Economics of Property Rights – Exam One

PowerPoint 1

Property rights o Origins of cooperation in stateless societies

Source of order in stateless societies (violence vs. nonviolence) Transformation of stateless societies

Mechanisms for constraining open access and establishing exclusive rights:o Exclusion by means of forceo Value systemso Custom and customary lawo Rules imposed by the state and its agencies

Formal vs. informal was of property rights enforcemento Costs of using the law

Gaining information about preventive technologies The costs of executing decisions The costs of obtaining information on applicable rules of liability

o Norms of welfare maximizing Welfare = not only commodities but also other outcomes that people

might value – parenthood, leisure, good health, high social status, and close personal relationships

System of informal control is less influentialo In short term relationshipso In less close-knit groupso When the magnitude of what is at stake is risingo When legal system gives the opportunity to third parties

Formal vs. informalo Legal policies influence the vitality of informal systems of social control

Theory of stateo State – “an organization with comparative advantage in violence, extending over

a geographic area whose boundaries are determined by its power to tax constituents”

Stateo Services

Providing “rules of the game” Lowering of transaction costs to promote economic growth

o Objective Income maximization (in taxes collected)

Constraints to ruler’s powero Domestic and foreign rivals (availability of substitutes)

o Opportunistic behavior of the agents of the state (their utility function is different from the ruler’s)

o Measurement costs (particularly the tax base) Stability of the state

o Economic growtho Economic declineo Source of change = change in relative prices power endowment change in

property rights Why rational rulers support policies that bring economic decline?

o There are two reasons why rulers sacrifice economic growth: Time horizon Size of their support group (public vs. private goods)

Institution and economic developmento What are institutions?o Stability of dysfunctional institutionso Fragility of growth promoting institutions

What are institutions?o Formal rules (rules, laws, constitutions)o Informal constraints (conventions, norm of behavior, and self-imposed codes of

conduct)o And their enforcement characteristics

Institutions vs. organizationso Organizations = groups of individuals bound by some common purpose to

achieve certain objectiveso Institutions = rules of the game o Organization = teams

Institutions o Affect the performance of the economy by their effect on the costs of exchange

and production o Major role of the institutions is reduction of uncertainty by establishing a stable

structure to human interactiono They develop through learningo They are created as a result of a political bargaining

Institutions and economic developmento Throughout history and for most societies in the past and the present economic

performance was not satisfactoryo Growth occurred in Western Europe and overseas extensions of Britain in the

last two centuries Institutions rise and fall because of:

o Changes in the political balanceo New material circumstanceso Changing fortunes of social models

PowerPoint 2

Economics of institutions and property rightso Theory o Practice

How did effective economic organization came to life in the West? Transaction costs

o Perfect markets – commodity and stock exchanges Market transaction costs

o In order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to inform people that one wishes to deal with and to what terms, to conduct negotiations leading up to a bargain, to draw up a contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on

o Market transaction costs = costs of: Preparing contract (search and information costs narrowly defined) Concluding contracts (costs of bargaining and decision making) Monitoring and enforcing contractual obligations Establishing and tending social relationships

Technical change and transaction costso Technical change can help lower transaction costs by introducing new effective

ways of measurement, design new structures of economic organization that lower costs of contracting

o Technical change – more complex commodities – higher TC Role of the state

o Lowered transaction costs by Introducing and maintaining standards of measurement Introducing and maintaining stable money

Influence of TC on economic developmento Size of the firm (organization)o Planning and regulations in economy o Exchange in economyo Political organization

Property rightso Property rights = the rights of individuals to use resources

Ronald Coase “The Problem of Social Cost”o Broadcasting – externalities problem

Externalities – effect (positive or negative) on the third party not involved in the current exchange

o In real world transaction costs are not zero and interaction of parties is seriously obscured

o Problem has a reciprocal charactero Property rights allocation matters

o Coase explained “what are traded in the market are not, as is often supposed by economists, physical entities but the rights to perform certain actions and the rights which individuals possess are established by the legal system”

Structure of property rightso = set of economic relations defining the position of each individual with respect

to the utilization of resources Enforcement of property rights

o = excluding others from the use of scarce resources Basic classification of ownership rights

o Privateo Stateo Communal = community controls access to a resource by excluding outsiders and

regulating its use by insiderso Common = open access = no one hold exclusive rights

Theories of emergence property rights o Naïve theory

The costs and benefits of exclusion The cost of internal governance when individuals share property rights “The emergence of new private or state owned property will be in

response to changes in technology and relative prices”o Interest group theory

Links naïve model with the theory of pressure groups “Disadvantaged parties will oppose the new argument, even though it

allows for an aggregate expansion in production and wealth” Tragedy of the commons

o Each is motivated to add more and more animals because he receives the direct benefit of his own animals and bears only a share of the costs resulting from overgazing

Comstock Lodge o “Given the high expected returns from exclusive control and the lack of an

existing ownership structure when ore was discovered, one would expect economic events to outweigh other social and political factors in the formation of the legal structure”

When rights do not emergeo Fisherieso Crude oil industry in USo Three types of cost functions:

Neoclassical cost of production Cost of internal governance Cost of exclusion

“The ruler acts like a discriminating monopolist offering to different groups of constituents protection and justice . . . in return for tax revenue. Because different

constituent groups have different opportunity costs and bargaining power with the ruler, different bargains result”

PowerPoint 3

Early Middle Ages Manorial economy and its elements

o Why is it important to learn about the manor? 95% agragarian population Source of capital Supply Demand

o The feudal relationship within the manor was between lord and serfo “Custom of the manor” which governed manorial relationships and obligationso Manors are isolated, have very weak ties to central authority

High Middle Ageso Law was local

It existed only within the settled areas Transfer of goods thus met high TC

o Land, while freely abundant, was valuable only when combined with labor and with protection and justice

o The abundance of land during the high Middle Ages made labor a very scarce and therefore valuable factor of production

Types of contractual relationships in manor and their effectivenesso Types of contracts in agriculture

Fixed rent contract Fixed age contract Share contract (output) – sharecropping Share contract (input)

Agriculture in Middle Ageso Unpredictability of the cropo High negotiation costs (lord and peasant)o High measurement cost (determine the price)

Contract of choice for 10-11th centuries:o Input sharing (lowest TC)

Major developments in property rights in lando Growth of the populationo Clearing of the new landso Increase in the size of the manoro Specialization and tradeo New sources of revenue – taxes and tolls levied against goods, fairso More goods traded – lower information costs (lower TC) o Money

o Changed factor prices adjust the master-servant contract Sources of income for the lord in the 12th century:

o Payment for this provision of public goodso Payment (in rents) for the use of his landso “Key money”

Contract of choice for the 12th century o Fixed rents and fixed payments

13th century o Inflation (prices tripled during the century)o Reduced real value of laboro Lords begin to reclaim their land as soon the lease expire, reimposing the labor

obligations 14th century

o Famines and plagues (1347-1351)o Reduction in population o Rise in the land/labor ratioo Flight of peasants, competition among the lords for laboro Contractual changes life leases with fixed rents

Land ownership became hereditary Evolution of law

o Toward simple absolute ownership of land and a free market for labor Field systems

o Communal open fieldo Less communal open field

Open field and less open field systems:o Economic development occurs in areas with:

Less communal systems Weak manorial over-lordship Market access Legal protection of property rights

PowerPoint 4

Early Middle Ageso Technological changeso Growth of cities in Europe

Technological changes Intellectual property

o Patents – 20 years Gives its owner the right to sue for infringement if anyone tries to make,

use, or sell, offer, import or offer to import the invention into the country issuing the patent

o Copyright protects the following from publishing to 70 years after authors death

Protects “original works of authorship fixed in any tangible medium of expression” – literature, music, drama, dance, pantomime, graphics, sculpture, movies, sound rec., and architecture

o Trade secrets Any information that (1) derives economic value from not being readily

known to, or ascertainable by others, (2) whose owner has taken reasonable steps to keep it a secret, and (3) is not publicly available

Evolution of IP protectiono Respect, reputation, government purchase and prizes, schools, public knowledgeo Monasteries, guilds, universitieso Patents, prizes, patronso Private foundationso Government funding (labs, grants)o Hybrid organizations (military-industrial complex, academic-industrial complex)

Technical changeso Three sources of technology in the West:

Classical antiquity Islamic and Asian societies Own original creativity

Which new techniques?o In agriculture:

Heavy plow Three field system – three coarse crop rotations: winter, summer, fallow

Energy utilizationo Windmillso Waterwheelso Dams

Horse powero Nailed horseshoe (9th century)o Invention of the stirrupo Modern horse collar

Transportationo Land – increased range and speed of horse-pulled wagonso Water:

The Viking ship (800 AD) The cog – 12th century

Time o Weight driven mechanical clock – end of 13th centuryo Spring driven clocks and watches – 15th century

Early Islamic societyo Papero Fabrics from Persia o Cotton

o Leathero Swords

Why so slow?o Property rightso Technical knowledge characteristics

Ways to transfer technology in the Middle Ageso Within the area (guilds) o Between the areas

Personal (group, minority) Texts Patents

Medieval technologyo Agriculture

Risk aversion High costs of experiment (starvation) Collective decision making

o Technology Implicit character of knowledge High information costs

Growth of cities in Europeo Types of settlementso Types of citieso City organizationo Country differences (Italy, Netherlands, Germany, Switzerland)o Political process and economic change

Types of settlementso Romano Fortification against sudden attack (castra, cite, portus)o “New” forts to protect new borders of the old cities’ territories

Types of citieso Regionalo Imperialo City-states

Evolution of democracy in Italian city-stateso Communeo Podestao Popoloo Signoria

Contado (countryside controlled by the city)o Food supplyo Human resourceso Tax revenue

Urban elite – Consorteria

o Mutual interest group bound together by oath Popolo

o New politically not represented groupso Societas amorumo Actions of the Popolo

Offices and revenues were divided between popolo and nobility Mutually acceptable podesta – captain of the popolo End of tax emptions for nobility and the church Reestablish law and order (stop feud, carrying of weapons, forbid

wearing of livery and insignia) Signoria

o Position of podesta became lifelongo Abolition of civic statuteso No more consuls, councils, or committees o It was always less successful in the cities where there was a strong Popolo to

check its progress Venetian republic

o Conservatismo Aristocratic exclusivismo Stability of the Constitutiono Lasted until 1797 when Venice was conquered by Napoleon

Doge of Veniceo Election of a Doge

Before 1172 – by a popular assembly After 1172 – by a committee of 40/41 elected by Grand Council

o Restrictions of Doge’s power Signoria (minor council + 3 members Quarantia (supreme tribunal)) Grand Council Council of 10 (corruption, intelligence, international affairs)

Cities in Germany and Switzerlando Created by charters from local lord (German dukes) or Emperor of the Holy

Roman Empireo Independent city = one that had ability to name its own candidate as imperial

representative, right to use its own courts to try capital cases

PowerPoint 5

Medieval companieso High risks of trade (high transaction costs)o 13th century

New types of business organization New accounting techniques New instruments of exchange

Super-companies Agents

o Factorso Shareholderso Correspondents

Risk sharing contractso Consortiao Partnerships (commenda and societas maris)o Sea Loano Companies

Consortiao Ships were financed by issuing shares (loca), that were brought, sold, or pledged

by individuals from all sectors of society Partnerships

o Commendao Societas mariso Created for the purpose of international tradingo Formed for a single-venture, dissolved at the close of each voyage

Commendao Investing partner (invest – all; profit – ¾)o Traveling partner (invest – 0; profit – ¼)

Societas mariso Investing partner (invest – 2/3, profit – ½)o Traveling partner (invest – 1/3; profit – ½)

Investing partner (“stay-at-home” partner)o Decided where the traveling partner should goo Whether he should take with him money or goodso Which foreign wares he should buy in exchangeo Took charge of the sale of the goods which were brought back by the traveling

partner Traveling partner

o Managerial responsibility Marine insurance

o Sea loan Investor lent funds to a venture merchant, charging a high premium but

with repayment of principal and premium contingent on the safe arrival of the cargo

Companies o Partnership that lasted for more than a journey, usually several yearso Each partner was subject to unlimited personal liability in case of bankruptcy o Each owner contributed a specific amount of money and shared the profit or loss

por ratao Had seal and set of accounts

o Always bore the name of the founding family Bookkeeping

o Single entry accounting (charge and discharge/stewardship accounting)o Double entry accounting

Single entry accountingo Was designed for control of individual ventures

Income, expense, settlemento Did not provide profit measurement automaticallyo Did not distinguish between capital and revenueo Made concealment of fraud easy, creating the need to fro frequent audit and

other devices Double entry bookkeeping

o Cross references Rise of the super-companies

o New market for northern Italian companies (Kingdom of Naples, Southern Italy)o Wheat of superior gradeo Spices, precious stones, and fine fabricso Flemish woolens, English wool, and silvero Rulers of England and Southern Italy had become increasingly aware of the value

of the commodities under their controlo As their power grew so did their expenses and the need for casho To secure this cash, they would grant trading privileges to those firms that could

advance large sums, the loans to be repaid from the duties or taxes levied on the exports

Super-companieso Bardi, Peruzzi, Acciaiuolio General tradingo Commodity tradingo Bankingo Manufacturingo Over a wide geographical area for an extended period

Englando Forbidden to export specieo Cistercian monasteries – wool growers

Italyo Grain trade 45,000 tons in 1311o Edible oil and wine

Peruzzi o Tavola – banking related operations in Florenceo Mercanzia – trading and logistics out of Florenceo Drapperia – textile contract manufacturingo Limosinan – charities (2% of companies capital)

o Special accounts – knights hospitalers, deposit in Palermo, accounts held by church dignitaries

Employeeso Salaries – according to their age, experience, and level of responsibilityo Bonus for outstanding worko They could use companies goods and serviceso Received commercial education in Florence

Sizes of the super-companieso 1330-1340o Peruzzi – 133o Bardi – 346o Papacy in Avignon – 250o + Carters, spinners, weavers, fullers, dyers, marine shippers, correspondents,

inn-keepers Problems medieval companies faced

o Fierce competitiono High riskso Unpredictable priceso Managerial problemso Coordination problems (arguing between partners, conflicts among branches)

Ways used by the Peruzzi Co. to reduce managerial transaction costso Strong control group at Florence headquarterso Staffing was strictly under control of the Florence officeo High salarieso Rotation of the personnel from location to locationo Strong chairmano System of internal couriers

Agency problem in Peruzzi Co. o Branch managers

Enjoyed personnel privileges and money grants from local ruling aristocracy, that strained their loyalty to the company

o Factors Corruption

Reasons for disappearance of the super-companieso Reduction in the population thanks to Black Death (reduced grain trade,

municipalities took over the trade)o Reforms of William Edington in England improvised expenditures of the king of

England and increased his revenueso High managerial transaction costs (communication and reporting technologies)

PowerPoint 6

New instruments of exchange in the 13th century

o Knights Templaro Moneychangers (cambium maritimum, dry exchange)o Pawn brokerso Italian companies (bill of exchange, promissory note, letter of credit)

Knights Templaro Founded in 1119o The Order of the Poor Knights of Christ of the Temple of Solomon in Jerusalemo Protecting the pilgrims visiting the Holy Lando Order was exempt from all authority except that of the Popeo Templar’s wealth

Gifts to the order Grants of property in return for sustenance Voluntary servitudes in return for security Deposits from the population Deposit for papal subsidies, and for bequests and aid for the Holy Land

o Templar’s comparative advantages Most prominent warriors at the time Chastity, obedience, accuracy, and honesty Never let anybody to default in contracts with them International network of Templar Houses in Europe

o Financial services of the Templars Safe deposits for the population, nobility, and kings Royal treasuries Transportation of money between England and Ireland, and France Auditing King’s accounts Trustees of funds placed in their custody for the execution of some

specific project Loans to the population, nobility, and kings

Moneychangerso Bancum – bench where the moneychangers were sittingo Forming partnerships, accepting time and demand deposits, extending credit to

customers and participating directly in business ventureso Required to be citizenso Bankers who combined dealings in exchange (not in bills of exchange) with

deposit bankingo The offices of moneychangers were commercial bankso Functions performed by moneychangers:

Trade in money and bullion Deposit business Lending or investing of surplus reserves

o Trade in money and bullion Formed the link between the public and the mint

Were expected to deliver to the mint all the bullion they purchased from the public

o Bank deposits Payments by book transfer exceeded by far the number of payments in

cash Book transfers were made on the strength of an order given by word of

mouth, both debtor and creditor being present Was possible to transfer credit when the debtor was the client of one

moneychanger, and the creditor, the client of another moneychanger Credit was extended by allowing customers (merchants and other

businessmen) to overdraw their accountso Direct investment

By entering into partnership with merchant in business enterprises or in commercial ventures

o Instruments used by moneychangers Cambium maritimum

Involved an advance of funds repayable in another, instead of the same, currency

Debtor was relieved from any obligation if the ship or the goods failed to reach their destination

The lender’s gain, instead of being expressed in a percentage of the principal, was concealed in the rate of exchange

Cambium Borrower, having received an advance in local currency, promised

repayment in anther currency and in another place Involved both credit and exchange Repayment was unconditional and ceased to depend upon the

safe arrival of a vessel or the major part of its cargo Dry exchange

Exchange contract of loan which stipulated repayment in the same place and in the same currency in which it was contracted

Designed to conceal a loan at interest Interest was included in the price of foreign policy

Pawn brokerso Known under the name of Lombards of Cahorsinso Were aliens, but they were not protected by trade privilegeso Operated their pawnshops under a license systemo Specialized in consumers’ credito Pawned articles ranged all the way from jewelry to cumbersome kitchenware

and furnitureo The Lombards lent to all classeso The Lombards were allowed to charge interest at 43% per cent a year

Italian companies

o Champagne fairso Permanent agencies in major European countries

Commercial privileges for the Italian companieso Organized into “nations” or merchant colonies headed by a consul (Genoa,

Venice, Florence, Lucca, and Milan)o Protect the merchants against any arbitrary action on the part of the local

authoritieso Fix the tariff of tolls and port dueso Regulate shipping issues

Financial activities of the Italian merchant-bankerso Dealings in bills of exchangeo Loans to the counts, to the city of residence, to great lords (temporal and

spiritual) Bill of exchange

o Originated during the period of Champagne fairso Were not endorsable and were not discountedo Buying a foreign bill was equivalent to the purchase of foreign exchangeo Involved the extension of credito Exchange involved 4 persons and two payments:

Usually a borrower, “deliverer” (1) bought a bill for ready cash From a lender, “taker” or drawer (2) who drew on one of borrower’s

correspondents abroad At maturity this correspondent, called payor (3), was expected to pay a

given amount in foreign currency To the payee (4) in whose favor the bill had been made out

o Bills were payable at “usance” (difference in dates, reflecting generally accepted time required to move goods between the two locations)

Venice Bruges – 60 days Venice London – 90 days

o Because of this time interval, the exchange rates always included interesto Exchange rate and the “usance” could also be negotiated

Promissory noteo Was stipulating payment in distant place, at some subsequent date indicatedo For pilgrimages, crusades, movements of clerical funds, and the transfers of

money to meet the expenses of students studying in distant towns Letter of credit

o Sold by the banks, and paid for in advance like modern traveler’s checkso The earliest letter among the papers of the crusades is of the year 1191

New instruments of exchange allowed:o Faster business transactionso More business transactionso Increase of the possible size of the transactionso To reduce the need for specie

PowerPoint 7

State formation 14th-15th centuryo Taxation – transaction costso Sources of ruler’s revenueo Constraints to ruler’s monopoly powero State – democracyo Evolution of property rights protection in 14th-15th century

Taxation – transaction costso Revenues of the early kings

Payments in kind, in service, royal prizeo Difficulties of taxation:

Agriculture brings low returns Need for developed markets to determine the value High measurement costs – imperfect assessment methods

o Preferences for indirect taxes – at the stage od production on the first scale Salt Drinks (ale, beer, cider, liquor) Meat Alum, ammonia Hats, silk Woolen textiles

o The tithe High possibility of cheating because of scattered holdings Do not harvest until tax inspector collects Setting up of fixed payment agreed upon by taxpayer and tax collector

alikeo Cadastre

Measuring acreage is a big job especially in hilly countries, or in regions of irregular, cut-up fields

They were often used for many years, while the value of the lands and even their ownership changed

This led to abandoned farmso Approximate estimates of wealth

Each community was assigned a collective sum due in taxes, and then elected men who would work out assessment of the tax based on their own knowledge of the resources of their neighbors

The wealthier potential taxpayers would be under-taxed, the distribution being falsified by the favor, or hostility of the assessor

Taxpayers were encouraged to hide their wealth Sources of King’s revenue

o Consumption taxeso Coin debasementso Borrowingo Forced loanso Property confiscationo Taxes on import-exporto Poll tax – capitalismo Venality of officeso Income from monopolieso Selling of the titleso The kings usually did not have the patience to wait for the economic growth to

occur So, they would turn to the taxes and practices that would bring the fast

cash but would eventually burden the economy Constraints to ruler’s monopoly power

o Domestic and foreign rivals (availability of substitutes)o Opportunistic behavior of the agents of the state (their utility function is

different from the ruler’s)o Measurement costs (particularly the tax base)

State – democracy Traditional view of state development in Europe:

o Absolutism – bureaucracyo Constitutionalism – parliamentarism o Although, constitutionalism has bureaucracy and absolutism has non-

bureaucratic forms of administration Factors in variation of political regimes and state infrastructures

o Organization of the local government during the first few centuries after state formation

o The timing of the onset of sustained geopolitical competitiono Independent influence of strong representative assemblies on administrative

and financial institutions Political regimes before 18th century

o Absolutist – France, Spain, Portugal, Savoy, Tuscany, Naples, Denmark, and German principalities

o Constitutional – Britain, Hungary, Poland, Sweden and Netherlands Stages in state building

o Small staff of ruler’s householdo Cooperation with the groups of society which possess the resources necessary

for the kingo These groups negotiate terms of service that will extend their privileges, status,

and income in the face of unlimited authority of the ruler Results of negotiation

o Officeholders get security of tenure and come control of the choice of a successor in one’s office

o Rulers resist appropriation and retain the right to remove officials at will, create and fill positions with qualified candidates

Modern bureaucracy Internal structure of the assembly:

o Two chamber – territorially based Upper house (higher nobility and clergy) Lower house (representatives of rurally based organs of local government

and of self-governing towns)o Tri-curial – estate based system

Representatives of legally privileged status group or estate such as the nobility, the clergy, and the burghers of the self-governing towns

o Tri-curial were easier for the king to manage and bribeo Each group was concerned only about its own privilegeso Local governments – publicity and freedom of discussion, financial resources,

and armed forces Evolution of the state

o Sources of income for the kings before 9th century: Trade Annual military expeditions (loot, tribute payments)

o 10th century Aristocracy starts to build castles, from which they could impose their will

upon peasants and other inhabitants of the district Royal judicial, military, and fiscal powers now rested with local

strongmeno 11th century

Household officers – higher nobility – hereditary All-purpose officials (prevot) – collect and disperse income from royal

estates and regalia dues, mete out justice, and organize local defense within ill defined area

These offices were farmed out by auctioning them annually or semiannually to the highest bidder

o 12th-14th century Increasing geopolitical pressures Changes in war – contract system replaced military feudalism by 14th

century Bigger armies, better organized, coming for much longer periods

of timeo Evolution of the state

Introduced new class of itinerant, regional justices, whose task was to consolidate higher royal jurisdiction over much larger areas, collect a

number of regalia dues, and ensure honesty and efficiency among the local prevots

Larger, more sophisticated central government Creation of national representative assemblies to provide ideological and

financial support for the king’s policies Transition from the “domain state” to the “tax state”

o Philip the Fair of France (1285-1314) Pressured church to grant him taxes on annual basis – tension with pope

– first estates General 1302 Imposed general property taxes without consulting the Estates Pressured Templars, Jews, and Italians

No practical results open revolt in 1314 Democracy and revenues in France 14th-16th century

o 1360 King Jean introduced general sales tax and tax on wine and tax on salto General direct tax for one year to support standing army, which remained

permanento These taxes still could not meet the need for ready money since they were

coming at a slow and irregular rate Office appropriation

o Conversion of military units into sources of private profito Control of revenue collection and disbursement by private businessmeno “Inside credit”o Appropriation of the means of administration by officials

State revenue in 15th-18th century Franceo Aides (wine)o Gabelles (salt)o Borrowingo Attempt of public debt – could not pay and ignored for over 40 yearso Selling of rentes – in return for a lump sum payment a borrower would sign over

to a lender the rights to an income form some type of property like a piece of land or a building

o Forced renteso Increasing the number of offices to sello Farming the sale of the offices as well

PowerPoint 8

16th-17th century France and Spain France

o Representative institution – Estates Generalo Continuously ignored after 1484

Estates General 1484

o Abolition of the traffic in offices and other administrative abuseso A more equitable distribution of taxes, and removal of the corrupt officials from

the revenue collectiono Managed to get public access to the accounts of the major financial officialso They were not called until 1560

King of Franceo Legislation, taxation, and foreign policy without consulting anyone (full imperial

powers)o Costly wars – need to put troops in the field for just one more campaigning

seasono War with Spain in Italy

French armyo Infantry was raised from German and Swiss mercenaries

Changes in military technologyo Ability to breach castle wallso New infantry tacticso Possibility of one decisive battle BUTo Invention of urban fortification built around the bastion – lengthy sieges and

massed infantryo Higher expenses the HAD to be covered on a regular basis – army could switch

sides if not paid Need for cash

o Tax increases – without approval – passive and active resistance from the taxpayers

o Look into the non-tax revenues Taxes

o Taille – could only be increased from 2.1 to 5.8 million livres/yearo Total tax revenues increased from 3.5 to 12 milliono Major revolts in 1542 and 1548 over the gabelleo Until 1515 revenue – 250,000o Expenditure – 4 million

Difference reached 4 million by the end of the 16th century Borrowing

o Lyon fairs (held 4 times a year)o 500,000/year at 12-16% a yearo Repayment of the principal was always due in 3 months but rolled overo Accumulation of debt of 4.9 million by 1555 and government’s credit was in

declineo Grand Parti

Financial association that would advance a government another 1.6 million

The government would pay 5% of the outstanding capital 4 time per year Tried to attract international capital and thousands of small investors

In 1559 all payments were suspended altogether 11.7 million was ignored for the next 40 years Thus, the possibility to create the system of public finance was

destroyed Need for cash

o Renteso Traffic of offices

Traffic of officeso 1534 law – only sales which occurred less than 40 days before the death of the

holder were void, and that office was to revert to the crowno Sale of reversions – insurance in case of the sudden death of the officeholdero Dividing offices in 2 partso Office sales mounted to 15% of the annual revenue

Farming of the revenue collectiono Crown began to abandon the traditional pattern of small, local revenue farms

and move towards large farms leased for long periods of timeo 1578 all salt tax levies became grandes gabelleso 1584 custom duties – cinq grosses femeso 1575 sales of offices was farmed

Unhappiness of the populationo Estates General were called in 1576 and 1588

“Reforms” of Sully:o Tribunals against bad financers

Pursuing those whose loyalty was in question The task of collecting the fines on them was farmed

o Resume government interest payments Thirty Years War

o By 1627, 56% of state revenues were absorbed by debt serviceo Increase of direct taxes by 65%o New offices soldo Sold the right to the officials to retain certain portion of tax receipts they

collected Results of the financial policy

o Less and less revenue ended up in the hands of the stateo Military – all captains and colonels paid for their units, these purchase did not

enjoy the same rights as a purchase of an office Pocketing of the soldiers’ salaries and massive desertion

Spaino Kings accumulated strong imperial powers thanks to their wars with Moors,

nobility, the Church, and the military orders Castile

o Representative assembly – Corteso Had retained the right to approve new taxes

o But since 1516 their independence and representativeness was underminedo 150 years of warso Without the cooperation of the wider nation it proved impossible to generate

sufficient tax revenueo Regressive tax structure, and damage to the economyo By mid 17th century, most state functions were in the hands of proprietary

officeholders, financers, military enterprises, and the noble owners of private jurisdiction and immunities

Reconquista Cortes support for the Kings

o Leaving urban oligarchs in place despite the communero revolto Created an order of “stewards and gentlemen” who were paid pensions from the

royal treasuryo Traffic of local government positionso Crown was paying for their expenseso Crown encouraged applications for money grants from 36 deputies

King’s revenueo Alcabala – sales tax (80% of total ordinary revenues) has been farmedo Municipalities opposed this and offered to pay a fix sum approved by the Cortes

in regular intervals and they would collect the money the way they saw fito Lasted 1495-1519 and it’s abandonment led to the communero revolto Alcabala farming was restored and added to tercia (levy on clerical tenths)o Deputies received a lump sum payment each time they voted a servicio (direct

tax) and millones (composed of sisas – sales tax on major foodstuff) They could also keep 1.5% of money collected

o Deputies always voted for more money for the kingo Juro – rente – interest charge – 40% of ordinary revenue in 1522

Greatly increased by 1560o Asiento – agreement to pay a certain sum in cash at a certain time at some

location outside of Spain and the government agreed to reimburse the asientista in Castile with interest a later date

o Cortes never objected expensive foreign policy Traffic of offices

o By 1650 created 30,000 proprietary officeholders in Castile alone – twice more than in France

o Transfer through sale of whole villages and towns to private, seigniorial jurisdictions (senorios)

o Included transfer of the right to elect alcabala decreasing Crown’s revenue baseo By 1500s only 30% of the territory were under direct Royal authorityo Both activities were farmed out to powerful clans of Genoeseo Military

Captains were forced to advance money from their own pockets to pay their troops, and the “company economy” began

o Territorial lords Were also becoming military entrepreneurs, as well as coastal towns and

regions – shipso Direct administration of provisioning and weapons production were turned over

to Genoese financers Results of the financial policy

o Far from promoting centralization and modern bureaucratization, war created administrative fragmentation and privatization

o Steady appropriation of state power by narrow social groupso Economic collapse and he fall of the empire by 1659

MESTAo Originally small common fields where ship grazedo Cooperative groups of neighbors developed to loot out for strayed sheep

Ineffective property rightso Organization that was much easier to tax and raise money for the kingo In exchange for that MESTA received privileges – extension of supervision over

all migratory flocks, including stray animals in the whole kingdom Canadas

o Canadas – sheep highways that led from summer pastures to the winter oneso Were protected by officials called judges of awardso Often enlarged the canadas over official 250 feet – law suits from the farmerso Each party of animal was of at least 1,000 headso Legislature in favoring herding at the expense of agriculture:

Official prohibition of enclosures Defense of the canadas (expel farmers that settled there during the last

50 years) Authorizing the shepherds to cut the trees if there is not enough grass,

and to burn the forests to make grass grow better Law that led the herders to invade farmers lands

Results of favoring MESTAo Crisis in the grain marketo Massive imports of wheat after 1506o Ruined the local farmers

Taxes in Spaino Transit taxes:

Bridge tax Turnpike tax Ferry tax Castle tax (to use the road under castle’s jurisdiction) Road tax (safeguarding of the highways) Duty on the passage of animals Custom duties

o Sales taxes

Alcabala – percentage on sales on the marketplace Sisa – deduction made by the treasury from the sale price of a product Tax on sheep – the largest

o 1595 – out of 80 million silver and gold ducats coming from America, 30% went into the pockets of the Genoese

PowerPoint 9

England 16th – 17th centuryo Paradox

Part of the Roman Empire Was conquered and ruled for many centuries by the French nobility Yet different system of government developed by the end of the 17th

century Difference with Latin Europe

o Large neo-roman state as in Europe never appeared in Englando Presence in England of territorially integrated local government built around the

participatory political communities of the shire and the hundredo The shires were reinforced and extended by the Norman and Angevin

conquerors Early onset of sustained geopolitical competition

o Creation as early as 1100s, of specialized organs of administration, finance, and justice

Rising cost of warfare in 1200so Emergence of a national representative assembly, the English Parliamento Two chamber assembly

Checks and balances problemo Had same proprietary office-holding, tax farming, “inside” credit, military

entrepreneurshipo But it could be checked somewhat during 1300s and 1400so As soon as the geopolitical pressure of the war was over in 1453 – no parliament

was called and abovementioned practices increasedo Revolution of 1641-1642 brought victory to the Parliamento Restoration and return to proprietary practiceso Regular meetings of the Parliament after 1660

Roman periodo Anglia was one of the first areas abandoned by the imperial governmento Romano-British elites and Saxon federates kept on fighting each other until most

of the roman heritage was destroyedo Wave of Germanic invaders who created small scale polities over 400s and 500so Island numbered 30 political units and 7 official kingdoms

9th-11th century

o Viking raids and settlement started in 830o Drive to create a single English kingdom under West Saxon leadershipo A single polity was formedo Shires system was spread all over the country, often centered around a royal

fortification Shire

o Initially was headed by an influential nobleman, the ealdorman, appointed by the king and answerable to him directly

o Responsible for the shire levy, collection of royal revenues, presiding over twice annual meetings of the local free men

o Meetings – discussion, assess taxes, disputes settled, criminal cases tried in the shire court

o In 10th to 11th century ealdorman were replaced with the royal official, the sheriff – so aristocratic appropriation would not happen

Hundredo Was responsible for:

The apprehending of the criminals Deciding lesser criminal civil cases (court held every month) Collecting taxes

Frankish influence on state organizationo Carolingian methods of land tax assessment and collection by shires and

hundreds were used beginning 991 to raise huge sums of money to buy off new waves of Viking raiders

o Monopolistic trade with the continent o Massive program of urban expansion, import of craft innovations, creation of the

market places Royal revenue:

o Income from the kings’ demesneso Impositions from royal vassalso Judicial fees

Royal administrationo 12th century Henry I revived the Carolingian missi – itinerant royal justices sent to

the countryside to conduct trials and hold inquiries into local complaints assisted by panels of sworn witnesses (juries) to root out corrupt sheriffs

o Traveling royal officialo Sheriffs and their assistantso Local men (elected officials (coroners) or temporary commissions (juries))

Magna Carta (1213)o King might levy extraordinary taxes on all of his subjects in cases of “urgent

necessity”o Provided he received the consent of the ‘common counsel of the realm’ (nobility

and clergy) Parliament

o 1254 shires and boroughs received representation and since the end of the 13th century it was called Parliament

o By 1330 House of Lords and the House of Commons are formedo Parliament acquired the power of co-legislation

Permanent taxationo Unrestricted grant of an export duty on wool in 1275 to pay for the crusadeo Special duties on imported products (wine and cloth)o “New customs”o Several property taxes were occasionally granted

Other sources of cash for the kingo Borrowing – Riccardi company of Lucca – as security they were assigned the

receipts of the new customs for 20 yearso Disruptions in trade – war with France

Patrimonialismo Increase in the number of officials especially in the central administrationo Attempts from ealdorman and sheriffs to make their positions hereditaryo Especially after 14th century when laymen replaced clerics as central government

positions Differed from Europe:

o Official could sell his office, but his replacement has to be approved by the kingo There was a law that prevented increase in the number of officials performing

the same tax Parliamentarism vs. patrimonialism

o Parliamentary criticism in 13th and 14th century of the patrimonial practiceso They were repealed by the kingo Parliament only got the right to inspect the accounts of the king’s bankers

16th to 17th centuryo As soon as the war was over – no need for the parliamento Consolidation of the proprietary officeholderso Persistent financial crisis after 1603

Patrimonialism in 16th centuryo Appointment to office and other royal favors were all obtained through

patronageo Traffic of offices and bribes to obtain an appointment, although traffic was

forbidden by the Parliament in 1552o The queen vetoed all measures suggested by the Parliament

Increase in royal spending Wars with Spain (1624-1630) and France (1627-1630)

o Crown turned increasingly to the patrimonial practices Customs were put to farm

o Introduction of Private treasurers who had to raise money on their own account Royal administration in 1620s

o Patronage

o Patrimonyo Purchase

Parliament vs. the 3 Pso Commissions created for the inquiry were staffed with the officeholders

themselves o It accused only those that belonged to the wrong factiono Money extortions from the accusedo Irregular and ineffective Parliament

Civil waro Removed the system that flourished during the Tudors and Stuarts rule, but was

administratively and politically unstableo New tax – the excise – on domestic commodities o Life tenure, office traffic, fee taking stoppedo Could not sole the financial problem

Inability to collect taxes by the Parliamento Resistance of the local political societyo Cromwell was forced to borrow from London goldsmith-bankerso Restoration in 1659-1660

Restorationo All bad practices were brought backo Parliament chose to vote one-time short period grants to the kingo This in turn pushed him to borrowing again

External threats – Dutch (1665-1667) and Frencho Dutch sailed up the Thames and burned the great naval dockyard in Chathamo Creation of a commission by the Parliament to establish Treasury as a master

department for revenue collection, spending, and official appointments New Treasury

o Precise system of records and set of written procedures for department businesso Introduced the rule of “specific sanction”

Written Treasury approval for departments spending, who were in turn required to send weekly written reports of their spending

o Altered fundamentally government credit system (taxes did not provide enough revenue)

Borrowing directly from the general publico Right to approve all new offices – stop of lifetime holdingo Took over the farm for the Excise and the Customs and created national network

of state customs officials Parliament

o Was now able to vote substantial extraordinary supplies New wave of anti-reform

o 1672 stop of the Exchequer Second reform

o 1679 third Treasury commission

o Bring ordinary revenue and expenditure into balanceo Efficiency of tax collection, restored public credit by paying off the debts

War with France (1689-1697), with Spain (1702-1713)o Need for money to increase fleet from 173 ships in 1688 to 323 ships in 1697

Checks and balanceso Commission of public accounts – check on corrupt practices in public

administration and the Navyo Press was freed when the old censorship law was abolished in 1695

More informed public opiniono Strong Parliament

Need for the cash to fund warso Extending and refining the Treasury Order Systemo Increase in excise (include more products) and large increase in direct taxeso Bank of England was created in 1994

To ease the government revenue and short-term credit problems by advancing it L 1.2 million raised through the sale of the bank’s stock to the general public

The dividends paid to bank shareholders would come from interest payments, guaranteed by the Parliament

The Bank was allowed to earn on profits by dealing in securities, bullion, foreign exchange, and commercial loans

o Replaced the old direct tax based on wealth with a new land tax raised by assessment

Government required that each country raise and remit to the Exchequer a fixed sum in cash every month

Credible commitmento General public was in position to punish the government for reported cases of

mismanagement by threatening to withdraw their fundso Improvement in long-term credit in Englando Economic growth

PowerPoint 10

International trade in the 14th-15th centurieso Land transport – became much safer after 1453 (100 years war), cheaper for

grain transportationo Sea transport – cheaper, faster, but pirates, weather, and sea wars

Sea trade participantso Veniceo Genoao Florenceo Spain

o Portugal Need for cost reduction

o Getting as close as possible to the source of the producto Develop new forms of industrialization (drive toward vertical integration)

Venice and Genoao Colonies in Mediterranean and Black Seaso Trading privilegeso Enabled them to obtain key raw materials and luxury manufacturers at the

lowest possible cost European purchases in the East consisted of two groups:

o Products of local cultivation and processing Cotton, sugar, silks, wheat, dyes, semi-tropical fruits, alum

o Products originating beyond eastern Mediterranean Pepper, ginger, cloves, and other exotic spices, fine silks, and jewelry

Constrictions to Venice and Genoa trade with the East:o Collapse of the Mongol Empire in 14th century disrupted northern trade routs –

access to Caffa and Tana in the Black Seao Ottoman Turks restricted access to the Black Seao Turkish seizure of the alum mines at Phocaea in Asia Minoro Mamluk conquest in Levant and Egypto Papal prohibition against trading with Mamluks

Spices, aromatics, dyes, drugs, sugar, and cottono Sharp spice price drop in the Farther East

Portugalo Scanty natural resourceso Few merchantso Population less than a milliono No great seafaring traditiono Initial discoveries in Africa were initialized by the crusading efforto Prince Henry – vigorously promoted exploration of Madeira and Azoreso By mid 15th century commercial attraction – gold, slaves, sugar, and later pepper

from Guineao Papal decrees of 1450s recognized Portuguese conquests, and commerce, past

and future, in Africa and in “the Indies”, and prohibited other nations from infringing on their monopoly of discovery, conquest, and commerce in those areas

Slaveryo In Europe – from Slavic countries – domestic service, concubines, opposition of

the church Agriculture was not suitable for labor intensive plantations

o In the Mediterranean – male slaves from the Black Sea for the Mamluk army and Christian galleys, and large estates in Crete, Majorca, and Aragon

From Africa – to rural estates in Muslim Spain

o Late 15th century increase in slave trade from Africa – for the sugar industry Sugar

o 12 months to ripen, only hot humid climate, crushing of the sugar cane was very labor intensive

o Plantations in the Atlantic islands reduced the price by 1/3o Just Madeira produced 1,000 tons per yearo Antwerp – main refining center of Europe

Organization of discoverieso Financing of the discoveries – Genoese

As soon as they became profitable – royal monopoly on the sea routes, and trade

o Casa da India directed flow of spices to the crown’s factor in Antwerp, which had exclusive selling rights in the North

Royal monopoly collapseo Complexities of managemento Poor administrationo Poor communicationso Need for ready casho Sales of licenses to private hands – foreign merchants

Spaino Final expulsion of Muslims from Granadao Royal ambition in Italyo Columbus – crown was not obliged to contribute fundso Genoese – dominated the business of providing sea loans, and directly engaged

in trade with the nascent settlements