The Culture Series: Part 3, How the culture of good governance and enterprise emerged in Europe.

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“A monarch is like a robber permanently on the prowl, always probing… always searching for… something… to steal.”

- Thirteenth-Century English Chronicler,
Quoted in Ralph V. Turner,
King John, 3

In my first two posts on Culture (post 1 and post 2), I defined culture and showed how an organization was able to change its culture over time. In this third post, I write about how governance culture in Europe evolved from the 14th century to what we see today. A lot of information from this post comes from Robert Bates’ book, Prosperity and Violence.

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It is tempting to casually observe most European states today without a deep appreciation for how some of their core political institutions were created. As Harvard University professor, Robert Bates, explains in Prosperity and Violence, war mongering monarchs needed money to fight their wars and the methods they used to raise funds evolved over time, ultimately giving birth to the swifter judiciaries and parliaments the continent enjoys today. But it was not always so.

Specialists in violence

In Prosperity and Violence, Bates refers to politicians as “specialists in violence”. One need not look too far to see the violence that is created, expanded, and committed by politicians. From Burundi to Syria; from South Sudan to Congo; and from Iraq to Ukraine, specialists in violence are hard at work. In most cases, this violence is perpetrated in the name of an ideal; like democracy, freedom, human rights, or national security. But in all cases, the violence is devastating to citizens and the long-term economic prosperity of nations. While studies show that violence has reduced dramatically in the modern era, this was not always the case. And certainly not in Europe. How did Europe, once a region laden with a culture of violence, overcome this problem?

Prosperity comes at a price

During the 14th and 15th century, the concentration of wealth in Europe gravitated from Italian cities to the shores of the Baltic and North seas. This was accelerated by the Atlantic trade. As people migrated to urban areas to take advantage of the opportunity in cities, the demand for agricultural products increased.

To satisfy the demand created by this urban migration, rural farmers invested in their farms. These investments yielded profits which created prosperity for the rural farmers. Because there were no proper law enforcement agencies at the time, families had to provide their own personal security. So prosperity brought along with it the “militarization” of families, but this private provision of security was both expensive and tenuous.

Monarchs and the city

Monarchs had a relatively easy time plundering from citizens that lived in rural areas despite their “militarization.” The mercenaries for the monarchs were always better armed than the mercenaries most farmers could afford. As cities developed, however, monarchs had to develop a different strategy for taxing city residents. This was one of the first signs that the culture of violence and outright plunder had begun to change.

They (monarchs) could not use force because most cities had erected walls and had a concentrated force that could strike the mercenaries of the monarchs. As such, the monarchs had “to govern with greater wisdom than they themselves had intended” as quoted by Montesquieu, 18th century French lawyer and political philosopher.

Without having violence as an option for tax collection, the monarchs enacted policies that were favorable to urbanization and manufacturers in cities. For instance, they prevented imports of finished goods so that manufacturers could command higher prices for their products.

But the policy that had the most impact was the right to self-govern. Monarchs simply allowed the “industrialists” in the cities purchase charters that allowed them make and enforce laws that promoted commerce and industry. With this new-found freedom, industrialists in the cities invested in public works and collected local taxes.

The sum of all these policies created a steady tax base for the monarchs without the sort of violence they were used to perpetrating. A new culture of enterprise was beginning to emerge.

The importance of a swift judiciary

As citizens became wealthier, the size of the deals they engaged in also grew larger. As a result, they became increasingly impatient with the existing justice system. Before the monarchs intervened, private justice prevailed. This system inflicted significant losses and delays necessitating the establishment of more efficient courts.

Citizens were willing to pay higher court fees, as long as justice was meted out swiftly and with some level of fairness. Most citizens actually preferred swiftness of the judiciaries to fairness. This became a huge source of revenue for the monarchs.

Sovereign debt was not always sovereign — The Parliament arrives

In order for the monarchs to keep raising funds to fight their wars, they promoted policies that supported urbanization and built a judiciary that responded swiftly to the needs of citizens. But these actions by the monarchs were not enough to attract sufficient capital for their wars as they grew increasingly longer and bigger.

These wars severely impacted their treasuries, compelling them to borrow as taxes alone were not sufficient. 500 years ago, sovereign debt was riskier than private debt. Private debt was typically smaller in size, had collateral, and was short-term. Sovereign debt, however, was larger in size, did not have collateral, and was long-term debt. Additionally, monarchies could simply renege on their promise to repay their debts.

Monarchies implemented some policies that gave investors some hope for repayment, like granting them monopolies and giving them the ability to collect customs payments. But just as easily as kings enacted these policies, they could also go back on their word. While these initiatives helped, the costs of borrowing stayed high until parliaments were introduced.

For instance, in 17th century England, the Dutch dethroned the Stuarts and replaced them with folks from their lineage, the House of Orange. William of Orange further legitimized parliament’s role in society by highlighting their sovereignty to investors and creditors. He highlighted their control over public policy and public finances.

The monarchy was willing to give up some of its power because it would gain credibility and better access to finance. As Professor Bates writes “the need to secure finances from citizens in order to pay for the wars therefore produced characteristic structure of political institutions in early modern times: parliamentary government.”

As can be seen from this post, circumstances led to the change in culture in European governance and enterprise. I enjoyed learning about this because it highlights the dynamism of culture and shows that productive enterprise can influence governance.

In my next post, I will write about the implications of culture for innovators, investors, and policy makers, especially those in emerging markets.

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