Introduction

The Renaissance Florentine wool industry employed an uncommon production system that presents a paradox of industrial organization. On the one hand, the firms in the industry were clearly profitable. It is no exaggeration to state that their profits funded much of the Florentine Renaissance, from the paintings and sculptures to the private palace architecture. This profitability made the industry large—indeed, it was by far the largest employer in Florence—with, at any given time, dozens of firms participating. (See Appendix 3B.) On the other hand, the industry's production used a putting-out production system organized by a guild. Though this system was widely used throughout late medieval and early modern Europe, a long tradition of economists and historians argue that both the guild and the putting-out system were hopelessly inefficient. Their ends in many ways signaled the beginning of the Industrial Revolution. Nevertheless, the wool industry was resilient. Over the course of three centuries, it experienced dramatic swings, but adapted by substantially changing its mix of inputs and products and its cost structure in response to each new challenge.

The small size of the companies would have amplified these effects. By any reasonable standard the companies within the wool industry were extremely small. They were small both in space—only a few people worked directly for the company—and in time, with the partnerships being time limited, generally only three years. This small size increased the already high transaction costs. This makes the investment, the long position in investment jargon, shorter both in size and in time. The paradox becomes even more apparent in the context of the survivor principle, which should apply here. That principle is designed to analyze business behavior in a competitive industry. Chapter 7 showed that the Florentine wool industry was competitive during the Renaissance. The principle, as used here, has no normative implications. The current debate about merchant guilds is an entirely different issue.

This study shows how this set of seemingly independent and clearly paradoxical aspects were actually all part of a single comprehensive response to a fundamental aspect of the medieval economy: risk. These institutional arrangements were complementary and, instead of decreasing overall efficiency, acted together. They allowed the company to hedge and reduce its aggregate commitment, thus providing a form of insurance.