The Rise, Organization, and Institutional Framework of Factor Markets
The development of markets for labor, land, and capital is a crucial element in the long-term growth of economies. Most economic historians would agree that technological change and specialization are interconnected with the rise of wage labor, land leases, and large-scale loans and investments. The growth of factor markets is slow process, however, fraught with stagnation, crisis, and even the reversal of trends. Perhaps most striking are the sharp differences between regions. While, for example, the commercial heartland of Europe witnessed the rise of large and flexible factor markets already in the late medieval and early modern period, other parts of Europe caught up only in the nineteenth century. In the twentieth century similar differences persisted on a global scale. Parts of the globe - south-east Asia for example - seem to be caught in a development path characterized by high interest rates, high indebtedness, and low rates of savings, a situation from which they are unable to escape. In western Europe on the other hand, we have to go back to the High Middle Ages to find similar structures - and there are many indications that already in the late Middle Ages interest rates had come down to relatively low levels, and that the performance of capital markets and labor markets was relatively good.
There are several possible explanations for these divergences in the growth of factor markets. Institutional economists and economic historians have shown that the development of factor markets is particularly related to the prevailing political, social, and cultural arrangements in a specific society. These institutions influence the costs and benefits of marketing land, labor, and capital, and thus help to determine the potential for technological change and economic specialization. In general terms, following North and De Soto, it is assumed that the efficient protection of property rights to land, labor, and capital, stimulates the transfer of these property rights, and thus helps to create efficient factor markets.
The purpose of the conference is to compare the institutional framework within which factor markets have developed (or not) in different historical periods and in different parts of the world. We want to focus this comparative analysis on two sets of institutions. First there are the rules concerning the ownership and transfer of labor, land, and capital. For labor markets these include facilities for job training and education, formal and informal rules for hiring and firing, and instruments for the monitoring of laborers. Capital market institutions consist of rules for the transferability and maturity of financial claims, rules concerning the liability of debtors and shareholders, financial intermediaries. Likewise land markets consist of rules for the assessment of the quality of land, of contracts that stipulate the price and duration of the use of land, and institutions that arrange for the division of the fruits of investments in land or land use.
A second issue we want to explore in the conference is the relationship between political structures and the development of factor markets. Political regimes often play a large role in the creation and enforcement of rules for the protection and transfer of property rights. On the one hand local and central authorities can exercise a positive influence on factor markets, for instance through the standardization of rules, the protection against crime, or the enforcement of contracts. What is more, rulers can help to reduce the pernicious consequences of the pursuit of private interests. On the other hand - and sometimes at the very same time - authorities can frustrate economic transactions, through warfare, the use of force, the granting of monopolies to certain persons or organizations, or the extraction of revenues through tolls and taxes. Thus political structures not only determine the organization of transactions of land, labor, and capital, they also influence the size and distribution of the rents created in these factor markets.
Increasingly these notions are translated into research or empirical tests. For the Middle Ages there are, for instance, the studies by S.R. Epstein, who analyses in this way the increase in the number of markets, the reduction of transaction costs and the accompanying economic development in late medieval England and Italy, paying special attention to the role of the state in this process. Whereas Epstein emphasizes developments in the period after the Black Death, R.H. Britnell searches the fundamental changes in the preceding period. He demonstrates that commercialization in England has gained headway as early as in the period 1000-1300, a suggestion investigated for the Holland economy in current research at Utrecht University. For the early modern period, in particular the institutional changes in late-17th century England have proved a fertile testing ground. Various scholars, among them North and Weingast, have argued that the institutional changes following the victory of Parliament in 1688 have resulted in better specified and more secure property rights, which in turn stimulated agriculture, trade, and industry, and thus set the stage for the Industrial Revolution.
Most of the research in this field, however, is only recently finished or just underway. To an even stronger extent this applies to the non-European countries; a situation hampering possibilities for comparison. Perhaps institutions were not so different here, or they were different but as efficient as those in Western Europe, as argued for China by K. Pommeranz. Or were they really different and prohibitive of the rise of markets, thus hampering economic growth? We do not know as yet. Answering these questions promises to be one of the most fruitful ways to a better understanding of the differences in economic development and growth between Northwestern Europe and the rest of the world.
The conference wants to avoid an at-random description of various institutional arrangements. Therefore it invites contributors to focus not only on the development of the institutional framework of factor markets, and the role of authorities in this, but also to test their analysis by way of linking it to concrete indicators on the functioning and development of these markets. This can be done by way of various indicators. The efficiency of the institutional framework of the capital market, for instance, can be tested through the development of the rate of interest, which constitutes an important indicator for the quality of the institutional framework. At that, the results of the analysis can be linked to the findings on the development of the volume of the market in question. Thus, not only a complete picture can be obtained of the way in which authorities affected the institutional framework of transacting, but also of the effect these institutions had on the development of the market economy.