How did medieval manufacturing guilds solve the "twin afflictions of adverse selection and counterfeit goods" that made long-distance trade difficult? :
Brand Names Before the Industrial Revolution, by Gary Richardson, NBER WP 13930, April 2008: Abstract In medieval Europe, manufacturers sold durable goods to anonymous consumers in distant markets, this essay argues, by making products with conspicuous characteristics. Examples of these unique, observable traits included cloth of distinctive colors, fabric with unmistakable weaves, and pewter that resonated at a particular pitch. These attributes identified merchandise because consumers could observe them readily, but counterfeiters could copy them only at great cost, if at all. Conspicuous characteristics fulfilled many of the functions that patents, trademarks, and brand names do today. The words that referred to products with conspicuous characteristics served as brand names in the Middle Ages. Data drawn from an array of industries corroborates this conjecture. The abundance of evidence suggests that conspicuous characteristics played a key role in the expansion of manufacturing before the Industrial Revolution.
Introduction In medieval Europe, manufacturers seeking to sell merchandise to anonymous consumers in distant markets had to overcome the obstacles of adverse selection and counterfeit goods. These obstacles arose because purchasers of defective products lacked legal recourse and because intellectual property, such as patents and trademarks, lacked legal protection. Adverse selection particularly afflicted markets for durable merchandise – such as textiles and metalware – with attributes that consumers could not observe before purchase. In these markets, sellers knew more than buyers about the quality of their wares. Manufacturers could cheat consumers and had an incentive to do so. Fear of being cheated deterred consumers from purchasing durable products. Exchanges that should have occurred because they were mutually beneficial did not occur because buyers worried that sellers would deceive them.1
Counterfeiting impeded efforts to overcome the problem of adverse selection. Today, counterfeit products account for a significant share of world trade.2 During the Middle Ages, counterfeit products probably accounted for at least as large a share of the market and perhaps much more. The staples of medieval manufacturing – textiles, tools, housewares, and military equipment – were commonly counterfeited. Recent research reveals striking examples. Much of the pottery produced in Europe before the Industrial Revolution was sold under false pretenses. The forgeries were so sophisticated that they fooled consummate consumers like medieval aristocrats and modern collectors. Chemical analyses of swords that scholars believed to be archetypical Damascus steel blades show that 1 in 4 were convincing counterfeits.3
One reason for counterfeiting’s prevalence was the lack of legal protection for intellectual property. Patents and trademarks arose initially in Italy during the fourteenth century, spread to industrial centers in the Low Countries during the fifteenth century, and reached England during the sixteenth century.4 These inchoate legal forms fell far short of modern standards, which evolved in the centuries following the Industrial Revolution. Enforcing modern standards across international boundaries became possible only in recent decades and remains far from perfect today.
While fourteenth-century manufacturers lacked twentieth-first-century techniques for overcoming counterfeiting, insufficient protection for intellectual property did not preclude the expansion of long-distance trade. Commerce in consumer durables expanded steadily from the eleventh through sixteenth centuries, a period known as the Commercial Revolution of the Middle Ages.5 Initially, durables were scarce, expensive, and seldom sold over long distances. People purchased textiles, tools, and tableware from local artisans, if they purchased them at all. At the end of the Middle Ages, durables were abundant and affordable. People purchased quantities of cloth, equipment, and furniture that would have amazed their ancestors four-hundred years earlier. The exchange of merchandise spanned enormous distances. Textiles manufactured in England made their way to the Middle East. Weapons manufactured in Italy appeared in markets in Moscow. Distribution channels became increasingly complex. Artisans sold most of their merchandise to merchants who resold it to retailers hundreds of miles away. Chains of middlemen transferred products from point of production to point of sale. Manufacturers ceased to have direct contact with ultimate consumers.
Manufacturers formed cooperatives now known as manufacturing guilds.6 Members of these associations lived in the same town, worked in the same industry, and sold standardized products. These artisanal alliances operated in most towns and industries. Guilds specialized in the production of particular products. Successful guilds produced quantities far beyond local or regional needs and exported ever-increasing quantities from their hometowns to rural villages, distant towns, and foreign nations. Guilds from distant towns competed against each other in those markets, where the preponderance of the population lived and where guilds sold most of their merchandise.7
Medieval manufacturing guilds, this essay argues, employed a two-step technique to cure the twin afflictions of adverse selection and counterfeit goods. Step one involved intensive efforts to control quality. Guilds of manufacturers inspected members' merchandise, prohibited sales of shoddy products, and punished members caught selling defective output. These efforts enabled the organizations to consistently sell defect-free merchandise and establish reputations for doing so. Good reputations assuaged consumers’ fears about purchasing products with hidden defects and encouraged consumption of manufactured merchandise. 8
Step two involved selling merchandise with conspicuous characteristics. Examples of these unique, observable traits included cloth of a distinctive color, fabric with an unmistakable weave, and pewter which when tapped with a spoon resonated at a particular pitch. These attributes identified merchandise made by particular guilds because consumers could observe them readily, legitimate manufacturers could produce them inexpensively, and counterfeiters could copy them only at great cost if at all. Guilds maintained a cost advantage by keeping manufacturing methods secret, using techniques that required local resources, and selling merchandise whose manufacture required significant investment in specialized equipment. The uniqueness of conspicuous characteristics communicated reputations from producers to consumers. Communication occurred even when products passed through the hands of numerous middlemen between point of production and point of sale. The phrases with which medieval men referred to products with conspicuous characteristics were the brand names before the Industrial Revolution.
The foundation for this paper’s hypothesis can be found in the work of George Akerlof, who introduced the issue of adverse selection to academic economists; Bo Gustafson, who first linked the issue and medieval markets; and historians, such as Richard Britnell and Robert Lopez, who seconded Gustafson’s suppositions.9 These historians documented an important point. Guilds standardized the observable attributes of consumer durables. Why guilds did that is unknown. Some scholars have suggested that standardization was a mechanism for monopolizing markets, but recent research questions that conjecture.10 Other scholars have speculated that standardization was a method of encouraging commerce, but their speculations remain unsubstantiated.11 No work documents the information asymmetries that engendered adverse selection or the way in which standardization alleviated that affliction. Whole industries have been ignored. The incentives of craftsmen and consumers have not been explored. Little effort has been made to collate the data or assess the scope and scale of the evidence. No work reveals how manufacturers established reputations, prevented counterfeiting, and disseminated information about unobservable attributes.
This essay fills those gaps in the historical record. It examines the principal industries of the British Isles, continental Europe, and Levant during the thirteenth through sixteenth centuries. A list of these industries and occupations appears in Table 1. Evidence comes from many sources. Court records reveal defects in manufactured merchandise. So do artifacts studied by archeologists, antique collectors, and museum curators. Legal codes reveal the structure of property rights and the effectiveness of enforcement. Other government documents – including tariff lists, tax accounts, inventories of property, and tax lists of municipal governments and the royal household – provide information about the nature of guilds, durable goods, and good names. Commercial documents illustrate the value of reputations and the mechanisms that transmitted information from craftsmen to consumers. Linguistic and literary studies confirm these conclusions. Guilds’ internal documents illuminate their goals, structure, and activities. So do returns surviving from England’s guild census of 1388. The number and variety of sources reflects the nature of the argument. Many types of evidence are required to substantiate the analogy between medieval markets for manufactured merchandise and modern models of adverse selection. No single source contains enough information to corroborate the hypothesis of this paper.
The following four sections present the essential evidence. Section 1 shows conditions conducive to adverse selection pervaded markets for manufactures. Section 2 describes the methods that craftsmen used to control quality, create conspicuous characteristics, communicate with consumers, and protect reputations from counterfeiters. Section 3 presents examples of guilds that successfully established reputations and evidence that those reputations influenced the decisions of consumers, price of products, and profits of manufacturers. Section 4 discusses the implications of these findings. By alleviating the afflictions of adverse selection and counterfeiting that plagued medieval markets for manufactures, the conspicuous characteristics created by manufacturing guilds facilitated the expansion of anonymous exchange at the heart of the commercial revolution of the Middle Ages.
[More discussion at Oxonomics.]
1 This note defines terms used in this essay whose definitions vary across disciplines. Throughout this essay, a reputation is a belief held by consumers about the characteristics of products that cannot be detected before purchase. Economists often label these characteristics as experience, hidden, or unobservable attributes. Quality is the true state of attributes that cannot be detected before purchase. A high-quality product has unobservable attributes that consumers prefer and is said to have few hidden defects. A low-quality product has unobservable attributes that consumers dislike and is said to have many hidden defects. Synonyms for quality such as superior merchandise and shoddy products also refer exclusively to unobservable attributes. A manufacturer with a good reputation is known to sell high-quality products. A manufacturer with a bad reputation is suspected of selling shoddy merchandise. Synonyms for good reputations, such as well regarded, widely know, reputable, and good names, refer exclusively to consumers’ beliefs about the unobservable attributes of manufacturers’ merchandise.
2 Recent estimates indicate the value of illicit goods exceeds $300 billion each year or 5% of the value of international shipments of manufactured merchandise (Business Europe 1999, Freedman 1999, Porter 1996). The share is highest in developing nations. In China, approximately 20% of all consumer durables are fake (Simone 1999). In the rest of Asia, Africa, and Latin America, the figure ranges from 5% to 25%. Floods of inferior merchandise drive genuine goods from many venues including the markets for recorded music in Brazil, videotaped motion pictures in Eastern Europe, computer software in China, and designer clothing in former Soviet republics. The hardest hit industries include software, clothing, cosmetics, footwear, movies, music, pharmaceuticals, publishing, and sporting goods. The Internet exacerbates the problem. Between one-in-ten and one-in-five web sites, accounting for a substantial share of ecommerce, sell counterfeit goods or misuse manufacturers’ trademarks (Freedman 1999 and Nicholson 1998).
3 Verhoeven, Pendray, and Dauksch 1998.
4 Copyrights developed later, spread less rapidly, and did not arrive in the United Kingdoms for another two hundred years.
5 Lopez 1994
6 Medieval men and women referred to these organizations by a variety of names including brotherhoods, companies, confraternities, fraternities, and mysteries.
7 The previous paragraphs compiled from Bridbury 1962 and 1982, Britnell 1986 and 1993, Cameron 1993, Cantor 1993, Cipolla 1980, Cunningham 1890, Dyer 1994, Hatcher and Miller 1995, Hilton 1995, Jardine 1996, Keen 1990, Lopez 1994, McKisack 1991, Mokyr 1990, Munro 1994, Myers 1991, Pirenne 1937 and 1952, Postan 1972 and 1987, Pounds 1994, Rorig 1967, Rowley 1986, Salzman 1923, Swanson 1989, Thrupp 1962 and 1963, Unwin 1908, Waugh 1994, and Zacour 1976.
8 Medieval efforts to overcome adverse selection focused on the same issues as modern efforts. In both eras, manufacturers try to communicate accurate information about their products’ unobservable attributes and to enable consumers to distinguish legitimate goods from inferior imitations. Modern mechanisms for signaling quality include trademarks, brand names, warranties, advertising, Consumer Reports, and the Food and Drug Administration.
9 Britnell 1993, Gustafsson 1987 p. 13, Lopez 1994 p. 129
10 Richardson 2001a and 2001b.