The Third Pillar: How Markets and the State Leave the Community Behind

by Raghuram G. Rajan

In feudal Europe around the turn of the first millennium, all that it seemed to take to create a self- sufficient political entity – it would be too much to call this a state – were fortified walls and a retinue of armed men. Indeed, often the first use of the independent taxation authority a town received was to build a strong wall – a policy that still appeals to some of our politicians.23 In the fourteenth century, by some counts there were over one thousand separate political entities in Europe.24 Each entity levied its own duties, taxes, and tolls, especially on goods crossing its borders, which increased the cost of transporting goods over long distances. These were just the legal impediments to commercial traffic; entrepreneurial lords could indulge in their own banditry, while sea captains could engage in piracy. If you drive alongside the Rhine near Frankfurt today, you will see the castles of the original robber barons at regular intervals, though today they only relieve tourists of their money, and in a far more civilised way than in the past. All these impediments ensured that the size of the market any producer could safely and profitably access was quite small – often only within the borders of the little political entity he resided in. The cannon changed everything. The Chinese invented gunpowder, but it was the Europeans who fully discovered and developed its destructive potential. At the battle of Crecy in 1346, English bowmen used small bombards, which, p...

From walls to large armies