History Lessons: The Birth of Impersonal Exchange: The Community Responsibility System and Impartial Justice

This paper describes the premodern European institution that supported impersonal exchange, in which a merchant's decision to exchange is independent either of expectations of future exchange with the same partner or of knowledge of that partner's past conduct or the ability to report misconduct to future trading partners. Economists know surprisingly little about how institutions evolved to support impersonal exchange. The standard story asserts that in the early stages of market development, exchange tends to be personal and is supported by reputation; then, after an economy becomes sufficiently large, society establishes centralized and impartial courts that, by the threat of coercively imposed sanctions, enable widespread impersonal exchange. But during the late medieval period, there was no centralized legal system capable of effectively supporting impersonal exchange among merchants from different localities; and, although local courts existed throughout Europe, they were not impartial dispensers of justice but were attentive to local interests and were controlled by the local elite. This paper describes how a particular institution, the "community responsibility system," nevertheless enabled European merchants to commit to keep their contractual obligations in impersonal exchange from the late medieval to the modern period.