WEBVTT - This Explains Why Modern Markets Developed Where They Did 0:00:08.800 --> 0:00:12.559 Hello, and welcome to another edition of the Odd Thoughts podcast. 0:00:12.640 --> 0:00:16.840 I'm Tracy Alloway and I'm Joe wisnal So Joe. We 0:00:16.920 --> 0:00:19.840 obviously talk a lot about markets on the show, and 0:00:19.920 --> 0:00:23.520 we talk a lot about stock markets, but do we 0:00:23.720 --> 0:00:28.440 ever stop and consider how stock markets came into being. 0:00:29.040 --> 0:00:32.959 We really don't talk about the origins of these markets 0:00:33.040 --> 0:00:37.320 all that much, why the stock market created was created. 0:00:37.440 --> 0:00:40.040 We sort of take it for granted. I'm very interested 0:00:40.040 --> 0:00:43.080 in the subject because I often wonder, you know, if 0:00:43.080 --> 0:00:46.040 you were to go around to market participants and ask them, 0:00:46.080 --> 0:00:48.479 why do we have a stock market in the first place? 0:00:48.720 --> 0:00:51.239 Why did we invent this thing? I'm always curious what 0:00:51.240 --> 0:00:53.199 the answers would be, because I still don't think I 0:00:53.240 --> 0:00:56.880 have a stelid grip on why they exist. Yeah, and 0:00:56.920 --> 0:00:59.600 if you think about it, if you think real hard 0:00:59.640 --> 0:01:02.920 about it, it's kind of a weird construction, right, the 0:01:03.040 --> 0:01:05.440 idea that a bunch of strangers are going to get 0:01:05.480 --> 0:01:11.480 together and share or sell each other shares in particular companies, 0:01:11.720 --> 0:01:14.920 or things like why do we do that? And why 0:01:15.000 --> 0:01:19.920 do we trust the other participants involved? Totally? Like every 0:01:19.959 --> 0:01:22.479 time there's an I P O or something and It's like, wait, 0:01:22.520 --> 0:01:25.840 if you're selling and you know more about the company, 0:01:26.280 --> 0:01:28.800 If you think the insiders and the company are selling, 0:01:29.040 --> 0:01:31.240 why should I be buying? I guess of that a 0:01:31.280 --> 0:01:35.960 bad sign. And of course there's various mechanisms that we've 0:01:36.000 --> 0:01:41.399 built to learn about companies, mandatory regulatory disclosures, quarterlia reports, 0:01:41.440 --> 0:01:46.600 earnings calls, presentations, outside auditors, but we're still essentially buying 0:01:46.720 --> 0:01:50.880 into companies that at best we only have partial information 0:01:50.880 --> 0:01:53.680 of what's really going on. Right, So that's the other 0:01:53.720 --> 0:01:56.280 side of the story, Right, There's two things. There's trust 0:01:56.760 --> 0:02:00.440 and there's information involved. So we are going to take 0:02:00.480 --> 0:02:04.040 a journey back in time for this particular edition of 0:02:04.080 --> 0:02:07.440 Odd Lots and figure out how those two things kind 0:02:07.440 --> 0:02:11.520 of came together at a particular moment in time to 0:02:11.720 --> 0:02:16.440 create some of the first modern markets. Really, I can't wait, 0:02:16.480 --> 0:02:19.040 because as hard as it is right now to really 0:02:19.080 --> 0:02:21.239 have a grip on what's going on with the companies 0:02:21.639 --> 0:02:24.600 we invest in, you know, you think back to hundreds 0:02:24.600 --> 0:02:28.760 of years ago and how much worse disclosure would have been, 0:02:28.880 --> 0:02:33.040 and auditing and standards of data reporting. Right now, we 0:02:33.120 --> 0:02:36.760 all basically all counting think about accounting in like the 0:02:36.800 --> 0:02:41.360 sixteen hundreds accounting and P and L statements and balance sheets. 0:02:41.400 --> 0:02:43.600 We have the we have machines that can part this 0:02:43.639 --> 0:02:46.120 in very standard ways of reporting this stuff. But at 0:02:46.120 --> 0:02:49.919 the beginning, how did anyone believe anything exactly? All right? 0:02:50.080 --> 0:02:52.880 So I'm glad you're on board. So to discuss all 0:02:52.919 --> 0:02:56.799 of this, we have Partique Raj for our guest. He 0:02:57.000 --> 0:03:00.359 is a PhD student over at the University College London. 0:03:00.400 --> 0:03:03.640 He's also a research fellow at the Stickler Center for 0:03:03.720 --> 0:03:06.520 the Study of the Economy and the State at the 0:03:06.600 --> 0:03:09.800 University of Chicago Booth School of Business. And he is 0:03:09.840 --> 0:03:14.520 also the author of a paper called the Origins of 0:03:14.680 --> 0:03:20.960 Impersonal Markets in Commercial and Communication Revolutions of Europe. And 0:03:21.000 --> 0:03:23.560 it's going to be really interesting, I promise. Let's bring 0:03:23.639 --> 0:03:32.280 him on all right, Critique, thanks for joining us today. Hi, 0:03:32.320 --> 0:03:35.480 Tracy and Joe. Great to be here. So, uh, did 0:03:35.520 --> 0:03:41.160 we get the intro? Right? Were trust and information kind 0:03:41.240 --> 0:03:44.320 of the two pillars of importance when it came to 0:03:44.440 --> 0:03:48.240 creating the first modern market? So when you think about trust, 0:03:48.320 --> 0:03:53.520 trust is generally a much more complicated construct, right, because 0:03:53.760 --> 0:03:55.880 you can have trust in your family members and you 0:03:55.880 --> 0:04:00.200 can have trust in strangers. So I think trust it's 0:04:00.240 --> 0:04:05.400 created when you have one some incentives to really trust strangers. 0:04:05.400 --> 0:04:07.840 So if you don't have any incentive to go out 0:04:07.920 --> 0:04:11.040 and do business with people who you don't know, why 0:04:11.120 --> 0:04:14.800 why would you need to trust them? So incentives really mattered. 0:04:15.160 --> 0:04:17.120 And then on the other hand, of course, you need 0:04:17.160 --> 0:04:21.520 to know about something about them, something about the markets 0:04:21.560 --> 0:04:23.960 they work in. You need to have certain trust in 0:04:24.000 --> 0:04:27.839 the markets and so forth. So yes, trust is really important, 0:04:28.240 --> 0:04:30.719 but then the key question is how do you create 0:04:30.760 --> 0:04:34.800 that trust. So in your paper, and before we talk 0:04:34.880 --> 0:04:39.960 about how impersonal markets or stock markets were created, you 0:04:40.000 --> 0:04:43.200 talk about the pre existing structures that were in place 0:04:43.520 --> 0:04:47.560 to essentially solve the trust problem or to partially solve it, 0:04:47.839 --> 0:04:50.240 and you talk about the role of I think trade 0:04:50.240 --> 0:04:53.920 guilds in this. So can you explain what these guilds were, 0:04:54.000 --> 0:04:58.160 what they did and they're important to comers. So not 0:04:58.279 --> 0:05:01.720 just in Europe but around the world. Traditionally business has 0:05:01.760 --> 0:05:07.320 happened through networks. So you have kabilahs in Arabic world, 0:05:07.400 --> 0:05:12.240 you have jattas in India, you have guangs or clans 0:05:12.279 --> 0:05:15.800 in China, and you have had guilds in Europe. And 0:05:15.839 --> 0:05:19.520 the central role that they play is that one you 0:05:19.720 --> 0:05:23.239 generally are interacting with people you know, or at least 0:05:23.320 --> 0:05:27.640 people you know who know other people. So what it 0:05:27.680 --> 0:05:30.960 does is that it creates a repeated interaction and that 0:05:31.080 --> 0:05:36.400 kind of creates trust. So that's the simplest reason why 0:05:36.480 --> 0:05:39.560 you can have you want to do business in networks. 0:05:39.960 --> 0:05:43.039 Can you give an example to really help us understand 0:05:43.080 --> 0:05:45.560 it of an industry you know, a lot of your 0:05:45.560 --> 0:05:48.040 writing is in europe An industry that would have been 0:05:48.080 --> 0:05:51.640 dominated by a guild and how specifically it would have 0:05:51.640 --> 0:05:55.920 facilitated trade within that area. Basically all sorts of trading 0:05:56.000 --> 0:05:59.640 industries would be dominated by guilds or networks. I think 0:05:59.640 --> 0:06:03.080 an sample in the modern world is like these taxi 0:06:03.120 --> 0:06:07.800 associations you are These are associations where basically entering is 0:06:07.920 --> 0:06:11.479 rather difficult. You need to have a high license fee 0:06:11.520 --> 0:06:14.680 to pay if you wanted to enter these taxi associations. 0:06:14.720 --> 0:06:17.279 And one of the reasons you have these was because 0:06:17.279 --> 0:06:21.400 you wanted reliable people to enter the taxi industry, because 0:06:22.040 --> 0:06:24.279 who knows if you have a taxi driver who is 0:06:24.320 --> 0:06:28.359 not very reliable. So taxi associations are an example of 0:06:28.400 --> 0:06:32.320 a good modern day guild. And then you have something 0:06:32.360 --> 0:06:36.839 like Uber or Lift disrupting that. So in a modern world, 0:06:36.920 --> 0:06:40.919 I think taxi associations are like a favorite example that 0:06:40.960 --> 0:06:45.680 I like to use. So in the sixteen hundreds in Europe, 0:06:45.720 --> 0:06:49.360 you have these powerful merchant guilds and there's a lot 0:06:49.440 --> 0:06:53.279 of influence and a lot of money presumably tied to 0:06:53.360 --> 0:06:56.600 them because it's almost a monopoly. I suppose that they 0:06:56.640 --> 0:07:00.520 have over particular areas of trade in a similar way 0:07:00.560 --> 0:07:04.240 to the taxi medallions have a monopoly nowadays, with the 0:07:04.279 --> 0:07:07.440 exception of the disruptive forces that are Uber and Left. 0:07:08.240 --> 0:07:13.720 What happened in the sixteen hundreds to dislodge the power 0:07:14.040 --> 0:07:18.800 of the merchant guilds. So generally, when people think about 0:07:19.560 --> 0:07:22.680 guilts or any of such network institutions, there tends to 0:07:22.720 --> 0:07:26.280 be these two extreme views. The one view is that 0:07:26.320 --> 0:07:31.400 all guilts were really nice institutions which were building, which 0:07:31.400 --> 0:07:34.160 were communities in which people would do business and rely 0:07:34.240 --> 0:07:38.880 on each other, and um kind of capitalism came in 0:07:39.040 --> 0:07:43.480 and created this very atomist world. That's one way of 0:07:43.800 --> 0:07:46.240 looking at guilts. And then the other way of looking 0:07:46.280 --> 0:07:49.280 at gils is that, well, these guilts were these networks 0:07:49.280 --> 0:07:53.400 of nepotism and monopoly, and basically free market comes in 0:07:53.520 --> 0:07:57.960 and rains in their power, and you have people who 0:07:58.000 --> 0:08:00.560 can come from anywhere or any background can enter a 0:08:00.640 --> 0:08:04.800 business and excel in it. So when you want to 0:08:04.880 --> 0:08:09.120 understand why the guilts deadline, we have to identify the 0:08:09.160 --> 0:08:12.240 things that they were really good at, which is providing 0:08:12.280 --> 0:08:17.320 information to people or basically protecting people from a lot 0:08:17.360 --> 0:08:20.400 of risks because you were basically trading with people who 0:08:20.480 --> 0:08:24.360 if they cheated on you, you could kind of ostracize 0:08:24.400 --> 0:08:29.960 them or make their reputation go bad. So this kind 0:08:30.000 --> 0:08:33.880 of reliability and information helped guilts survive for so long. 0:08:34.240 --> 0:08:37.520 So when you think about how would guilds deadline, you 0:08:37.559 --> 0:08:40.280 have to go back and look at situations where people 0:08:40.320 --> 0:08:44.200 had suddenly a new incentive to start to do business 0:08:44.240 --> 0:08:47.400 with new people, because guilts were not very good at 0:08:47.880 --> 0:08:51.559 providing you with new opportunities or situations where you could 0:08:51.600 --> 0:08:54.200 get new information. So you have to look at the 0:08:54.240 --> 0:08:58.320 interaction between incentives to go outside of guilts and the 0:08:58.559 --> 0:09:01.839 need to they wily did to get information. And so 0:09:01.960 --> 0:09:05.800 in your paper you identify two key factors that sort 0:09:05.800 --> 0:09:09.800 of demonstrated grand unified theory, and you look at where 0:09:09.800 --> 0:09:13.480 these impersonal networks took off, and the two factors seemed 0:09:13.520 --> 0:09:17.479 to be a in the cities that had an opportunity 0:09:17.640 --> 0:09:21.520 to trade with the outside world, so key trading ports, 0:09:21.880 --> 0:09:25.200 geographic exposure to trade routes, and then the other thing 0:09:25.480 --> 0:09:31.160 is proximity to the town where Guttenberg invented the printing press. 0:09:31.520 --> 0:09:34.319 And so the combination of places that sort of had 0:09:34.360 --> 0:09:37.720 access to printing press the new vector of information and 0:09:37.800 --> 0:09:42.120 places that were on these trade routes. Combining those two 0:09:42.360 --> 0:09:47.559 is where you see the first impersonal networks germinated, yes, exactly. 0:09:47.720 --> 0:09:50.679 So that's that's the story. The big question is that 0:09:50.920 --> 0:09:54.920 why is it that it's northwestern Europe where the first 0:09:54.920 --> 0:09:58.520 stock markets or the first joint stock companies immerged. Why 0:09:58.559 --> 0:10:01.600 not Spain or why not in Italy or why not 0:10:01.800 --> 0:10:06.360 in Germany? And that's where you want to look at 0:10:06.440 --> 0:10:10.000 this combination of factors. For example, Spain had all the 0:10:10.040 --> 0:10:12.760 benefits of Atlantic trade. So when it comes to the 0:10:12.800 --> 0:10:15.880 incentive to go out of gills and do business, I 0:10:15.920 --> 0:10:20.720 think like Amsterdam, even in southern cities of Spain, you 0:10:20.800 --> 0:10:24.440 had such incentives. On the other hand, if you want 0:10:24.440 --> 0:10:26.840 to go after a theory that oh, well, access to 0:10:26.840 --> 0:10:29.319 information made it easier for people to talk to each 0:10:29.360 --> 0:10:31.480 other and to talk to strangers. Then you would have 0:10:31.520 --> 0:10:34.560 to ask why did this not happen in Germany where 0:10:34.600 --> 0:10:38.400 basically that's the hub for the printing press. And so 0:10:38.559 --> 0:10:40.880 it is the combination of these two things that, well, 0:10:40.920 --> 0:10:42.880 you need to have incentives to go out and do 0:10:42.960 --> 0:10:45.520 business with people you don't know, and you need to 0:10:45.520 --> 0:10:49.920 have information about the markets and the commodities you're trading 0:10:49.960 --> 0:10:54.240 and somewhat the people you're working with. That's really important. 0:10:54.559 --> 0:10:56.760 So it's the two things when they come together that 0:10:57.440 --> 0:11:00.480 at least in this paper, I argue, create the uh 0:11:00.640 --> 0:11:04.280 conditions that are favorable for the rise of such markets. Okay, 0:11:04.320 --> 0:11:08.000 so if I'm a trader in Antwerp or Amsterdam and 0:11:08.040 --> 0:11:12.000 I'm looking at all these opportunities taking place in the 0:11:12.040 --> 0:11:15.000 new world, is the basic idea that in addition to 0:11:15.160 --> 0:11:18.720 having that exposure to new types of trade or new 0:11:18.720 --> 0:11:22.720 potential businesses, I can now pick up a printed book 0:11:22.960 --> 0:11:26.040 or pamphlet and I can learn how to trade or 0:11:26.080 --> 0:11:30.600 I can learn more information about those particular businesses. Yes, 0:11:31.080 --> 0:11:34.640 so that's sort of the idea. So obviously, when the 0:11:34.640 --> 0:11:37.760 printing press came in, all sorts of things were being printed. UM. 0:11:38.160 --> 0:11:41.880 A lot of it was religious books, and the smallest 0:11:41.880 --> 0:11:45.720 part of it was things like merchant manuals and books 0:11:45.720 --> 0:11:49.760 in economics, etcetera, etcetera. And what was happening is that 0:11:49.760 --> 0:11:52.920 when you happen to be at a place where trade 0:11:53.080 --> 0:11:56.360 is really desirable, the content that gets produced in these 0:11:56.400 --> 0:11:59.840 kind of places are related to those which helped trade 0:11:59.920 --> 0:12:04.520 or out. For example, Amsterdam was emerging as a good 0:12:04.600 --> 0:12:08.920 hub where a lot of navigation related UM books were 0:12:08.960 --> 0:12:13.960 being printed. Or for example, in Antwerp, uh there was 0:12:14.120 --> 0:12:19.120 a lot of printing of economics books, or it emerged 0:12:19.160 --> 0:12:23.720 as a hub for double entry bookkeeping. So basically the 0:12:23.800 --> 0:12:27.760 incentives to do trade was driving once you had the 0:12:27.840 --> 0:12:30.760 access to printing, it was driving the content that was 0:12:30.800 --> 0:12:35.160 helpful for creation of information that could help with trade. 0:12:37.520 --> 0:12:40.120 What happened to the merchant guilds in these areas, in 0:12:40.160 --> 0:12:43.280 areas like Antwerp and Amsterdam, did they try to fight 0:12:43.360 --> 0:12:46.120 the change or was it just sort of a slow 0:12:46.200 --> 0:12:49.600 dissolving of the role that they played in facilitating trade. 0:12:50.040 --> 0:12:53.240 So it could differ from place to place. Like one 0:12:53.280 --> 0:12:58.400 of the interesting historical stories that I learned while doing 0:12:58.400 --> 0:13:03.360 this research was this virgence between Hamburg and Lubeck, and 0:13:03.520 --> 0:13:06.240 which kind of tells you how. For example, in Lubek, 0:13:06.679 --> 0:13:09.679 guilts tried to push back on the idea of opening 0:13:09.679 --> 0:13:13.960 of impersonal markets, while in Hamburg they were not able 0:13:14.040 --> 0:13:18.280 to have that kind of resistance. And the reason why 0:13:18.360 --> 0:13:20.560 I think that was the case is because these two 0:13:20.559 --> 0:13:23.760 cities happened to be at a very interesting geography. So 0:13:23.800 --> 0:13:27.079 they are on two sides of the Jutland Peninsula in 0:13:27.120 --> 0:13:31.240 the northern Germany, and Hamburg is on the Atlantic coast 0:13:31.400 --> 0:13:35.560 while Luebeck is on the Baltic coast. So the basic 0:13:35.640 --> 0:13:38.720 idea is that because Hamburg was at the Atlantic coast, 0:13:38.760 --> 0:13:43.320 so this side of the of the Jutland Peninsula had 0:13:43.440 --> 0:13:47.319 greater incentives to basically or exposure to the Atlantic trade 0:13:47.320 --> 0:13:51.520 and its benefits. While Luebeck, while it was a major city, 0:13:51.840 --> 0:13:54.880 it didn't get that kind of exposure because it was 0:13:54.920 --> 0:13:58.199 on the Baltic side of the sea. And these two 0:13:58.200 --> 0:14:01.520 cities were just sixty five apart from each other. So 0:14:01.760 --> 0:14:04.760 in Lubec you have a lot of resistance to new 0:14:04.800 --> 0:14:08.760 merchants coming in and they start to proper privileges, they 0:14:08.800 --> 0:14:11.920 start to fight against the Danish and the Dutch who 0:14:11.920 --> 0:14:15.560 are giving them competition. So yes, um, the guilts in 0:14:16.080 --> 0:14:19.400 more established cities fight to fight back, while in a 0:14:19.440 --> 0:14:22.960 place like Hamburg this slowly basically dissolved a way. You know, 0:14:23.000 --> 0:14:27.520 I noticed particularly kind of introduced this as talking about 0:14:27.560 --> 0:14:30.840 the origins of the stock market. You've been very specific 0:14:31.040 --> 0:14:34.400 using this term in personal markets. Can you talk just 0:14:34.480 --> 0:14:37.400 a little bit about what sort of the distinction is. 0:14:37.480 --> 0:14:41.320 I mean, I imagine that the early impersonal markets aren't 0:14:41.400 --> 0:14:45.000 really recognizably what we would call stock markets today. So 0:14:45.320 --> 0:14:49.080 what precisely was being traded here? So the first stock 0:14:49.120 --> 0:14:53.800 market was the Amsterdam Stock Exchange, which was specifically just 0:14:54.000 --> 0:14:58.360 made to raise capital for the Dutch East India Company. 0:14:58.440 --> 0:15:00.760 So it was for this one giant end company that 0:15:01.120 --> 0:15:04.920 essentially a stock market was created. Before that, there existed, 0:15:04.960 --> 0:15:08.760 for example, these commodity bourses where so for example in Antwerp, 0:15:09.000 --> 0:15:12.600 where people would basically trade commodities in start uh in 0:15:12.720 --> 0:15:16.840 spot kind of situations. So the key, the reason why 0:15:16.880 --> 0:15:19.920 I like to use the term in personal markets is 0:15:19.960 --> 0:15:23.720 because from a historical point of view, Um, my view 0:15:23.840 --> 0:15:27.920 is that sixteenth century and thereafter was a major historical 0:15:28.040 --> 0:15:31.720 break in terms of how the world was doing business, 0:15:31.760 --> 0:15:35.360 which was that while until now you had relationships that 0:15:35.480 --> 0:15:39.520 drove how business was done, but now suddenly at least 0:15:39.560 --> 0:15:44.080 an opportunity emerged that somebody from some part of the 0:15:44.120 --> 0:15:46.640 world could just come in and start to do business 0:15:46.640 --> 0:15:50.600 in some other city. So basically this kind of lowered 0:15:50.640 --> 0:15:53.560 the entry barriers for people who might not have been 0:15:53.600 --> 0:15:57.120 privileged enough in the prior centuries to do trade. So 0:15:58.040 --> 0:16:01.560 it is a major part of this sorry that how 0:16:01.600 --> 0:16:06.960 impersonal markets, by making things more individualistic, make it easier 0:16:07.000 --> 0:16:10.680 for people who are probably more motivated to come and 0:16:11.200 --> 0:16:14.200 do business. So for example, in case of Hamburg, it 0:16:14.320 --> 0:16:17.360 was a major hub for foreign merchants, but Lubec had 0:16:17.400 --> 0:16:20.080 this problem that they didn't want to have foreign merchants 0:16:20.080 --> 0:16:23.280 because they wanted to keep all their privileges for the locals. 0:16:23.320 --> 0:16:25.360 So that's why I like to use the term in 0:16:25.440 --> 0:16:29.200 personal markets, because the rise of stock market can be 0:16:29.320 --> 0:16:32.320 like a side effect of this broader change in history. 0:16:33.080 --> 0:16:35.840 But so for example, when you think about the Wall Street, 0:16:36.360 --> 0:16:38.400 people from all parts of the world just come in 0:16:38.480 --> 0:16:40.640 and then work at these banks, and it's not that 0:16:40.800 --> 0:16:44.840 you have to be it's a pretty diverse place, and 0:16:44.840 --> 0:16:48.320 and it's because your networks don't necessarily need to be 0:16:48.440 --> 0:16:52.400 so important as long as you are really good making money. 0:16:52.760 --> 0:16:57.000 So how much of the rise of impersonal markets had 0:16:57.040 --> 0:17:02.960 to have happened along with strengthening of legal and governmental institutions, 0:17:03.000 --> 0:17:05.359 because I imagine that that took care a part of 0:17:05.359 --> 0:17:11.640 the trust problem as well. Right, Yes, So there's sort 0:17:11.640 --> 0:17:13.840 of a code of evolution that is happening that you 0:17:13.880 --> 0:17:17.960 especially see in cities like Antwerp in Amsterdam and also 0:17:18.080 --> 0:17:23.000 Hamburg and London, where basically, when you already have an 0:17:23.000 --> 0:17:27.200 incentive to attract new people whom you don't have any 0:17:27.280 --> 0:17:31.400 historical or you know, familial ties with to your city, 0:17:31.720 --> 0:17:34.240 then in order to attract these new merchants, you start 0:17:34.280 --> 0:17:38.880 to make your institutions better. You essentially say, well, okay, 0:17:39.400 --> 0:17:43.280 until now, our courts were so designed that you would 0:17:43.320 --> 0:17:47.520 only allow for you will only do provide these legal 0:17:47.560 --> 0:17:50.480 services to a certain group of merchants coming from a 0:17:50.520 --> 0:17:53.920 specific group places, so you will give out privileges. Now 0:17:53.960 --> 0:17:58.000 suddenly you started to build these institutions which were more generalized. 0:17:58.640 --> 0:18:01.880 What it means is that instead of giving legal services 0:18:01.920 --> 0:18:04.520 to a specific set of merchants, all your laws would 0:18:04.560 --> 0:18:07.840 now apply to all merchants that come there, and there 0:18:07.960 --> 0:18:12.400 is no special privilege that exists too a few set 0:18:12.480 --> 0:18:15.639 of merchants. So there's this sort of a democratization of 0:18:15.800 --> 0:18:20.359 institutions where you could simply get the legal services of 0:18:20.640 --> 0:18:23.240 of that particular city if you happen to be a merchant. 0:18:23.280 --> 0:18:26.160 So legal institutions start to evolve, and obviously it takes 0:18:26.200 --> 0:18:28.960 a long time before they start to look the way 0:18:28.960 --> 0:18:32.720 they look now, but that's in my view of time 0:18:32.800 --> 0:18:36.240 when there's a big start of this legal evolution as well. 0:18:36.920 --> 0:18:40.720 So listening to all this, it's pretty obvious that the 0:18:40.840 --> 0:18:43.879 lessons that you drew out from this period there are 0:18:44.040 --> 0:18:47.320 so many that apply to markets today and some of 0:18:47.359 --> 0:18:51.240 the changes that we're saying. You already mentioned uber and 0:18:51.359 --> 0:18:54.480 now I could get in someone's car without knowing who 0:18:54.480 --> 0:18:55.840 they are, and I don't have to see that they're 0:18:55.880 --> 0:18:58.159 part of some taxi guild, and I could have a 0:18:58.160 --> 0:19:00.439 pretty good trust that they're going to get me to 0:19:00.480 --> 0:19:02.639 where they are. So that's a big change. But it's 0:19:02.680 --> 0:19:05.480 funny you mentioned Wall Street, which is of course highly 0:19:05.480 --> 0:19:09.159 relevant to us. And even though the stock market and 0:19:09.200 --> 0:19:11.679 all the markets we talk about are on in some sense, 0:19:11.840 --> 0:19:15.160 in personal markets for a long time. Even still there's 0:19:15.200 --> 0:19:19.200 been this important personal element, and people on Wall Street, 0:19:19.320 --> 0:19:22.720 financial advisors, brokers, they're always talking about it. We bring 0:19:22.760 --> 0:19:26.159 you the personal element and we have a personal relationship 0:19:26.160 --> 0:19:29.360 with clients. And if there's one of the biggest tensions 0:19:29.880 --> 0:19:32.960 that we're seeing right now on finance, it's this question 0:19:33.080 --> 0:19:36.080 of whether that's overrated and will we still need financial 0:19:36.080 --> 0:19:40.280 advisors or whether it'll all be robo advisors. So it 0:19:40.359 --> 0:19:43.280 seems to me there's still this very big personal element 0:19:43.359 --> 0:19:45.479 to it, and the same you know, this build up 0:19:45.480 --> 0:19:49.159 of new information is once again, you know, really threatening that. 0:19:49.920 --> 0:19:54.000 So I think relationships are always going to matter. Um, 0:19:54.080 --> 0:19:57.280 that's just always going to be the case, because there 0:19:57.359 --> 0:20:00.520 is always going to be some informational advantage that you're 0:20:00.560 --> 0:20:05.200 going to have with building relationships and building personal trust 0:20:05.240 --> 0:20:09.680 with people. But I think this issue becomes relevant when 0:20:09.680 --> 0:20:13.399 you want to build Wall Street kind of institutions in 0:20:13.480 --> 0:20:16.920 other parts of the world. So, for example, there is 0:20:16.960 --> 0:20:20.840 an interesting paper by Raguram Rajan and Luigi's in Galis 0:20:20.840 --> 0:20:24.520 about the Asian banking crisis in the late nineties where 0:20:24.560 --> 0:20:28.760 they basically talk about how this relationship based nature of 0:20:29.440 --> 0:20:34.080 uh of trade or business in the in Asian stock 0:20:34.119 --> 0:20:39.120 markets was responsible partly for the weakness of the financial 0:20:39.119 --> 0:20:43.160 institutions in that region. And what they need is better 0:20:43.200 --> 0:20:46.359 contract through institutions to make sure that the overreliance on 0:20:46.440 --> 0:20:50.200 relationship kind of goes away. So it is a spectrum 0:20:50.200 --> 0:20:56.080 where certain societies kind of have too much of reliance 0:20:56.160 --> 0:21:00.359 on the relationships versus some which have were limited. So 0:21:00.560 --> 0:21:02.440 it would never be the case that they will all 0:21:02.480 --> 0:21:05.520 go away, but you could be in a world where 0:21:05.560 --> 0:21:08.600 relationships really really matter and you could do nothing without 0:21:08.640 --> 0:21:13.080 having them. What about the information side of things, because 0:21:13.200 --> 0:21:16.760 quite a few people have drawn an analogy between what 0:21:16.800 --> 0:21:19.800 we've seen recently with the power and rise of the 0:21:19.840 --> 0:21:24.000 Internet and fake news and the ability of basically everyone 0:21:24.080 --> 0:21:29.480 to disseminate information at will with the revolution that was 0:21:29.720 --> 0:21:33.159 the printing press. Um So if we have another big 0:21:33.200 --> 0:21:37.960 spurt in the democratization of information or the dissemination of information, 0:21:38.680 --> 0:21:41.360 what does that mean for the development of markets this 0:21:41.400 --> 0:21:44.880 time around? So when you think about the Internet, it's 0:21:44.920 --> 0:21:47.960 obviously has already and the mobile phone it has already 0:21:48.040 --> 0:21:51.200 kind of democratized information for a lot of people. For example, 0:21:51.200 --> 0:21:54.600 in India, um landline phones were available to like a 0:21:54.720 --> 0:21:59.480 very small fraction of people, but now about like a 0:21:59.640 --> 0:22:02.719 lot of majority of Indians have a mobile phone and 0:22:02.880 --> 0:22:07.680 with it access to basic internet spacilities. So there's already 0:22:07.760 --> 0:22:11.800 this democratization of information happening. But one of the conclusions 0:22:11.800 --> 0:22:15.359 that I drew, especially after the last year, of the 0:22:15.400 --> 0:22:19.280 way political economy has evolved, is that there is no 0:22:19.359 --> 0:22:23.919 such thing that information technology would have a blanket positive 0:22:24.040 --> 0:22:26.880 or a negative effect. And once again it goes back 0:22:26.880 --> 0:22:30.920 to the question of incentives. So what kind of content 0:22:31.040 --> 0:22:36.040 people develop once they have Internet in their hands depends 0:22:36.080 --> 0:22:38.800 a lot on other things that is around them. So 0:22:38.920 --> 0:22:43.879 if in case you have economic opportunities, opportunities to do business, etcetera, etcetera, 0:22:44.400 --> 0:22:47.960 you will basically try to seek information that is financially 0:22:47.960 --> 0:22:50.840 relevant for you. But I guess if in case you 0:22:50.920 --> 0:22:54.560 would you are in a place which is economically not growing, 0:22:55.040 --> 0:22:57.600 the same information technology can be used for other stuff. 0:22:57.640 --> 0:23:01.400 For example, in sixteenth century europ most of the places 0:23:01.440 --> 0:23:07.160 were primarily printing stuff about old religious texts or analysis 0:23:07.200 --> 0:23:10.399 of something that was happening in the past. So the 0:23:10.560 --> 0:23:13.880 incentives drive your content in the end, and the same 0:23:14.000 --> 0:23:18.480 is true today. Was there fake news and Antwerp. So 0:23:19.359 --> 0:23:23.040 what I know is that there's this new book by 0:23:23.119 --> 0:23:26.840 Jared Rubin who talks about the fact that, for example, 0:23:26.960 --> 0:23:30.879 in the Ottoman Empire, they didn't really like the printing 0:23:30.920 --> 0:23:34.840 press a lot because they basically thought that printing would 0:23:34.920 --> 0:23:38.800 lead to a lot of fake religious books and would 0:23:38.880 --> 0:23:44.240 kind of corrupt the existing pristine religious materials. So certainly 0:23:44.240 --> 0:23:50.639 there existed people who would have this concern for fake 0:23:50.720 --> 0:23:54.479 news in a different version, and they were rumors and 0:23:54.520 --> 0:23:57.640 there were things like that, and so yeah, so that's 0:23:57.680 --> 0:24:00.800 something that I got really interested in the last year 0:24:01.480 --> 0:24:05.399 because I honestly didn't really think that fake news and 0:24:05.560 --> 0:24:09.560 this kind of fraudulent information would be so relevant. But 0:24:09.800 --> 0:24:12.280 looking at the way things have moved over time, I 0:24:12.320 --> 0:24:15.600 think that's something which is probably a topic of a 0:24:15.600 --> 0:24:18.920 future paper, that how do institutions deal with our people. 0:24:19.000 --> 0:24:21.440 People trust the media itself, so why did people trust 0:24:21.480 --> 0:24:23.760 the printing present the books being printed in the first place. 0:24:23.960 --> 0:24:26.480 That's an interesting research topic in itself. In my view, 0:24:27.200 --> 0:24:29.479 We'll have to have you back on once you publish 0:24:29.520 --> 0:24:35.000 that paper. Critique. I'll be happy to come, all right. Critique. 0:24:35.280 --> 0:24:38.880 Raja PhD student over at the University College London. Thank 0:24:38.920 --> 0:24:41.240 you so much for joining us today. Thanks a lot, 0:24:41.680 --> 0:24:52.200 Thank you. Critique. That was great, So Joe, I thought 0:24:52.240 --> 0:24:57.480 that was a really fascinating conversation with so many modern parallels, 0:24:57.640 --> 0:25:01.119 especially when it comes to the idea of trust of 0:25:01.160 --> 0:25:05.920 course and of course disseminating information, because the Internet has 0:25:06.200 --> 0:25:10.360 really revolutionized both those things, and so has new technology. Absolutely. 0:25:10.400 --> 0:25:13.920 I mean, I think, like, intuitively, it's not a surprise 0:25:14.280 --> 0:25:17.600 that the rise of the Internet and new communication technologies 0:25:18.040 --> 0:25:22.399