Craft guilds

Craft guilds were created as a response to certain problems associated with raising royal revenues and securing basic public services in Prague during the medieval and early modern periods. The theory consistent with historical evidence predicts that the rise, spread, and fall of guilds was a result of mutually beneficial bargaining between local craftsmen and their feudal rulers. Guilds enabled craftsmen to utilize the benefits of collusion by offering their capacities to sovereign authorities in exchange for exclusive market privileges. Nevertheless, they created social distortions within their industries in the process.

Medieval and early modern craft guilds were rent-seeking coalitions of local producers that controlled markets at the expense of society as well as market-enhancing organizations that reduced the high transaction costs associated with pre-modern industries. This article presents an economic analysis of this seemingly contradicting behavior. The proposed argument is simple. Obtaining a market privilege guaranteed guild members extra rents while increasing the cost of losing membership, which motivated greater collective action within the organization. The ability to punish free-riders and enforced cooperation was used to overcome the problems brought by the transition from kin to market economy.