What is the Big Idea?
Back in the 16th century, a group of rural and urban weavers who worked in the Black Forest mountain range of Germany formed a guild to prevent those from other occupations from infringing on their craft. They did this by collecting money and lobbying for a monopoly from the capitol. The guild imposed wage ceilings, fines and public rebukes to push their competitors out of the weaving market.
What was originally a dynamic industry that produced all kinds of fine fabrics turned into an industry that prevented innovation and creative destruction.
The guild imposed a salary cap which means a good weaver was paid the same amount as a bad weaver. And even though innovations led to nicer fabrics, a weaver in the guild who was paid by how much she produced had no incentive to make better yarn, which takes longer to make. She only wanted to spin yarn quickly to maximize her income.
“It was one of the real problems of increasing quality and introducing innovations.” said Sheilagh Ogilvie, an economic historian at Cambridge University.
New innovations also meant competition within the guild, resulting in inequality amongst the weavers which the guild rejected. Young startup guild members might have embraced innovation, but it was the elite members who made the rules.
Innovation also meant increased output. By keeping output down, they were able to drive up their prices. Eventually the whole weaving industry in the Black Forest suffered, and so did the guild.
What is the Significance?
Today's economic climate forces lobbyists to function in much the same way as the elite members in the weavers' guild. Firms today lobby for monopolies and trade barriers to make more money.
In medieval times, trade barriers came naturally because of distance and lack of proper transportation. Today, lobbyists have to fight for trade barriers to limit output and drive up prices.
Young startup companies, especially those in music or technology, frequently find disruptive and innovative ways of distributing music or software. They seek to challenge everything from copyright laws to patent protection. But established companies who got rich off of the old way of doing business don't want to encourage the free movement of data or music on the Internet. They have no incentive to explore new models.
“Its one of the great challenges for any policymaker in any society whether in medieval Europe, early modern Europe, in the industrial revolution or today, which is to try to ensure that the creative destruction which we associate with a dynamic economy that is really good at inventing new things and responding flexibly to changes and satisfying consumers and producers.” said Ogilvie.
In other words, capitalism requires failure as much as success.
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