Price Theory and Guilds

People who know me and people who have read Economic Forces for an extended period of time are by now aware of my affinity for Earl Thompson. In my opinion, Earl was a great and under-appreciated price theorist. Earl was known for his unconventional explanations and provocative ideas. Armen Alchian, who was once his teacher and then later his colleague at UCLA, once described Earl’s work as follows: “What appears upside down at first begins to look right-side up — from the newly acquired but very lonely Thompsonian perspective.”

There are two things that I have always enjoyed about reading Earl’s work. The first is that while it often challenged conventional wisdom, it is always firmly grounded in price theory. Just as importantly, he was also often able to point out where is critics claims were not so well-grounded in price theory. Second, Earl was supremely motivated by explaining “what is” rather than “what should be.” This is not to say that Earl didn’t do welfare economics or make normative claims. Instead, what I mean is that Earl really just wanted to understand the world as it is, using price theory as his guide — and he was committed to it.

To give people a sense of what Earl was like, I would like to discuss Earl’s joint work with Charlie Hickson on European guilds that persisted from the Middle Ages up until around the Industrial Revolution. (Once upon a time, Brian and I recorded a podcast with Charlie Hickson. You can find that here.)

Conventional Wisdom Meets Price Theory

Guilds are associations that regulate and support the practice of a specific trade or craft. They were ubiquitous over this period and dominated trades and crafts in Europe. Although there are notable exceptions, the conventional wisdom on these guilds is that they were inefficient cartels, excluding competitors and limiting innovation.

Thompson and Hickson argue that there are four major flaws with this argument. The first major flaw is that guilds typically imposed maximum prices as well as minimum quality standards. This not only does not sound like an exploitative monopoly, but rather much more like optimal monopoly regulation. If this was a cartel to restrict trade, why would these guilds create such rules for themselves?

A second problem is that if these were inefficient cartels restraining trade, there should be geographic variation in the prevalence of guilds that correspond ...