Communities and Markets in Economic Development

Communities and Markets in Economic Development

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Communities and Markets in Economic Development

Edited by Masahiko Aoki and Yujiro Hayami

Great Clarendon Street, Oxford OX2 6DP Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Bangkok Buenos Aires Cape Town Chennai Dar es Salaam Delhi Hong Kong Istanbul Karachi Kolkata Kuala Lumpur Madrid Melbourne Mexico City Mumbai Nairobi São Paulo Shanghai Taipei Tokyo Toronto Oxford is a registered trade mark of Oxford University Press in the UK and certain other countries Published in the United States by Oxford University Press Inc., New York © Oxford University Press 2000 The moral rights of the author have been asserted Database right Oxford University Press (maker) First published 2000 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organizations. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer British Library Cataloguing in Publication Data Data available Library of Congress Cataloging in Publication Data Communities and markets in economic development/edited by Masahiko Aoki and Yujiro Hayami. p. cm. Includes bibliographical references and index. 1. Economic development–Social aspects. 2. Community organization. I. Aoki, Masahiko, 1938-II. Hayami, Yujiro, 1932HD75 .C646 2000 306.3–dc21 00-061120 ISBN 0-19-924101-5

Contents List of Figures vii List of Tables ix List of Abbreviations xii List of Contributors xiii Introduction: Communities and Markets in Economic DevelopmentMasahiko Aoki and Yujiro Hayami xv Part I.Historical and Theoretical Perspectives 1. Impersonal Exchange and the Origin of Markets: From the Community Responsibility System to Individual Legal Responsibility in Pre-modern EuropeAvner Greif 3 2. Community and Market in England: Open Fields and Enclosures RevisitedRobert C. Allen 42 3. The Two Paths of Agrarian System Evolution in the Philippine Rice BowlYujiro Hayami and Masao Kikuchi 70 4. Community Norms and Embeddedness: A Game-Theoretic ApproachMasahiko Aoki 97 Part II.Community in Market Development 5. Middlemen in a Peasant Community: Vegetable Marketing in IndonesiaYujiro Hayami and Toshihiko Kawagoe 129 6. Market Integrators for Rural-based Industrialization: The Case of the Hand-Weaving Industry in LaosAkihiko Ohno 153

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CONTENTS

7. The Role of Business Networks in Market Development in Sub-Saharan AfricaMarcel Fafchamps 8. Risk and Insurance in Transition: Perspectives from Zouping County, ChinaJonathan Morduch and Terry Sicular Part III.Governance of Local Commons 9. Water Community: An Empirical Analysis of Cooperation on Irrigation in South IndiaPranab Bardhan 10. State, Community, and Market in the Deterioration of a National Irrigation System in the PhilippinesMasao Kikuchi, Masako Fujita, and Yujiro Hayami 11. Evolution and Consequences of Community Forest Management in the Hill Region of NepalKeijiro Otsuka and Towa Tachibana 12. Liberal Reforms and Community Responses in MexicoAlain de Janvry, Céline Dutilly, Carlos Muñoz-Piña, and Elisabeth Sadoulet 13. Community Arrangements to Overcome Market Failures: Pooling Groups in Japanese Fisheries Jean-Philippe Platteau and Erika Seki CommentsDouglass C. North Index

186 215 247 265 295 318 344 403 409

List of Figures 2.1. 2.2. 3.1. 3.2. 3.3. 3.4. 3.5. 5.1. 5.2. 5.3. 5.4. 5.5. 6.1. 6.2. 6.3. 6.4. 8.1. 10.1. 10.2. 10.3. 10.4. 10.5.

Real open field rent, South Midlands (five year moving average) Output per worker in agriculture, 1300–1800 Map of the central plain of Luzon, indicating provinces and municipalities covered by the field surveys Regional distribution of different harvesting systems commonly used by municipalities in the central plain of Luzon, 1968 Regional distribution of different harvesting systems commonly used by municipalities in the central plain of Luzon, 1978 Relationship between the year the harvesting arrangements changed and the year in which land tenure status changed across municipalities in inner central Luzon Regional distribution of different types of permanent labor arrangements commonly used by municipalities in the central plain of Luzon, 1987 Location of the study village relative to market centers Traditional cropping systems New cropping systems Marketing channels for vegetables Seasonal fluctuation of cucumber prices and marketing margin for inter-village collectors Map The marketing process of cloth Gross sales of a retailer in Talaat Sao Contract choice Hierarchy of agricultural insurance provision by the People's Insurance Company, 1993 Location of the NIA irrigation system Canal layout of the NIA irrigation system Organization of the NIA as of December 1995 Irrigation ratio per year for the entire system, upper reaches, and the lower reaches of Lateral C Operation and maintenance expenditures per hectare in the NIA system excluding NIA staff salaries, deflated by GDP deflator (1995=100), three-year moving averages, 1980–1993

50 54 71 77 78 79 84 130 131 132 135 145 155 158 165 167 236 267 268 269 271 272

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LIST OF FIGURES

10.6. Rice price and NIA project expenditures, 1965–1995 10.7. Changes in the ratio of irrigated area per year to service area in the NIA system by lateral, three-year moving averages, 1985–1994 12.1. Equilibrium attendance at assemblies 12.2. Cooperation and community size: percentage of members who assist at assemblies and number of ejidatarios 13.1. Sophisticated fishermen's groups as clusters of interlinked attributes 13.2. Choosing to pool or not to pool when there are profitability and insurance advantages associated with pooling, and when group heterogeneity and local status effect are present 13.3a. The payoff matrix of a 2×2 game where two boats have to choose between two fishing locations in a decentralized manner 13.3b. The payoff matrix of a 2×2 game where two boats have to choose between two fishing locations in a coordinated manner

273 275 330 333 350 383 398 398

List of Tables 2.1. 3.1.

Crop Yields and Enclosure, c. 1800 Imputation of Wage Rates for Rice Harvesting Work under Different Contracts in the Lowland Rice Area of Laguna, Philippines 4.1. The Payoff Consequences of the Exchange Game 5.1. Credit Cost for Vegetable Producers under Alternative Credit Arrangements in the Majalengka District, 1990 5.2. Trade Practice of Farmers and Number of Collectors in the Majalengka Village, 1989/90 6.1. Major Features of Traders 6.2. Frequency of Contractual Arrangements 6.3. Possibility of Agent's Opportunism 6.4. Social Characteristics of the Large-scale Master Weavers 7.1. Loyalty to Suppliers in African Manufacturing 7.2. Percentage Ethnic Composition of the Ownership of African Manufacturing Firms 7.3. Estimate of Ethnic Bias in Firm Entry 8.1. Average Real Income Growth, 1990–1993 8.2. Contributions of Agricultural and Non-Agricultural Income to Income Growth, by Quartile, Percentage Points 8.3. The Potential for Risk Sharing: The Average Coefficient of Variation of Household Consumption under Hypothetical Scenarios 8.4. Inter-household Transfers, 1990–1993 8.5. Transfers Received from Inside versus Outside the Village 8.6. In-Kind Transfers, 1990–1993 8.7. Determinants of Transfers Received, 1990–1993, Random Effects Estimates 8.8. Determinants of Transfers Received, 1990–1993, Random Effects Tobit Estimates 8.9. Net Financial Savings, 1990–1993 8.10. Net Savings Rates by Average Household Income 8.11. Determinants of Net Saving Rates, 1990–1993, Random Effects Estimates 9.1. Dependent and Independent Variables 9.2. Ordered Logit Estimates 9.3. Logit Estimates 9.4. Logit Estimates 9.5. First-Stage Logit Estimates

47 90 100 140 143 159 161 161 174 188 196 197 222 223 224 225 226 228 229 230 232 233 234 251 257 258 258 259

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LIST OF TABLES

10.1. Length of Laterals, Service Areas, and Number of Sub-laterals, Villages and Farms in the Five Laterals of the NIA system, 1996 10.2. Benefits and Costs to Farmers of Switching from the Surface to Pump Irrigation, and Social Benefits and Costs of NIA's investment in the System 10.3. Social Benefits and Costs of NIA's Institutional Development vs. Increased O&M Expenditure for Irrigators' Associations (IAs) in the System 10.4. Private Benefits and Costs to NIA of Institutional Development vs. Increased O&M Expenditure for Irrigators' Associations (IAs) in the system 11.1. Basic Characteristics of Sample Forests 11.2. The Number of User Groups Initiating Informal and Formal Management by Period 11.3. Forest Conditions in 1978, 1992–96, and 1997 by Management Regime in 1997 11.4. Frequency of Sample Forests Adopting Regulations of Forest Resource Extraction/Use by Management Regime in 1997 11.5. Determinants of the Emergence of Forest User Group Management: Probit and Ordered-Probit Regressions 11.6. Marginal Effects for Ordered Probit Regression 11.7. Determinants of Regeneration per Hectare in 1997 12.1. Access to Land in the ejido, 1997 12.2. Importance of Common Property Resources (CPR) across ejidos, 1997 12.3. Use of CPR Land in ejidos, 1997 12.4. Population Pressure for Access to Land in the ejido 12.5. Indicators of Cooperation at the ejido Level, 1997 12.6. Determinants of Cooperation in 1994 and 1997: Assistance to Assemblies (Robust Ordinary Least Squares) 12.7. Effect of Group Size on the Percentage of Members who Assist in Assemblies (partial results from robust ordinary least squares regression) 12.8. Determinants of Change in Cooperation between 1994 and 1997: Change in Assistance at Assemblies (Robust Ordinary Least Squares) 12.9. Appropriation of Common Property Land, 1994–1997 12.10. Consequences of Individual Appropriation of CPR Land 12.11. Incorporation of New Members in the ejido, 1994–1997 13.1. Functioning Characteristics or Attributes of the Three Sample Groups

279 283 286 290 300 301 303 305 310 310 313 324 325 325 326 327 332 333 335 337 339 341 348

LIST OF TABLES

13.2. The Rationales of Pooling as Perceived by the Sample Skippers (frequencies of answers) 13.3. Covariances between the Gross Incomes (per haul) of each Individual Fishing Unit and the Aggregate Incomes of the Rest of the Group to which it Belongs (for the three sample groups) 13.4. Revealed Preferences for Fishing in Heta and Oki and Observed Performances Therein—A Comparison between Groups A and B (based on data collected during June–August 1997) 13.5. Frequencies of Net Damage and Labor Time Spent for the Search and Repair of Nets Damaged Over the Period June–end of August 1997, for Groups A and B in Shinminato 13.6. Estimation Results of Marginal Product Functions (based on production data collected during June–end of August 1997) 13.7. Probabilities of Net Damage and Losses According to Fishing Locations and Groups 13.8. Fishing Intensities and Estimated Marginal Products of Fishing Effort in Heta and Oki, for Groups A and B 13.9. Comparison of Daily Landings of Group A between the Two Fishing Periods (April–May and June–August 1997) 13.10. Comparative Catch Performances of the Three Sample Groups over the Two Fishing Seasons and Minimum Prices Obtained on a Day (1997) 13.11. Comparative Degrees of Heterogeneity in the Three Sample Groups, as Measured by Output Performances

xi 362 363 366 367 372 373 373 376 377 388

List of Abbreviations CNC CPR CRRA CRS DFO FASID FCA GDP GPS IA IDO NIA O&M OECD PAP PIC PROCEDE PWD RAN SGPE SRA TFP TSA VDC

National Confederation of Peasants (Mexico) common property resources constant relative risk aversion Community Responsibility System district forest officer (Nepal) Foundation for Advanced Studies on International Development Fishery Cooperative Association (Japan) gross domestic product geostatic positioning system irrigators' association (the Philippines) institutional development officers National Irrigation Administration (the Philippines) operation and maintenance Organisation for Economic Co-operation and Development Parambikulam Aliyar Project People's Insurance Company (China) Program to Certify Ejidatario Rights and Land Plots (Mexico) Public Works Department National Land Registry (Mexico) sub-game perfect equilibrium Secretariat of Agrarian Reform (Mexico) total factor productivity turn-out service area (group) (the Philippines) village development council (Nepal)

List of Contributors Robert C. Allen University of British Columbia, Canada Masahiko Aoki Stanford University Pranab Bardhan University of California at Berkeley Alain de Janvry University of California at Berkeley Céline Dutilly University of California at Berkeley Marcel Fafchamps Oxford University, England Masako Fujita Takushoku University, Japan Avner Greif Stanford University Yujiro Hayami Foundation for Advanced Studies on International Development (FASID), Japan Toshihiko Kawagoe Seikei University, Japan Masao Kikuchi Chiba University, Japan Jonathan Morduch Princeton University Carlos Muñoz-Piña University of California at Berkeley Douglass C. North Washington University in St. Louis Akihiko Ohno Aoyama-Gakuin University, Japan Keijiro Otsuka Tokyo Metropolitan University Jean-Philippe Platteau University of Namur, Belgium Elisabeth Sadoulet University of California at Berkeley Erika Seki University of Namur, Belgium Terry Sicular University of Western Ontario, Canada Towa Tachibana Hokkaido University, Japan

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Introduction: Communities and Markets in Economic Development Masahiko Aoki and Yujiro Hayami There is an increasing awareness among economists that the ways in which economic systems are organized in developing economies make a difference for their developmental performance and potential. We conceptualize an economic system as a comprehensive coherent arrangement of institutions through which competition among, and expectations of, people are coordinated for the use of resources. In the past it was customary to classify economic systems in terms of varying combinations of the state and the market in their control of resource allocation. At one end of the spectrum we find the central planning system in the Soviet model characterized by the dominant role of the state over markets and, at the other end, we find the liberal market system in the tradition of Adam Smith, with the socalled ‘developmental state,’ ‘welfare state,’ ‘corporatist state,’ etc. somewhere in between. Our advocacy in this book is to recognize the community as the third major element constituting an economic system. Further, we depart from the conventional view that markets and community norms are to be treated as two alternative ways of organizing economic activity, and that economic development is to be viewed as movement away from community norms to markets and contracts. We argue that markets and community norms may sometimes be complementary rather than substitutes, in that the presence of the latter may facilitate the development of markets, just as the state may sometimes enhance the ability of the private sector to coordinate through markets. We also ask, under what conditions does this occur? In our definition a ‘community’ is a group of people characterized by intense social interactions among themselves. The common usage can encompass the range of communities from the family to the ‘national community’ and even further to the ‘international community.’ However, the communities with which this book is concerned are limited to those characterized by personal relationships among mutually identifiable agents. In developing economies they are typically observed as tribes and villages characterized by non-voluntary membership based on kinship or territoriality. However, in developed economies also, community relationships, which are formed in various spheres, such as the workplace, alma mater, church, sport and other hobby clubs, have significant influences on business transactions and political activities (Hayami 1997: 241–2; Putnam 1993; Ellickson 1991).

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What role does the community play in economic development, along with the market and the state? The market is the institution that coordinates the activities of profit-seeking individuals through autonomous exchanges, under the guidance of prices toward efficiency-improving production and consumption of private goods. The state can be conceived of as the institution that supplies public goods (alternatively ‘public bads’)—including the protection of property rights—by means of the legitimate coercive power under its monopoly. On the other hand, through the repeated interactions of members, the community is capable of endogenously generating rules (norms) for coordinating the activities of members and thus making them self-enforcing without third-party involvement. In other words, community norms are informal institutions that can guide community members toward achieving voluntary cooperation (or alternatively failing to do so) in the supply of local public goods in a broad sense. This role of the community has increasingly been recognized in recent years with respect to the conservation and use of common property resources (local public goods in a narrow sense), such as forests, grazing land, fishing grounds, and irrigation, commonly called the ‘local commons’ (Feeny et al.1990; Ostrom 1990; Ostrom and Walker 1994; Bardhan 1993; Baland and Platteau 1996). Since local commons are characterized by the difficulty of charging users cost-prices because of technological non-excludability, it cannot be expected that sufficient effort for their conservation will be elicited through the profit-motive of agents in the market domain. The state may try to force the people to conserve the local commons through its coercive power. The state management, however, is subject to inefficiency arising from the weak incentives of bureaucrats for serving the needs of local people, as well as the high costs involved in accurately grasping the local needs and in monitoring whether the conservation rules are duly observed at the grassroots level. In this regard a high potential exists in rural communities in developing economies to organize collective action for their common goods based on cooperation among the users constrained by sanctions, such as social opprobrium and ostracism against free riders. An emerging new paradigm among development practitioners is to advocate for delegating the management of the commons to the initiative of local communities (e.g. World Bank 1996). The role of rural communities in the management of local commons cannot be over-emphasized. How to enhance their capacity to fulfill this role is the high-priority question on development research agendas. In fact, a major proportion of this book, particularly Part III, addresses this question. Also the greater focus of this volume is placed on the possible role of the community in enhancing the development of a market economy. In the past community norms and markets have been considered two rival institutions in suppressing and/or substituting for each other. A popular view, from Thomas More's Utopia to narodniki in Czarist Russia, and from U.S.

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populists in the nineteenth century to Mahatma Gandhi in India, asserts that the intrusion of market activities into subsistence-oriented communities is bound to destroy the traditional norms of mutual help and subsistence guarantees, resulting in the destitution and misery of the poor. The opposing model, held by enlightenment philosophers such as Montesqieu, identifies the traditional customs and norms of communities as oppressors of human minds and conduct, and identifies market development as a liberator (Hayami 1989). These two rival models share the common view, however, that the community and market are mutually exclusive institutions from the normative perspective. In an influential economic anthropological study, Polanyi (1944) identified pre-modern economic systems as arrangements in which exchange terms are governed by customs, commands, etc., sharply distinguished from market economies which are governed by the law of supply and demand. A theoretical treatise of economic history by Hicks (1969) follows the same track. However, recent developments in institutional economics involving the theories of games, transaction costs and principal–agent contracts, suggest the possibility that community relationships can be an important basis for market development, especially in its early stage. The major barrier against the development of markets in developing economies is the absence of an effective mechanism to protect property rights and enforce contracts. For example, when it is uncertain if a supplier will honestly deliver supplies to a manufacturer at an agreed-upon quality and time, or if the manufacturer will honor the contract of paying an agreed-upon price, potentially mutually beneficial production and trading may fail to take place. Theoretically this market failure can be corrected by contract enforcement through legal procedures. In practice, however, the judicial costs involved in formal court procedures may be large, often exceeding the expected gains from dispute settlements on the small transactions typical of less-developed economies. Moreover, when judges and police are not motivated to be the faithful agents of citizens, market failures cannot only go uncorrected but can even become larger through government failures (e.g. bribery, predation). In this situation where legal resources and competence are underdeveloped, community norms based on intense social interactions can become a low-cost substitute for the legal enforcement mechanism. The incidence of contract violation should be smaller among people whose personal interactions are intense because each can identify and accurately predict the behavior of others. Also, mutual trust and community norms, nurtured through close personal relations within a community involving credible social sanctions, should work as an effective brake on moral hazards. It is therefore no surprise to find historically thriving trade and financing activities among certain ethnic groups, such as the Maghreb Jews in the medieval Mediterranean and the Chinese in Southeast Asia. Cultural beliefs leading to the conviction that default on a contractual agreement

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with any member of the community should be collectively retaliated against by exclusion from further trading relationships and are able to prevent moral hazards from occurring in transactions among group members as well as outside agents (Greif 1989, 1993; Hayami and Kawagoe 1993). The possibility of honest exchanges based on reputation, however, may not be limited to an occurrence within ethnic groups. Imagine that there is a village community that has developed a dense information network through the collective management of a traditional local commons, or has otherwise faced the possibility of becoming engaged in exchanges with outside markets through intermediary traders possibly indigenous to the community. Then the reputation building of the members of the community (e.g. regarding the quality and timing of supply) vis-à-vis external markets, and that of the intermediary traders vis-à-vis the community (e.g. regarding the due and fair payment) may be regulated through a self-enforcing sanction mechanism replicating community norms under certain technological, social, and political conditions (Hayami and Kawagoe 1993; Tanimoto 1998; Hayami 1998). Also, communities that have developed their own internal contract enforcement mechanisms may mutually enhance impersonal trade across communities by effectively attributing collective responsibility for any breach of a contract by a trader to his community (Greif, Chapter 1 of this volume). Thus the initial development of markets can be embedded by community relationships. However, there can also be limits and disadvantages to the community mechanism as well. The community mechanism of contract enforcement is based on intensive social interactions. In general, the smaller the size of a community, the more intensive the interactions are and hence, the stronger its enforcement power. Therefore, trade based on community relationships tends to be small in range and characterized by a strong entry barrier. An equilibrium outcome from competition within the small group is naturally inferior to that evolving in a trade domain with a larger number of participants. Moreover, mutual trust and cooperation among community members often provide a basis for collusion to suppress competition even within the group. Indeed, it is not unusual to find that a trading institution based on community relationships which had initially served for the expansion of exchanges later became a barrier to further competition. A typical example is the guilds that were created in medieval Europe, Japan, and elsewhere. The guild's aim was to reduce transaction costs by controlling the quality standards of commodities and regulating transaction procedures among its members. Also, in Europe the capacity of the guild to mobilize collective penal actions against rulers who reneged on their promises to protect merchants' property rights served as a source of credible commitment on the side of the rulers for the expansion of trade (Greif et al.1994). The guild can be regarded as a kind of community

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with a strong entry barrier and an autonomous self-regulating mechanism. However, the success of guilds in reducing transaction costs eventually entailed the formation of a monopoly and became a major hindrance to market expansion in the late medieval and early modern eras. Whether the merit of community-based trade relationships outweighs their drawbacks may depend on the stage of economic development. This book represents an effort to shed some light on the question of what types of community relationships promote or deter market development. The role of the community in the conservation of local commons is essentially the same as its role in market development. In both cases, it enforces rules at a modest cost. The cost can be modest so long as the community is small in size and relatively closed. Just as the community mechanism of rule enforcement is more efficient in controlling trade in a small local market than in wide regional or national markets, it is more efficient in the conservation of a forest within a village than in a national park. Therefore, the conventional theory dictates that the operation of broad markets, as well as the conservation of large commons, must be supported by the state's coercive power in the stipulation and enforcement of formal laws. Yet, the theory cannot tell precisely which sizes of markets and commons need to be controlled by communities and which sizes by the state. This is partly an empirical question whose answer may differ, depending on development stages and cultural traditions. However, fully relevant answers are unlikely to be found through trying to demarcate between what activities should be born by state bureaucracy and what should be left to community-level collective action. Rather, an optimum mix arrangement may be found in their complementary roles. For example, a large national forest can be conserved more efficiently if the cooperation of several villages across the forest are organized through education and training as well as by providing them with adequate incentives, compared to the case of management by state forest rangers alone. Thus, similar to the advocacy for the ‘market-enhancing’ role of government in market development (Aoki et al.1997), government activities geared for strengthening the communities' capacity to organize collective actions for their common goods may be desirable. This book aims at drawing policy implications from this perspective. Let us now introduce the chapters to follow. The whole volume is divided into three Parts. The first Part, entitled ‘Historical and Theoretical Perspectives,’ consists of four chapters. Chapter 1, entitled ‘Impersonal Exchange and the Origin of Markets: From the Community Responsibility System to Individual Legal Responsibility in Pre-modern Europe,’ by Avner Greif challenges the view that communities and markets are alternative modes of governing transactions by providing game-theoretical and historical analysis of the community responsibility system. This institution relied on intra-community contract enforcement mechanisms to support

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inter-community exchange that has been impersonal, but up to trader's community affiliation. In the late thirteenth century attempts were made throughout Europe to abolish this system and establish legal systems administered by the state. This transition reflects the nature of institutional dynamics as a historical process since the former did not collapse because of exogenous shocks. It decayed because it contained the seeds of its own destruction: the growth of traders' communities in size and number, and economic and social heterogeneity. While the initial development of markets may be embedded by community relationships, there can also be developmental paths toward market economies evolving on the destruction of peasant community relationships. Robert Allen in Chapter 2, entitled ‘Community and Market in England: Open Fields and Enclosures Revisited’ makes such an argument about the evolution of English agriculture from communal open fields to enclosed farms. Allen challenges the traditional analysis of English agricultural organization in which enclosure triggered economic progress by abolishing community management of the open fields. On the contrary, Allen provides evidence that open field organization achieved high productivity and that enclosure gave only a small boost to total factor productivity. However, with the emergence of great estates, landlords substituted individual tenants for unified communities in order to increase land rents. Thus, the communal mechanism of open fields was uprooted by market capitalism rather than enclosure overthrew communities and created markets. However, Allen argues that a new type of social capital conducive to the efficient management of these new, large estates emerged between landlords and large-scale tenants and replaced the old community norm among the yeomen. Chapter 3, entitled ‘The Two Paths of Agrarian System Evolution in the Philippine Rice Bowl,’ by Yujiro Hayami and Masao Kikuchi focuses on the importance of historical factors in determining the evolutionary paths of economic systems despite basic similarities in environmental conditions. Early Spanish settlement of the Coastal Regions in the Philippines led to a close-knit system of small landlords and tenants while a hacienda system of large plantations developed in Inner Central Luzon as a result of the later settlement. Later events, such as land reform and technological advance, failed to homogenize the systems in these two regions: the different communal norms adapted to these exogenous changes in respective ways and still produced different farmer–laborer relations. Chapter 4, entitled ‘Community Norms and Embeddedness: A Game-Theoretic Approach’ by Masahiko Aoki, provides a unified game-theoretic framework for conceptualizing community norms and the sociological concept of ‘social embeddedness.’ It examines conditions necessary for norms to become self-enforceable in the domain of community as well as among quasi-community groups formed endogenously in the domain of initially

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impersonal exchanges. It tries to relate some of the empirical findings in other chapters of this volume to this framework and provides illustrative examples from Japanese historical experiences from the Tokugawa period to the post-war growth period. Part II, entitled ‘Community in Market Development,’ contains four chapters dealing with the role of the community in the process of market development in contemporary developing and transitional economies. Chapter 5 entitled ‘Middlemen in a Peasant Community: Vegetable Marketing in Indonesia,’ challenges a famous anthropological thesis by Clifford Geertz that the entrepreneurship for modernizing, non-farm business activities cannot emerge endogenously from within the village. They looked at the emerging Indonesian vegetable market in which village-based traders act as the intermediaries, delivering the produce to towns. In order for this operation to be effective, credit must be advanced; this induces moral hazard problems. However, community norms—and not any legal system—enforce these contracts and countervail against the temptation of farmers to cheat. Further, traders are compelled to give farmers a fair price, since there is symmetric information in the village on the market prices. Thus, the market and community norms act in concert to prevent trader cheating. Chapter 6, entitled ‘Market Integrators for Rural-based Industrialization: Case of the Hand-Weaving Industry in Laos,’ examines similar issues in the emerging market for hand-woven cloth from the Laos countryside. Large scale ‘master weavers’ bridge the information gap between the demands of the city market and the suppliers in the village; they are able to take advantage of community-based trust to avoid moral hazard problems. Macroeconomic stability allows for this relationship to flourish. Ohno shows that the currency crisis in Laos increased the gains from opportunism; as a result, the trust-based contracts were in some cases replaced by spot transactions. Again, community norms and market conditions reinforce each other in economic development. The previous two chapters examine how community-based trust aids in early market development by lowering transaction costs. Chapter 7 by Marcel Fafchamps, entitled ‘The Role of Business Networks in Market Development in Sub-Saharan Africa,’ extends this analysis to Sub-Saharan Africa. Much like the vegetable markets in Indonesia or hand-weaving in Laos, Sub-Saharan African markets use business networks to establish relationships and trust, which allow for forward contracting, contract enforcement, information sharing, and other processes which lower the cost of trading. However, while the networks in Chapters 5 and 6 are centered around the village, the membership in the SubSaharan business networks is likely to be determined by common religion or ethnic background, but it cannot be considered as entirely exogenous to the market formation process. Referral by family and friends is the most likely channel through which

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ethnic concentration arises. The author also discusses alternative institutions that perform functions similar to those of business networks. A case where there is a lack of community–market interaction is addressed by Jonathan Morduch and Terry Sicular in Chapter 8 entitled ‘Risk and Insurance in Transition: Perspectives from Zhouping County, China’. In China, the development of markets has led to impressive growth over the past two decades. But with the de-collectivization of Chinese agriculture in the 1980s came the volatility of the markets, without the development of formal insurance mechanisms to buffer households against these shocks. Community-based transfers do not fill this need; they are too small and homogenous to be effective. Households would normally then rely on their extended family mechanisms to smooth consumption; however, shrinking family size has led to an increase in savings, but not enough to eliminate vulnerability. In light of these needs, Morduch and Sicular put forth a proposal for insurance coverage that combines community and market. Part III, entitled the ‘Governance of Local Commons,’ shifts the focus from community norms interacting in emerging markets to communal control over local public goods. In contrast to Garett Hardin's solution to the ‘tragedy of commons’ problem, i.e. state control or the establishment of private property rights rules, the first four chapters deal with complementary roles of the state and the community in the governance of local public goods and the last chapter with collective private control of fishing. In Chapter 9 entitled ‘Water Community: An Empirical Analysis of Cooperation on Irrigation in South India,’ Pranab Bardhan examines 48 irrigation communities in south India, using multiple regressions to come to conclusions about the interaction of government and community in regulating water usage. In general, both village elites and average farmers will consider the rules fair if they have input in framing the rules, instead of being imposed rigidly by the government. Further, Bardhan finds that cooperation is hindered by inequality in landholding but helped by social homogeneity, small group size, longer duration of access to water, monitoring by guards, and other factors in some cases. Chapter 10 by Masao Kikuchi, Masako Fujita, and Yujiro Hayami, entitled ‘State and Community in the Deterioration of a National Irrigation System,’ cautions against putting too much faith into the community management paradigm. Specifically, organization at the rural community level may not be sufficient to manage large complicated systems because of monitoring difficulties. In the Philippines, the national agency which had regulatory control over the irrigation system was able to function rather effectively with infusions of external funds. However, when the management of the irrigation system was turned over to the communities in light of budgetary pressures, some communities succeeded, but many others failed. The authors conclude that rural communities lacked the sufficiently

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strong organizational capacity to control free-riding problems. Also, the existence of a market exit option deprived the farmers of an opportunity to effectively organize their voice in irrigation management. Thus, it may be advisable for the government to play a complementary, facilitating role for local communities to develop their own capabilities to regulate their local commons, rather than leaving them on their own. To follow up those conclusions, Chapter 11 by Keijiro Otsuka and Towa Tachibana, entitled ‘Evolution and Consequences of Community Forest Management in the Hill Region of Nepal,’ demonstrates the effectiveness of community management regimes when supported by the government. When deforestation occurred in Nepal, informal user groups began to emerge; these groups voluntarily began to manage their local forest resources. The government began to actively support these groups, handing over forest rights to user groups. These formal user groups—who work with the government's forest officers—have been able to achieve reforestation at levels above those in areas managed by informal user groups or without any management. For the most part, the communities studied in Chapters 9 through 11 were formed endogenously over a period of time. In Chapter 12 entitled ‘Liberal Reforms and Community Responses in Mexico,’ Alain de Janvry, Céline Dutilly, Carlos Muñoz-Piña, and Elisabeth Sadoulet examine a set of communities called ejidos that were exogenously formed by the Mexican government to serve political ends. Though the community owned all land, some of it was parceled out in individual plots of land and the rest became common property with regulated access for all members. Though regulated by community leaders, the state had effective control over their management. Reforms in 1992 eliminated governmental oversight of the ejidos: the economic costs outweighed the political benefits. There was a varied response to this hand-over: some ejidos experienced increased cooperation, others preserved the status quo and some saw a decrease in cooperation and increased privatization. Much like Chapters 10 and 11, Chapter 12 emphasizes the importance of government redesigning of the ejido communities, particularly in their size. In order to take advantage of the gains from cooperation, the Mexican government should aid the ejidos in their transition. Chapter 13 turns to another classic case of ‘tragedy of the commons’: fishing. Jean-Philippe Platteau and Erika Seki argue in ‘Community Arrangements to Overcome Market Failures: Pooling Groups in Japanese Fisheries’ that in this sector there are considerable gains to pooling resources. Economies of scale can be captured by working together including: work coordination such as collective lost-net retrieval and repair, information sharing, regulation of fishing activity and sales price stability. In return for these collective efforts, income pooling can distribute these gains. Platteau and Seki observe that in a Japanese village practicing such

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an egalitarian sharing scheme, fishermen of high capability are compensated by high social esteem paid by other village members. Finally the book concludes with the record of Douglass North's comments from a transaction cost perspective on drafts of the chapters discussed at the final conference leading to the present volume.

References Aoki, M., Kim, H., and Okuno-Fujiwara, M. (eds.) (1997) The Role of Government in East Asian Economic Development, Oxford, Oxford University Press. Bardhan, P. (1993) ‘Symposium on Management of Local Commons’, Journal of Economic Perspectives, 7(Fall): 87–92. Baland, J.-M. and Platteau, J. P. (1996) Halting Degradation of Natural Resources: Is there a Role for Rural Communities? Oxford, Oxford University Press. Ellickson, R. C. (1991) Orders Without Law, Cambridge, MA, Harvard University Press. Feeny, D., Berkes, F., McCay, B. J., and Acheson, J. M. (1990) ‘Tragedy of the Commons: Twenty-two Years Later’, Human Ecology, 18(1): 1–19. Grief, A. (1989) ‘Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi Traders’, Journal of Economic History, 49(Dec): 857–82. —— (1993) ‘Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders' Coalition,’ American Economic Review, 83(June): 525–48. —— , Milgrom, P., and Weingast, B. R. (1994) ‘Coordination, Commitment, and Enforcement: The Case of the Merchant Guild’, Journal of Political Economy, 102(Aug.): 745–76. Hardin, G. (1968) ‘The Tragedy of the Commons,’ Science, 162: 1243–8. Hayami, Y. (1989) ‘Community, Market, and State’, The Elmhirst Memorial Lecture at the 20th International Agricultural Conference of Agricultural Economists, in A. Maunder and A. Valdes (eds.), Agriculture and Government in an Interdependent World, Aldershot, Gower, pp. 3–14. —— (1997) Development Economics: From the Poverty to the Wealth of Nations. Oxford, Oxford University Press. —— (ed.) (1998) Toward the Rural-based Development of Commerce and Industry: Selected Experiences from East Asia, EDI Learning series, Washington DC, World Bank. —— and Kawagoe, T. (1993) The Agrarian Origins of Commerce and Industry: A Study of Peasant Marketing in Indonesia, New York, St. Martin's Press. Hicks, J. (1969) A Theory of Economic History, Oxford, Oxford University Press. Ostrom, E. (1990) Governing the Commons, New York, Cambridge University Press. —— and Walker, J. (1994) Rules, Games, and Common-Pool Resources, Ann Arbor, MI, University of Michigan Press. Putnam, R. D. (1993) Making Democracy Work, Princeton, Princeton University Press. Polanyi, M. (1944) The Great Transformation, New York, Rinehart. Tanimoto, M. (1998) Nihon ni okeru Zairaiteki Keizai Hatten to Orimonogyo (Indigenous Economic Development and the Textile Industry in Japan), Nagoya, University of Nagoya Press. World Bank (1996) World Bank Participation Book, Washington, DC, World Bank.

Part I Historical and Theoretical Perspectives

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1 Impersonal Exchange and the Origin of Markets: From the Community Responsibility System to Individual Legal Responsibility in Pre-Modern 1

Avner Greif

1.1 Introduction Communities and markets are considered by economists as alternative modes of governing transactions. In contrast, this paper calls attention to the importance of considering them as complements. In economic development and economic history, the view that communities and markets are substitutes has long been characterized by postulating that the community is an inferior mode of governance. It entails personal, as opposed to impersonal, exchange and hence limited division of labor. Accordingly, it has been held that the historical process of economic development requires substituting away from community based governance to market based governance. The feasibility of this transformation, in turn, depends on the nature of a society's contract enforcement institutions. It necessitates a transition from contract enforcement relying on personal, repeated relations within a community to one based on formal, state-mandated legal contract enforcement among market's participants. This view has been based, to a large extent, on our understanding of the process of market expansion in pre-modern Europe. North (1991: 101), for example, invokes the experience of the Western world to argue that a legal system administered by the state is a necessary condition for an advanced division of labor and a market economy. ‘Undergirding … markets are secure property rights, which entail a polity and judicial system to permit low cost contracting’. Hence, market societies ‘need effective, impersonal contract enforcement [provided by the state], because

1

This research was supported by the National Science Foundation Grants 9009598-01 and 9223974. Masahiko Aoki, Gregory Besharov, Brent Daniel Goldfarb, and participants in Workshops in the University of Chicago, Oxford University, Cambridge University, the Hebrew University, and Stanford University provided useful comments. Yadira Gonzalez de Lara provided indispensable research assistance and comments.

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personal ties, voluntaristic constraints, and ostracism are no longer effective’ (p. 100).2 In recent years, however, inspired by Coase's analysis of the relationships between the firm and the market, this view of the nature of market economies has been altered: it has been recognized that even in modern, developed economies contract enforcement based on personal and repeated relations is important for economic efficiency. It is important because even impartial legal contract enforcement entails transaction costs due to asymmetric information, incomplete contracts, and the costs required to verify past actions and states of the world by the court. Within communities, however, informal contract enforcement mechanisms can, at times, economize on these costs. Relevant information may be more readily available to one's community members, incomplete contracts can be replaced by tacit knowledge of a code of conduct, and a third party with the ability to verify past actions is not required for informal contract enforcement to function. This Coasian view led to a different understanding of the relations between markets and communities (surveyed in Greif 1997): markets and communities are substitutes in providing contract enforcement, each of which entails distinct cost and benefit for the organization of exchange. The benefit of community-governed exchange is the low cost of contract enforcement but its cost is the efficiency loss due to the confinement of exchange to a relatively small number of individuals. The benefit of market exchange is that transactions are not confined to the relatively small number of the community's members but the exchange within the market entails a relatively high cost of contract enforcement. Hence, communities and markets interrelate in a manner equivalent to the Coasian vision of how firms and markets interrelate. An efficient organization of an economy entails that transactions are allocated between market and communities in a manner that minimizes transaction costs. Guided by this view of communities and markets as substitutes, theoretical and empirical studies examined the factors determining the cost and benefit associated with each mode of transacting and the nature of intra-community contract enforcement mechanisms.3 The related theoretical and empirical studies of the dynamics of the relationships between markets and communities have integrated this Coasian view of communities and markets as

2

See also: Weber (1981 [1927]: 277) who argued that for the European ‘capitalistic form of industrial organization’ to emerge, it ‘must be able to depend upon calculable adjudication and administration’ of the law. Similarly, Rosenberg and Birdzell (1986: 116) argued that the establishment of a legal system able to facilitate exchange in the 18th century provided (1986: 117) ‘an important element in the development of capitalist institutions’.

3

e.g. Macauly (1963), Granovetter (1985), Macneil (1985), Greif (1989, 1993, 1994), Montgomery (1991), Bernstein (1992), Klein (1992), Guinnane (1994), Landa (1994), Fafchamps (1995).

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substitutes with Durkheim's analysis of economic development. This analysis maintains that the relationships between communities and markets are unidirectional. Increases in the efficiency and extent of markets undermines the governance of exchange by communities since it provides outside options to a community's members. Theoretical considerations and the historical experience of pre-modern Europe, however, indicate the limitations of these static and dynamic views of the relationship between market and communities. Theoretically, (either formal or informal) intra-community contract enforcement mechanisms can provide a basis for the functioning of intercommunity impersonal exchange. More specifically, communities (rather than an impartial legal system with authority over both transacting individuals) can provide the basis for exchange that is impersonal up to one's community affiliation. Furthermore, this exchange is not necessarily spot exchange. Rather, similar to the exchange made possible by the court, as long as past actions can be verified at relatively low cost, this exchange can be with respect to transactions (such as credit and contracts for future delivery) characterized by separation over time and space between the quid and the quo. In other words, markets and communities are not necessarily substitutes. They can be complements. Communities enable the operation of markets and (relatively) impersonal exchange. Indeed, the emergence of markets can crucially depend on the existence of appropriate community structures rather than on an impartial court. It is in the absence of such community structures to provide contract enforcement mechanisms that the operation of the market requires a well functioning legal system. Conversely, a reduction in the effectiveness of the intra-community contract enforcement mechanism may lead to a reduction in the extent to which impersonal, market relationships are possible. Furthermore, such a reduction in the communities' ability to support market relations may not reflect an exogenous alternative provided by the market to members of a community. Rather, it reflects a process through which the same market relationships that communities enable gradually undermine these communities' ability to provide the appropriate institutional foundations for the market. Perhaps more important than the above theoretical argument, the experience of pre-modern Europe indicates the important complementarity between communities and markets in the process of development. Indeed, a particular system of inter-community contract enforcement based on intra-community contract enforcement supported market expansion in Europe during the late medieval commercial revolution (of the eleventh to the fourteenth century). It enabled impersonal exchange characterized by separation between the quid and the quo despite the absence of an impartial legal system with authority over the transacting individuals. It was indeed during this period that western Europe witnessed trade expansion and market integration as well as a widespread reliance on arrangements

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such as credit, contract for future delivery, negotiable securities, and maritime insurance. Furthermore, the same processes that this community responsibility system fostered—processes through which trade expanded and merchants' communities grew in size, number, and economic and social heterogeneity—reduced its economic efficiency and the intra-community political viability. Yet, the extent to which communities could have replaced the community responsibility system with an alternative institution based on Individual Legal Responsibility depended on their political environment. The political system in England and France was conducive to such a transition while that in the politically fragmented Italy was not. The paper elaborates on the above theoretical argument and presents the community responsibility system that prevailed in Europe prior to the rise of contract enforcement provided by the state.4 Furthermore, it elaborates on the reasons for the system's decline and how the nature of the distinct political systems in England and Italy directed the details of the system that replaced the community responsibility system. Specifically, Section 1.2 discusses the issue of impersonal exchange during the late medieval period. Section 1.3 presents a theory of the community responsibility system. Section 1.4 utilizes the insights of the theoretical analysis, as well as information from contracts, court records, charters, and royal and community regulations, to evaluate the extent to which a community responsibility system indeed functioned in Europe during that time. Section 1.5 examines, theoretically and historically, the deficiency of the community responsibility and attempted transitions to an alternative system based on individual responsibility. Conclusions follow.5

4

An earlier generation of scholars have noted the operation of this system (e.g. Santini 1886; Arias 1901; Maitland and Bateson 1901; Patourel 1937) and this paper extensively relies on their important contributions. By and large, these scholars did not analyze the system but concentrated on the inter-community disputes which this system entailed viewing them as reflecting archaic and barbaric behavior. For a more recent presentation of some of the system's elements, see Moore (1985).

5

This paper relates to several recent studies in economic history which combined game theory and historical analysis to examine the institutional infrastructure underlying the late medieval Commercial Revolution. Greif (1989, 1993) analyzed the institution that governed the relations between merchants and their overseas agents among the Maghribi traders who operated mainly in the Muslim Mediterranean during the eleventh century. Greif (1994) provided a comparative study of eleventh- and twelfthcentury institutions among the Maghribi and Genoese traders and these institutions' inter-relations with their cultures and societal organizations. Greif et al. (1994) examined how the institution of the Merchant Guild secured alien merchants' property rights despite the ability of rulers to abuse them using their coercive power. Two papers, Benson (1989) and Milgrom et al. (1990), are directly concerned with institutions that supported exchange characterized by separation between the quid and the quo among merchants who did not expect to interact frequently. In particular, the latter paper proposed that during the late medieval period a Merchant Law System enabled impersonal exchange by providing the appropriate information and generating the appropriate incentives. Their explicit game-theoretical analysis indicated how a local legal system, without any coercive power but with a monopoly over the ability to verify merchants' past actions and store and communicate information, could ensure contract enforcement in impersonal exchange. It did so by controlling the information required for a multilateral reputation mechanism among the merchants. Thus, they argued that impersonal exchange at the Champagne Fairs—the central trading fairs in Europe during the Commercial Revolution—was possible because the local court functioned as a Merchant Law System.

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1.2 On the Nature of Exchange Characterized by Separation Between the Quid and the Quo During the Commercial Revolution The historical records indicate that exchange characterized by a separation between the quid and the quo over time and space was common in western Europe during the late medieval Commercial Revolution, perhaps for the first time since the fall of the Roman Empire. In towns, fairs, and market-places, merchants provided and received credit, bought and sold through contracts for future delivery, and insured the cargo they shipped over the sea.6 While we cannot qualitatively measure the efficiency contribution of such exchange relations, their contributions were arguably great. Lopez (1976), the eminent historian of the Commercial Revolution, has viewed credit as necessary for commercial expansion to occur with a monetary system based upon a limited supply of precious metal. The ‘take-off [of the Commercial Revolution] was fueled not by a massive input of cash, but by a closer collaboration of people using [commercial] credit’ (p. 72). The historical records also reflect the identity of the individuals who enter into exchange characterized by a separation between the quid and the quo over time and space during the Commercial Revolution. Such exchange was often conducted among individuals who lived in close proximity to each other. Herman Van der Vee (1977), for example, has noted that exchange relations characterized by a separation between the quid and the quo were frequently established among merchants and their local consumers in Europe during the later middle ages. ‘Consumer credit underwent great expansion in the local economy’ and ‘merchants from the town or country regularly bought up agricultural produce from the farmers before it had been harvested against partial or complete cash payment.’ At the same time, ‘farmers and workers received credit guaranteed by their future harvest or future labor output’ (p. 300). It is more intriguing to note, however, that exchange characterized by a separation between the quid and the quo was also established from as early as the twelfth century among merchants who did not live in close proximity to each other. For example, around the middle of the century traders from Asti regularly sold on credit northern textiles imported from the Champagne Fairs to Genoese traders (Reynolds 1929, 1930, 1931; Face 1958). Credit arrangements among individuals from other localities are frequently mentioned in Genoa's historical records. In 1190, for example, two Genoese traders, Bonifacius della Volta and Nicola Mallonus,

6

For a description of these developments, see, for example, Lopez and Raymond (1955: 157–238); de Roover (1963: 42–118); and Postan (1973).

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bought goods for a Piacenzan merchant for 120 lira with one year to pay. On the 28th of March, 1210, Rubeus de Campo of Genoa paid a debt of one hundred marks sterling in London on behalf of Vivianus Jordanus from Lucca.7 Credit transactions among individuals from distant localities were not confined to Italy during this time. Such transactions were common in England during the twelfth and thirteenth centuries among English merchants from different localities and among English merchants and French, Flemish, and German traders.8 Similarly, contracts for future delivery among individuals from distant localities were common in Italy, England and France. For example, in 1191, a Genoese merchant named Ugo Mallonus bought, from a Pavian and a Roman, 5 bales of fustian of Pavia at 40 pieces per bale, including 13 vermilion, 6 green, the rest brown, and contracted to buy 3 more bales at mid-Lent and 2 more bales at Easter. At the Fairs of Champagne, where much of the trade between northern and southern Europe was conducted during the twelfth and the thirteenth centuries, merchants from different localities frequently entered into contracts for future delivery.9 Contract enforceability is necessary for any exchange but the necessity of enforcement is particularly important in exchange characterized by separation between the quid and the quo. In the absence of appropriate institutions, a borrower, for example, can make himself better off after obtaining a loan by not repaying his debt. Expecting such behavior ex post, a borrower would not lend ex ante. Similarly, a merchant who is paid to deliver goods in the future will find it optimal to retain possession over these goods, implying that the buyer would not be willing to pay ex ante. Hence, exchange characterized by separation over time and space between the quid and the quo requires contract enforcement institutions that enable the transacting parties to ex ante commit to carry out their contractual obligations ex post. What were the institutions that enabled such exchange during the Commercial Revolution? How could a twelfthcentury borrower from Lucca, for example, commit himself ex ante to repay ex post a debt to a lender from London? Did late medieval Europe develop contract enforcement institutions that enabled impersonal exchange? Or was exchange confined to personal exchange in which repeated interactions or family relationships mitigated the commitment problem? Given the available

7

Obertus Scriba (1190), no. 669 and see also nos. 138, 139. Lanfranco Scriba (1952), vol. 1, no. 524, p. 234.

8

e.g. Calendar of the Patent Rolls Preserved in the Public Record Office, 1266–72, p. 20. English Historical Documents, vol. II, pp. 1012–3. Postan (1973).

9

Ugo: Guglielmo Cassinese (1190–2), no. 250. With respect to England and France, see Moore (1985), and Verlinden (1979). Toward the end of the thirteenth century Bruges became the main center for trade in products.

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historical evidence, we cannot address this question by tracing the exchange relations of individual merchants over time. Hence, to examine the extent to which impersonal exchange was feasible in pre-modern Europe one has to determine whether an institution that enabled impersonal exchange functioned during this time. In the early days of the period under consideration there was no legal system in Europe that could have effectively supported impersonal exchange among individuals from distant localities. Even within a relatively well-organized political unit (such as England), there was no legal system that could support, at low cost, the enforcement required for such exchange.10 Local courts that could supervise and enforce contracts executed in the areas under their authority existed throughout Europe. They had the ability to provide contract enforcement required for exchange among individuals present in the (limited) territorial area over which they had legal jurisdiction. Yet, such local courts were not, by and large, unbiased agents of a central legal authority. Rather, they were the embodiment of local interests and are known to have been biased in their judgments against foreigners.11 Similarly, late medieval communities probably had informal contract enforcement institutions of the kind that often emerge among individuals who live in close proximity.12 Such local formal and informal contract enforcement institutions, however, could not govern impersonal exchange characterized by separation between the quid and the quo among individuals who lived far away from each other. The lack of a legal system that could have supported impersonal exchange characterized by separation between the quid and the quo among merchants from distant localities led to the perception common within economic history that, prior to the rise of the state, such exchange was not feasible. Yet, this assertion ignores the observation that late medieval trade actually occurred in a particular social context, namely, that of communities. Trade was not conducted among individuals without any social affiliation. On the contrary, it transpired among individuals with particular community affiliations. Evidence of the fact that long-distance traders were identified as members of a particular community can be found in the many commercial contracts that survived from the late medieval period. Since during this period last names were not yet common among non-nobles, individuals often had

10

Ashburner (1909) ; Plucknett (1949: 142); Postan (1973) ; and the information contained in Hall (1930) Select Cases Concerning the Law Merchant, A.D. 1239–1633, 2: Central Courts.

11

e.g. Hanawalt (1974).

12

Ellickson (1991) has argued, and provided some empirical support, that communities develop welfare-maximizing norms supported by informal contract enforcement institutions. For analysis of such informal contact enforcement institutions among merchants, see Greif (1989, 1993), Bernstein (1992), Clay (1997).

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surnames or nicknames indicating their profession, place of origin, particular features, etc. In contracts related to longdistance trade it is common to find merchants whose surnames or nicknames reflect their places of origin.13 Furthermore, such contracts were signed in the presence of witnesses whose names were registered on the contract. It is common to find that merchants from one community witnessed a contract that members of their community entered into when they were abroad, indicating close association among them. The recognition of ones' community of origin was probably facilitated by the relatively low level of social and cultural integration that prevailed during the medieval period. National languages, for example, were not yet developed and distinct cities and small regions still had their own peculiar linguistic characteristics. Furthermore, communities provided an important part of the organizational framework associated with long-distance trade. While this reflects their importance in trade it also indicates a mechanism that facilitated learning about one's community. For example, at the Champagne Fairs various merchant communities had permanent representation, scribes, and even courts of law. Merchants from a particular community often traveled abroad together, living and trading from their own compound. The organization of the German merchants who frequented the large international emporium in the city of Bruges was based on the merchants' home towns and regions. Genoa and Venice had their own quarters in Constantinople, while the Flemish merchants at the Boston Fair lived in the same quarter.14 As further discussed below, the communities with which merchants were identified and which provided the organizational framework within which long-distance trade was conducted assumed various forms. The most common ones were a home town, a borough, and merchant guild. In any case, all these communities seem to have shared a particular feature, namely, that the nature of their members' (social, economic, or legal) relations were such that the community had the ability to impose punishment on each of them. This ability, in and by itself, reflects the broader social and legal environment of the period. The economic and social cost of leaving one's community were relatively high. Is it theoretically possible that the identification of individual merchants with particular communities and the associated intra-community contract enforcement institutions were utilized in late medieval Europe to support inter-community impersonal exchange? Methodologically, to address this question the next section develops a repeated game model of exchange characterized by separation between the quid and the quo. It enables

13

Emery (1952) and Lopez (1954).

14

e.g. Verlinden (1979: 131) (the Champagne Fairs), Greif et al. (1994).

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exploring the factors constraining impersonal exchange and the role of communities in overcoming these constraints.

1.3 A Theory of the Community Responsibility System Theoretically, communities with intra-community contract enforcement institutions could have supported intercommunity impersonal exchange. To highlight the function of the community, the analysis begins by examining the assumptions required to enable impersonal exchange when there are no communities or legal contract enforcement mechanisms. It then examines the more realistic model satisfying only the sufficient conditions required for a legal system to support impersonal exchange. The examination reveals that these conditions are also sufficient for communities to support impersonal exchange. Without loss of generality, the discussion concentrates on exchange in which credit is provided for trading, and for ease of exposition, technical details are not presented. The theory of repeated games suggests that exchange characterized by separation between the quid and the quo may be possible even in the absence of legal contract enforceability among individuals who expect to interact even only once with each other.15 When profitable exchange can be repeated, the fear of retaliation—the fear of losing future gains from exchange—may prevent cheating. To examine the extent to which expectations for retaliation can support exchange, consider the following simple model. Consider an economy in which there are lenders and borrowers. Each period or stage game is divided into two subperiods. In the first sub-period each borrower has to decide whether to be randomly matched with a lender or not. Borrowers who choose to be randomly matched will never be matched again with the same lender.16 A lender who was matched with a borrower can decide whether to lend (a finite amount) or not.17 A borrower to whom a loan was made travels away to trade and in the second sub-period can decide whether to repay his loan or not. One's gain from exchange or defaulting in a particular period is consumed only after the following period. Lending is efficient and profitable to both parties conditional on the borrower paying his debt. In other words (ignoring the process through which the expected gain from each loan is divided), the division of gains from lending and trading is such that it is profitable for a

15

For a survey of the relevant literature, see Fudenberg and Tirole (1991).

16

See Townsend (1981) for the appropriate specification.

17

For simplicity's sake, it is assumed that no matter how many borrowers decide to travel, each is matched with a lender. Random matching is assumed to capture the impersonal aspect of exchange.

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lender to lend and a borrower to borrow if the loan will be repaid and the gains divided as agreed upon. If a loan was made and not repaid, however, the lender is worse off than he would have been had he not made the loan. Furthermore, since this lender loses his capital he is unable to furnish loans in the future. Note that this (one-sided prisoners' dilemma game) is characterized by separation over time and space between the quid and the quo. If this game is played once, there is no sub-game prefect equilibrium in which lending occurs. Hence, efficient exchange is not feasible. This is the case because the best a borrower can do ex post if a loan was given is to not repay it. Anticipating ex ante that this would be the case, a lender would not furnish a loan. However, the following are sufficient conditions for exchange to be possible: (1) The game is repeated for an infinite number of periods, (2) borrowers have an identity, a ‘label’ that is known to all the lenders, and (3) the history of the game is common knowledge, namely, each player's past actions are known to all. When these conditions are satisfied, there is sub-game prefect equilibrium (SGPE) which enables exchange if a borrower is sufficiently patient or, for a given time discount factor, if his (per-period) gain from exchange is high enough. Specifically, consider the following strategy combination: a borrower chooses to be randomly matched but repays if and only if he has never cheated a lender before, while a lender provides a loan only to a borrower who has never defaulted on a loan. A borrower is induced not to default ex post by the lender's threat that if he defaults he will not be able to borrow in the future. The lender's threat is credible since he expects a borrower who cheated once to cheat again, and this indeed is a cheater's best response given the lender's strategy. Expecting ex ante that this will be the case, the lender will lend.18 Does the above analysis indicate that impersonal exchange is feasible given the above conditions? While the answer should seemingly be to the affirmative, this is not the case. It basically places identity at the center of the analysis. Exchange with a borrower who cheated in the past is not feasible despite the inherent profitability of the exchange because of the identity of that particular borrower. In other words, it indicates that personal exchange—in which a borrower's identity as captured by his past actions—is feasible. It does not indicate, however, that impersonal exchange is possible.19 Could communities have relaxed this constraint

18

For a formal exposition of such a multilateral reputation mechanism, see Milgrom et al. (1990) and Greif et al. (1994) for the case when the history of the game is known to all players.

19

Kandori (1992) and Ellison (1994) examined the operation of such mechanisms (in PD games) when each player knows only his private history. Exchange can be supported under rather restrictive conditions by imposing a general punishment, namely, on those who defaulted and those who did not. In any case, their analysis does not hold when players have a finite life-span as is appropriate to assume and is assumed below.

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and enabled exchange without the need to link one's identity to one's ability to exchange? Furthermore, the above model is an inappropriate departing point for examining the role of communities in fostering impersonal exchange since it is based on the above three unrealistic assumptions. Medieval traders did not have an infinite life-span. Yet, if borrowers have a finite horizon, it is optimal for them to default in their last period. Anticipating this, the lenders would not lend in the last period, implying that borrowers would find it optimal to default in the period before the last. Yet, expecting default, the lenders would not lend in this period either. Carrying this logic further indicates that lending would not be provided in any period.20 Similarly, a merchant's identity may have been known to his exchange partners in each particular period but could not have been easily transmitted to other merchants in the age prior to last names, passports, and drivers' licenses. Finally, past conduct was private information although it may have been verified ex post by a third party. Hence, to examine the potential role of communities in fostering impersonal exchange it may be appropriate to alter the above model by dropping these unrealistic assumptions and replacing them with the assumptions that are sufficient for a court to be able to support impersonal exchange. Accordingly, assume that while the number of borrowers each period is constant, each of them lives for only a finite number of periods. Each borrower plays the above stage game each period up to his last period when he ‘retires’ and does not trade. Furthermore, assume that a borrower's identity is known to the parties to the exchange, and that past actions are private information although they can be verifiable by a third party. Note that in this model there is no equilibrium in which lending occurs. Lenders' finite life-spans are sufficient for this result. Yet, as discussed below, expanding the model to include communities implies that an equilibrium with impersonal lending does exist. To introduce communities in the analysis assume that all borrowers are members of community B while all the lenders are members of community L. (The analysis holds if there are many borrowers' communities but introducing many lenders' communities is more problematic as discussed below.) Apart from providing a community label to each borrower, a community is conceptualized as having two features: a ‘territory’ and an intra-community contract enforcement institution that can impose a punishment

20

Telser (1980) pointed out that infinite horizon games are conceptually identical to finite horizon games with an uncertain number of periods. For this to be the case, however, the probability that the game will end in each period should be constant over time. Yet, this condition does not hold with respect to the uncertainty associated with human lives. For how the finite horizon problem was mitigated in intra-community agency relations during the late medieval period, see Greif (1989, 1993).

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or abuse the property rights of both a community member and any individual present in the community's territory. While the following analysis holds whether a community's enforcement institution is formal or informal, this institution is referred to below as a ‘court.’ Denote the lenders' court by LC and the borrowers' court by BC. The second feature of a community is that its court has a payoff function which is the sum of the payoff functions of its (living) members. In other words, a community aims at maximizing the sum of the lifetime utilities of its constituting members.21 While the two latter aspects of the above conceptualization of a community may be intuitively appealing, they are, in a sense, an equilibrium outcome.22 Given the lenders' equilibrium strategies that enable impersonal exchange (discussed below), it is optimal for every (non-retired) borrower that an intra-community contract enforcement institution with the above payoff be established by the community. In other words, had the game been extended to enable, in the first period of the game, members of each community to decide whether to establish such a court or not, the only equilibrium entailing impersonal exchange is the one in which the communities establish courts. In addition to the actions available to borrowers and lenders in the previous game, in this game borrowers now have to travel to the lenders' community to be matched and must return there to pay their debts. Furthermore, in each second sub-period each of the lenders can complain if he was not paid; the LC can impound or confiscate the goods of any and all borrowers present in the lenders' community, verify whether or not a default occurred, and apply to the BC to demand compensation.23 If compensation is received, the LC can release the impounded goods and distribute the total proceedings in any manner among the lenders. In each first sub-period, the BC can verify any complaint about defaulting, and can decide whether to impose a punishment on any borrower, to impound any borrower's property, and to furnish a particular compensation to the LC.

21

This model relates to two lines of work in game theory. Works on games between a long-lived player and a sequence of short-lived players, and works on games with overlapping generations of players. For a survey, see Fudenberg and Tirole (1991: 168–72).

22

Examining the case in which there are multiple lenders' communities is more complicated and is left for future work.

23

Both the terms ‘impound’ (namely, to take legal or formal possession of goods to be held in custody of the law) and ‘confiscation’ (namely, seizure under public authority) seem appropriate here. In the historical reality of the late medieval period the goods were at times confiscated directly by the lender to become his or her property or were impounded by the authority and held as a pledge.

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Under mild conditions, impersonal exchange can be sustained in this game as an SGPE outcome.24 The conditions are that (1) the borrowers' time discount factor and the amount the LC can impound are sufficiently high relative to the amount defaulted upon and the gains to the borrowers from future trade, and (2) that the gains for the LC from impounding the goods of all the borrowers present in the lenders' community are lower relative to the present value of future gains of providing loans.25 When these conditions hold, there is an equilibrium in which each borrower is motivated not to default by the expectation of punishment by the BC. The BC is motivated to punish one who defaulted because a failure to do so implies the loss of impounded goods and all future gains from exchange. The LC verifies any complaints, impounds goods, demands compensation if default occurred and distributes the proceedings to the lender who was cheated. The LC is motivated to do so because otherwise a cheated lender would not complain, leading borrowers to default and hence reducing the LC's payoff. Thus, each lender, knowing that the best a borrower can do is to pay, finds it optimal to lend. Specifically, if the above conditions hold, exchange that is impersonal up to one's community affiliation can be supported as an SGPE outcome by the following strategy combination: a borrower travels if and only if the LC never impounded or confiscated goods when a default did not happen, borrows if given a loan, and returns to pay his debt if and only if the lenders' strategy calls for complaint following a default and as long as the BC has not refused to pay a compensation. A lender lends as long as the BC has not refused to pay a compensation and complains if cheated. The LC verifies any complaint and, if and only if it is a valid complaint, impounds the goods of the borrowers present in the lenders' community and demands a compensation from the BC equal to the present value of the cost imposed on the lender due to the default. If compensation was given, the LC then advances it to the lender who was cheated, otherwise it impounds the goods of borrowers until equivalent compensation is obtained. Finally, the LC impounds the goods of all borrowers in its territory if it ever impounded goods when no default occurred. The BC verifies any complaint and, if and only if the complaint is valid, confiscates the defaulter's goods and pays a compensation not higher than the present value of the cost imposed on the lender due to the default. To finance the compensation the BC utilizes the defaulters' confiscated goods and any additional sum it receives from confiscating goods in an equal manner from all the other borrowers. Finally, it imposes punishment

24

Note that if the borrowers were members of several communities, exchange would have been impersonal up to one's community label.

25

Note that the game specification was such that the punishment the BC could impose on a borrower is at least as high as his gains from defaulting.

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on a borrower who defaulted which erases all the utility gains from defaulting. Hence, theoretically, the social context within which late medieval trade was conducted could have enabled intercommunity impersonal exchange despite the absence of a state supported, centralized legal system. Community affiliation that is known to lenders and community ability to inflict punishment based on limited inter-community social mobility provides the foundations for the operation of an economic institution, the Community Responsibility System. The CRS—by holding the entire community responsible for a default of one of its members—provides the incentives required to conduct exchange that is impersonal up to one's community affiliation. When exchange is governed by the CRS, in considering whether to enter a profitable exchange relation one does not have to examine the private history of the other party. As long as that party's community affiliation is known and the above conditions hold, exchange can be conducted. Hence, exchange is impersonal in the sense that one's past actions do not influence a decision whether to enter into exchange relations with him. In addition, the CRS is effective despite the borrowers' finite life-span and requires a relatively small amount of information to support impersonal exchange. The community internalizes the cost inflicted by the default of a borrower who is about to retire on the other borrowers thereby credibly committing to punish the one who defaulted. Although the community aggregates the payoffs only of its living members, each of whom has a finite life-span, it becomes, de facto, a substitute for a single infinite horizon player. Furthermore, in terms of information the lenders neither have to know the identity of each borrower nor his past actions. Knowing a lender's community label and having the courts able to verify past actions only in cases of default is sufficient for exchange. Finally, note the symbiosis implied by the analysis between social structures and economic institutions. The CRS is an economic institution whose functioning is based on pre-existing social structure. The affiliation of individuals with particular communities and the knowledge of such affiliation enables the operation of the CRS. At the same time, this economic institution reinforces the underlining social structure. It provides communities with additional incentives to define the boundaries between members and non-members, to devise mechanisms for collective decision-making and collective action, and to establish an intra-community contract enforcement institution. Although the CRS could have enabled inter-community impersonal exchange during the late medieval period, this does not imply that such an institution for contract enforcement indeed functioned then. Did the CRS facilitate intercommunity impersonal exchange in western Europe during the late medieval Commercial Revolution? Do the historical records provide evidence consistent with its operation?

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1.4 The Community Responsibility System: History A systematic examination of the extent to which a Community Responsibility System, whose essence is captured by the above model, functioned in pre-modern Europe is yet to be undertaken. Yet, a preliminary investigation indicates it was widespread. In late medieval Europe, a CRS supported inter-community, impersonal exchange and its use and explicit recognition by contemporaries is well reflected in cartularies, charters, court cases, and other sources from Italy, England, France, and Flanders. The origin of the CRS has not yet been revealed by the historical records. It may have emerged during the ninth and tenth centuries when merchants from the same locality traveled together in armed bands to trade abroad. Historical evidence indicates, however, that by the twelfth century it prevailed in Europe. The earliest comprehensive cartulary available from late medieval Italy is that of a Genoese scribe named Giovanni Scriba. One of its entries, registered on July 22, 1164, reveals the operation of a CRS. This entry indicates that shortly prior to 1164 a Genoese trader, Amicus Zostro, received a loan from Xecha Bohadie, a Muslim trader from Tripoli. While Amicus had evidently already arranged to pay Xecha's brother or son in Sicily, Xecha claimed that no such payment had been made. In July 1164, following Xecha's assertion that payment had not been made, Amicus sent an agent named Baldezonus from Genoa to Tripoli carrying six cantras of copper. Baldezonus was instructed to sell the copper and pay Xecha, if the latter would swear in the presence of reliable witnesses that he would hold neither Amicus nor any other Genoese merchant for ransom.26 Another mention of the CRS in Italian sources of the twelfth century, however, indicates that the operation of the CRS was confined neither to the relations between Christian and Muslim traders nor to Genoa at that time. When the Emperor of the Holy Roman Empire, Frederick Barbarossa, visited Bologna in 1155, the students of Bologna's famous law school expressed to him their dissatisfaction with the CRS because the city of Bologna was holding them liable for debts incurred by members of their original communities.27 In twelfth-century England the functioning of a CRS is reflected in a charter given to London sometime between 1130 and 1133. The King, Henry I, announced that ‘all debtors to the citizens of London discharge these debts, or prove in London that they do not owe them; and if they

26

Giovanni Scriba, no. 1245. By the fifteenth century this procedure through which a European community provided a bond for the conduct of its members in the Muslim world had already been institutionalized. As an Arabic writer noted, ‘the consuls are the chiefs of the Franks and are hostages for each community. If anything happens in any community dishonoring to Islam, the consul is answerable.’ Lewis (1988), p. 76.

27

Munz (1969), p. 77.

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refuse either to pay or to come and make such proof, then the citizens to whom the debts are due may take pledges within the city either from the borough or from the village or from the county in which the debtor lives.’28 Such community responsibility could have even been invoked in response to illegal taxation imposed on Londoners. ‘If anyone has taken toll or custom from the citizens of London, then the citizens of London may take from the borough or village where toll or custom has been levied as much as the man of London gave for toll, and more also may be taken for a penalty.’29 The above charter focuses on the relations between members of different communities within the same political unit, namely, England. It explicitly defines one's relevant community as either his borough, village, or county. A distinct definition of one's community is found in the English legal documents inspected by Maitland (1889). They indicate that at times one's guild was considered to be the relevant community for the operation of the CRS. He noted that in England, in general, the ruling was that members of the same merchant guild, rather than residents of a particular borough, were held responsible for each other.30 ‘Every member of the guild … guaranteed the debts contracted by every member in the way of his trade—is subsidiary liable for those debts. You are a member of the commonality of X:—it is a course of action for me against you that A, who is your “peer and parcener,” your “fellow commoner,” [or] “at scot and lot” with you, has contracted a trading debt with me and has not paid it’ (Maitland 1889: 134). The governance by the CRS of impersonal exchange between merchants from England and those from other political units is reflected in a statement made by King Henry III in 1266. The king granted ‘to his burgesses and merchants of Lubeck, that during the king's life, they or their goods within the king's power shall not be arrested for any debt whereof they are not sureties or principal debtors; unless the debtors are of their commune and power and have failed to pay in whole or part and the said burgesses of Lubeck, by whom the said town is governed fail in justice to the men of the king's land and power, and this can reasonably be proved.’31 In some English boroughs, the process was simpler. Once a foreign creditor could establish that a member of the borough had failed to repay his debt the authorities paid him out of the borough's funds. Later they sought double indemnity from the debtor.32

28

English Historical Documents, vol. II, pp. 1012–13, and see discussion by Stubbs (1913: 128–30) Selected Charters and Other Illustrations of English Institutional History from the Earliest Times to the Reign of Edward the First. In this charter Henry exempted the Londoners from the Community Responsibility System, an issue which is discussed below.

29

English Historical Documents, vol. II, pp. 1012–13.

30

Notwithstanding the fact that in many towns the mercantile and municipal organizations were identical, since the merchant guild was the governing body of the borough.

31

Calendar of the Patent Rolls Preserved in the Public Record Office. 1266–72: 20.

32

Plucknett (1949: 137).

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The operation of the CRS in Flanders around 1252 is reflected in statutes drawn up by Countess Margaret regarding the operation of foreign merchants visiting the Flanders Fairs. Such foreign merchants were held liable for debts assumed by their peers. Yet, consistent with the interpretation that such liability was utilized to ensure punishing the one who defaulted, only a principal debtor or his guarantor could be imprisoned for debt. Other members of the defaulter's community could be punished only by impounding their goods.33 The historical records also indicate changes in the CRS that are consistent with the above theoretical framework. Although most of the above evidence on the operation of the CRS is explicit in stating that goods will be impounded following default, theory indicates that confiscation is not always required for the CRS to enable impersonal exchange. If the value of future trade in the borrower's community is sufficiently high, confiscation or impounding goods is not required to support exchange. To see why this is the case, suppose for the moment that the LC cannot impound goods or that the BC would have to make a transfer. In this case, for the strategy combination discussed in the previous section to be an equilibrium strategy, the present value for the BC from future trade must be more than the gain from not compensating and retaining the amount defaulted upon. (Since otherwise the BC would prefer for trade to cease and hence forgo compensation.) This condition is more likely to hold if the number of borrowers is large or value of trade high, since then the present value of future trade will be higher as well, ceteris paribus. Conversely, this condition is not likely to hold when communities are small and the trade value low. When this condition does not hold, impounding goods may be required to support exchange since it increases the cost to the BC of not compensating. In deciding whether to compensate or not, the BC takes into account that a failure to compensate will also imply the loss of the impounded goods. Hence impounding goods enables exchange at a relatively low level of trade. Thus, theory implies that in the early stages of the Commercial Revolution when communities and their trade were relatively small and growing, the CRS was likely to require actual confiscation. As time passed and trade increased, however, the value of future trade was likely to eliminate the need for actual confiscations. Consistent with this theoretical prediction, thirteenth-century historical records from Italy and England reflect this transition. While the evidence regarding the operation of the CRS in Italy during the twelfth century mentioned above reflects the threat of impounding goods, by the thirteenth century this was no longer the case. A treaty signed between Pisa and Florence in 1214, for example, contains the provision that if one community refused to compensate the other, members of the latter would be allowed 40 days to leave town.34

33

Verlinden (1979: 135).

34

Santini (1886: 165).

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More than a century later, in 1325, a similar clause appears in a Florentine statute. It required the podestà to wait one month between declaring and acting upon any impounding of goods under the CRS.35 A similar transition to CRS, based on using the value of future trade rather than impounding is reflected in the history of the Champagne Fairs which were the most important trade fairs in Europe during the thirteenth century. Consistent with the above theoretical analysis, the operation of a CRS there relied on the value of future trade rather than impounding. In 1260 the wardens of the Champagne Fairs had the right to pronounce a sentence of exclusion from the fairs following a default, and this exclusion extended to the compatriots of the defaulters if the judicial authorities of their own town or principality did not compel them to fulfil their obligations.36 Interestingly, and consistent with the operation of the CRS, all the major trading communities had representation at the fairs by this time. The discussion so far has assumed perfect information and verifiable actions. Reality, however, is characterized by commercial disputes in which both parties disagreed about whether contractual obligations were fulfilled or not. Furthermore, different courts (and even judges and juries in the same trial) can reach different conclusions based on the same evidence. Thus an empirical study of inter-community contract enforcement institutions can be potentially facilitated by examining implications more realistically. Accordingly, consider the following alteration of the model. Assume that lender–borrower relations are characterized by imperfect monitoring—the lender receives a signal which is a random variable that depends on the action taken by the borrower. Particularly, even if cheating has not occurred, the lender's signal may indicate that he was cheated.37 Further assume that each court also has an independent imperfect monitoring ability—if a dispute occurs each court receives a signal indicating whether cheating has occurred. Each court's signal is private, non-verifiable information and the signals are not perfectly correlated.38 In other words, courts can sincerely disagree about whether cheating took place. The observable implication of this imperfect monitoring is the most efficient equilibrium in which impersonal exchange is conducted will be characterized by periods of inefficient inter-community ‘retaliations’ followed

35

Santini (1886: 168–72).

36

Verlinden (1979: 131). Most likely this right was held previously by the count and the ecclesiastical jurisdictions of the area.

37

The historical records suggest that disputes were more likely to occur when one of the contracting parties passed away, the debt was old, the contract was not clearly defined, or the contracting obligations were allegedly fulfilled by the agents of one of the parties rather than one of the parties themselves.

38

It is assumed, for simplicity, that if there is no dispute, the courts have perfect monitoring ability.

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by ‘suspension’ of the retaliation.39 During retaliation, impounding would occur and exchange would cease, imposing costs on both communities. Such retaliations, however, would last for a finite number of periods following which retaliation would be suspended and exchange would resume. Despite the fact that no cheating occurred (in the sense that a borrower chose not to pay), these costly periods of inefficient retaliations are required to provide the communities and the contracting individuals with the appropriate incentives. Specifically, the only possible equilibrium strategies (that enable exchange) specify confiscation and period(s) during which inter-community exchange ceases when the LC concludes that cheating occurred and the BC concludes that cheating did not occur. Such periods of retaliation are required since if the BC's strategy calls for compensating the lender although it concludes that cheating did not occur, the LC's best response is to claim that a dispute occurred even if it did not. Similarly, if the LC's strategy calls for not continuing confiscation when it maintains that cheating occurred, the BC's best response is not to furnish compensation even if its signal indicates that cheating occurred thereby motivating borrowers' to cheat. Thus, for intercommunity impersonal exchange to be feasible despite imperfect monitoring, inefficiencies (in the form of forgone exchange) must be incurred by the communities.40 Consistent with the theory, impounding (or confiscation) and retaliations following disputes and disagreements among courts are well reflected in the Italian historical records. Since disputes are more likely to occur when trade volume is high, it may not be surprising to find that retaliation became common as trade expanded (Arias 1901). In 1238, Beatrice, wife of Marcovaldo of Florence, requested a retaliation against the properties of the people and the Commune of Pisa, for a sum of 2,000 and interest of

39

This conclusion qualitatively holds even if disputes do not occur, but courts have imperfect monitoring ability and there is a probability that each court would reach a distinct conclusion following a complaint. This puts a limit on the penalty the LC can place on a lender whose complaint was found invalid. If the penalty is too high relative to the court's probability of making a mistake, lenders would not complain even if cheated, and hence exchange cannot take place. Similarly, the BC cannot place a penalty that is too high relative to the probability of a mistake because it would encourage lenders to file false claims. Hence, if borrowers have different time discount factors or distinct probabilities of being detected cheating, the resulting equilibrium can be characterized by a temporary breakdown of cooperation.

40

If retaliations reflect the inability of two communities to objectively verify the conflicting claims made by their citizens, rather than the communities' desire to gain compensation or to take revenge, costly retaliations are unavoidable. Even arbitration will not resolve the dispute since unless it is costly enough, it will not provide the appropriate incentives. The LC, for example, would be induced to submit claims regarding disputes even if it was aware that they were groundless. Indeed, the only case known to me in which communities attempted to employ an arbitrator failed. In 1234, Volterra and San Gimignano submitted themselves to arbitration by the council of Florence in a futile attempt to end a state of retaliation between them. Santini (1886: 168). Note, however, that this arbitration was ex post and hence does not fit well the theoretical reasoning for arbitration's failure.

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750 dinar piccoli of Genoa, to be paid by the heirs of Ubaldo Viscount and Torritano, the son of the late Lamberto, and by two Pisans who had posted a guarantee for them. The retaliation was granted by the podestà after the Commune of Pisa, which had been asked for restitution (according to the Statute), denied cooperation.41 Such denial, according to the above model, should occur when the two courts differed in their assessment of the situation. That contemporaries considered retaliation to be unavoidable in cases of disagreement among courts is reflected in various commercial treaties. As a matter of fact, in the treaty between Pisa and Florence signed in 1214, it is specified that retaliations would follow if the judges were unable to settle the dispute.42 Disputes were not unique to Italy. A dispute may have been the reason in 1270 that ‘Gottschalk of Almain, burgher of Lynn, complains [in the court of St Ives Fair in England] of the communities of Ghent, Ppoeringen, Douai, Ypres, and Lisle as subjects of the countess of Flanders, for that whereas the said Gottschalk caused 14 sacks of wool worth seven score marks to be brought from the realm of England to Flanders to trade with it there and hosted this wool at the house of a certain Henry Thurold on Sunday.’ The wool, however, was detained in Flanders and the loss amounted to about 200 marks. Yet, the countess of Flanders refused to provide justice. Accordingly, Gottschalk requested that the court impound the goods of members of the above communities present at the fair.43 That retaliations were a calculated response aimed at fostering exchange rather than acts of revenge is suggested by attempts to confine them to only inter-community commercial matters. A 1325 statute from Florence, for example, explicitly enumerated the cases in which it was appropriate to grant retaliation. Retaliation could be granted in cases in which there were losses in currency or goods, damage to properties, extorted taxes, or personal detention. No retaliation was allowed in cases involving personal bodily offenses.44 Further evidence that retaliations were a means to ensure proper incentives rather than compensation per se is suggested by the observation that they indeed lasted for a finite number of periods and communities terminated a retaliation period by announcing a ‘suspension’ without making it conditional on full compensation. Retaliations were not necessarily carried out until full compensation was achieved, but lasted long enough to inflict the appropriate cost to the other side exactly as predicted by the theory.45

41

Santini (1886: 165).

42

Santini (1886: 166–8).

43

Pro SC 2/178/93: 14 May 1270 published in Select Cases Concerning the Law Merchant: A.D. 1270–1638. 1: Local Courts, pp. 9–10.

44

Santini (1886).

45

For a discussion of suspension, see Arias (1901: 177–88). See also Santini (1886: 165).

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Theory also suggests that if the per-period cost of retaliation to two communities is high, they will invest more resources to resolve disputes without retaliation by acquiring better information and devoting more attention to the details. Indeed, as the trade of the Italian cities increased, the process through which retaliation could have been initiated became more circumspect and better regulated. This was accomplished by involving several authorities in the decision-making process. Initiating retaliation in Florence prior to 1250 was basically in the domain of the city administrator and his council. By 1325, however, in order to initiate a retaliation, the city administrator had to make two requests to the Commune to approve it and had to wait one month before enacting the retaliation. In 1415 the process was made even more difficult: a statute detailing the rules for retaliations was listed as being under the authority of consuls responsible for crafts and trade and no longer under the authority of the city's administrator. Yet, for these consuls to grant retaliations they had to be approved by two additional bodies, the Consuls of the Popolo and the Consuls of the Commune.46 The above theoretical and historical discussion emphasizes the association between communities and courts. Yet, fair courts which were not affiliated with a particular community also applied the principal of community responsibility during the late medieval period. An examination of fair court cases indicates that fair courts acted like the LC, holding one member of a community responsible for contractual obligations assumed by another member.47 As mentioned above, the Champagne Fairs held a community responsible for the contractual obligation of each of its members. English fairs acted similarly. For example, sometime in the thirteenth century in the fair of St Botulph in England, a certain James complained that several merchants of Brussels had cheated him. After verifying his complaint, the fair bailiff impounded wool belonging to the merchants from Brussels who were present at the fair.48 How were fair courts motivated to apply the strategy of the LC and demand compensation, or the strategy of the BC and punish a person who defaulted on his obligations? The events in the fair of St Botulph discussed above indicate that some motivation was provided by the fairs' courts legal obligations to the king or another lord. The bailiff of the fair neglected to adhere to the CRS. After a while the ‘bailiff of the fair aforesaid, had wrongfully delivered sacks of the wool aforesaid to the aforesaid merchants [of Brussels] to the grave damage and manifest loss of James himself, inasmuch as the same commune has not yet satisfied him in respect to

46

Santini (1886: 168–72).

47

For many examples of the applications of community responsibility in courts at the English fairs, see Moore (1985). See above for the Champagne Fairs.

48

Selected Cases Concerning the Law Merchant, vol. II, no. 7, pp. 11–12.

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the debt aforesaid.’ Accordingly, James entered a plea against the bailiff before the ‘lord king’ of England. Yet, economic incentives may have provided an even more important motivation. The right to hold a fair court was granted by the lord who established the fair, and running a successful fair and its court was a profitable business. (Courts were paid by the case.) Hence, those who held the rights to the fair and its court stood to gain from increasing the volume of trade at the fair under their jurisdiction. Guaranteeing inter-community impersonal contract enforcement increased the fair's attractiveness to alien merchants. Note that such incentives might be diluted if the fair court was also a community court since, in that case, the community's own merchants might have to bear the cost of retaliation in case of dispute. Fairs which did not have an affiliated merchant community might have been better able to promote impersonal exchange. Interestingly, a salient feature of Europe's late medieval fairs is that the most important fairs did not have an affiliated community. This is true, at least with respect to the Champagne Fairs, the important trade center of Bruges which replaced the Champagne Fair as northern Europe's trade center, and one of England's most important fairs, the fair of St Ives. A CRS enabled, during the Commercial Revolution, inter-community exchange that was impersonal up to one's community affiliation. Its novelty is that it took advantage of the existing social structure and the repeated nature of the interactions among members of a community to support inter-community impersonal exchange. Although information was limited and each community member had a finite life-span, one's identification by others as a member of a particular community and the strategy this recognition enabled motivated each community member to establish and employ the intra-community enforcement institution to retaliate following a community member's default. Similar to an exchange supported by a centralized legal system, however, the extent to which the CRS could support impersonal exchange was limited by the ability to verify the past actions of people at a relatively low cost. Exchange in which conduct could not be verified by the court, as was the case, for example, in agency relations, could not be governed by the CRS.49 Yet, the CRS enabled inter-community impersonal exchange despite the absence of any legal authority with jurisdiction over the whole scope of the transaction. It was this institution that facilitated the Commercial Revolution by enabling contracts for future delivery and credit arrangements between individuals from various corners of Europe.

49

Indeed, agency relations during the Commercial Revolution were governed by institutions other than the CRS. See, for example, Greif (1989, 1993, 1994).

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1.5 Institutional Decline and Transition: From CRS to Individual Legal Responsibility During the late medieval period the CRS enhanced efficiency by supporting impersonal exchange. Yet, the historical records of the late thirteenth century reflect attempts to abolish the system in Italy, France, and England. Indeed, at that time it was replaced, at least in England, by contract enforcement provided by the state and based on the concept of individual legal responsibility. What led to the decline of the CRS? The common explanation to similar organizational and institutional changes that occurred in the late medieval period is that they reflect either economies of scale associated with increasing population and trade (North and Thomas 1973) or an attempt by the state to dominate communities and fill its own coffers (Benson 1989). Yet, there is not much evidence to support either of these hypotheses with respect to the CRS. There is no measure of the economies of scale associated with either system. Furthermore, the historical records do not reflect a return to the CRS following the great contraction of population and trade that occurred in first half of the fourteenth century and lasted for generations. Similarly, the mere fact that transition away from the CRS was repeatedly attempted also in politically fragmented Italy indicates that the rising centralized state was not necessarily the driving force behind this transition. Hence, it is appropriate to consider whether the decline of the CRS reflects intra- and inter-community economic, social, and political processes that reduced the system's efficiency and undermined its intra-community political viability. Addressing these questions requires examining the cost and limitations of the CRS and its inter-relations with economic, social, and political processes inside and outside communities. The results of a preliminary examination point to the centrality of intra- and inter-community economic and social processes in leading to the decline of the CRS. These processes increased the system's inefficiency and decreased its intra-community political viability. Ironically, the process of economic growth, community expansion, and social integration which was facilitated by the CRS also led to its decline. Theoretically, the first line of causation between the CRS's economic efficiency and social processes is due to the CRS's dependency on the extent to which one's community affiliation can be established. While the above analysis assumes that one's community affiliation is common knowledge, the extent to which this assumption is appropriate depends on the social context within which exchange occurred. If this social context is such that it is relatively easy to falsify and difficult to verify one's community, the less efficient is the CRS. In the early days of the Commercial Revolution, cities may have been sufficiently small and merchants' communities sufficiently few that falsification of one's community was difficult and verification

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of alleged affiliation was easy. Yet, the late medieval period was a time in which communities grew in size and number. For example, between 1200 and 1300 the population of Genoa increased from about 30,000 to 100,000, while that of Venice increased from about 70,000 to about 110,000.50 In England there were a little more than 200 boroughs at the turn of the thirteenth century, but there were about 500 at its end.51 By the second half of the thirteenth century the ease of falsification and the difficulty of verification seem to have hindered the operation of the CRS in England. As Moore (1985: 119) has noted, ‘this procedure [of the CRS] apparently worked well enough in many cases, but it could be cumbersome and time consuming both for the creditor and the court: it usually seems to have involved long disputes over whether or not the original debtor and/or the men actually being sued for the debt were truly members of their town community or gild, with everyone scurrying to disclaim responsibility for the obligation’. Similarly, Plucknett (1949: 137–8) noted that ‘there seems to have been much trafficking between foreign merchants and natives whose mercantile status was doubtful, and whose assets and persons were by no means entirely within the territorial jurisdiction of a local court’. The ability of individuals to falsify their identity and the strategic use of this ability is well reflected in a case brought before the court of the St Ives Fair ‘on Wednesday next after the feast of St John before the Latin Gate in the eight year of Abbot William,’ which happened to be the year 1275.52 On that day William and Amice of Fleetbridge brought a complaint against Thomas Coventry of Leicester. But since he was not present at the fair, several of Thomas's other ‘peers and parceners,’ namely other merchant members of the community of Leicester, were summoned to the court. William and Amice claimed that Thomas owed Amice money for a sack of wool he bought three years ago from her (late) father, who lived in Leicester, and for which Thomas had been supposed to pay in the following year but had not. To prove their case, William and Amice produced a tally from the court of Leicester.53 Leicester's merchants, who were present at the court and held responsible for the debt, denied, however, ‘any breach of the peace of the lord Abbot and the bailiffs or the fair and the damage of the said William and Amice’ and were ‘ready to verify in such manner as the court shall award that the said Thomas Coventry was never peer or parcener of theirs or at scot and lot with them or a member of the commonality of Leicester.’ The court

50

Bairoch et al. (1988).

51

Beresford and Finberg (1973).

52

The case: pro. SC 2/178/94: 8 May 1275. Parts of the document appeared in Select Pleas in Manorial and Other Seigniorial Courts, Reign of Henry III and Edward I. pp. 145–6, 155.

53

On the tally and its use, see Select Pleas in Manorial and Other Seigniorial Courts, Reigns of Henry III and Edward I. p. 133.

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refused to accept their claim and judged in favor of William and Amice. Yet, shortly after these proceedings, Thomas of Coventry appeared at the fair and did not deny being from the commonality of Leicester. He did claim, however, that William and Amice had brought a false accusation against him, causing him ‘no small damage,’ most likely by the response of the merchants of Leicester whose goods were impounded by the fair court. William and Amice could not defend themselves but claimed not to be under the jurisdiction of the court since they were from London.54 Another link between social and economic processes and the efficiency of the CRS is due to the costs implied by the periods of costly retaliation. Such retaliations are unavoidable transaction costs required to support informal contract enforcement in a world characterized by limited ex post verifiability of actions. Yet, as communities and their trade expand, so does the probability of dispute and hence retaliations. This is the case because the possibility of retaliation increases the uncertainty associated with trade to all merchants. The above model abstracted away from this uncertainty, yet, the CRS implies that there is a positive probability that the goods of a (risk averse) merchant will be confiscated or impounded, he himself will be taken hostage, and his trade will be interrupted, even if he fulfilled all his contractual obligations. The courts' ability to impound goods only from some merchants—those present in their jurisdiction—but not from others, further increases the cost implied by this uncertainty. Whenever retaliation looms on the horizon, merchants are likely to attempt to ensure that their own goods will be saved by leaving the city that is likely to impose sanctions. Hence, theoretically, the relationship between trade expansion and the cost implied by possible disputes is not linear. Rather, the nature of the uncertainty implied that cost would rise faster than trade volume. Indeed, Florence's historical records indicate that once a retaliation was expected, merchants of the communities involved would refrain from trading in each others' cities, while merchants who permanently lived in the other communities would leave their residences with their merchandise.55 Communities attempted to reduce the inefficiency associated with these costs by agreeing to restrict the penalty that could be imposed on a particular individual or allocate the costs more evenly. In 1251, Genoa contracted with Florence to warn its merchants at least two months prior to a retaliation so that Florentine merchants could leave Genoa in an orderly manner.56 After trade expanded sufficiently to enable the CRS to function without impounding or confiscation, taxes on members of one community

54

See below regarding the exception of London from the CRS.

55

For this behavior and its costs in Italy, see Arias (1901: 156–8).

56

Arias (1901: 52).

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were used by another to better allocate the costs of retaliation.57 Statutes issued by Countess Margaret in 1252 regarding foreign merchants visiting the fairs of Flanders ruled that only a debtor or his guarantors could be imprisoned for debt. Only goods could be confiscated from other members of the debtor's community.58 Yet, the uncertainty implied by the CRS could not be completely avoided and as size of communities increased, the cost of retaliation and uncertainty increased by more. There is, however, another link between a community's size and the inefficiency associated with the CRS that causes the CRS's inefficiency to increase by more than a community's size. The CRS intensifies the moral hazard problem associated with credit financing. It provides insufficient incentives to lenders to examine the creditworthiness of borrowers and the extent to which incentives were insufficient increased with a community's size. Thus, a consequence of the CRS (which is not captured in the above simple model) is that it increased the probability that a borrower would not be able to pay his debt. Since retaliation often occurred following a borrower's bankruptcy, the CRS also increases the probability that a retaliation will occur. Under credit financing, the lender assumes all downside risks while the borrower retains all the gains above a certain amount. Hence, credit financing encourages borrowing for high risk ventures. Appropriate incentives to lenders to evaluate ex ante the creditworthiness of the borrowers mitigates this problem, but the CRS undermined such incentives. Under the CRS the future trade of all members of the borrower's community was the de facto collateral for the loan, and hence a lender had a relatively weak incentive to verify the borrower's ability to repay it.59 In other words, credit financing under the CRS attracted borrowers with ‘bad’ projects which were likely to fail, and thus were more likely than other projects to lead to retaliation. While the above discussion indicates a theoretical possibility, in order to influence the lenders' behavior during the late medieval period they had to be aware that this possibility existed. Interestingly, lenders during this period clearly understood this moral hazard problem. On February 8, 1281, several cities in Tuscany agreed not to retaliate against each other. In announcing this agreement to their merchants, the authorities stated that the merchants should start paying more attention to the personal creditworthiness of merchants from the other towns they would be dealing with. This extra precaution was required, it was argued, since from now

57

For example, on February 22, 1296, Florentine merchants petitioned their city to agree that Bologna would impose a toll (pedaggio ) on Florentine goods entering Bologna in order to settle a retaliation. Arias (1901: 165).

58

Verlinden (1979: 135).

59

Almost one hundred years prior to the invention of Information Economics, Arias (1901: 166), noticed this adverse effect of the Community Responsibility System.

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on ‘a chui dato, a colui rechesto’ (that is, ‘to whom it is given, from him it will be asked’) because retaliation would not be permitted.60 Theoretically, communities could have attempted to mitigate this moral hazard problem by either increasing the cost of defaulting to a borrower who took a risky venture or increasing the cost of default to a lender.61 Indeed, late medieval communities took such actions but with a limited success. The increasing ease by which one could move from one city to another in the thirteenth century implies that, following bankruptcy, one could have escaped to another city. The extent to which this option was exercised and an attempt to curtail it is reflected in a treaty signed on April 7, 1279, among Florence, Genoa, and most of the other towns of Tuscany, Lombardia, Romana, and March Trevigiana. It established that merchants fleeing with money belonging to other people could be imprisoned in the territories of the towns who signed the treaty and there they would be kept until brought to justice.62 In England, the authorities were usually unable to locate an individual who escaped from his place of residence.63 Furthermore, one did not even have to escape in order to avoid paying a debt. During this period English law precluded selling one's house or real estate to repay a loan, or even punishing a borrower who defaulted with imprisonment.64 Another way to mitigate the moral hazard problem is to provide a lender with better incentives to screen prospective borrowers. Had the LC been able to perfectly verify the claim that a particular borrower indeed went bankrupt and not demand compensation in that case, the lender could have been provided with the appropriate incentives. Yet, medieval courts had limited ability to do this. Indeed, retaliation often occurred due to bankruptcy and disputes over the distribution of the remaining funds among various borrowers. Hence, in Italy and England alike, the authorities gradually resorted to increasing the cost of default to the lender by demanding that prior to requesting justice from the legal authorities of his own community, a lender had to travel to the other community and make his case there. Only if justice were not provided, could he apply to his own community court requesting retaliation.

60

Arias (1901: 166–7).

61

Note, however, that if these costs were raised too high, they would undermine the operation of the CRS and the incentive to trade.

62

Arias (1901: 100).

63

Plucknett (1949: 142). As late as the 17th and 18th century, ‘a felon could consider himself distinctly unlucky if he was captured by the authorities. Policing was left largely in the hands of the local community. The maxim was not efficiency, but financial economy, making the system of public order pay for itself. A king with no proper permanent army, who could not pay the members of his own household with regularity, was not likely to visualize or finance a proper police system’ (Bellamy 1973: 201).

64

Jones (1979).

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For example, the city of Cambridge received a charter and the right to establish a merchant guild as early as the middle of the twelfth century. Yet, only a charter given to the city by King Henry III in 1256 states that ‘our beloved burgesses of Cambridge … may forever throughout the whole of our land and dominion have this franchise, namely that they themselves or their goods, wheresoever found in our dominion, shall not be arrested for any debt of which they shall not be the sureties of principal debtors, unless perchance the debtors shall be of their commonality and power and shall have to make satisfaction for their debts in whole or in part and the said burgesses shall have made default in justice to the creditors of the same debts and this can be reasonable proven.’65 The cost implied by the moral hazard problem depended, similar to the cost associated with falsification, on social factors. First, it depended on community size—since the larger a community is the more likely it is that a lender will be able to recover, at relatively low cost, a debt in case of default. Second, it depended on inter-community ease of mobility. The more advanced is the social and economic integration of a society and the more secure are life and property for aliens abroad, the more difficult it is for a community to discipline its own members. Finally, to the extent that community growth implies increasing intra-community social and economic heterogeneity, it is likely to reduce the intra-community political viability of the CRS. Community growth and heterogeneity imply that some segment of the community bears the cost, but not the benefit, of the CRS. This segment of the community will then be motivated to act within the commune to abolish the CRS. For example, rich, well established merchants gain less from the CRS than others since they already have the connections, reputation, and wealth required to conduct trade, based on personal rather than impersonal exchange, and with little reliance on credit. Yet, the CRS implies that they will have to bear the cost of the system, and perhaps an even higher cost, than those less-well-to-do merchants whose trade depends on the CRS. Similarly, the non-mercantile part of a community is likely to bears the cost implied by the absence of alien merchants in the community during retaliations without directly gaining much, or anything, from the CRS. Hence, while the CRS fostered inter-community economic interactions and facilitated the growth of trade, as well as growth in size, number, and heterogeneity of merchants' communities, theory suggests that these processes diminished the system's effectiveness, increased its economic costs, and undermined its political viability. Unfortunately, establishing quantitatively the extent to which this was the case seems impossible, but there is an indication that these costs were rising in the second half of the thirteenth century in England according to the Close Rolls. Debts could be

65

Maitland and Bateson (1901: 14–15).

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registered in these chancery rolls, thereby placing the transaction under the jurisdiction of the Common Law. This implies that property and goods could have been placed as bond for repaying debts.66 Registration, however, was costly and prior to 1271 few debts, if any, were enrolled each year. Their numbers rose substantially by 1271, however, just before (as discussed below) the CRS was abolished in England.67 Yet, the historical records do reflect, consistent with the above theoretical considerations, that wealthy traders and large communities attempted, in England and Italy alike, to be exempted or to abolish the CRS and different segments of cities had distinct incentives with respect to the CRS. Moore (1985) examined cases brought before the court of St Ives Fair in England and noticed that in the second half of the thirteenth century there ‘was an increasing numbers of individuals … able to respond to … suits [related to the CRS] by producing royal licenses of immunity from prosecution for any debts except those for which they were principal debtors or pledges’ (p. 119). In England large communities sought an exemption from the CRS from the king. With about 25,000 residents, twelfth-century London was the largest city in England and a large city by western European standards of that time.68 In 1133, Henry I declared that the citizens of London ‘shall appoint as sheriff from themselves whomever they may choose, and shall appoint from among themselves justice whomsoever they choose’ and ‘no other shall be justice over the men of London.’ Indeed, as mentioned above, William and Amice claimed that they could not be judged at the St Ives court. Yet, as cited above, Londoners had the right to apply the principle of community responsibility to residents of other cities.69 Later, the king provided other large communities with various exemptions from the CRS. In Flanders, Ypres was the largest city and about twice the size of London. Indeed, King Henry III, sometime between 1225 and 1232, assured the merchants of Ypres that none of them ‘will be detained in England…nor will they be partitions for another's debts. ’ Only the debtor, or those who made a pledge for him, would be liable for the debt. Yet, the King seemed to be aware of the need to induce the community of Ypres to ensure any merchant that he would receive justice if a complaint was brought against him. It was agreed that ‘if any aforesaid burger or merchant of Ypres were to offend the King or other men or merchants from

66

See discussion in Moore (1985: 120), no. 105.

67

Close Rolls of the Reign of Henry III, 1227–72. 14 vols. London: His Majesty's Stationery Office, years 1256–1272. There is one entry for 1257; four for 1269; and 43 for 1271. For the high cost of a merchant using the common law court, see Plucknett (1949: 137).

68

Bairoch et al. (1988: 33).

69

English Historical Documents, vol. II, no. 270, pp. 1012–13.

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England, or if a dispute were to arise between another man of his and a man from England, it will stand by law in the courts of the king by the king, or by his judges, or by his bailiffs in that place where the offense was committed for the purpose of amending the mistake and making proper payments.’70 The historical records from Italy reflect the reduction in the CRS intra-community political viability. Distinct incentives among various segments of Florence with respect to the CRS are reflected in an appeal made on 22 February, 1296, by some Florentine merchants to the authorities of the city regarding a retaliation with Bologna. These were merchants whose livelihood depended on being able to pass through Bologna. They proposed setting up a toll (pedaggio) to be levied almost exclusively on their goods, just to settle the retaliations in which they were probably not directly involved. It seems that the rest of Florence did not care about settling the matter.71 Similar distinct incentives are reflected in Florence's fifteenth-century regulations. In 1415 it was forbidden to retaliate against foreign rectors, officials, or against traders coming to Florence to sell edibles.72 The mercatores of Florence were the city's affluent merchants whose business during the thirteenth century was carried out over most of Europe, as far north as Sweden. While they may have had the ability to exchange based on their own reputation, they had a great deal to lose from retaliations. Indeed, once they secured political control over the city, they entered into a sequence of treaties aimed at moving Florence away from the CRS.73 On April 9, 1279, the cities of Florence, Venice, Genoa, as well as most of the cities of Tuscany, Lombardy, Romagna, and Marca Trivigiana, agreed ‘that from this day forth nobody of the said city-states is able to be or should be, on behalf of another, detained or taken captive or disturbed, in person or goods, but it should be demanded of him alone to whom it should be given, or of him who by justice should be held.’ To enable impersonal inter-community exchange, however, it was also agreed that each town would imprison any merchant in its territory who was fleeing with other people's money and that his creditors would receive justice.74 That most of Italy's large city-states also sought an end to the CRS in the second half of the thirteenth century suggests that by that time, the most important Italian communities sought to abolish the system. The examination of the costs associated with the CRS, and the relationship between these costs, and social, economic, and political processes within and between communities, suggests that these processes were important factors in the decline of the CRS. In England, the state may have

70

Calendar of the Patent Rolls Preserved in the Public Records Office, 1232–1339: 460.

71

Arias (1901: 165).

72

Santini (1886: 168–72).

73

Arias (1901: 170–6).

74

The Latin version of this treaty is contained in Arias (1901: 400–4).

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contributed to an increase in the ineffectiveness of the CRS by granting individuals and communities legal immunity from impounding or confiscating their goods. In doing so, however, the state seems to have been responding to demands reflecting processes within and between communities. The observation that the Italian city-states also attempted to move away from the CRS toward the end of the thirteenth century, strongly supports the view that the state was not the originator of this transition. Yet, the extent to which communities in Italy and England could have abolished the CRS did depend on the existence of a central state. In Italy, communities could not rely on a third party, a King, to provide them with an alternative institution. Indeed, while the extent to which inter-community treaties to abolish the CRS in Italy achieved their aim should still be examined empirically, retaliations did continue after the thirteenth century. This was not the case in England, where the state enabled the communities to abolish the CRS. In 1275, King Edward I issued the Statute of Westminster I that forbade applying community responsibility to debts, and established the following ruling with respect to any ‘stranger who is of this kingdom [namely, an Englishman from one locality present in another].’ Such an individual should not ‘be distraint in a city, borough, vill, fair or market for what he is neither debtor nor pledge for, and he who does this is to be severely punished and the distress is to be released without delay by the bailiffs of the place or by the other, the king's bailiffs if need be.’75 The Statute of Westminster I did not establish any alternative institution for contract enforcement and the results—in terms of inability to contract—were apparently severe.76 A later statute in 1283 declared that ‘merchants who in the past have lent their substance to various people are impoverished because there was no speedy law provided by which they could readily recover their debts on the day fixed for payment, and for that reason many merchants are put off from coming to this land with their merchandise to the detriment of merchants and of the whole kingdom.’77 Edward seems to have abolished the system, recognizing its cost, only to later realize its benefits. The alternative contract enforcement institution established by Edward I may have been influenced by a similar institution that had been enacted in France. This conjecture gains some support from the observation that in England it was first established in the Channel Islands in 1279, and only later, in 1283, in the rest of England.78 The Statute of Acton Burnell of 1283 established this alternative contract enforcement institution by

75

English Historical Documents, vol. III, p. 404.

76

Although the merchants could have used, as mentioned above, the costly and time consuming common law court.

77

English Historical Documents, vol. III, p. 420.

78

See discussion in Patourel (1937: 97) who also refers to the work of Giry, Manuel de Diplomatique Paris (1925: 649–52, 835–54) who discusses this institution in France.

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enabling, though not requiring, a creditor and debtor to appear before the mayor of either London, York, or Bristol, acknowledge the debt, and have it registered in a roll. The creditor would then be given the debtor's bond sealed by a special royal seal kept by these mayors for this purpose. In case of default the creditor did not need to bring an action of debt, but could resort to immediate confiscation and selling of the chattels and divisible property that were placed as bond. Recovering the loan through a forced selling of the bond, if necessary, was the responsibility of the mayor or sheriff in whose jurisdiction the bond was to be found. If the proceedings from the bond were not sufficient to cover the debt, the debtor would be imprisoned.79 Despite its intent, the Statute of Acton Burnell failed to provide an appropriate contract enforcement mechanism, and two years later, in 1285, the Statute of Merchants had altered some of its provisions because ‘merchant complained to the king that sheriffs misinterpreted his statute and sometimes by malice and by misinterpretation delayed the execution of the statute to the great detriment of the merchants.’80 The provisions of this statute indicate the difficulties in providing the appropriate incentives to those who were supposed to administer the legal procedures established by the Statute of Acton Burnell. Among the provisions were the following: instead of one administrator, two were required to produce a roll specifying a debt, one nominated by the king and the other by the local authorities. Two rolls specifying the bond had to be made, and after being sealed by the seal of the debtor, each would be held by another administrator. Forced sales were abolished and the debtor was imprisoned until the matter was settled but he was given three months to enter any contract necessary to raise the money required for paying his debt. If he failed to do that, the Statute of Merchants and the Statute of Westminster II established that his chattels and his land could be handed over to the creditor in compensation. The land, however, could not be alienated, but the proceedings from the land could be used to pay the debt.81 Finally, the ability to register and seal contracts subject to this procedure would be made available to merchants in towns other than London, York, and Bristol, and in every fair. The procedures established in England between 1283 and 1285 provided the basis for a contract enforcement mechanism that enabled impersonal exchange based on a central legal system and individual responsibility. The system did not mature overnight, and several improvements were made over the years to enhance its functioning. For example, in 1352, the

79

The Statute is published in English Historical Documents, vol. III, no. 54, pp. 420–2. For a discussion of this Statute and other relevant developments, see Plucknett (1949), pp. 138–50; Moore (1985), p. 120.

80

This Statute appears in English Historical Documents, vol. III, no. 58, pp. 457–60.

81

For the Statute of Westminster II of 1285, see English Historical Documents, vol. III, no. 57, pp. 428–57 (and see in particular c. 18).

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common creditors were ranked with the crown's creditors insofar as imprisonment of the defaulted debtors were concerned, and outlawry was extended to debt and actions of account.82 Yet, even as late as 1543, the authorities could not break into the locked house of a debtor who defaulted on his debt.83 A contract enforcement institution based on individual responsibility, similar to the contract enforcement institution based on collective responsibility which it replaced, developed slowly.

1.6 Conclusions A Community Responsibility System enabled exchange that was impersonal up to one's community affiliation in late medieval Europe. It took advantage of the existing social context, namely, the existence of communities, the relatively easy identification of one's community, and intra-community contract enforcement institutions that were effective despite their local nature because of the social and economic cost of inter-community mobility. These features of the medieval society were supplemented by the strategies that provided individuals and communities with the appropriate incentives. It enabled impersonal exchange despite the absence of the legal contract enforceability provided by a state and human's finite lifetime. Furthermore, at least in England, the state itself attempted to further enhance the institution based on community responsibility by making its strategies the legal obligation and right of courts in communities and fairs. While the preliminary historical examination presented above indicates that this contract enforcement institution facilitated impersonal exchange throughout Europe, it came with a price. It restricted exchange to members of identifiable communities and required local courts. Yet, the biggest cost it imposed was due to courts' imperfect monitoring ability. It led to periods of retaliation, increased the uncertainty of trade, and amplified the moral hazard problem associated with credit financing. Over time, various communities and legal authorities became aware of the origin of these costs and labored to contain them by increasing the accuracy of information, smoothing the uncertainty to individual merchants due to retaliation, and increasing the cost of bankruptcy to borrowers and lenders alike. The growth of long-distance trade and communities' size, number, and heterogeneity fostered by the CRS also reduced the system's economic efficiency. These economic and social processes made it easier to falsify community affiliation, hindered verification of one's community, reduced the

82

Plucknett (1949: 324–6, 343). Neither did the system enhance the ability to recover debt when the debtor was an alien and landless in England. See discussion in Moore (1985: 121).

83

Jones (1979: 13–16).

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cost of escaping to another community for those who defaulted or went bankrupt, and increased the severity of the moral hazard problem. Furthermore, increasing diversity within communities implied that the cost of the CRS to communities or some segments in the community outweighed the benefit. By the late thirteenth century, communities were laboring to abolish the CRS and, where possible, the state stepped in to provide an alternative. The process through which individual legal responsibility came to dominate the modern legal system moved forward. This study of a particular impersonal contract enforcement institution during the late medieval period reveals the importance of understanding the inter-relations between social, economic, and political factors in determining the set of feasible and actual economic institutions. It indicates that economic institutions can be based on and provide a positive reinforcement to a particular social structure. While the CRS was based on the existing, community-based social structure, it reinforced it by motivating the community members to clearly define their communal membership, to communicate it to the rest of the society, and to strengthen their intra-community contract enforcement institutions. At the same time, the dependency of the economic institution on its social foundations implies that social, as well as economic, processes can erode the effectiveness and political viability of the economic institutions. While similar conclusions had been reached in studies that examined contract enforcement within communities (e.g. Ellickson 1991; Greif 1989, 1993, 1994), the study of impersonal exchange reveals the importance of a particular aspect of social context. Sociologists have long emphasized the cognitive aspects of communities—namely, that a community exists when individuals consider themselves and are considered by others as members of that community. The study of the CRS indicates the importance of incorporating this cognitive aspect in game-theoretical analysis for comprehending the inter-relations between the social context and economic institutions. For the CRS to function, the social affiliation of individuals with communities had to be known. Unless this is the case, impersonal, intercommunity exchange is not feasible even if communities do exist. There is much evidence for the operation of economic institutions that built on the existing social context to enable impersonal exchange in past and present non-European economies.84 Yet, the extent of their contribution to past and present economic development, the exact forms of these institutions, and their evolution and interrelationships with political and legal institutions are yet to be explored. We do not know, for example,

84

See Varian (1990), Besley and Coate (1995), Bouman (1995) regarding joint liability in credit markets in developing economies and Fairbank (1992: 177) regarding exchange in imperial China.

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what implications distinct social processes associated with development in pre-modern Europe and developing countries have had on the ability of community enforcement institutions to enhance economic efficiency. Analyzing these institutions and their inter-relations with social structures in different historical episodes will lead the way to a comparative institutional investigation that may shed additional light on the evolutionary process of economic institutions and development. Be the conclusion of this analysis as it may, the broad policy conclusion that this paper yields is clear: one can attempt to utilize a society's existing social structures to foster contract enforcement required for advancing development. At the same time, one has to realize that social structures can be taken as exogenous to economic processes only in the short or medium run. The same economic processes that economic development brings about can erode the underlying social structures. Unless an economy is able to respond by developing contract enforcement institutions that can replace those based on social structure, the economy may be stifled.

References Arias, G. (1901) I Trattati Commerciali della Repubblica Fiorentina, Firenze, Successori le Monnier. Ashburner, M. A. W. (1909) The Rodian Sea-Law, Oxford, Clarendon Press. Bairoch, P., Batou, J. and Chêvre, P. (eds.) (1988) The Population of European Cities from 800 to 1850, Genève, Center of International Economic History (in French and English). Bellamy, J. (1973) Crime and the Courts in England, 1660–1800, Princeton, Princeton University Press. Ben-Porath, Y. (1980) ‘The F-Connection: Families, Friends, and Firms and the Organization of Exchange,’ Population and Development Review, 6: 1–30. Benson, B. L. (1989) ‘The Spontaneous Evolution of Commercial Law,’ Southern Economic Journal, 55(January): 644–61. Beresford, M. and Finberg, H. P. R. (1973) English Medieval Boroughs: A Handlist, Newton Abbott, David and Charles. Berman, H. J. (1983) Law and Revolution: The Formation of Western Legal Tradition, Cambridge, MA, Harvard University Press. Bernstein, L. (1992) ‘Opting Out the Legal System: Extralegal Contractual Relations in the Diamond Industry,’ Journal of Legal Studies, XXI (January): 115–57. Besley, T. and Coate, S. (1995) ‘Group Lending, Repayment Incentives and Social Collateral,’ Journal of Development Economics, 46(Feb.): 1–18. Bouman, F. J. A. (1995) ‘Rotating and Accumulating Savings and Credit Associations: A Development Perspective,’ World Development, 23(3): 371–84. Calendar of the Patent Rolls Preserved in the Public Record Office (1893–1910) 14 Vols. London, His Majesty's Stationery Office.

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Cassinese, Guglielmo. Cartolare di. 1190–1192. Edited by Hall, M. W., H. G. Krueger, and R. L. Reynolds 1938. (Documenti, XII–XIII), Turin. Chiaudano, M. (ed.) (1935) Giovanni Scriba, Cartolare di, 1154–1164, vols. I, II, Turin. —— and Morozzo Della Rocca, R. (eds.) (n.d.) Obertus Scriba de Mercato, 1186–1190, (Documenti, XI and XVI). Turin. Clay, K. (1997) ‘Trade Without Law: Private-Order Institutions in Mexican California,’ Journal of Law, Economics, & Organization, 13(1): 202–31. Close Rolls of the Reign of Henry III, 1227–72 (1902–1938) 14 vols. London, His Majesty's Stationery Office. de Roover, R. (1963) ‘The Organization of Trade,’ in The Cambridge Economic History of Europe. vol. III. Cambridge, Cambridge University Press. Ellickson, R. C. (1991) Order Without Law. Cambridge, MA, Harvard University Press. Ellison, G. (1994) ‘Cooperation in the Prisoner's Dilemma with Anonymous Random Matching,’ Review of Economic Studies, 61(3): 567–88. Emery, R. (1952) ‘The Use of the Surname in the Study of Medieval Economic History,’ Medievalia et Humanistica, VII: 43–50. English Historical Documents (1968) Edited by David C. Douglas and George W. Greenaway, London, Eyre and Spottiswoode. vol. II, pp. 1042–189. English Historical Documents (1975) Edited by Harry Rothwell, London, Eyre and Spottiswoode. vol. III, pp. 1189–327. Face, R. D. (1958) ‘Techniques of Business in the Trade Between the Fairs of Champagne and the South of Europe in the Twelfth and Thirteenth Centuries,’ The Economic History Review, 10: 427–38. Fafchamps, M. (1995) ‘Trade Credit in Zimbabwe,’ in Spring, A. and McDade, B. (eds.), African Entrepreneurship, Indiana University Press. Fairbank, J. K. (1992) China, A New History, Cambridge, MA, Harvard University Press. Fudenberg, D. and Tirole, J. (1991) Game Theory, Cambridge, MA, MIT Press. Granovetter, M. (1985) ‘Economic Action and Social Structure: The Problem of Embeddedness,’ American Journal of Sociology, 91(3): 481–510. Greif, A. (1989) ‘Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi Traders,’ Journal of Economic History, XLIX(Dec.): 857–82. —— (1993) ‘Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders' Coalition,’ American Economic Review, 83(3). —— (1994) ‘Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies,’ The Journal of Political Economy, 102(5): 912–50. —— (1997) ‘Contracting, Enforcement, and Efficiency: Economics Beyond the Law,’ in Bruno, M. and Pleskovic, B. (eds.), Annual World Bank Conference on Development Economics, Washington, DC, The World Bank. —— (Forthcoming) Culture and the Institutional Foundations of States and Markets. Historical and Comparative Institutional Analysis of Genoa and the Maghribi Traders, Cambridge University Press. Grief, A., Milgrom, P., and Weingast, B. (1994) ‘Coordination, Commitment and Enforcement: The Case of the Merchant Guild,’ The Journal of Political Economy, 102(4) (August).

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Gross, C. (ed.) (1908) Select Cases Concerning the Law Merchant: A.D. 1270–1638, 1: Local Courts, Selden Society Publications, 23, London, B. Quaritch. Guinnane, T. W. (1994) ‘A Failed Institutional Transplant: Raiffeisen's Credit Cooperatives in Ireland, 1894–1914,’ Explorations in Economic History, 31(Jan.): 38–61. Hall, H. (ed.) (1930) Select Cases Concerning the Law Merchant, A.D. 1239–1633. 2: Central Courts, Selden Society Publications, 46, London, B. Quaritch. Hanawalt, B. (1974) ‘The Peasant Family and Crime in Fourteenth-Century England,’ Journal of British Studies, 13: 1–18. Hirschman, A. O. (1982) ‘Rival Interpretations of Market Society: Civilizing, Destructive, or Feeble?’ Journal of Economic Literature, XX (4, Dec.): 1463–84. Jones, W. J. (1979) The Foundations of English Bankruptcy: Statutes and Commissions in the Early Modern Period, Philadelphia, Transactions of the American Philosophical Society. Kandori, M. (1992) ‘Social Norms and Community Enforcement,’ Review of Economic Studies, 59. Klein, D. B. (1992) ‘Promise Keeping in the Great Society: A Model of Credit Information Sharing,’ Economics and Politics, 4(2): 117–36. Krueger, H. C. (1957) ‘Genoese Merchants, Their Partnerships and Investments, 1155 to 1164,’ in Studi in Onore di Armando Sapori, Milano, Institudo Editoriale Cisalpino. —— (1962) ‘Genoese Merchants, Their Associations and Investments, 1155 to 1230,’ in Studi in Onore di Amintore Fanfani, Milano, Multa Paucis. —— and Reynolds, R. L. (eds.) (1952–4) Lanfranco Scriba, 1202–1226, (Notari Liguri del secolo XII e del XIII, I–III), Genoa. Landa, J. T. (1994) Trust, Ethnicity, and Identity, Ann Arbor, University of Michigan Press. Lewis, B. (1988) The Political Language of Islam, Chicago, Chicago University Press, p. 76. Lopez, R. (1954) ‘Concerning Surnames and Places of Origin,’ Medievalia et Humanistica VIII: 6–16. —— (1976) The Commercial Revolution of the Middle Ages, 950–1350, London, Cambridge University Press. Lopez, R. S. and Raymond, I. W. (1955) Medieval Trade in the Mediterranean World, New York, Columbia University Press. Macaulay, S. (1963) ‘Noncontractual Relations in Business: A Preliminary Study,’ American Sociological Review, 23: 55–70. Macneil, I. R. (1985) ‘Relational Contract: What We Do and Do Not Know,’ Wisconsin Law Review, 3: 482–524. Maitland, F. W. (ed.) (1889) Select Pleas in Manorial and Other Seigniorial Courts, Reigns of Henry III and Edward I, London, Seldon Society Publications, 2. —— and Bateson, M. (1901) The Charters of the Borough of Cambridge, Cambridge, Cambridge University Press. Milgrom, P. R., North, D. C., and Weingast, B. R. (1990) ‘The Role of Institutions in the Revival of Trade: The Law Merchant, Private Judges, and the Champagne Fairs,’ Economics and Politics, 2(1): 1–23.

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Montgomery, J. (1991) ‘Social Networks and Labor-Market Outcomes: Toward an Economic Analysis,’ American Economic Review, 81(5): 1408–18. Moore, E. W. (1985) The Fairs of Medieval England, Toronto, Pontifical Institute of Medieval Studies. Munz, P. (1969) Frederick Barbarossa, Ithaca and London, Cornell University Press. North, D. C. (1991) ‘Institutions,’ Journal of Economic Perspectives, 5(1): 97–112. —— and Robert P. T. (1973) The Rise of the Western World, Cambridge, Cambridge University Press. Patourel, J. H. le (1937) Medieval Administration of the Channel Islands, 1199–1399, Oxford, Oxford University Press. Pirenne, H. (1956 [1936]) A History of Europe, New York, University Books. Plucknett, T. F. T. (1949) Legislation of Edward I, Oxford, Clarendon Press. Postan, M. M. (1973) Medieval Trade and Finance, Cambridge, Columbia University Press. Reynolds, R. L. (1929) ‘The Market for Northern Textiles in Genoa 1179–1200,’ Revue Belge Philologie et d'Historie, 8: 831–51. —— (1930) ‘Merchants of Arras and the Overland Trade with Genoa Twelfth Century,’ Revue Belge Philologie et d'Historie, 9: 495–533. —— (1931) ‘Genoese Trade in the Late Twelfth Century, Particularly in Cloth from the Fair of Champagne,’ Journal of Economic and Business History, 3: 362–81. Rosenberg, N. and Birdzell, L. E. Jr (1986) How the West Grew Rich, New York, Basic Books. Santini, P. (1886) ‘Appunti sulla Vendetta Privata e sulle Rappresaglie,’ Archivio Strico Italiano, XVIII: 162–76. Stubbs, W. (1913) Selected Charters and Other Illustrations of English Institutional History from the Earliest Times to the Reign of Edward the First, 9th edn. Oxford, Clarendon Press. Sugden, R. (1989) ‘Spontaneous Order,’ Journal of Economic Perspective, 3(4): 85–97 Telser, L. G. (1980) ‘A Theory of Self-enforcing Agreements,’ Journal of Business, 53: 27–43. Tirole, J. (1996) ‘A Theory of Collective Reputation (with applications to the persistence of corruption and to firm quality),’ The Review of Economic Studies, 63(1): 1–22. Townsend, R. M. (1981) ‘Models of Money with Spatially Separated Agents,’ in Kareken, J. H. and Wallace, N. (eds.), Models of Monetary Economies, Minneapolis, Federal Reserve Bank. Van der Vee, H. (1977) ‘Monetary, Credit, and Banking Systems,’ in Rich, E. E. and Wilson, C. H. (eds.), The Cambridge Economic History of Europe, vol. V, Cambridge, Cambridge University Press. Varian, H. R. (1990) ‘Monitoring Agents with Other Agents,’ Journal of Institutional and Theoretical Economics, 146 (1): 153–74.

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Verlinden, C. (1979) Markets and Fairs. Vol. 3. The Cambridge Economic History of Europe, Edited by M. M. Postan, E. E. Rick, and M. Miltey. Cambridge, Cambridge University Press. Weber, M. (1927) General Economic History, translated by F. H. Knight, New York, An Adelphi Publication, Greenberg. Williamson, O. E. (1985) The Economic Institutions of Capitalism, New York, The Free Press.

2 Community and Market in England: Open Fields and Enclosures 85

Robert C. Allen Opposition between ‘community’ and ‘market’ originated with nineteenth-century social theorists like Marx (1867) and Tonnies (1887), who contrasted the modern, capitalist world with a preceding feudal or communal world. The modern world was seen as rational, efficient, and progressive. Economic activities were coordinated by the market and economic agents responded to prices. In contrast, the earlier communal world was seen as irrational and stagnant. Tradition governed economic behavior and thwarted progress. Redistribution rather than growth was the goal. The replacement of ‘community’ by ‘market’ was essential for economic progress. These views have been elaborated in the twentieth century by Polanyi (1944), Geertz (1963), and Scott (1976). Agrarian organization was the prime example of this dichotomy. In this case, ‘community’ meant the open field village. Open field agriculture was widespread (but not universal) in England and on the continent. Settlement in open field areas was in nucleated villages rather than dispersed farms and hamlets. Each farmer's land consisted of strips scattered uniformly around the village. The strips were grouped in great fields (usually two or three), which served as crop rotation units. In the case of the three field system, for instance, all the land in one field was planted with a winter grain (wheat or rye), another was planted with a spring crop (oats, barley, beans, or peas), while the third was left fallow. In addition to the arable, there was some meadow and rough pasture. The latter was owned collectively and managed as a common on which the village livestock was grazed. The village herd was also grazed on the fallow field and the cropped fields after the harvest. In this way, the land was fertilized and weeded. While there were elements of private ownership in this system—each farmer owned particular strips in the fields—there were significant communal aspects: The common pasture was collectively owned and managed, and the village herd was also grazed in common on the fallow field. For that to happen, all of the

85

I would like to thank Masahiko Aoki, Hans Binswanger, Marcel Fafchamps, and Yujiro Hayami and other participants at the World Bank Conferences in Paris (1998) and Stanford (1999) for their comments and discussion.

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farmers had to follow the same crop rotation, and that was regulated by the village community often under the aegis of the manorial court. A long tradition regards the open field village as hidebound and resistant to progress. In Ernle's (1912: 199) memorable phrase, ‘open-field farmers were impervious to new methods.’ In this view, agricultural progress required the elimination of village control through enclosure. In an enclosure, commons were abolished, land ownership was consolidated, and the institutions of communal management were abandoned. Each landowner or his tenant farmer could use the land as he saw fit. Enterprising farmers could no longer be held back by a hidebound peasant majority opposed to progress. The overstocking of commons was also eliminated. When communalism ended, progress began. This essay presents an alternative interpretation of the open fields based on the historical research of the last thirty years. The guiding idea of this research is that the open fields were an efficient institution for meeting the needs of small scale, grain growing farmers. These needs included diversification against the risk involved in grain production and increasing agricultural productivity. McCloskey (1972) has championed the view that the scattered landholdings in the open fields can be explained as diversification. Land was not uniform, so the productivity of different parts of a village's land responded differentially to variation in the weather. In years of high rain fall, low lying land might have been waterlogged and given low yields, while higher land might have been productive. Conversely, when rainfall was light, the upland might have been too dry to produce well, while yields might have been high in the low lands. Scattering is a feature of low income agriculture around that world, so a simple explanation applicable everywhere commends itself. Diversification is the usual explanation (Hayami 1997: 261). The second need of poor farmers was higher productivity, and the open fields were an efficient organization for achieving that goal. Since this conclusion is so important and so inconsistent with the standard, negative assessment of open fields, the first purpose of this paper is to present the case for their progressiveness. The conclusion that open field agriculture was conducive to technical progress raises two further questions that have not been intensively studied. The first relates to decision making in the open fields. The negative assessment of open fields presumes that technical change required widespread agreement, which was hard to obtain. How broad a consensus was, in fact, required, and, how was it achieved? The second relates to the enclosure movement. If the open fields were so productive, why were they enclosed? This paper addresses these questions through a case study of open field performance in Spelsbury, Oxfordshire. While history never repeats itself exactly, it can suggest likely patterns of development. While the Ernle view of open fields as backward and

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unprogressive raised the presumption that communal institutions were a poor basis of economic organization, the more positive vision of the open field community developed here leads to the presumption that communal institutions can effectively manage economic resources and secure rising productivity.

2.1 Efciency of Open Fields—Micro Evidence The economic performance of open field agriculture has been extensively researched since the World War II. A variety of indicators—crop choice, yield per acre, output per worker and various measures of total factor productivity—have been used. This research all points to a far more favorable assessment of open fields than is found in the social science literature that contrasts the open field ‘community’ with the enclosed ‘market’ economy. Before considering the evidence on agricultural efficiency, it should be emphasized that the Polanyi view that open field agriculture was ‘precommercial’ is not seriously entertained by most historians today. Quite the contrary. MacFarlane's highly influential The Origins of English Individualism (1978) argued that English farmers were commercial as far back as the middle ages. This has become the modern view, as evidenced, for instance, by the title of Britnell and Campbell's recent collection A Commercializing Economy: England 1086 to c. 1300 (1994). The Polanyi depiction of open fields as premarket organizations—a view asserted without evidence—can be tested with probate inventories commencing in the early sixteenth century. Most people in this period—including, in particular, small scale farmers—made wills and when they were proved, the executor of the estate was required to produce a list and valuation of the deceased's property. Most farmers had unsold grain in the barn, and one can compute the value per bushel placed on this wheat and barley by the executors. These values were similar to wholesale market prices both in level and movement, as a comparison of the two series shows (Allen 1988). Evidently, the executors, who were themselves often farmers, were attuned to market prices and used them for valuation. It is difficult to see how these findings can be squared with a ‘precommercial’ view of the open fields. If open field farmers had a commercial outlook, it would be surprising if they did not try to raise efficiency. This issue has been explored with data ranging from the middle ages to the nineteenth century, and the consensus is that open field agriculture was progressive. Our knowledge of open fields in the middle ages (1000–1500) is sketchy, but even for that period there is overwhelming evidence for advances in efficiency. The two field system was the norm in many open fields in the early middle ages, but many of these systems were reorganized as three

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(sometimes four) field systems by the early modern period (Gray 1915; Thirsk 1973: 255–62). This change reduced the fallow from one half to one-third of the farm land, leading to a substantial increase in output. Such a reorganization would have affected everyone and so is considerably important. A second important change in medieval agriculture was the substitution of horses for oxen. While this change did not directly involve the village community, there may have been a link in that the shift to three field farming probably increased the production of oats, which were eaten by the horses. In any event, the adoption of the horse shows that small scale open field farmers were willing to take up innovations (Langdon 1986). Several important changes in land management were made in the early modern period (1500–1750). First, peas and beans were added to open field rotations. Since the new crops replaced other spring crops, the change was not too far reaching but still shows the innovativeness of open field farmers (Hoskins 1950, 1951). Second, crop yields rose substantially in the open fields. For wheat, the premier crop, the increase was particularly large and equalled most of the gain achieved by enclosed farmers c. 1800 compared to their medieval, open field predecessors. For barley and oats, the gains were less substantial but still impressive (Allen 1999). Why yields rose is an ongoing subject of research, but that they rose is further testimony to the innovativeness of open field farmers. Third, open field villages in areas well suited for pasture converted much of their arable to grass and greatly expanded livestock production. These changes emulated the pastoral husbandry followed in enclosures in the same districts. Open field farmers seem to have converted less arable to pasture than did enclosed farmers, but the change was far reaching for the open field villagers since it required a reorganization of the main aspects of field management (Allen 1992: 121–5). All told the changes in farm methods in the early modern period were far reaching in their importance. Finally, the innovativeness of open field farmers can be assessed with village by village surveys conducted around 1800. Systematic comparisons of cropping in open and enclosed villages was first undertaken by Yelling (1977) and, particularly, by Turner (1982, 1986). Studies of this sort require stratifying the data by soil type so that the profitability of the new method is the same for the open and enclosed villages being compared. My own research (Allen 1992) has concentrated on the south midlands—a region extending roughly from Oxford to Cambridge to Leicester. The region includes 2,850,866 acres of land and 1,568 villages. The south midlands comprises three natural environments—the pasture, light arable, and heavy arable districts. In each district there was an improvement or cluster of improvements that raised productivity in the eighteenth century. In the pasture district, conversion of most (sometimes all) of the land to grass was its most profitable use. Convertible husbandry was sometimes

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practiced here. In the light arable district, most land was kept as arable, and the soil was light enough so that the Norfolk rotation (turnips–barley–clover–wheat) could be profitably used. New Leicester sheep, an improved breed, were often introduced to eat the clover and turnips. In the heavy arable district, there was little change in cropping, but subsurface drains were introduced to deal with standing water. The comparisons show that Ernle clearly overstated his case, for there is considerable evidence that open field villages adopted the rent maximizing techniques. Nonetheless, the pace of innovation was slower than it was among the enclosed villages. In the pasture district, for instance, open villages allocated an unusually large fraction of land to grass, but the proportion was less than in enclosed villages, and there seems to have been no alteration of land between pasture and arable—the hallmark of convertible husbandry. In the light arable district, open villages certainly cultivated clover and turnips, but to a lesser extent than did enclosed villages. The latter were also more likely to have raised improved sheep. Finally, in the heavy arable district, enclosed villages were much more likely to have drained their land. So there is evidence that open field villages were more rigid than enclosed villages although not as hidebound as Ernle would have us believe. A more favorable assessment of open field villages is reached, however, by using other indicators of performance. Crop yields have received considerable attention. Table 2.1 compares yields in the three districts of the south midlands. In most cases the yields were highest in the enclosed villages, but the percentage gain was often small and erratic. Yields had approximately doubled between the middle ages and the nineteenth century, and that increase provides another yardstick for judging the gap between open and enclosed villages. The difference between open and enclosed yields was often small compared to the growth of yields that had occurred between the middle ages and enclosed yields c. 1800. This conclusion applies with great force in the case of wheat, for the difference between open and enclosed yields was small for this—the preeminent—crop. The difference between open and enclosed yields was somewhat larger in the case of oats and barley, especially in the heavy arable district. Overall, the yield comparisons lend support to the conclusion that enclosed villages were more efficient than open, but indicate that the advantage was small. Moreover, open field villages had accomplished most of the gain that had occurred between medieval levels and the standard of efficiency reached by enclosed farms c. 1800. These results carry over to comparisons of total factor productivity (TFP). These comparisons are often developed in the context of the rental value of the land. Enclosures were pushed forward by large scale land-owners with the aim of raising the rent they received from their tenants. McCloskey (1972) first pointed out that rent was an indicator of efficiency since an

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Table 2.1 Crop yields and enclosure, c. 1800

Heavy arable district Wheat Barley Oats Beans Average Light arable district Wheat Barley Oats Beans Average Pasture district Wheat Barley Oats Beans Average

Open bushels/acre

Enclosed bushels/acre

Enclosed relative to open Enclosure gain relative to 19th century enclosed—medieval

19.7 26.5 23.5 18.8 21.2

20.2 31.8 33.0 22.2 24.1

2.2 20.0 40.4 18.1 14.7

5.3 35.3 44.6 27.9 23.8

20.0 27.0 26.5 19.9 23.4

19.7 29.3 32.5 18.1 24.7

−1.5 8.5 22.6 −9.0 5.6

**** 18.4 28.8 **** 10.9

20.9 28.0 36.9 22.4 24.7

21.9 32.2 38.1 23.4 26.7

4.8 15.0 3.3 4.5 8.1

8.9 27.3 4.5 7.5 14.2

Source: Allen (1992: 136).

enclosed farmer could afford to pay a higher rent only if he increased his output per acre or reduced his (nonland) costs per acre or some combination. Any such combination implies a rise of output with respect to total inputs, that is, higher total factor productivity. The relationship between Ricardian surplus per acre and total factor productivity can be shown easily for a Cobb–Douglas technology. Let the production function be

(1) where Q is output, K, L, and T are the quantities of capital, labour, and land, and A is the index of total factor productivity. The exponents are positive fractions and sum to one. In that case, the dual cost function is:

(2) where r, w, and s are the prices of capital, labor, and land, while P equals the cost (assumed to equal the price) of agricultural products. Solving equation 2 for A shows how efficiency can be inferred from land values:

(3)

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The variables in equation 3 can be interpreted as relative values in the instances being compared. The denominator involving P, r, and w is a price index that deflates changes in land values for inflation. If P, r, and w are constants, then the rise in total factor productivity can be calculated by raising the relative change in Ricardian surplus to a power equal to the exponent of land in the Cobb–Douglas production function. For instance, if the exponent of land was one-third and if rents rose eight-fold, then total factor productivity doubled (two is the cube root of eight). Allen (1982) generalizes this result to production functions besides the Cobb–Douglas. The most direct way to infer total factor productivity from land values is direct calculation of the Ricardian surplus, that is, the revenue minus the opportunity cost of the labor, capital, and materials applied to the land. Calculations for the south midlands show an erratic pattern. Enclosure in the heavy arable district came closest to the standard story, for enclosed farms realized revenues about one half pound per acre more than open farms with the same cost structure. As a result, the rental value of the land rose by the rise in the value of output. This corresponds to a 13 percent increase in TFP. In the light arable district, however, the gain in TFP was only 3 percent. In the pasture district, the results were mixed with some old enclosures, apparently on the most productive lands, showing significant increases in farm revenue per acre due to high stocking densities of beef cattle. These output increases translated into a 13 percent rise in TFP. In other districts, enclosure did not result in higher stocking densities, and TFP changes ranged from −4 to +0.2 percent. On average, enclosure gave only a small boost to TFP but in some districts the gains were significant (Allen 1992: 176–7). Calculations of Ricardian surplus have also been used to test the hypothesis that common pastures were overgrazed. If access were unlimited, then profit maximizing farmers would have increased herds until the cost of an extra animal equaled the average product of animals on the common. In that case, rent would have been zero. While this case is theoretically alluring (Hardin 1977), it has always been doubtful on historical grounds since many villages were aware of the common property problem and set stints limiting grazing. In addition, it has been possible to test the hypothesis econometrically with a sample of 231 farms described by Arthur Young in his tours of England c. 1770. Ricardian surplus was regressed on a variety of variables including the number of sheep grazed on commons. The coefficient of sheep was positive, statistically significant, and equal to the value of the annual ‘profit of a sheep’ reported in contemporary literature (Allen 1982). This statistical evidence, thus, runs counter to the overgrazing hypothesis. Direct calculations of Ricardian surplus are the exception rather than the rule. Rents actually paid are the usual measure of land value. These figures are readily available in estate records, and, indeed, McCloskey

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originally proposed that productivity be inferred from rent in order to take advantage of this information. There are several limitations to this approach, however. First, poor rates and land taxes were also paid out of Ricardian surplus, and they should be added to rent to ascertain the surplus. Second, and probably more importantly, land markets were often out of equilibrium. This has been shown for two data sets in the late eighteenth and early nineteenth centuries (Allen 1982, 1992: 176–9). Such a disequilibrium could arise since mobility among tenants was low, rents were adjusted only at long intervals, and accounting was so primitive—certainly with respect to family labor and capital costs (livestock and implements) that bulked large in total costs. Even surveyors relied on rules of thumb and used prevailing rents, rather than Ricardian calculations, as the basis of valuation. In the long run, no doubt, rents tended to follow Ricardian valuations, but significant discrepancies could arise. Despite these caveats, many economic historians (myself included) have succumbed to the easy availability of rents and used them to infer productivity. Clark (1998b), for instance, has compiled about 20,000 quotations of rents received for lands owned by English charities. Many (on the order of 93 percent) of these reports applied to atypically small and highly valued properties, which are unrepresentative of the normal course of rents. Nonetheless, Clark reports only small rent gains at enclosure. Rents can also be used to measure productivity growth over time, although in this application they must be deflated by an index of farm input and output prices to purge them of inflation. Such calculations point to significant productivity gains in the open fields. Figure 2.1 plots real rents for open field villages in the south midlands from 1450 to 1800. These curves show considerable rent lag during periods of inflation (the price revolution of the sixteenth century and the late eighteenth and early nineteenth century). Nonetheless, the overall rise in rent suggests productivity growth in the open fields. Such a result is not surprising. Since there was significant productivity growth in English agriculture between the middle ages and the nineteenth century—a fact attested by the rise in crop yields and one supported by other evidence to be considered—a corollary of the finding that enclosure made only a small contribution to productivity growth is that productivity rose sharply in open field villages in the early modern period. This implication is borne out by Fig. 2.1. The evidence reviewed here runs strongly counter to the depiction of open fields in the standard story. Open field farmers achieved significant productivity growth in the early modern period, and they went part way in adopting the famous improvements of the eighteenth century. Nonetheless, enclosed farming usually had an advantage over open field farming whether the indicator be new methods, crop yields, or rent paid. There is thus some evidence in favor of the view that enclosure raised efficiency. The main point, however, is that the efficiency advantage of enclosed farming

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Fig. 2.1 Real Open Field Rent, South Midlands (Five Year Moving Average)

was small, and that open field farmers had achieved almost all of the productivity gains available between 1500 and 1800. Enclosure explains neither the productivity advantage that England enjoyed over other countries c. 1800, nor the rise in efficiency that had occurred since the middle ages.

2.2 England: Macro Evidence The focus of research in English agricultural history has shifted to macro evidence about output and productivity. This research provides further insight into the performance of open fields and enclosures by testing whether output increased during major enclosure waves as the proponents of enclosure claimed. Overton (1996a, b), who is the only economic historian in recent years to have reaffirmed the view that eighteenth-century enclosures were critical for agricultural modernization, rested his case mainly on these

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reconstructions. However, his use of the evidence is idiosyncratic for reasons to be discussed. More plausible reconstructions of the aggregate series support the conclusions derived from the micro evidence. All of the reconstructions start with the identity that agricultural output (Q) equals the population (N) multiplied by per capita consumption of agricultural products (c) and by the ratio of agricultural production to agricultural consumption (t):

(4) The factor t incorporates international trade in agricultural goods into the analysis. Before the nineteenth century, it played only a small role in most cases, but it is included for completeness. Overton used equation 4 to reconstruct aggregate farm output by making the additional assumption that per capita consumption of agricultural products (c) was constant. Since t was always close to one before 1800, this procedure effectively interpolated agricultural output from the population. The English population expanded from 1500 to 1650, was then static to 1750, and after that began to grow rapidly in the world's first population explosion. Assuming that farm output followed the same pattern implies a 115 percent increase in output between 1500 and 1650, a 13 percent rise from 1650 to 1740, and a 39 percent surge in ouput from 1740 to 1800 at the time of the parliamentary enclosure movement. From this, Overton concluded that there was no agricultural revolution in the open fields between 1650 and 1750, and that the parliamentary enclosures were critical to agricultural productivity growth. While the assumption of constant per capita food consumption was once commonly made, it has been rejected by most investigators for over twenty years. Crafts (1976) first pointed out that consumption depended on income and prices, and he and subsequent investigators (Jackson 1985; Allen 1999) have used that fact to estimate agricultural output by specifying a demand curve for farm goods. The simplest formulation is to specify per capita consumption of agricultural goods (c) as:

(5) where p is its price, i is income per head, m is the price of other consumer goods, and a sets the units of measurement.86 Calculation of agricultural

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The calculations are explained in Allen (1998b), and the data sources are described in detail in Allen (1998a). Briefly, p is a retail price index of foodstuffs, i is the wage of building craftsmen, and m is a retail price index of nonfood goods. All of these variables are expressed in real terms by deflating them by an international, intertemporal consumer price index made up of the food and nonfood prices used in p and m.

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consumption requires values for e, g, and b. These are taken from analyses of English budget studies and from demand studies for developing countries. The usual assumptions in the historical literature (Crafts 1976; Jackson 1985; Clark et al.1995; Allen 1999) are that the income elasticity of demand was 0.5, the own price elasticity was [0.6, and the cross price elasticity between food and manufactures was 0.1. (Other reasonable values give similar results.) Substituting equation 5 into equation 4 gives the following equation for estimating the growth in agricultural output:

(6) Making demand a function of income and prices implies a very different pattern of output growth from extrapolations from the population. Far from being a period of stagnation, the years between 1650 and 1740 stand out has a period of significant advance when output increased by 26 percent. This finding supports the view that output grew rapidly before the parliamentary enclosures when small scale family farming (the yeoman mode of production) was predominant in the open fields. Furthermore, the period from 1740 to 1800, which includes major waves of parliamentary enclosures, was characterized by a negligible increase (only 3 percent) in farm production. While the population was increasing, which tended to raise demand, the prices of agricultural goods were rising rapidly in the last half of the eighteenth century, and that inflation indicates that supply was not keeping pace with demand. The demand curve simulations do indicate a resumption of agricultural output growth after 1800, but the main period of enclosures is remarkable for its stagnation. The aggregate evidence, thus, points to substantial productivity and output growth in the seventeenth and early eighteenth centuries. Growth slackened in the second half of the eighteenth century. The progressive period is the same as that in which the open field, yeomen farmers were ascendant, while the period of stagnation coincided with the parliamentary enclosures and the elimination of peasant proprietorship. Micro and macro evidence point to similar stories of the agricultural revolution.

2.3 Agricultural Labor Productivity: A European-Wide Perspective Further insight into the causes of agricultural productivity growth and of the role of enclosure can be gained by extending the macro evidence to a European-wide perspective and by combining the output estimates with estimates of agricultural employment to gauge labor productivity.

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The point of departure is Wrigley's (1985) well-known paper on economic structure and labor productivity. He presumed that the population could be split into agricultural and nonagricultural components. Dividing agricultural ouput (as defined by equation 4) by the agricultural population (A) gives an expression for agricultural labor productivity:

(7) Like Overton, Wrigley assumed that c was a constant and t was one (in most cases). With those assumptions, output per worker is inversely proportional to the share of the population in agriculture (A/N), and the problem of measuring agricultural productivity is reduced to demography. N and A are required to implement Wrigley's procedure. Historical demographers have estimated the total populations of European countries back to the middle ages. Estimates have also been made of the urban population. The difference is, of course, the rural population. Wrigley split it into agricultural and nonagricultural components as follows: the division in 1800 was obtained from nineteenth-century censuses. Values ranged from about 0.5 to 0.8. Wrigley guessed that 80 percent of the rural population was agricultural in 1500—a plausible value in view of Dutch evidence (de Vries and van der Woude 1977: 233). The increase in the rural, nonagricultural share from 20 percent in 1500 to as much as 50 percent in 1800 corresponds to the ‘proto-industrial’ revolution that occurred in that period. The nonagricultural fraction of the rural population was interpolated for intervening dates. Wrigley undertook these calculations for England and France from 1500 to 1800. Output per worker rose in both countries, but the pace of advance was higher in England. The results provide support for the traditional view that enclosure raised productivity since they show England ahead of France and since ‘labor productivity’ measured in this way rose sharply between 1750 and 1800, i.e. during the intense phase of parliamentary enclosing. But that interpretation cannot be sustained for the same reason that Overton's reconstructions of English farm output were abandoned: Wrigley's calculations do not provide an accurate depiction of labor productivity since per capita consumption depended on income and prices. The solution is to compute per capita consumption c with equation 5. In that case, output per worker becomes:

(8) Output per worker depends on the fraction of the population in agriculture A/N, the trade balance t, and per capita consumption, which is a function of income and prices.

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Fig. 2.2. Output Per Worker In Agriculture, 1300–1800

Figure 2.2 plots the results for England, Belgium, Italy, Spain, the Netherlands, and Austria/Hungary, which cover the main possibilities. Most of the European continent—Spain, Italy, France, Germany, Austria/ Hungary, Poland—shared a common agricultural productivity history, as exemplified by the curves for Spain, Italy, and Austria/Hungary in Fig. 2.2. Italy, whose data run back to 1300, shows a rise in labor productivity from 1300 to 1400 due to the population losses associated with the Black Death. Between 1400 and 1800, population grew steadily, and output per worker in agriculture declined. There is no evidence of an agricultural revolution on the continent. The history of labor productivity in present day Belgium was quite different. Output per worker was very high in the middle ages—Flanders was renowned for its agriculture—but did not increase thereafter. However, it set a standard showing what might be achieved. The Netherlands and England had agricultural revolutions in the early modern period. In 1500, output per worker in Dutch agriculture was similar to that on most of the continent, but productivity rose sharply to 1700

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when the Belgian level was surpassed. This rise was achieved despite a rapidly growing population. From 1300 to 1600, the productivity history of England was like that of most of the continent. Output per worker rose after the Black Death and remained high to 1500 due to the continued stagnation of the English population. Demographic growth accelerated in the sixteenth century and labor productivity fell due to diminishing returns. This typical continental pattern was broken after 1600 when labor productivity surged upward reaching the highest level in Europe in 1750. The patterns in Fig. 2.2 have two important implications for agrarian history. First, the rise in English labor productivity was confined to the period 1600–1750, that is the period when open field, yeoman agriculture was ascendant. The last half of the eighteenth century again stands out as a period of stagnation despite the enclosure movement. Second, the figure requires us to reformulate the search for the causes of agricultural productivity growth. Three countries were highly productive—England, Belgium, and the Netherlands. What did they have in common that distinguished them from the less successful countries? They certainly did not share enclosures—the notion that these institutions were the recipe for rapidly rising agricultural productivity dies a fast death when subjected to the test of comparative history. It is more accurate to say that they shared systems of owner-occupying family farms, for they were very common in England between 1600 and 1750 and were widespread in the Low Countries. Open fields were also common there. Indeed, their agricultures have been criticized for the prevalence of just such institutions. However, Fig. 2.2 shows that they were the bases of progress in the early modern period—not poverty. While open fields and family farms were a good base for agricultural advance, they are not a complete explanation for these institutions were found elsewhere as well. However, there was one thing that farmers in England and the Low Countries had in common and which distinguished them from farmers elsewhere in Europe, and that was rising urbanization. In medieval Belgium where high levels of productivity were first achieved, 39 per cent of the population was urban. From 1500 to 1750, the share of the population living in cities in the Netherlands rose from 30 percent to 36 percent, and, in England, the share rose from 7 percent to 23 percent over the same period. These percentages are higher than elsewhere or rising more (Bairoch et al.1988). Urbanization affected agriculture through the demand for farm products—a theme running back to von Thuenen—and it also affected agriculture through the labor market. Early modern cities had extremely high mortality rates and could not exist, let along expand, without high rates of rural–urban migration. Wrigley estimated that half of the natural increase of the English population was required by the growth of

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London, and the same was true of Dutch cities (Wrigley 1967: van Zanden 1993). Wages were very high in the cities of northwestern Europe (Allen 1998a). Agriculture responded to the high urban demand for labor in ways that raised agricultural labor productivity. In England, where the property law favored the landlords, agriculture was eventually reorganized by enclosure and large farms—changes which generally reduced employment per acre. Throughout the region, peasants responded to the high demand for labor by increasing their output since that raised their incomes without reducing employment.

2.4 A Case Study of Decision Making in the Open Fields The conclusion that open fields were highly innovative makes sense on one level but not on another. The finding makes sense in that early modern England was a poor, backward economy, and so it would be a surprise if its farmers did not want a higher standard of living. From that perspective, it is not surprising that their basic institutions supported productivity growth. On the other hand, the progressiveness of the open fields is hard to square with the ‘inflexibility’ usually imputed to them in the historical literature. The place to begin is the presumption that unanimity—or, at least, widespread agreement—was required for most changes in cropping to occur, so a few hidebound traditionalists could block progress. Testing this view requires looking inside the open fields to see how decisions were made and, in particular, whether unanimity was required and how it was achieved. This can only be done with a case study, and I review evidence for the parish of Spelsbury in Oxfordshire. For this parish, one can trace the adoption of new crops in the eighteenth century. In one case, unanimity was required at the outset, and that requirement raised significant problems that were only overcome by coercion on the part of the manorial lord. In other important cases, the need for unanimity was avoided, and the changes in field management were structured so that farmers had a individual choice as to whether to take up the new crops. After the initial phase of voluntarism, the extension of the cultivation of the new crops was done on the basis of majority rule; unanimity was never required. There were, thus, at least two approaches to organizing innovation in the open fields. Flexibility was a desirable strategy from an economic, as well as a social, point of view. Technical progress involved experimentation. There was a risk that new crops might fail, and, even if they were suitable, their culture had to be adapted to local conditions. Demonstration or experimental farms are a twentieth-century solution to these problems, but there were no state agricultural services before the industrial revolution. The home

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farms of great estates rarely served this function. The task was left to the peasants. In the open fields, experimentation was accomplished by letting people do what they wanted. In that case, enterprising individuals could try out new methods and adapt them to local conditions. Their more risk averse neighbors could follow suit when they were convinced the new techniques paid off. This view of open fields is, of course, the antithesis of the standard straight jacket model, which presumed that entrepreneurial farmers could try new crops only after enclosure. The records of Spelsbury give some insight into the way experimentation and innovation were carried out in an open field community. The adoption of sainfoin early in the eighteenth century was one of the first examples of the innovativeness of open field farmers adduced by historians (Havinden 1961). I will review those agreements, and then carry the story forward to the enclosure of the village in the early nineteenth century. Spelsbury was an unusually large parish (3,900 acres according to the 1851 census) containing several settlements with their own field systems. I am concerned here with the townships of Taston, Fulwell, and Spelsbury proper. Their fields amounted to 2,016 acres divided into 53 yardlands of 38 acres each. A yardland was a standard early modern farm. It could have been cultivated by a family without much hired labor. In the early eighteenth century, most holdings were held as copyholds. Fifteen holdings were one yardland, and twelve amounted to half a yardland in size. These were yeomen farms. In addition, there were a few two yardland holdings, which required considerable hired labor, and a single four yardland (152 acres) holding, which was a fully fledged capitalist farm. The demesne of eight yardlands (304 acres) was also operated as a single farm. With the exception of the four and eight yardland holdings, family farming was the predominant mode of production in Spelsbury.

2.5 The Adoption of Sainfoin Three new crops—sainfoin, turnips, and clover—became available to Spelsbury farmers in the eighteenth century. They were extensively cultivated in nineteenth-century enclosed farms, and open field farmers adopted all of them in the eighteenth century. Sainfoin was grown in meadows for hay. It was the first to be adopted. Special agreements were made to reorganize the land for sainfoin cultivation. The first agreement was made in Taston in 1701, and it created a special sainfoin meadow. The agreement provided for withdrawing several furlongs from the fields of Taston and fencing them with walls or hedges and ditches. Sainfoin was to be planted and mowed for hay and then grazed. The agreement calls this ‘inclosing’ and it was in that the land was

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withdrawn from the common fields, fenced, and managed separately. But many features of the open fields remained: landholdings were not consolidated; each copyholder retained his original, scattered strips within the enclosure. While each copyholder now mowed his own strips for hay, the aftermath was grazed with a common herd. Each proprietor was required to maintain the perimeter fence where it crossed his strips. Three fieldmen were chosen on the first of each year to establish the dates when sainfoin would be planted, when animals could graze, and to enforce the maintenance provisions. Violations of the agreement (like withdrawing land or allowing stock to graze at unauthorized times) were punishable with fines paid to the lord of the manor. The Taston sainfoin agreement created an improved meadow that was operated in the traditional, open field manner. The Taston sainfoin agreement was signed by all of the copyholders in Taston.87 It was thus the result of a unanimous decision. The ‘inflexibility’ of communal decision making could be transcended. Achieving unanimity was not effortless, however. William Canning, the steward of the estate, regularly wrote to the Earl of Litchfield about estate matters. On 3 April, 1703, Canning recounted that ‘at the Court I found a great disturbance a Mungst them of Tastone & Fullwell about Settling their Methods of Managing the sainfoine Grass that they had Sowed.’ The management of the sainfoin enclosure had shifted to the manorial court—this was not a surprise—for the court was the arena in which rules for the fields were normally promulgated, field men appointed, and fines assessed. While Canning believed that sainfoin cultivation ‘is like to be a great Improvement if it be inCouraged, & carryed on as it should be, But I found so much Crossness … a Mongst the Mainuagers of it; that if they be not overawed, the designe will soon be destroyed.’ Canning does not tell us what they were arguing over. The dispute may have centered on the schedule of sowing, mowing, and grazing, or it may have been more fundamental like removing land from the enclosure, something which was explicitly prohibited in the agreement. In any event, dissent was confined to two copyholders. ‘Therefore, I took upon me to force Wilt. Rooke & John Hull of Tastone to a better Comployance, and the way that I took was the next day after the Court, I took John Freeman [another copyholder in Taston] with me & went to them both.’ Canning ‘told them that if they wold not Imedially Comploy to the Well ordering of all those Matters we had on foote, I wold forthwithe Report to ye Losp, their Ill Manners & misbehaviour at the Court Thursday that their should be such a course taken with them as to have them severely

87

This conclusion is based on a comparison of the Spelsbury quit rental for 1703 (DIL II/b/33) and the Taston Inclosure Agreement (DIL II/n/1). All documents referenced in this paper are deposited in the Oxfordshire County Record Office.

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punished.’ In addition, Canning threatened to harass them until they complied. He proposed to punish them ‘for leting their Houses run to Ruin.’ In addition, ‘for every little offense which they should commit against ye well ordering of the Sainfoine I would have a writ on their Backs, and as for Hull if he did not Imediably pay me 20s for the Tree he cut down I wold serve him with a Writ the next day.’ These threats worked. ‘So then they bothe agreed with me that they Wold comply to any orders I should make.’88 Evidently unanimity could be obtained by manorial coercion, but that was not the only—or, indeed, most desirable—way to effect change in the fields. The alternative was to restructure the change so that it could proceed voluntarily. This was done in a 1708 agreement to enclose land in Spelsbury. The purpose of the agreement was to make ‘a certain quantity of land Every years Land,’ that is, land that was continuously cropped. As in Taston, communal grazing was practiced after the harvest, fieldmen were chosen to regulate the grazing, and fines were assessed for violations of those rules. The main difference with the Taston agreement was that each copyholder could use his Every Year's Land as he liked—‘to soo Corne or Sainfine or What they please.’89 The only sensible use of this enclosure was to cultivate sainfoin as in Taston, but that was not required of everyone at the outset. It is likely that it became the usual practice, however. Court records later in the eighteenth century refer to the ‘old sainfoin’ field90 as does the field map prepared at enclosure.91 By providing flexibility at the outset, the kind of disputes that occurred at Taston were avoided, the entrepreneurial copyholders could proceed with experiments, and the others could adopt the sainfoin culture after it was proved in their village.

2.6 The Adoption of Turnips and Clover Sainfoin was a major improvement, but clover and turnips were the most famous new crops of the eighteenth century. Their cultivation in England began in East Anglia in the seventeenth century. At first, their culture was not linked; it was only in the eighteenth century that they were combined in rotations like the famous Norfolk rotation (turnips–barley–clover– wheat). In the eighteenth century, the cultivation of clover and turnips spread north and west. The earliest reference to turnip cultivation in Oxfordshire was in 1727 (Allen 1992: 111). How receptive were Spelsbury farmers to these most famous of crops? The first reference to them was in the manorial court rolls for 1751. The management of the open fields was carried out in the manorial court, and

88

DIL I/k/1h.

89

DIL II/n/26.

90

E.g. DIL II/w/134.

91

Misc. Sta. I/1.

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the court rolls, the minutes of the proceedings, frequently summarized orders regulating the fields. The Spelsbury orders for 1751 state: First, we do order and agree that the Over Furlong Shooting into Chipping Norton Road in a field called Sinquefoil field in Spelsbury be sowd with turnips this next Season, we agree to abate our sheep common for every Bushel of Barley Seed that the Ground shall take for Sowing thereof, any neighbour that shall agree to Sow Turnips in any part of the Same Field shall have the same abatement, that every person shall make his own mind.92 This order is significant in several respects. First, the principle of voluntarism was respected: each person could decide for himself whether to grow turnips. Second, the turnips were not introduced at first in the fields but into the sainfoin enclosure, the original Every Year's Land where everyone could choose his crops. Third, the abatement of common rights was normal: If people were not growing sainfoin on the every year's land they were not contributing aftermath to feed the common herd, and so they had to reduce the number of animals they could put in the herd. (The measurement of common rights in terms of the barley seed that could be sown on the land in question was the standard formula in Spelsbury.) By the late 1750s, these procedures were modified. While the cultivation of turnips was still confined to the ‘sainfoin enclosure,’ cultivation became obligatory. Unanimity was not required, but the majority ruled. Thus, the 1758 field orders state that ‘We do order and agree to Sow White Turnips the next Season in such part of Spelsbury Field called Old Saint Foyne Field as the Landholders or Major part of them shall by next May Day Agree.’93 By 1762, a portentous change had occurred. The cultivation of turnips was shifted out of the sainfoin enclosure into the open fields themselves: We order & agree that the Barley quarter shall be sowed with Turnips and that each person shall abate three sheep for a quarter of Barley seed. Also it is ordered and agreed that if any person shall let his lambs go loose out of the fold and thereby trespass upon his Neighbours Turnips he shall forfeit ten shillings for each offense.94 The orders for 1763 were more explicit in indicating where the turnips were to be planted: Also We Order and Agree to Sow Briar Furlong Turnips and to hain [fence] them so soon as the Turnips are up And that winter beer furlong and Butt furlong shall be sowed with Turnips and hained as the others, to be sowed as low down as the owners of the Land shall think proper, to be Mounded by the Outside Proprietors and for each breach of this Order the person offending shall pay to the Lord the Sum of five shillings.95

92

DIL II/w/108.

93

DIL II/w/108.

94

DIL II/w/134.

95

Ms. summary of Spelsbury court rolls.

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1762 was also the first year in which clover was mentioned in the court records. Their cultivation began in the fields: Also We agree to plant almshouse Furlong and Winter Bere with Clover and that the same shall be hained from Christmas Day to tenth of April under the penalty of ten shillings for each person who shall turn in any Cattle between Christmas and the said Tenth of April.96 Subsequent courts record a slow shifting of turnip and clover cultivation around the fields. In 1765, for instance, winter beer furlong was planted with turnips, and briar furlong with grass seed.97 This was a reversal of the practice in earlier years. Gradually, the cultivation was spread to other furlongs. By the 1780s, the cultivation of clover and turnips had been standardized: At this court it is agreed to sow Clover on Costar Hill and Dean Field side and that the same shall be hained at Michaelmas and broke the twelfth of July with Sheep and the Sheep to be stocked as usual And to sow Turnips from Jack's Brake to Slate Pits and to hain the same as soon as they are up & that they shall be mounded by the Occupiers. And that the Clover shall lie two years at Coom Road to be hained the first of January and broke the twenty sixth of April.98 While land was planted with turnips for only one year before it was shifted to another crop, the land was planted with clover for two years before being rotated. It might also be noted that the language had shifted subtly from that of the 1760s. Twenty years before, it was the owners (i.e. copyholders) who were required to mound the perimeter of the turnip field, but by the 1780s, it was the occupiers. This change in language reflects the replacement of copyholders with tenant farmers, a change to be analyzed shortly. Separate field orders were recorded for Spelsbury and for Taston, but agricultural practices developed in similar ways in both hamlets. In 1785, the court minutes record: Also it is ordered and agreed to sow Clover on West Field from caught-house to Banbury Gap & to sow Clover upon small Narnills for a Sheep Common to lye with Sharigo Hills to be paid by the yard Land. To sow Turnips upon Enwellin Quarter up to Green Ball to be hained as soon as they are up. The Clover to be hained at Michaelmas and broke the Twelfth of July. The Sheep commons to go as usual. All the moundng to be done by the yard Land. The drift Road for the Sheep to go by Shilcott Wood. Sharigo Hill & small Narnills to be hained the first of November and broke at old May Day. Also that no person shall turn their plows on the Sain Foin that shall be sown this year, next Spring under the penalty of Ten Shillings to the Lords for each year.99

96

DIL II/w/134.

97

DIL II/w/18.

98

Ms. summary of Spelsbury court rolls.

99

Ms. summary of Spelsbury court rolls.

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The reference in the last sentence to sowing sainfoin is significant in two respects. Organizationally, it represents a transfer of jurisdiction over the sainfoin to the manorial court. The first sainfoin enclosures were created with formal contracts independently of the court. By the middle of the eighteenth century, sainfoin cultivation was sufficiently routine that the enclosures were managed by the manorial courts along with the ordinary business of the fields. Agriculturally, the reference to sowing sainfoin is important since it suggests that the farmers of Taston were practicing a form of convertible husbandry in which land was alternated between sainfoin meadows and arable planted with corn, clover, and turnips. For instance, the court rolls for 1766 recorded an extension of the sainfoin field. Ordered … that the Field of Taston from the old St. Fine wall down to Guys Close and as far as the Landholders can agree shall be planted with St. Fine in the Spring of 1767 and mounded by the Michmas following by the Yard Land to continue for Twelve Years to be hained at Christmas and broke at Michmas but no sheep to go thereon at any time. And all Folds to be off on the one Cropp Land by Lady day and to have the Folds to be staked from Ladyday till Harvest is in under the penalty of Ten Shillings to the Lord for each offence.100 The minutes for 1788 prescribe the reverse sequence: ‘Also it is agreed and ordered that Turnips shall be sowed on part of the Old Saint Foin down Deadman Hill as far as each tenant thinks proper and that the same shall be hained as soon as they are up.’101 Converting field land to sainfoin enclosures for a dozen years, and then converting the land back to cultivation of turnips, clover, and corn amounts to convertible husbandry—hardly the practice that Lord Ernle imagined open field farmers to have been capable of. We have seen how open field farmers took their first steps in adopting sainfoin, clover, and turnips. There was an evolution in practice across the century as farmers learned the best way to grow and integrate these crops. This is not surprising. In 1700, no one knew the optimal system; it was developed by trial and error everywhere. Spelsbury was no exception. What is perhaps more surprising is that the open fields were a suitable environment for this evolution, for two reasons. First, furlongs rather than fields were the fundamental operating units, so land could be shifted to new or experimental uses in small quantities. Second, not everyone in each furlong had to do the same thing. The first Spelsbury sainfoin enclosure was set up so that each person could grow what he wanted. The aim of the enclosure was certainly to grow sainfoin, and ultimately it did, but uniformity waited until the gains became obvious to everyone. (Failure to follow this procedure resulted in disputes like those in Taston. While manorial

100

Ms. summary of Spelsbury court rolls.

101

Ms. summary of Spelsbury court rolls.

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authority could force a minority to comply with a majority, voluntary procedures could achieve similar ends without coercion.) The voluntary principle was also applied again when turnip cultivation was tried. ‘Every person shall make his own mind.’ By letting those eager to try the new crops take the first steps, small scale experiments were undertaken to establish whether and how the new crop should be cultivated. Other farmers soon followed. Eventually, majority rule replaced individual decision making. Even then, however, the open fields catered to many tastes. By the end of the eighteenth century, the majority had not forced all the land to a four course Norfolk rotation. Instead, a complicated system evolved incorporating the new crops but also old practices like the use of the fallow. The late eighteenthcentury survey data discussed earlier in this paper shows that to have been the typical pattern in the open fields. The flexibility of the open fields, which had been a strength at the outset when it allowed enterprising individuals to try out new crops, became a weakness later since it continued to make way for the least enterprising.

2.7 Enclosure Reconsidered If open fields were so good, why were they enclosed? There are three explanations in the literature. First, enclosure accelerated technical progress. We have seen that there is some truth to this and, indeed, have just offered an explanation for why the open fields lagged behind enclosures in the use of the newest crops at the end of the eighteenth century. But evidence discussed earlier shows that the gains from these changes were small, and the increases in land value were frequently not large enough to justify the expense of enclosing. Second, enclosure redistributed income. Enclosure extinguished many insecurely established customary rights. It also gave the landlords an opportunity to raise rents. Redistribution may have been a more important factor in enclosure than one might expect due to the primitive nature of cost accounting and agricultural knowledge. While today's economists can computerize eighteenth-century data and compute by how much enclosure on a particular type of land should have raised its value, such calculations were impossible for people in the eighteenth century. Even in the nineteenth century, land surveyors paid lip service to Ricardo, but valued land by rules of thumb because they could not put Ricardo's concept of surplus into practice (Allen 1992: 171–87). All landlords knew was that they could usually raise rents after enclosure, and that is what improvement meant to them. Whether the rent gains came from higher efficiency or income redistribution was unclear. The concept of social capital (Coleman 1990; Putnam 1993, 1996) provides another approach to the incentive to enclose and relates enclosure to changes in the social relations of production in agriculture. Much of

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England's open field farm land was in the hands of small-scale farmers in the eighteenth century, who were quasi proprietors and held their land on copyholds or beneficial leases. In Spelsbury, as we noted earlier, most of the land at the beginning of the eighteenth century was divided into farms of one half or one yardland (19 or 38 acres). Three holdings were leases for lives, but the great majority were copyholds. The latter were held ‘according to custome of one life & a widdow's estate in possession & one in reversion’.102 At any time, there were at most three people—specifically named—with a right to the copyhold—a man, his wife, and a third person, usually a child. If nothing was done, the copyhold would revert to the lord of the manor at the death of the three named people. Before the eighteenth century, it was usual for parents to extend the agreement to include a child by ‘buying a reversion.’ According to a document dated 1705, a reversion cost five times the annual commercial value of the estate. A yardland was valued at five pounds per year in 1705, so the value of the reversion was 25 pounds.103 The lord of manor was under no legal obligation to sell reversions, and he stopped doing so in the first quarter of the eighteenth century. The change in policy took many decades to achieve its full effect because some copyholds had been recently renewed and the heirs lived long lives, while others were coming up for renewal and were held by old people. By the end of the eighteenth century, only three copyholds were left. The history of Spelsbury was typical of many villages in England. The concentration of landownership in great estates obviated the advantages of open fields. They had been an effective means of diversification for small farmers, but scattering land over the village was no attraction to the lord who now owned the whole village. The creation of great estates presented new management problems, and open fields frustrated their solution. Before the eighteenth century, manorial lords were not directly concerned with motivating farmers. Land was let as copyholds, and the lords realized income from them when entry fines or other levies were collected, but the management of the land, including any subtenants, was the responsibility of the copyholders. Even demesnes had usually been let as beneficial leases, so, again, the lords collected a fine occasionally but otherwise land management was limited. In both cases, the tenants farmed with fixed and low rents for long periods of time, and consequently received the full benefit of any improvements as higher income. Tenancy terms encouraged innovation but made it difficult for landlords to capture the gains. When copyholds and beneficial leases were run out, landlords had to deal directly with farmers. They had the chance to appropriate increases in land values due to rising productivity or prices, but they had to do this without destroying the farmer's incentive to improve: If rents were raised

102

DIL II/b/32.

103

DIL II/a/4e.

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whenever productivity increased—i.e. if English landlords followed the (perhaps mythical) Irish model of ‘predatory landlordism’ (Mokyr 1983: 81–111)—then the incentive to improve would have been destroyed. On the other hand, leaving the tenants with fixed rents indefinitely would provide a great incentive to raise productivity but the gains would stay with the tenants. Share cropping was one possible solution, but it was not utilized in eighteenth-century England. Tithes (a 10 percent tax on grain output) were regularly denounced as a tax on improvement, and the much larger percentage of output that would have been paid as rent would have been a considerably greater disincentive to increase efficiency. Furthermore, improvement often meant the conversion of arable to grass, and that, in turn, meant that output fell with labor costs dropping more. If the landlord's income was a fixed share of output, then it would have fallen even though the commercial value of the land was rising. Share cropping did not commend itself as a simple way of managing landed property. Long-term, fixed rent contracts were another solution, and, indeed, twenty-one year leases were frequently advocated. They were not frequently used, however, because the unstable price level between 1750 and 1850 meant that a reasonable rent could not be predicted in advance. Instead, the English gentry and aristocracy developed a management system consisting of several elements. Legally, tenancies were short term; indeed, most farmers were merely tenants at will who held their land for a year beginning on Michaelmas (the 29th of September), and rents were officially determined at the outset of that year. In practice, however, these agreements were renewed repeatedly, and farmers occupied the same farms for many years. Rents were raised infrequently, so farmers had a financial incentive to raise productivity since they realized the gains. Rents might not be adjusted for decades, although the period could be shortened if inflation was rapid. Rent adjustment was done in a bureaucratic manner, i.e. by hiring a surveyor to revalue the estate, so that it appeared objective and fair. Fluctuations in farm prices and yields were accommodated by allowing tenants to postpone rent payments (run up arrears) when farm incomes were low. The object of this system was to create incentives for farmers to raise productivity while guaranteeing that eventually productivity gains were passed to the landlords in the form of higher rents. While the rental agreements were officially annual, the tenants had to regard them as long term if they were to have an incentive to raise productivity. Tenant confidence and loyalty were fostered by the infrequent and bureaucratic method of raising rents, by renewing tenancies every year, and by allowing the tenants to fall behind in rent payments. Landlords gained when tenants felt a long run attachment to the estate and believed they would be fairly treated by it. These tenancy terms and associated norms of behavior and

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expectations of proper treatment were forms of social capital. When this capital was in place, productivity rose. The open fields had also had social capital, but it was directed antithetically. The open field village fostered solidarity amongst the tenants. The communal management of open field land required a forum—usually the manorial court—in which the tenants could negotiate their economic affairs together. Courts were also responsible for other aspects of local government (McIntosh 1999). These continued associations and the economic benefits that derived from them encouraged solidarity among the villagers. Moreover, this solidarity was often opposed to the lord. Many times in the preceeding millennium peasant communities had had to act in concert to protect their interests vis-à-vis the lord. This too reinforced solidarity, which may have facilitated the management of the fields. Open field farming strengthened bonds between peasants and made them wary of lords. While the social capital of the open field village raised productivity in that context, it was counterproductive when the yeomen were eliminated and replaced by tenants at will. The self-governing institutions of the open fields were now manned by tenants: participation in these institutions encouraged solidarity among the tenant farmers vis-à-vis the lords. In particular, each tenant could plead that he could not improve his cropping because the village majority would not accommodate it. More generally, tenant self-government strengthened bonds among tenants whereas the new system of short-term leases put a premium on the tenants identifying with the great estate. The new system of short-term leasing worked best if the social capital of the open field village were replaced by a new kind of social capital. Once landlords had run out copyholds and beneficial leases, the days of the open field village were numbered.

2.8 Conclusion Nineteenth-century interpretations opposed ‘community’ to ‘market.’ Economic relations were noncommercial and nonprogressive in the ‘community,’ and the reverse with the ‘market.’ The research of agricultural historians in the last fifty years has demolished this paradigm. The open field community has been shown to have been innovative, effective, and progressive. An important reason that the open fields were progressive was because communal field management was far more flexible and open to experimentation than was imagined by proponents of the community–market dichotomy. The biggest puzzle about open fields is not why they persisted but why they disappeared. A variety of explanations were reviewed, and we have also suggested that another factor that was at play. In the eighteenth

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century in many villages, the yeomen lost their land as their lords refused to renew their copyholds and beneficial leases. The land was then let on short-term agreements to capitalist farmers. The new system of leasing required a new psychological commitment. The open fields had their characteristic form of social capital in which an assembly of villagers governed the fields and opposed lordly claims. These associations fostered solidarity among the yeomen in opposition to the lord. In contrast, the great estates that emerged in the eighteenth century required that each farmer identify his fortunes with the estate rather than with his fellow villagers. Open field social capital was obsolete and had to be replaced with social capital appropriate to the great estate. Enclosure was the result. It was not, therefore, that enclosure overthrew community and created market capitalism. Rather, the reverse was the case: market capitalism undermined the open field community from within and precipitated enclosure.

References Allen, R. C. (1982) ‘The Efficiency and Distributional Consequences of Eighteenth Century Enclosures,’ Economic Journal, 92: 937–53. ––—(1988) ‘Inferring Yields from Probate Inventories,’ Journal of Economic History, 38: 117–25. —— (1992) Enclosure and the Yeoman, Oxford, Clarendon Press. —— (1994) ‘Agriculture during the Industrial Revolution,’ in Floud, R. and McCloskey, D. (eds.) The Economic History of Britain since 1700, Cambridge, Cambridge University Press, pp. 96–122. —— (1998a) ‘The Great Divergence: Wages and Prices in Europe from the Middle Ages to the First World War,’ U.B. C. Department of Economics Discussion Paper No. 98–12. —— (1998b) ‘Agricultural Output and Productivity in Europe, 1300–1800,’ U.B.C. Department of Economics Discussion Paper No. 98–14. —— (1999) ‘Tracking the Agricultural Revolution,’ Economic History Review, 2nd series. Bairoch, P., Batou, J., Chêvre, P. (1988) La population des villes europeennes: banque de donnees et analyse sommaire des resultats, 800–1850, Geneva, Librairie Droz. Britnell, Richard H. and Campbell, Bruce M. S. (eds.) (1994) A Commercializing Economy: England 1086 to c. 1300, Manchester, Manchester University Press. Clark, G. (1998a) ‘Commons Sense: Common Property Rights, Efficiency, and Institutional Change,’ Journal of Economic History, 58: 73–102. —— (1998b) ‘Renting the Revolution,’ Journal of Economic History, 58: 206–10. —— Huberman, M. and Lindert, P. H. (1995) ‘A British Food Puzzle, 1770–1850,’ Economic History Review, 2nd series, 48: 215–37. Coleman, James S. (1990) Foundations of Social Theory, Cambridge, MA, Harvard University Press.

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Crafts, N. F. R. (1976) ‘English Economic Growth in the Eighteenth Century: A Re-Examination of Deane and Cole's Estimates,’ Economic History Review, 2nd series, pp. 226–35. de Vries, Jan, and van der Woude, Ad (1977) The First Modern Economy: Success, Failure, and Perseverance of the Dutch Economy, 1500–1815, Cambridge, Cambridge University Press. Ernle, Lord (1912) English Farming: Past and Present, London, Heinemann Educational Books Ltd and Frank Cass and Company Ltd, 1961. Geertz, Clifford (1963) Agricultural Involution: The Processes of Ecological Change in Indonesia, Berkeley, University of California Press. Glennie, P. (1988) ‘Continuity and Change in Hertfordshire Agriculture, 1550– 1700: II—Trends in Crop Yields and Their Determinants,’ Agricultural History Review, 36: 145–61. —— (1991) ‘Measuring Crop Yields in Early Modern England,’ in Campbell, B. M. S. and Overton, M. (eds.), Land, Labour and Livestock, Manchester, Manchester University Press, pp. 255–83. Gray, H. L. (1915) English Field Systems, Cambridge, MA, Harvard University Press. Hardin, Garrett (1977) The Tragedy of the Commons, San Francisco, W. H. Freeman. Havinden, M. (1961) ‘Agricultural Progress in Open Field Oxfordshire,’ Agricultural History Review, 9. Hayami, Yujiro (1997) Development Economics: From the Poverty to the Wealth of Nations, Oxford, Clarendon Press. Hoffman, P. (1991) ‘Land Rents and Agricultural Productivity: The Paris Basin, 1450–1789,’ Journal of Economic History, 51: 771–805. Hoskins, W. G. (1950) ‘The Leicestershire Farmer in the Sixteenth Century,’ in Hoskins, W. G. (ed.), Essays in Leicestershire History, Liverpool, pp. 123–83. —— (1951) ‘The Leicestershire Farmer in the Seventeenth Century,’ in Hoskins, W. G. (ed.), Provincial England, London, Macmillan, pp. 149–69. Jackson, R. V. (1985) ‘Growth and Deceleration in English Agriculture, 1660–1790,’ Economic History Review, 2nd series, 38: 333–51. Langdon, John (1986) Horses, Oxen, and Technological Innovation: The Use of Draught Animals in English Farming from 1066 to 1500, Cambridge, Cambridge University Press. McCloskey, D. (1972) ‘The Enclosure of Open Fields,’ Journal of Economic History, 32: 15–35. MacFarlane, Alan (1978) The Origins of English Individualism, Oxford, Basil Blackwell. McIntosh, Marjorie K. (1999) ‘The Diversity of Social Capital in English Communities, 1300–1640 (with a Glance at Modern Nigeria), Journal of Interdisciplinary History, 29: 459–90. Marx, K. (1867) Capital. Mokyr, Joel (1983) Why Ireland Starved: A Quantitative and Analytical History of the Irish Economy, 1800–1850, London, Allen & Unwin. Overton, M. (1979) ‘Estimating Crop Yields from Probate Inventories: An Example from East Anglia, 1585–1735,’ Journal of Economic History, 39: 363–78.

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Overton, M. (1991) ‘The Determinants of Crop Yields in Early Modern England,’ in Campbell, B. M. S. and Overton, M. (eds.), Land, Labour and Livestock, Manchester, Manchester University Press, pp. 284–322. —— (1996a) ‘Re–Establishing the Agricultural Revolution,’ Agricultural History Review, 44(I): 1–20. —— (1996b) Agricultural Revolution in England, Cambridge, Cambridge University Press. Polanyi, Karl (1944) The Great Transformation, Boston, Beacon Press. Putnam, Robert D. (1993) Making Democracy Work: Civic Traditions in Modern Italy, Princeton, Princeton University Press. —— (1996) ‘Tuning In, Turning Out: The Strange Disappearance of Social Capital in America, PS Political Science and Politics, 28: 644–83. Scott, James C. (1976) The Moral Economy of the Peasant: Rebellion and Subsistence in Southeast Asia, New Haven, Yale University Press. Thirsk, Joan (1973) ‘Field Systems of the East Midlands,’ in Baker, A. R. H. and Rutlin, R. A. (eds.), Studies of Field Systems in the British Isles, Cambridge, Cambridge University Press, pp. 232–80. Tonnies, Ferdinand (1887) Community & Society (Gemeinschaft und Gesellschaft), translated and edited by C. P. Loomis, East Lansing, Michigan State University Press, 1957. Turner, M. E. (1982) ‘Agricultural Productivity in England in the Eighteenth Century: Evidence from Crop Yields,’ Economic History Review, 2nd series, 35: 489–510. —— (1986) ‘English Open Fields and Enclosures: Retardation or Productivity Improvements,’ Journal of Economic History, 41: 669–92. —— Beckett, J. V. and Afton, B. (1997) Agricultural Rent in England, 1690–1914, Cambridge, Cambridge University Press. —— —— and—— (1998) ‘Renting the Revolution: A Reply to Clark,’ Journal of Economic History, 58: 211–19. van Zanden, J. L. (1993) The Rise and Decline of Holland's Economy: Merchant Capitalism and the Labour Market, Manchester, Manchester University Press. Wrigley, E. A. (1967) ‘A Simple Model of London's Importance in Changing English Society and Economy, 1650–1750’, Past and Present, xxxvii: 44–70. —— (1985) ‘Urban Growth and Agricultural Change in the Early Modern Period,’ Journal of Interdisciplinary History, 15: 683–728. Yelling, J. A. (1977) Common Field and Enclosure in England, 1450–1850, Hamden, CT, Archon Books.

3 The Two Paths of Agrarian System Evolution in the Philippine Rice Bowl Yujiro Hayami and Masao Kikuchi The evolution of economic systems is inherently dependent on historical paths. According to the perspective of evolutionary game theory, an economic system evolves as a process of adaptation to environmental changes through trials and errors by human beings, characterized by bounded ratio-nationality and myopia (Mailath 1992; Kandori et al. 1993; Matsui 1996). Once a historical accident has twisted a system's evolution path, it seldom returns to the old path even if the shock of the accident may subside. Strong inertia usually operates for the preservation of its unique evolutionary path because of scale economies in the use of any specific institution as well as complementarity among various institutions in the system (Aoki 1994, 1996). The evolution of economic systems, therefore, seldom converges into a single path, even if the economic conditions surrounding them are similar. Such a process of the system's evolution is most clearly illustrated in the evolution of agrarian systems in a major riceproducing area in the Philippines. An ‘agrarian system’ is here defined as a combination of land tenure and labor employment arrangements which coordinate and constrain rural people in their use of land and labor, the two primary factors of agricultural production. In the central plain of Luzon Island, two distinct agrarian systems emerged and evolved despite basic similarities in economic conditions, such as ecological conditions for rice production, access to market, colonial history and post-independent government policies such as land reform. The difference emerged mainly from the different community norms that were created through different settlement histories since the Spanish colonial period. Critical influences of the path-dependent community norms on economic system evolution toward multiple equilibria will be demonstrated in this paper on the basis of field research over the 1970s and 1980s.

3.1 Traditional Agrarian Systems Our investigation covers seven provinces—Laguna and Rizal in the Southern Tagalog Region, and Bulacan, Nueva Ecija, Pampanga and Tarlac in the Central Luzon Region.104 These provinces constitute the

104

This section and the next draw heavily on Kikuchi et al. (1979), Kikuchi and Hayami (1980) and Hayami and Kikuchi (1981, ch. 4).

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largest rice-producing area in the Philippines, commonly called the rice bowl’ of this nation (Fig. 3.1). Despite the geographical contiguity and ecological homogeneity as well as similarities in the access to metropolitan Manila market, the region is not homogeneous in terms of agrarian Fig. 3.1 Map Of the Central Plain Of Luzon, Indicating Provinces and Municipalities Covered By the Field Surveys

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structure. The region is sharply divided into two subregions characterized by different agrarian systems—the ‘Coastal Region’ and ‘Inner Central Luzon.’ The Coastal Region includes Laguna, Rizal, the southern parts of Bulacan and Pampanga, and the northern part of Pangasinan. Inner Central Luzon encompasses the remaining landlocked area.105 Most areas in the Coastal Region are easily accessible from Manila by sea or lake and have a long history of settlement since before the Spanish conquest in the sixteenth century. In contrast, the landlocked Inner Central area had largely been left uncultivated until the late nineteenth century, since when it has been developed as a rice-producing area.

Two Modes of Landlordism Corresponding to the difference in the settlement history, there emerged a major difference in land-ownership patterns between the Coastal Region and Inner Central Luzon. Both regions are characterized by pervasive landlordism. However, in the Coastal Region, the large estates of native nobility (datu) recognized by Spanish laws or established as royal grants to Spanish conquerors were subdivided gradually over a long period of time into smallholdings through inheritance and sales (Phelan 1959). At the same time, piecemeal accumulation of lands by Chinese or Chinese mestizo traders progressed through their moneylending operations by taking native peasants' lands as collateral (McLennan 1969). The landholdings were thus relatively small and scattered, typically less than ten hectares. A common landtenure arrangement was share cropping called kasamahan (a Tagalog word meaning ‘partnership’) by which both harvest and production costs were shared equally between landlord and tenant. In general, the relation between small resident landlords and their tenants in the Coastal Region was a paternalistic one. A landlord as a patron helps the tenant by advancing credit and by utilizing his connections and social influence, in return for the loyalty of the tenant (Anderson 1964; Larkin 1972). In contrast, Inner Central Luzon was characterized by the development of huge estates (haciendas) of several hundreds to thousands of hectares. The haciendas originated as royal grants and purchases of undeveloped royal domain. This process of large-scale land acquisition by Spaniards began in the eighteenth century after the removal of restrictions on Spanish residence in the provinces. Although some royal grants and large purchases

105

The two regions have similar climatic patterns, both subject to the influence of the southwest monsoon, and have the same farming systems except for harvesting and threshing. On the average, irrigation systems are better developed in the Coastal Region than in Inner Central Luzon. But there are a number of districts in Inner Central Luzon where irrigation systems are equally well established.

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did occur in the Coastal Region, too, they took place more recently in a much larger scale in Inner Central Luzon, which then represented the frontier of settlement. Until the late nineteenth century, most areas in Inner Central Luzon were covered by jungle, and the large haciendas engaged primarily in cattle ranching. The raising of cattle came to an end during the 1880s when a series of rinderpest and hoof-and-mouth disease decimated cattle herds (McLennan 1969). Subsequently, the haciendas located in the lowland areas developed a system of rice monoculture carried out by tenants who had migrated from Ilocos and Southern Tagalog, whereas the haciendas located in upland areas were converted into sugar plantations. In these large rice haciendas with several hundreds or thousands of tenants, the landlord–tenant relationship was inevitably less paternalistic than in the Coastal Region. Typically, the owner lived in Manila and the hacienda was managed by an encargado (farm manager) and a number of katiwalas (overseers) (Umehara 1974). The tenure contract was geared more strictly to economic considerations, and it was enforced more strongly by legal means than by a sense of obligation based on patron–client relationships. As a result, the haciendas became a hotbed for tenants' uprisings represented by the Hukbalahap movement (Dalisay 1937; Kerkvliet 1971; Pelzer 1945; Rivera and McMillan 1954).

Two Rice Harvesting Arrangements Corresponding to the different modes of landlordism, different labor employment relations emerged in the form of two distinct rice harvesting arrangements. Traditionally used in the Coastal Region was a labor contract called ‘hunusan’, by which, when a farmer specifies a day of harvesting, anyone can participate in harvesting and threshing and the harvesters receive a certain share of the harvest.106 The share ranges from one-fourth to one-ninth of the harvest, but traditionally one-sixth is the most common. The typical land-tenure arrangement before land reform was such that the harvest was divided into equal halves between landlord and tenant after the share of the harvesters was deducted. In this system the crop is cut manually with sickles and the threshing is done by hand beating on a wood-bamboo plate by the same worker. In contrast, the tilyadora system in Inner Central Luzon is characterized by the use of big threshing machines called tilyadora. The tilyadora threshers are of McCormic–Deering design. The first few machines imported from the United States during the 1910s were run by a steam engine. They

106

The hunusan system has an old origin. Before sickles were introduced, it was a common practice in the Philippines as well as other countries in Asia to cut the ears using hand knives with mass participation of village people. The harvested ears were bundled and the harvesters received one out of six bundles. For the traditional harvesting systems in the Philippines, see Africa (1920).

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were replaced during the 1920s and 1930s by machines run by belt pulley from a tractor of 40–50 horsepower. The threshing by tilyadora is generally done in one central location on each tenant's farm where unthreshed crops are hauled and stored in large stacks. Crop cutting and threshing are two separate operations. While the threshing process is mechanized, the crop cutting is still done by hand with sickles. The labor contract under the tilyadora system is entirely different from the hunusan system. Under the tilyadora system it is difficult to determine harvest shares at the stage of crop cutting because of the difficulty of ascertaining the quantity of grain per sheaf.107 Therefore, harvesters are employed at a fixed daily wage rate (upahan) or at a fixed payment per unit of area harvested (pakyaw). The cost of harvesting before land reform was shouldered by the tenant.108 The fee of threshing by tilyadora (at a rate of 4–6 percent of the harvest) was deducted from the harvest before it was shared between landlord and tenant.109 The introduction of tilyadora in Inner Central Luzon can be partly explained by a relative labor shortage in the areas of new settlement. However, a more important reason appears to be that the tilyadora system was used by the hacienda owner to collect share rent. Under the share cropping contract the first requirement for collecting the right amount of rent was to ascertain the quantity of the harvest. In the Coastal Region, with its paternalistic relationship between landlords and tenants, the landlords could largely trust the honesty of their tenants in their report on the crop harvested. They could also check it easily as they lived together in the same locality. Thus, the transaction costs involved in the collection of share rent were relatively modest when the traditional hunusan system was used for harvesting. Share cropping (kasamahan) was the common form of tenancy in Inner Central Luzon also before the recent land reform after the Second World War. However, in the earlier stage of the development of the rice haciendas, the common tenure arrangement had been the leasehold at a fixed rent (canon). At the start of a settlement, the hacienderos gave a parcel to each settler without rent payment for the period of the land opening, and

107

It is easier to standardize the grain quantity per bundle when crops are cut at the neck of the ears by hand knives than when they are cut at the bottom of plants by sickles. Crop sharing by bundle was especially common in Indonesia, where knife cutting was still commonly used in the 1970s. However, even in Indonesia, crop sharing for harvesters has been shifting from bundle terms to threshed-grain terms as sickle cutting has been introduced. See Collier et al. (1973).

108

In the share-tenancy contract under the hunusan system the cost of harvesting as well as other costs such as seeds, fertilizers, and transplanting were commonly shared half and half by tenants and landlords. Under the tilyadora system, the harvesting cost was shouldered by tenants but the transplanting cost was shouldered by landlords, while the other costs were shared half and half.

109

In reality, wide variations existed for each category of harvesting system. There were cases where the fixed-wage contract was used together with animal treading instead of tilyadora.

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requested from him only a nominal rent even after the gratis period. However, as the population and labor force grew, the canon was raised gradually, and finally shifted to share cropping.110 This shift in tenure status took place largely during the 1920s and 1930s. The national census of 1903 indicates that there were 2,215 leasehold cash tenants and only 290 share tenants in Nueva Ecija. According to the 1918 census there were 2,796 cash tenants and 1,798 share tenants. By 1939, the transition was complete with only 867 cash tenants and 50,831 share tenants. The 1920s and 1930s were also the years when the tilyadora became the common method of threshing. The data on the number of tilyadora threshers are not available. However, according to sales records of International Harvester, the number of threshers shipped to the Philippines from the USA increased from only three in 1926 to 37 in 1939.111 Such concurrent growths in the share-tenancy system and the use of tilyadora suggest the hypothesis that the major factor underlying the diffusion of the tilyadora system in Inner Central Luzon was the motivation of hacienderos to reduce the transaction costs required for the collection of share rent and that the tilyadora facilitated the conversion of the land-tenure system from leasehold to share tenancy.112Tilyadora was not adopted in the Coastal Region presumably because the possibility of reducing transaction costs expected from its introduction was much smaller with the paternalistic relationship between landlords and tenants.

3.2 Agrarian Change in Inner Central Luzon From Tilyadora to Hunusan The best data to test our hypothesis are the changes in the harvesting system in Inner Central Luzon following postwar land reform. We should expect that, if the introduction of tilyadora were mainly based on the motivation of hacienderos to reduce the transaction costs incurred in the collection of share rent, the tilyadora system should have been abandoned

110

The shift from leasehold to share tenancy was based on the preference of hacienderos to raise the average rate of land rent at the expense of shouldering a part of the risk involved in rice production. Although the shift from the canon to the kasama system was found widely in Nueva Ecija, where large haciendas were pervasive, it was also observed in other areas in Inner Central Luzon such as Northeastern Pampanga.

111

Personal communication from Mr. Greg Lennes, Corporate Archivist, International Harvester, Chicago, August 31, 1978. Data before 1926 and during 1927–38 are not available.

112

The results of our personal interviews with older people (including an ex-manager of a hacienda) who witnessed the process of tenure change are consistent with the hypothesis that the share cropping system could not have been adopted in the haciendas without the use of the tilyadora.

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according to the logic of institutional complementarity when land reform programs abolished share tenancy. The post-war land reform in the Philippines began during the Magsaysay regime, but its basic structure was stipulated in the Agrarian Reform Code of 1963, specifying two major reform operations: (a) the conversion of share tenancy to fixed-rent leasehold tenancy, and (b) the subsequent transfer of ownership of tenanted land devoted to rice and corn crops in excess of the landlord's retention limit (originally 75 hectares and later reduced step-wise to 7 hectares) to cultivating tenants. The land-reform programs were strongly reinforced by Presidential Decrees No. 2 and No. 27 in 1972 under the Martial Law proclaimed by President Marcos, with the result that the rice-hacienda system was broken, and share croppers were converted into leaseholders or amortizing owners, mostly during the 1970s.113 Upon the abolition of share tenancy, major changes in harvesting systems occurred. The results of our survey covering 43 municipalities in six provinces,114 as shown in Fig. 3.1, clearly show that the regional distribution of harvesting systems in 1968 followed the traditional pattern, i.e. tilyadora was commonly used in Inner Central Luzon whereas hunusan was practiced in the Coastal Region (Fig. 3.2). However, with land reform an entirely different pattern had emerged by 1978 (Fig. 3.3). The most dramatic change was a shift from the tilyadora system to the hunusan system in Inner Central Luzon. In 1968, 96 percent of farmers in Inner Central Luzon in our sample used the tilyadora system. However, the percentage declined sharply to 33 percent in 1978, even though the custom service of tilyadora thresher with operators continued to be available as before. The majority of the farmers shifted completely to hunusan with hand threshing for both wet and dry seasons or adopted hunusan partially for the wet season while using tilyadora for the dry season (‘mixture’ in Fig. 3.3). The shift from the tilyadora to the hunusan system was not uniform within Inner Central Luzon. The shift was complete in the Eastern part of the region (Northern Bulacan and South-to-Central Nueva Ecija) where hunusan was adopted by most farmers for both wet and dry seasons. In the Western part of Inner Central Luzon (southern Pangasinan, Tarlac and Northern Pampanga), the diffusion of hunusan was slower; it was introduced for the wet season only. In Fig. 3.4, the years of shift of sample farmers from the tilyadora to the hunusan system are compared with the years of shift in their tenure status from share croppers to leaseholders or amortizing owners. The fact that no observation lies below the 45-degree line is consistent with the hypothesis that the tilyadora system was introduced

113

For more details on land reform in the Philippines, see Hayami et al. (1990).

114

The two surveys were conducted in February and July 1978 covering 100 farms in 43 municipalities. The sample consisted of farms covered by the Central Luzon/Laguna Loop. Surveys conducted by the International Rice Research Institute for 1966, 1970, and 1974. Historical information was supplemented by those earlier surveys.

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Fig. 3.2 Regional Distribution Of Different Harvesting Systems Commonly Used By Municipalities In the Central Plain Of Luzon, 1968

Source: Kikuchi et al. (1979: 12); reproduced in Hayami and Kikuchi (1981: 86) in order to facilitate the management of the haciendas under the share cropping system and, therefore, that the change in the tenure status was a prerequisite to the shift in the harvesting system. In Fig. 3.4, almost all observations from Northern Bulacan and South-Central Nueva Ecija in our sample are located on the 45-degree line, implying that most farmers shifted from the tilyadora to the hunusan system in the year of their tenure change. Sample observations from the Northern Nueva Ecija and Tarlac are located above the 45-degree line, indicating that time lags were involved in the shift from the tilyadora to the hunusan system. A regression equation

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Fig. 3.3 Regional Distribution Of Different Harvesting Systems Commonly Used By Municipalities In the Central Plain Of Luzon, 1978

Source: Kikuchi et al. (1979: 12); reproduced in Hayami and Kikuchi (1981: 86) was estimated for all regions with the year of the adoption of the hunusan system (H) as a dependent variable and the year of tenure change (T) and regional dummies (D for Northern Nueva Ecija and D for Tarlac) as independent n t variables. The least-squares estimation for the sample of 40 farmers for which data are available resulted in

where the numbers inside the parentheses are the student t-values, and R2 is the coefficient of determination adjusted for the degree of freedom.

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Fig. 3.4 Relationship Between The Year the Harvesting Arrangements Changed and the Year In Which Land Tenure Status Changed Across Municipalities In Inner Central Luzon

Source: Kikuchi et al. (1979: 14); reproduced in Hayami and Kikuchi (1981: 88) The results of the regression analysis show that the intercept is not significantly different from zero and that the coefficient of T is not significantly different from one at conventional levels of probability. They support the hypothesis that the relation between H and T is the 45-degree line. In other words, the estimated relation between H and T implies that the shift from the tilyadora to the hunusan system occurred as soon as the tenure status changed, except for regional time lags. The coefficients of D and D indicate that the shift in the harvesting system lagged behind the tenure n t change, on the average, 1.6 years for farmers in northern Nueva Ecija and 4.6 years in Tarlac. Such time lags seem to reflect the geographical route and direction of the diffusion of hunusan. According to the information obtained from the interviews in our survey, the diffusion of hunusan in Inner Central Luzon was channeled primarily through seasonal migrant workers from Laguna and Southern Bulacan. Most farmers that we interviewed replied that the workers from the south asked the farmers to adopt the hunusan contract.

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The diffusion of hunusan first began in the southeastern part of Inner Central Luzon and then moved to the north and to the west. The diffusion from the coastal area of Pangasinan to the south was not very significant, perhaps because of the lack of large scale migration of harvesting workers. The speed with which farmers in Bulacan and Nueva Ecija shifted from the tilyadora to the hunusan system after the land-tenure change reflects the inefficiency of tilyadora as a harvesting technology for farmers despite its merit in the collection of share rents by hacienda management. It must also be recognized that, although the land-tenure reform was the basic condition for the shift from the tilyadora to the hunusan system, technological developments in rice production had made the use of tilyadora more inefficient. First, during the 1960s the area under irrigation expanded greatly, especially in Nueva Ecija, with the construction of the Upper Pampanga River Irrigation System. Second, in the late 1960s there was the beginning of a dramatic diffusion of modern rice varieties with short-maturing and nonphotosensitive characteristics. Those developments made the double-cropping of rice a common practice. In the traditional single-cropping regime with the photosensitive varieties, the rice crop matures after November when the length of the day becomes shorter and the rainy season is over. Because the weather is dry, harvested crops can be stored in the fields without danger of spoilage until the tilyadoras arrive. However, in the double-cropping system, the modern varieties mature before the rainy season is finished. Since heavy tilyadoras cannot enter wet fields, the harvested crop must be hauled over a long distance to available dry spots. The risk of crop damage is large due to possible delay in the arrival of the tilyadora. Despite these developments, the tenant farmers were not able to abandon the tilyadora system as long as the regulations of the haciendas were still in force. It seems reasonable to hypothesize that the accumulated frustration of the farmers resulted in an overnight switch to hand threshing as soon as they were emancipated from the yoke of haciendas. As a test of this hypothesis, we estimated a regression equation, where the dependent variable is the time interval between the year of shift from tilyadora to hand threshing (H) and the year of change in the tenure status (T) and the independent variable is the time interval between T and the year of introduction of the system of double-cropping of rice (M). We expect that the longer the interval between T and M, the more clearly farmers recognized inefficiency in the use of tilyadora and, thereby, the shorter was the interval between H and T. The least-squares estimation based on the sample of 26 farmers for which the data were available resulted in

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where the numbers in parentheses are the student t-values and R2 is the coefficient of determination adjusted for the degree of freedom. The results are consistent with our hypothesis, showing the significant effect of the time interval between the tenure change and the introduction of double-cropping in reducing the time lag between the tenure shift and the shift in the harvesting arrangement. The shift in the harvesting contract as outlined above clearly illustrates the force of institutional complementarity that makes it difficult for one institution to change independently of other institutions in an economic system, even if its change becomes economically profitable.

Emergence of Permanent Labor Contracts It is easy to enumerate the shortcomings of the land reform program in the Philippines.115 The land retention limit for a landlord (seven hectares) was still too high and it was often evaded by registering excess holdings in the names of relatives and friends. The reform applied only to tenanted land planted in rice and corn. It did not apply to land under the direct administration of landlords. Nor did it apply to land used for cash crops such as sugar. Therefore, it was a widespread practice of landlords to expand the area under their direct management by evicting tenants under the guise of voluntary submission of land from tenants to landlords or to plant sugar in paddy land. Often, collusion between landed elites and local officials invalidated the effect of the land reform program. The operation of transferring land ownership has been particularly slow and its effect has been limited (Purtzel 1992; Riedinger 1995; Takigawa 1994). Despite such apparent failures, the fact cannot be denied that large haciendas were broken down and that most tenants established their status as leaseholders or amortizing owners during the 1970s, though sizable areas remained under landlords' direct administration (Hayami et al.1990, ch. 4; Umehara 1992, 1997). The beneficiaries of land reform were able to capture a large economic surplus because rice yields increased significantly due to irrigation development and application of new varieties and fertilizers, while both rent and amortization payments were fixed. Thus, the land reform was successful in transferring much of the economic return to land from absentee landlords to ex-share croppers. On the other hand, it produced inefficiency in land use as the reform regulations made the land market inactive. Moreover, it created serious income inequality within village communities because the reform produced a major gain

115

This section draws on Hayami et al. (1987), Hayami et al. (1990, ch. 4) and Hayami and Otsuka (1993b).

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to tenant farmers alone with no direct benefit accrued to agricultural laborers subsisting on casual farm work. As a typical ‘land-to-tillers’ program in Asia, Philippine land reform was geared at transferring rights on farm lands from non-cultivating landlords to cultivating tenants, while giving no right to agricultural laborers who are at the bottom of rural communities; wage laborers are not considered the ‘tillers of soil’ even if they work on a farm (Hayami et al.1990, ch. 1). Ironically, the successful income transfer from landlords to ex-share croppers induced the land reform beneficiaries to shift their status from actual tillers of land to non-tilling farmers or semi-landlords. The major income gains from rice yield increases under fixed rent/amortization fees raised the disutility of labor of land reform beneficiaries. On the other hand, landless agricultural laborers whose wage income did not rise, or even decline under strong population pressure, desperately sought employment opportunities. Correspondingly, new employment arrangements developed to facilitate the substitution of landless workers' labor for the family labor of land reform beneficiaries. Rice farming in the Philippines was known for its high dependence on hired labor (Barker and Cordova 1978). However, the hired labor contract was usually short-term, mostly for a day, or for a task which is concluded within a day. Permanent laborers employed for a year or a crop season—relatively common in India and Nepal—were seldom found in the rice sector of the Philippines as well as in other Southeast Asian countries, although they were common in plantations growing tropical cash crops—e.g. dumaan in sugar haciendas in the Island of Negros (Hayami et al.1990, chs. 5 and 6). Indeed, sociological and economic investigations into the agrarian structure of rice villages in the Philippines found an insignificant incidence of permanent labor contracts in the past (Hester and Mabbun 1924; Rivera and MacMillan 1954; Anderson 1964; Takahashi 1969; Umehara 1974; Hayami and Kikuchi 1981; Ledesma 1982). However, there is a sign that a new class of agricultural laborers employed under long-term contracts for a crop season or a year, who resemble the permanent farm laborers of India, has been emerging in Inner Central Luzon. This form of labor contract has been used as a substitute for the land tenancy contract under conditions of dramatic progress in new rice technology and land reform regulations. This development suggests the transformation of the agrarian system in the rice bowl of the Philippines into a structure characterized by bifurcation between non-working farmers and landless laborers, analogous to that of India (Bardhan and Rudra 1980). A survey conducted in August 1987 covering 36 municipalities in six provinces identified three types of permanent or attached labor contracts being practiced there. These were contracts for (a) farm servant, (b) semi-attached laborer, and (c) semi-tenant laborer. A laborer in the first type is

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called kasugpon in Ilocano and kasugpong in Tagalog, literally meaning ‘farm helper.’ He is usually a young single male who lives in a farmer-employer's house, is provided with food and clothing, and works exclusively at the employer's farm. A laborer in the second type is also called kasugpong, but is not necessarily single. He may live with his family in a shanty either inside or outside the employer's residential area, usually with no meals provided. He performs certain preassigned tasks, though he is allowed to work outside his master's farm as a casual worker so he can supplement his income. In both types of arrangements, laborers receive fixed wages in paddy ranging from 10 to 30 cavans per season (1 cavan=45 kg), depending on their experience and skill and the scope of the tasks assigned to them. The third type is commonly called porsientuhan, meaning ‘share.’ This arrangement is similar to that of the ‘semiattached laborer’ type but with a more comprehensive coverage of farm tasks to be assigned and with greater autonomy in labor allocation to the assigned parcel of land. Payments are usually in a share of output (usually 10 percent). This arrangement resembles share tenancy. Usually, the semi-tenant and the semi-attached laborer types coexist in the same municipalities. In fact, these two types are difficult to distinguish. For all three types, the contract period is one crop season, but the contract is usually renewed continuously. According to a survey conducted in 1987, employment contracts of the farm servant type were clustered in a rainfed area lying from the Nueva Ecija, Tarlac border to Pangasinan's southern part (Fig. 3.5). This practice is said to be an old one, dating back to before the Second World War. Its incidence did not increase recently but rather declined somewhat because young landless laborers tended to emigrate to irrigated areas. In contrast, the semi-tenant type was commonly observed in the irrigated areas of Nueva Ecija. It is a new system which became common from the late 1970s in replacing contracts of the farm servant type. In Bulacan and Pampanga, the semi-attached laborer and the semi-tenant types seems to have coexisted. These arrangements, especially of the semi-tenant type, became common in these areas. Historical studies suggest that the original kasugpong, or farm servant arrangement, was introduced by migrants from the Ilocos region in the north to Inner Central Luzon when it opened up for rice production in the late nineteenth century (McLennan 1969). In sparsely populated frontier lands in which peace and order were still not well established (e.g. where there was high incidence of carabao theft), it would have been convenient for settlers to have young male helpers living in their farms. At the same time, this arrangement should have provided the young men with a step up from agricultural wage laborer to tenant farmer, since it enabled them to acquire farming skills and to save money needed to purchase farm implements and/or carabao.

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Fig. 3.5 Regional Distribution Of Different Types Of Permanent Labor Arrangements Commonly Used By Municipalities In the Central Plain Of Luzon, 1987

Source: Hayami et al. (1987, 1988) However, as the land frontier reached its limit, it became increasingly difficult for the landless to ascend the agricultural ladder. Moreover, with the implementation of land reform, which protected tenants' cultivation rights and controlled land rent, landowners became more reluctant to rent

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out their lands. Thus, the avenue for laborers to become tenants was almost completely closed, unless they were fortunate enough to inherit land cultivation rights from their parents. Today, their options are either to continue living in the same village as casual farm laborers or to emigrate in search of better opportunities elsewhere. One such opportunity is to become semi-tenant laborers in irrigated areas. Meanwhile, the disutility of labor increased among land reform beneficiaries, creating strong demands to substitute hired labor for family labor in rice-farming operations. Traditionally, hired labor performed rice transplanting and harvesting. Rice transplanting was contracted out on a daily wage basis to a crew of transplanters organized by a labor drafter called kabesilya, while harvesting was done under various employment contracts as already explained. In contrast, land preparation had traditionally been the major task that farmers were supposed to perform themselves, because it required due care in plowing and harrowing without harming their draft animals. Recently, however, plowing has increasingly been contracted out to the custom services of large tractors. The remaining tasks performed by farm operators and family members are those that require care and judgment and, therefore, are more difficult to monitor, such as water control, and fertilizer/chemical application and weeding. Unlike transplanting and harvesting, labor demands for these tasks spread thinly over a crop season in an unpredictable manner. Altogether, transaction costs associated with the use of casual labor for these tasks tend to be higher than long-term contracts with a few specific laborers with whom an employer can create a relationship akin to the cooperative-game solution (Hayami and Otsuka 1993b). It is reasonable to expect that the demands for permanent or attached laborers would have become especially large in areas where major yield gains were achieved with the progress of land reform. If a well-to-do land reform beneficiary in a well-irrigated area would want to minimize his own farm work including labor supervision, it would be most efficient to have a tenancy contract with a worker, leaving all the tasks to him for a fixed or harvest-share rent. In fact, some new leaseholders opted to have subtenancy contracts with landless laborers. However, the subtenancy arrangements are highly hazardous because, if the lessee dares to appeal to the Agrarian Reform Office, the lessor's tenancy title would be forfeited and transferred to the lessee if the lessee proves himself to be the real ‘tiller of the land’. Therefore, subtenancy arrangements are bound to be limited to a narrow circle of relatives and close friends. The labor employment arrangement of the semi-tenant type can be considered an institutional innovation to fill the demand of well-to-do land reform beneficiaries in irrigated areas, who want to withdraw

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from farm work while keeping the titles on lands. It plays a role similar to tenancy contracts, while it can easily be disguised as a labor employment contract even though farming based on the employment of permanent laborers is proved to be less efficient than that based on the family labor of either owner or tenant operators (Hayami and Otsuka 1993a, ch. 9). A typical example was found in the case of a large farmer holding three hectares of leasehold land and two hectares of amortizing land in the municipality of Muñoz, Nueva Ecija. While he operated a small rice mill and a grocery (sari-sari) store, he left almost all the farm tasks, including land preparation (except transplanting, weeding, and harvesting), to a family of three working males (father and two sons). For their services, this family received 10 percent of the gross paddy output from this farm. They lived in a shanty in the farmer's residential area but neither food nor clothing was provided to them by the employer. They were entitled to receive daily wages when they engaged together with other casual laborers in transplanting, weeding, and harvesting activities. In addition, they supplemented their income by entering into a semi-tenant labor contract with another farmer. The use of permanent laborers as a substitute for tenancy contracts was not limited to land reform beneficiaries. It was also used by large landlords who still maintain large tracts of land under their direct administration, because nontenanted lands are exempt from land reform programs. Such a case was also found in Muñoz. The widow of a former owner of a rice hacienda of 200 hectares were managing a farm of 30 hectares, while the rest was taken away by reform programs. She was managing this farm with ten permanent laborers each assigned two to three hectares of land. These laborers were supervised by one overseer. While these workers received 10 percent of gross output, the overseer received a 5 percent share. In addition, the overseer was allowed to cultivate 1.5 hectares under a 50:50 sharetenancy contract. An interesting aspect of this case is that the landlord forced her workers to sign written contracts indicating that they are laborers but not tenants. In fact, the appeal of one worker to the Agrarian Reform Office to establish a tenancy title was turned down because of this document. The emerging agrarian structure in Inner Central Luzon resembles that of India where farmers of upper castes do not themselves work but only supervise the work of laborers of lower castes, with no agricultural ladder bridging them. The agrarian system of India was crafted on the social norm that prohibits the low-caste laborers' ascent to farm operators. It was further reinforced by the prohibition of share tenancy by land reform laws (Hyami and Otsuka 1993a: 85–9). Land reform in the Philippines has had the same effect. This ‘Indianization’ of the Philippine rice bowl will be

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reversed only with the creation of sufficient nonfarm employment opportunities for the rural poor.

3.3 Agrarian Change in the Coastal Region An apparent anomaly compared with the case of Inner Central Luzon was the sharply different mode of agrarian system evolution in the Coastal Region represented by the diffusion of the gama harvesting system (Fig. 3.3) with little incidence of permanent labor contracts (Fig. 3.5).116 In terms of these characteristics the province of Laguna, which may be called the heartland of the Coastal Region for its old settlement history and traditionally easy access to Manila by means of safe lake lanes, was the most distinct. Henceforth, our discussions will refer mainly to the case of Laguna. However, it must be noted that this province's experience was rather typical of agrarian system changes in old-settled peasant communities in the Philippines as well as other economies in Southeast Asia (Ledesna 1982; Hayami and Kikuchi 1981, chs. 7 and 8).

From Hunusan to Gama Concurrent with a shift from the tilyadora to the hunusan system in Inner Central Luzon, a shift occurred in the Coastal Region from the hunusan to the gama system (Fig. 3.3). Gama is a harvest-sharing arrangement similar to hunusan except that the employment for harvesting and threshing is limited to workers who weeded the fields without receiving wages. In other words, in the gama system the free service of weeding is a prerequisite for laborers to be employed in harvesting and receive a certain output share, usually one-sixth, of the harvest. In 1968, 83 percent of our sample farms in the Coastal Region used the hunusan system but the ratio declined to less than 50 percent in 1978 as it was replaced by gama. This shift was most complete in Laguna where the ratio of gama adopters increased from 27 to 100 percent during the same period. It should be recalled that hunusan was an old form of contract in this area. It was ingrained with the traditional norm of ‘work and income sharing’ within a village community. This norm dictates that well-to-do members in a village community should provide income-earning opportunities to poor neighbors by retreating themselves from work. It is a kind of

116

This section draws heavily on Hayami (1998) and Kikuchi and Hayami (1983).

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community principle of mutual help to guarantee minimum subsistence to the poor.117 A condition for the original establishment of the sharing principle could have been a low level of agricultural productivity with high risk. Until rather recently, Southeast Asia had been characterized by sparse population relative to available land for cultivation. Before the diffusion of modern high-yielding varieties since the late 1960s, rice farming was typically extensive with little fertilizer application and weeding practice, so that yield differences between diligent and idle farmers were not pronounced. Therefore, whether a farmer himself worked hard on his field or left the work to hired laborers did not greatly affect the level of yield. On the other hand, production risk was high, especially in the absence of irrigation and drainage systems. During drought, crops in elevated locations may be destroyed, whereas a bumper crop may be harvested from lowerlying marshy fields. The reverse is likely to be the case during a season of heavy rain and flooding. Similarly, an outbreak of pes