduced duties reciprocally and contained a most-favored-nation clause. These were the precursors of the reciprocal trade agreements of the twentieth century and hence of the European Union. [11] The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization represent the highest degree of economic compromise achieved by humankind by the end of the twentieth century, though not — it is to be hoped — the highest in all time. Seven years of struggle, dotted with confrontations, threats, and hardline brinksmanship, yet also with yielding and recognition of potential gains, marked the historic agreement of December 1993, concluding the Uruguay Round. Further historical references on negotiation, cooperation, and compromise on economics and trade in Europe appear in Appendix 5.1.

Taxation as Leverage

In much of the medieval world, and in some places for centuries thereafter, taxation was tribute collected by force. In Britain, by contrast, from the twelfth century onward, the ruler could tax only with the consent of his bourgeois and noble subjects, who in turn had to deal with their peasants. That pattern later became the norm in other European countries.

In 1258, Henry III of England, weakened by civil war and bankrupted by an ill-advised military foray into Sicily, called upon his barons for funds. They made their cooperation contingent on his accepting a body of counselors who prepared the Provisions of Oxford, which specified the authority of Parliament. [12]

Thenceforth taxation became a matter of negotiation. Centuries later, in the Great Contract of 1610, James I agreed to restrain his extravagance in return for an appropriate income guaranteed by Parliament. [13] Under Charles II, Parliament withheld taxes that the king would allegedly use to promote "Popery" and absolutism. [14] All these arrangements strengthened the concept that higher authorities could be held accountable.

The course was similar in France. "French kings . . . established their power to tax income and property through a process of negotiation and conciliation that extended over several centuries. . . . During the twelfth century, subjects in different towns in the kingdom agreed to pay periodic tallages . . . in exchange for the king's written pledge to maintain a stable currency during his lifetime." [15] In similar vein, Webber and Wildavsky describe the further evolution of taxes through negotiation between kings and representatives of taxpayers. [16]

Jurisdiction and Power

Conflicts over jurisdiction and power were common to Europe throughout the period under review. [17] But a relative cultural shift occurred, away from sheer power and toward trade and wealth as the most meaningful objectives sought by rulers, as well as a shift from insistence on total victory to willingness to make a compromise peace. Foremost among the early conflicts were those over who should rule, with what powers, and over what territory.

In an effort to end joint kingships and to decrease the violence of competing claimants to the throne, in the late ninth century the West Saxon kings decided on succession by will or family agreement. While the kingship would go to only one candidate, family property would be divided so that all relatives were satisfied. [18] By the twelfth century in France, younger brothers were being recognized through the granting of apanages, princely domains in which they would rule while remaining under the titular authority of the king. [19] All this was an improvement over the succession battles of the later Roman Empire.

About 1200, a large number of allodial landholders in France (those not subject to feudal lords) wanted to upgrade their status by assuming noble titles and converting their houses into small castles. The neighboring nobility opposed this move, fearing a challenge to their prerogatives. In an "unprecedented compromise," [20] the titles and rights to build small castles were granted in exchange for subjecting the land to the feudal jurisdiction of the neighboring nobility.

In the perennial conflict between state power and regional jurisdiction, Philip II (r.1180-1223) validated local administrative organizations but appointed his own men from Paris to administer them. He strengthened the church while enforcing royal rights over the clergy. These compromises probably reflected a realistic appraisal of the balance of power among king, church, and provincial authority. They remained in effect for generations.

Both Henry III (r.1216-72) and Edward I (r.1272-1307) of England claimed the right to appoint their own officials and advisors, but the barons, prelates, knights, and burghers insisted that their consent was essential to new laws and taxes beyond what was customary. Each recognized the rights of the other in a "working compromise" and "uneasy truce." [21]

Although burghers were classified as "rich" and "poor" in town documents in Germany of the fourteenth century, equality between them, in conducting the town's business and in a common justice, was frequently sought in practice. Power sharing was agreed in compromises in Augsburg in 1340 and Strasburg in 1334.

The powers of the king of England, still unsettled at the time of the Restoration (1660), were defined gradually, by negotiation, in the Convention of 1660 and with the "Cavalier Parliament." [22] Parliament "had demonstrated a capacity for adaptation and an ability to carry on the government of the country in very difficult circumstances." [23] Further historical references to compromise on jurisdiction and power are found in Appendix 5.2.


Frederic Maitland, historian of law, wrote in 1898 about an earlier era:

Everywhere we see strife and then compromise, and then strife again, and at the latest after the end of the thirteenth century the state usually gets the better in every combat. . . . The rulers of the church, therefore, had to tolerate much that they could not approve in the name of the church. They could give and take without any sacrifice of first principles. . . . Popes, and popes who were not weaklings, had taught them by precept and example that when we are dealing with temporal powers we may temporize. [24]

The greatest religious crisis of medieval times — the Gregorian reformation and the investiture struggle (1075-1122) — was settled everywhere by compromise, eventually. The controversy between Pope Gregory VII and the Holy Roman Emperor Henry IV led to a long civil war in Germany, not settled during the lifetime of either. In England the dispute was mainly between Anselm of Canterbury, devotee of Pope Urban II, and Kings William II and Henry I. Both were settled by heroic compromises. In England, the Synod of Westminster in 1107 recognized Henry's right to reconquer Normandy from his brother Robert, while Henry gave up his right to invest the clergy. Anselm in turn agreed to do homage to Henry. In Germany a similar conflict was settled by the Concordat of Worms in 1122, with the clergy doing homage to the emperor, Henry V, for their secular responsibilities but receiving their spiritual authority from the pope, Calixtus II. An image of the conflict returned with the confrontation between England's King Henry II and Thomas Becket, culminating in Becket's murder in 1170.

The disputes ranged much more widely than those settled at Westminster and Worms, however. They played into the wars between the Hohenstaufen and the pope, which involved the French and the English as well, from Frederick I's first invasion of Italy (1158) through the battle of Bouvines (1214) to Tagliacozzo (1268). [25] Warfare and other violence were endemic, but "ultimately compromises were reached on a whole range of issues involving not only the interrelationship of church and state but the interrelationship of communities within the secular order — the manorial system, the lord-vassal unit, the merchant guilds, the chartered cities and towns, the territorial duchies and kingdoms, the secularized empire." [26] Even the Henry-Becket controversy ended in compromise — albeit too late for Becket — in that the pope and the king agreed on two separate legal jurisdictions and set the boundaries between them. [27]

With the possible exception of the French Revolution, the wars of religion of the sixteenth century marked the greatest period of civil bloodshed and internal hatred in French history. To end these wars, France's Henry III (r.1574-89) proposed Protestant Henry of Navarre as a compromise successor provided that he became Catholic. The peace that followed under Henry IV (r.1589-1610) called for an utmost attempt at compromise between Catholics and Protestants, whose bitterness toward each other had been nurtured for decades. [28] A parti des politiques was formed "to subordinate religious conflicts to a national interest and to a raison d'état. [But] this happened only after the turn of the [seventeenth] century." [29] The revocation of the Edict of Nantes by Louis XIV in 1685, depriving Protestants of their civil liberties, was a temporary setback in an irreversible trend toward freedom of religion.

The wars of religion are not yet over in Europe. Perhaps by imagining the struggles of Northern Ireland — or even the Middle East — as somehow encompassing virtually the entire continent of Europe, present-day observers may obtain some idea of the impact of these wars and of the power ethic on the European economy. Surely the ultimate settlements by compromise were essential to the economic advances of Europe. So will they also be, ultimately, to the economic health of Ireland and the Middle East. (The compromises of 1993-94 in the Middle East will be discussed in Chapter 20). Further historical references on negotiation and compromise in religious matters are found in Appendix 5.3.

Intellectual Discourse

The art of negotiation and compromise applies not only to economic, political, and religious affairs but also to ideas and intellectual discourse. The harmonizing of reason with faith — antithetical in many cultures, including some Western fundamentalist sects — was a principal goal of scholastic philosophers in the Middle Ages. The idea that reason could help understand faith and that free will did not conflict with divine order had been introduced by Boethius as far back as the sixth century CE. It was carried on by the Scholastic method from the twelfth to the fifteenth centuries. Thomas Aquinas (1224/5-74) was one of its principal exponents.

This method depended on dialectical reasoning, which might be construed alternatively as a foundation for scientific thinking and a basis for intellectual compromise. In Policraticus (1159), John of Salisbury tried "to put together in a comprehensive way theories, texts, and examples from the most diverse and contradictory sources — Plato, Aristotle, Cicero, Seneca, Virgil, Ovid, the Old Testament, the New Testament, the church fathers, the Roman lawyers, . . . the canon lawyers, and others — and to attempt to synthesize them. . . . John found a method of actually achieving synthesis through the use of concepts which combined contradictory norms by abstracting their common qualities." [30] The belief that all of these documents were sacred and absolute, yet the need to synthesize them and resolve internal conflicts, surely provided excellent training in compromise.

One example of the synthesis of opposites was the conflict between hereditary succession and election of kings. John of Salisbury proposed a compromise in which the eldest son would be the presumed heir but confirmed by election. In so suggesting, he anticipated another compromise not agreed upon until centuries later in the West: the existence of a "public power" distinct from both the ruler and private society.

The very Scholasticism that Hegel eschewed in the nineteenth century may have been the ancestor of his philosophy of thesis-antithesis-synthesis. This harmonization of opposites is surely a part of that period in Western history called the Enlightenment. Shapiro writes of "a common set of assumptions about the nature of truth, the methods for attaining it, and the degree of probability or certainty that may be attributed to the findings." [31] She shows how this common set cuts across natural science, religion, history, law, and literature in the West. Wilson associates the Enlightenment with universalism: the view that one's own moral sentiment should be extended to encompass persons of other races, cultures, and nationalities than one's own, which he finds to be peculiar to the West. [32] He also points, with some marvel, to the way in which the ideas of philosophers such as those cited here were extended to the common citizenry, embracing their everyday actions, instead of being confined to the writings of an elite group of thinkers.

Confrontation and Intransigence

The tendency toward negotiation, compromise, and cooperation among pluralist groups was neither linear nor unbroken. European history is full of examples of confrontation and intransigence. Henry II and Thomas Becket each set forth demands knowing the other would not accept them. [33] In 1419, Henry V of England insisted on sovereignty over Normandy and Aquitaine, a condition neither the Duke of Burgundy nor the Queen of France could accept.

Talks were fruitless. [34] Events leading to and during the English civil war and the war itself revealed many instances of misunderstanding, mistrust, polarization of ideology, and intransigence. [35] "Almost without exception, contemporaries attached long-term significance to their struggles and described them as confrontations between monarchy and Parliament." [36] While the issues of the civil war could not be surmounted at the time, however, they were all resolved by compromise within the next century.

Although the French Revolution did contain compromises, on balance intransigence was the rule. The legislature changed hands and composition several times, and those whose opinions fell from favor often had their heads fall as well, especially during the Terror from 1792 to 1794.

Liberalism lost in the European revolutions of 1848, with many of its proponents mercilessly hanged. Yet virtually all they had fought for — nationalism, independence of artisans from guilds, freedom for workers, the end of serfdom, more attention to education — were put into place before the end of the century, mainly by negotiation, compromise, and legislation. Most of these reforms were achieved by the very leaders who had opposed them in 1848 or by their political heirs. [37]

Confrontation and violence have not disappeared from Western culture. Rather, negotiation and compromise have grown relatively stronger, over the centuries, as principal means of resolving conflicts. The same has been true among the Japanese. But other societies — Middle East, African, and Latin American — have not followed this pattern to the same extent. It is because of their centuries-long experience in conflict resolution, and not only their economic power, that Western Europe and the United States are called on as arbiters in other conflicts, such as those of the Middle East.

Summary of the Power-Diffusion Process: Common Elements of Japan and Northwestern Europe

Let us now summarize the power-diffusion process as it operated in the histories of Japan and northwestern Europe from the Middle Ages to at least the nineteenth century.

  1. The economic systems of both regions in the Middle Ages were based on contract feudalism, [38] in which lords and tenants performed specific assignments for each other. This contrasts with the rest of the world, where feudalism was mainly by conquest, with tenants subject to whims of the lords, unable to gainsay them in their extravagant demands. Contract feudalism emphasized the concept of contract, which ultimately led to its counterpart concept of private property and then to free markets.
  2. Taxes were increasingly collected by agreement with middle-class contributors, granted in return for their right to monitor government expenditures. [39] While medieval peasants paid dearly and mostly had no choice, nevertheless from time to time they too bargained, as part of a peasant rebellion. The fact of agreement, if only by members of parliament or the estates in Europe or the village councils in Japan, reinforced accountability. In other parts of the world, taxes were collected mainly as tribute and often by military force.
  3. The earliest legal and monetary systems of both areas were initially derived, for the most part, by agreements among the groups that used them, acting as corporate bodies. For example, commercial law was agreed upon by groups of bourgeoisie and their customers, while monetary instruments were free contracts between issuers and holders. [40] In other world areas, by contrast, these systems were mainly dictated by sovereign powers.
  4. In northwestern Europe and Japan, lower-ranking corporate groups levered their power by allying themselves with upper-ranking groups. For example, peasants, though intrinsically weak, would swing the balance in a conflict between nobility and royalty, demanding greater power for themselves in return. Vertical alliances with leverage over the centuries constitute the power-diffusion process, which became a principal reason why power is more diffuse in northwestern Europe, its cultural descendants, and Japan than in the less-developed zones today.
  5. By vertical negotiation and compromise, the corporate interest groups of Japan and northwestern Europe offered economic benefits to each other. By contrast, in the rest of the world economic "cooperation" was principally forced by elite groups upon politically-weak, unorganized peasants and artisans.
  6. Because of all the aforementioned factors, the art of negotiation and compromise grew in both Japan and northwestern Europe, relatively to brute confrontation, stonewalling, and military force. This art facilitated the creation and modification of institutions of economic growth, such as the legal system, the monetary system, trading rules, corporations, and parliamentary democracy.
  7. Likewise, endemic warfare gave way to long periods of peace in both societies. [41] Prosperity, economic growth, and institutional change were concentrated in these periods. The concept of taxes by permission of the parliament helped limit endemic warfare. The king could no longer engage in war on his own, and parliament did not always find the king's wars to be to its advantage. Periodic wars — those with clear beginnings and endings — did continue, however.
  8. Not only did power become more diffuse over the centuries, but its nature changed. The bases of power shifted away from the military and religion and toward economic and political institutions. For example, over time a king and his army or a priest and his clergy lost power over social action, relative to corporate groups such as labor, the senate, and political lobbies. Personal power came to depend on one's position within such institutions more than on brute force or fear of God.
  9. Market freedom was the result of these negotiations conducted through these behavioral norms. In the rest of the world, market freedom either did not evolve or was mandated by authorities and did not last long.

Because of pluralism, vertical alliances, and leverage, lower classes gained greater access to resources in Japan and northwestern Europe than did their counterparts in the rest of the world. They also held their leaders, and each other, more accountable for the efficient use of resources through free-market institutions. This access and freedom, brought about through a culture of negotiation and compromise, constitute keys to Japanese and northwest European economic development. North American and Australian/New Zealand development are descended from the northwest European and are not covered separately in this book.

A Warning

None of the propositions in the preceding section is absolute. All are subject to exceptions and mixtures with their opposites. While the power-diffusion process conduces to negotiation and cooperation up and down the social scale, and to peaceful resolution of conflicts, the opposite — confrontation, violence, misunderstanding, and institutional destruction — also are found throughout European and Japanese histories. The violence in inner cities in the United States is an example. Nor is the power-diffusion process totally absent in today's less-developed areas; the verdict is relative only.

In the chapters on Europe and Japan, the power-diffusion process has been explained with a small number of examples. The same number could probably be found for less-developed areas. The difference lies in the fact that hundreds, maybe even thousands, of instances occur in the histories of northwestern Europe and Japan, some of which are found in the appendixes. Very few occur elsewhere. The scholar who wishes to challenge the power-diffusion process may consult the appendixes to examine the relative occurrences. Readers who wish only to understand the process may be content with reading the text.

Relationship to North's Theory of Institutions

Concurrently with the present volume, Douglass North was writing Institutions, Institutional Change, and Economic Performance (1990), which covers similar territory. While the two books are complementary, there are significant differences. Page numbers and other parenthetical references in this section refer to North's book.

Elements Common to the Two Books

  1. "History matters" (vii). Neoclassical economic theory assumes the existence of institutions of information, contract, enforcement, and others, which allow the economic model to function efficiently. It is deficient in not recognizing alternative patterns of economic intercourse in areas where these institutions do not exist. It also fails to explain how the requisite institutions have been historically shaped.
  2. A major purpose of institutions is to reduce transaction costs.
  3. With minor exceptions, free markets are more efficient than centrally directed institutions. Institutions that tend to equate private with social costs and private with social benefits [42] also tend to be efficient. The question is: "What creates efficient institutions?" (137)
  4. We both specify the importance of contract and property in economic institutions.

Elements of North's Theory Not Found in the Present Book

  1. North distinguishes between informal and formal institutions, and he deals with theories of enforcement and transaction costs. None of that material is covered in this book. Rather, I agree with North's theses on these points.
  2. In explaining the rise of institutions, North relies on path dependency, a concept that he credits to David (1975) and Arthur (1988). Because of some circumstance — geographical, accidental, or other — two societies make slightly different early choices. Each initial choice implies a different choice of the next institution, and so on into increasingly divergent paths. One path may be more efficient than the other, but by the time this efficiency is recognized the marginal cost of changing is greater than the marginal benefit.
  3. "Institutions change, and fundamental changes in relative prices are the most important source of that change" (84). North is right in that such changes bring about new technologies, and these in turn imply different ways for people to deal with each other: advanced communications, for example. While accepting this, I suggest still more important ways by which institutions change, according to the power-diffusion process.

Elements of the Present Book Not Found in North's Theory

  1. While not denying the roles of technology and prices, I explain institutional change more importantly in terms of culture, such as the willingness of a people to compromise rather than to confront and to seek peaceful resolution of conflict rather than to choose war as a first resort. North recognizes culture (37, 42), but he does not address the source of cultural differences. The power-diffusion process suggests that they arise largely (though not exclusively) when a society happens into some circumstance in which the dominant group is forced, for its own survival, to negotiate with groups it deems inferior. Repeated practice and the increasing recognition of positive sums cause the two (or more) groups to behave with constraints that become institutionalized. This experience, more than relative prices, technology, or other economic conditions, can explain the difference between northwestern European and Japanese institutions on the one hand and those of the rest of the world on the other.
  2. In this book, power is treated as an economic good, with both costs and benefits. It may be a capital good (to produce other goods for the powerholder) or a consumer good (to be enjoyed for its own sake). North also mentions power (21), but he adheres to the idea of economic utility/productivity and costs, while I accept cultural variables as having their own utility/productivity and cost functions as well. For example, the cost of power includes the mental anguish from losing it.

    North illustrates path dependency by contrasting England with Spain in the sixteenth century. England had become a relatively centralized state while Spain was not unified. England had developed a Parliament that reduced rent seeking, while Spain possessed an extravagant bureaucracy, and so on (112-16). For these reasons, each government reacted differently to the common fiscal crisis brought about by widespread warfare. "In [England], it led to the evolution of a polity and economy that solved the fiscal crisis and went on to dominate the Western world. In [Spain], in spite of initially more favorable circumstances, it led to unresolved fiscal crises, bankruptcies, confiscation of assets, and insecure property rights and to three centuries of relative stagnation." [43] So far so good, and I agree with North's path-dependency analysis. But surely Spain's Philip II (r.1556-1598), with his almost absolute power, could have solved his fiscal crisis through his current institutions if he had wanted to. Rather, Philip valued his power over his subjects [44] in Spain, Portugal, and the Netherlands more than he valued fiscal responsibility. He also wanted to humble France and the Ottoman Empire. So he made an economic choice between two goods — power and fiscal responsibility — when he could not afford both. To me, this choice, and Philip's power to make it, were the major factors in Spain's fiscal crisis and all that followed from it (see chapter 15). With power already more diffuse in England, his rival Elizabeth I (r.1556-1603) did not have to waste resources defending hers.
  3. If successful, the power-diffusion process leads, over centuries, to a sufficient balance of power among interest groups, but precisely what constitutes "sufficient" is impossible to quantify or specify. Labor must not be "too" weak vis-à-vis management, exporters not "too" weak vis-à-vis domestic producers, and so on. The diffusion of power has led to a constellation of forces more balanced in northwestern Europe and its cultural descendants and in Japan today than in the rest of the world. This balance holds a relatively efficient institutional structure in its place. North comes closest to this point when (123) he quotes Colson (1974:59): "The communities in which all these people live were governed by a delicate balance of power, always endangered and never to be taken for granted." But he does not show how this balance is obtained or held.
  4. North writes: "Third-party enforcement means the development of the state as a coercive force able to monitor property rights and enforce contracts effectively, but no one at this stage of our knowledge knows how to create such an entity." (59, italics mine). While no one knows how to command such a state to exist, the power-diffusion process does explain — in part — how northwestern Europe and Japan achieved such a state. Each decision leading toward it was taken for its own specific reasons, and the contract-enforcing state was the serendipitous result.


North's volume is helpful to the present book, for it carries the theory of economic institutions into important areas that I did not touch. I wanted to concentrate on vertical alliances, pluralism, leverage, accountability, and power diffusion.

The principal difference between North's theory and my own is that North has not broken the "economics barrier" and therefore bases his analysis on economic goods and services, and their prices and technologies. In the present book, by contrast, cultural artifacts — including power — are deemed to be economic goods. They, too, may be analyzed within the economics matrix. Once these are included, the formation of institutions follows logically, through repeated transactions based on individual perceptions of benefits and costs. The benefits may be selfish or altruistic. The costs may be self-centered or may include social values, such as environmental protection. But benefits and costs must be perceived by each individual separately, while the transactions are negotiated institutionally. All this is complementary to North's path-dependency theory and in no way disputes it.

Why Northwestern Europe? Why Japan?

Why did the power-diffusion process happen only in northwestern Europe and Japan? Throughout this book, I will speculate on any proposition for which no provable reason is apparent. Let us consider two possibilities — land scarcity and relative lack of trade — which may have initiated contract feudalism, the first step in the power-diffusion process in these two areas.

Land Scarcity

In mainstream economic theory, development is promoted by the availability and mobility of factors of production. This book takes a contrasting view, that the relative lack of land and the relative immobility of labor in the tenth to thirteenth centuries may have helped initiate the power-diffusion process, and hence durable development, in Japan and northwestern Europe.

In the tenth to thirteenth centuries in northwestern Europe and in the sixteenth century in Japan, specific peasants bonded with specific lords [45] for want of alternative land. Each group could not have survived without the other. By negotiating across the social scale, and by requiring accountability of each group to the other, this bonding may have set the power-diffusion process into motion.

In Japan, land was limited by the islands. In northwestern Europe it was scarce because to the north lay cold territory, to the west the ocean, to the south the mountains and settled areas of the Mediterranean, and to the east the Germans. None of these was an impenetrable barrier, but each inhibited migration. By contrast, land stretched in abundance across eastern Europe, China, south Asia, the Middle East, Africa, and the Americas, where vast movements of peoples were possible. Lords who did not agree with peasants could wipe them out or force them to leave, replacing them with serfs or slaves from war. Peasants too severely oppressed would escape or die. Thus only in northwestern Europe and Japan did specific lords and specific peasants stay with each other long enough to form groups and negotiate. I will refer to this phenomenon as "peasants and lords not being able to escape each other." Its result was labor by contract instead of slavery. The word "escape" will be used in this sense frequently in the remainder of this book.

The culture of contract facilitated the free market for labor, as opposed to serfdom and slavery. Epstein shows how this came about among urban guilds in Europe. [46] Outside northwestern Europe and Japan, slavery, which was associated with land abundance, continued much longer. Who would be willing to work for another if alternatively one's own land might be free? Unable to hire workers, would-be employers would enslave them by force. The choice probably depended on which was cheaper, free hire or slavery. In the land shortage of northwestern Europe and Japan, free hire was ultimately selected because tenants — in possession of land by their settlement upon it and having some power and minds of their own — became cheaper to hire by contract, or their product cheaper to buy, than either was to seize and control.

While land shortage and one-on-one bonding of peasants and lords appear to me valid reasons for starting the power-diffusion process in northwestern Europe and Japan, they may not be the full explanation. Similar conditions occurred in ancient Rome and Greece, where the same process did not result. Helots (serfs) of Sparta in the fifth century BCE, and their counterparts in other Greek and Roman city-states, also bonded one-on-one with their patrons, and land was in short supply. [47] Spartan patrons and helots also could not escape each other. Yet pluralistic groups and vertical negotiation did not emerge. The major difference that I see is that these ancient patrons had conquered their serfs instead of making agreements with them and were far more cruel — they tortured them routinely — than were medieval Europeans. While violent rebellions occurred in Sparta, they were brutally suppressed, and never were lords and peasants close enough to each other to negotiate. Perhaps Roman lords in the fifth century CE became more humane toward their serfs because they needed each other to defend themselves against a collapsing government that had been tyrannical toward both. I am left thinking that while land shortage is a logical hypothesis partially explaining the start of the power-diffusion process in northwestern Europe and Japan, its fruition depends also on other reasons for establishing vertical trust. This will become more clear in subsequent chapters, on areas where the power-diffusion process was aborted.

The land abundance in early North America and in Australia and New Zealand does not negate this hypothesis, which relates only to the start of the power-diffusion process in northwestern Europe and Japan. By the time the Western hemisphere and South Pacific were settled by Europeans, the power-diffusion process was already far advanced for them.

Lack of Trade: The Goodell Thesis

While long-distance trade was prevalent over all the world, the geography of northwestern Europe and Japan was less conducive to it in medieval times than that of the Mediterranean states, the Middle East, or India. In the latter areas, lords escaped bonding with specific peasants. They still needed peasants, but if they killed or drove off one set of them, gold earned directly from trade or from taxing its passage enabled them to survive until they could find another. In northwestern Europe and Japan, by contrast, the scant opportunity for trade forced specific lords and specific peasants to depend more closely on each other. This second cause of lord-peasant bonding is called in this book the "Goodell thesis." [48] Goodell wrote about Persian lords along the silk route, but her thesis would apply elsewhere as well.

Other Reasons for European Economic Development

Speculation on land shortage and the Goodell thesis as possible causes of the power-diffusion process in northwestern Europe and Japan in no way precludes the many other theories of economic development that have been posited for Europe, such as through institutional remnants of the Roman Empire, through preservation of knowledge by monasteries, and through population growth. The purpose of this book is to add to existing thought, not necessarily to replace it.

From Contract Feudalism to the Free Market

Those who minimize the importance of contract feudalism argue that the power gap between peasants and lords was so great and peasants so oppressed that mutual agreements benefited them little. Unequal though these contracts were, they nevertheless started a cumulative process in which contracts became less unequal over the centuries.

But the free market in all goods and services did not come quickly. Indeed, it is far from complete today. As national health programs are instituted in western Europe and North America in the twentieth century, the first thought of virtually all politicians and their constituents has been that governments must manage them. They will only be disabused of this idea if programs fail through lack of accountability, improper management, and power to tax — developments that may require decades to reveal themselves. Production and price controls have remained for many goods and services, even in northwestern Europe, its cultural descendants, and Japan — rent controls and minimum wages, for example. Only over centuries did the idea of a free market spread, and only over future centuries will it evolve further. Always the free market was nobody's first choice; every group preferred a monopoly for its own product or wished to make major decisions alone. Only when monopolies became clearly unavailable to all, and only as the powers of all bargaining groups began to be felt, and only after centuries of negotiation mixed with warfare, did free markets emerge. Product by product, their immediate cause was economic efficiency, which later became explicated in general by Adam Smith. [49]


  1. Braudel 1979:362.
  2. Powelson 1988:70-73.
  3. Berman 1983:293.
  4. Epstein 1991:62.
  5. Gilles 1986:113.
  6. Epstein 1991:100.
  7. Hibbert 1987:21.
  8. Bolin 1966:646.
  9. Koebner 1966:46.
  10. Wilson 1967:537.
  11. Other references to economic compromises include those between Edward III and the merchants (Cannon and Griffiths 1988:225); new leaseholding arrangements between innovating landlords and tenants in England in the seventeenth century (Brenner 1985:49); and cooperation among Dutch towns in the seventeenth century (Braudel 1979:180).
  12. Hogue 1966:62.
  13. Cannon and Griffiths 1988:360.
  14. Miller 1987:245.
  15. Webber and Wildavsky 1986:180.
  16. Nevertheless, the Estates often bargained badly in France, compared to England. Sometimes they gave up the power to approve taxes by approving them in perpetuity. The English parliaments were more cautious. In addition, the French Estates did not meet from 1614 until 1789.
  17. Berman 1983:75, citing Stephen White 1978:301-2.
  18. Cannon and Griffiths 1988:38.
  19. Gilles 1986:123.
  20. Barthelemy 1988:416.
  21. Hogue 1966:57.
  22. Miller 1987:184.
  23. Cannon and Griffiths 1988:402.
  24. Maitland 1898:56-57, cited in Berman 1983:261.
  25. This history is too well known to require repetition here. For a recent, insightful analysis, see Barber 1992, especially Chapter 4.
  26. Berman 1983:107.
  27. Berman 1983:268.
  28. Sicard 1986:181.
  29. Holborn 1959:251.
  30. Berman 1983:279-80.
  31. Shapiro 1983:3.
  32. Wilson 1993:191-221.
  33. Berman 1983:257.
  34. Seward 1987:130.
  35. Miller 1987:67.
  36. Cannon and Griffiths 1988:389.
  37. Robertson 1952:412.
  38. To the best of my knowledge, the term contract feudalism was first used by Bloch (1961). It has been widely accepted in the literature on feudalism.
  39. This statement applies more to England and Germany than to France, more to France than to Japan. But some elements of it were true for all northwestern Europe and Japan. See the appropriate chapters.
  40. Monetary systems here includes promissory notes, bank currency, and other instruments issued by private persons. The coin of the realm was usually minted by the sovereign, or else private parties could submit their metals for minting, by paying a seignorage fee.
  41. This statement applies from the late seventeenth century on for England on its own soil; from the seventeenth century on for Japan, and from 1815 on for continental Europe. I do not count the Crimean War, Franco-Prussian War, and the Balkan wars as endemic.
  42. Private costs are those paid for by a producer; social costs are all costs to a society, including private costs plus damage suffered by others than the producer, such as pollution of streams or acid rain. An analogous distinction is made for private and social benefits.
  43. North 1990:113.
  44. Philip married Elizabeth's predecessor, Queen Mary, neither for love nor to make his economic institutions more efficient. He did so to extend his power.
  45. I use lords and peasants generically. In fact, each group had many subdivisions.
  46. Epstein 1991.
  47. Grant 1992:85-91.
  48. After Goodell 1980, who I believe originated the idea.
  49. I do not propose that a free market exists totally anywhere today — all is relative. Indeed, "today" is but one point of historical evolution.

Copyright © 1994 by the University of Michigan. First published in the USA by the University of Michigan Press, 1994.

Published on the World Wide Web by The Quaker Economist with permission from the University of Michigan Press, 2005.

Creative Commons License This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 2.5 License.