The ideas presented in this paper grew out of some notions offered by the author in the economic history seminars at the University of Washington. Their present state of development owes much to the contributions of Douglass C. North and Robert Paul Thomas. Some of the following discussion has been incorporated into their forthcoming book, The Rise of the Western World: A New Economic History.

¹ See for example, North, Douglass C. and Thomas, Robert P., “An Economic Theory of the Growth of the Western World,” Economic History Review, XXIII (April 1970), pp. 1–17CrossRefGoogle Scholar; Slicher Van Bath, B. H., The Agrarian History of Western Europe A.D. 500–1850 (New York: St. Martins Press, 1963), pp. 77–131Google Scholar.

² “There is no single phenomenon that can be produced to ‘explain’ the expansion” writes Charles Wilson in summarizing the seventeenth century. Wilson, C., “Trade, Society and the State,” The Cambridge Economic History of Europe, IV (Cambridge: Cambridge University Press, 1967), p. 575Google Scholar.

³ The absence of new breakthroughs in agricultural, manufacturing, and commercial techniques is generally recognized for the period under study. For some informed statements about the progress of sixteenth and seventeenth-century agricultural and manufacturing technology, see Sella, Domenico, “European Manufactures, 1500–1700,” The Fontana Economic History of Europe, Vol. III, Section 5 (London: Collins, 1970)Google Scholar; Bairoch, Paul, “Agriculture and the Industrial Revolution,” The Fontana Economic History of Europe, Vol. III, Section 8 (London: Collins, 1969), pp. 8–14Google Scholar; Walker, J., British Economic and Social History (London: Macdonald and Evans, 1968), pp. 22–29Google Scholar. An attempt will be made in section IV of this paper to explain what progress did take place in these sectors.

Although a number of commercial techniques became widespread in Holland and England for the first time in the seventeenth century, these business practces had been known and used for some time by the Italians. Charles Wilson remarks on this point, “there was little in the way of business or industrial techniques in use in the northern economies that would have been unfamiliar to a Venetian merchant or a Florentine clothier of the fifteenth century” (C. Wilson, “Trade, Society and the State,” p. 490). Indeed, it is the long delay in the adoption of these techniques that will be an argument in section II of this paper for the existence of economies of scale in the production of transactions services.

Before leaving the topic of technological change, it might be noted that in the absence of private property rights over new knowledge, one would expect little to be produced. Also, in a post-printing press period, one might not expect new technology, even if it did appear, to have long run effects on differential growth patterns among neighboring countries.

⁴ For a summary of the population data see Karl F. Helleiner, “The Population of Europe from the Black Death to the Eve of Vital Revolution,” The Cambridge Economic History of Europe, Vol. IV, pp. 20–58. For real wage data for England, France, and Spain see Phelps-Brown, E. H. and Hopkins, Sheila V., “Builders’ Wagerates, Prices and Population: Some Further Evidence,” Economica, XXVI (February 1959), pp. 18–38CrossRefGoogle Scholar. For real wages in Holland see Wee, H. Van der, The Growth of the Antwerp Market and the European Economy, Vol. 1 (The Hague: Martinus Nijhoff, 1963), p. 543Google Scholar; N. W. Posthumus, Lakenhandel, Vol. II, pp. 217, 1014–17; de Vries, Jan, The Role of the Rural Sector in the Development of the Dutch Economy: 1500–1700, unpublished doctoral dissertation (Yale, 1971)Google Scholar.

⁵ Another relevant issue not addressed by this paper is the differential growth of France and Spain in the seventeenth century. It will be argued that both declined relative to Holland and England for lack of large market areas, but what explains the decline of Spain relative to France? An important part of the answer to this question lies in the failure of Spain to develop private property rights in land due to the Crowns’ reliance on the Mesta for revenue. See Vives, Vincens, An Economic History transom of Spain (Princeton: The University Press, 1969)CrossRefGoogle Scholar; Klein, Julius, The Mesta (Cambridge: Harvard University Press, 1920)CrossRefGoogle Scholar.

⁶ See Heckscher, Eli, Mercantilism, Vol. 1, Ch. 5 (New York: The Macmillan Co., 1931)Google Scholar; Nef, John U., Industry and Government in France and England (Ithaca: Cornell University Press, 1957)Google Scholar.

⁷ For a more detailed description and some first steps towards explanation of seventeenth-century government policy in Spain, France, Holland and England, see North and Thomas, The Rise of the Western World: A New Economic History.

⁸ For some problems it is helpful to separate out transportation costs and include only search, enforcement, and negotiation costs in transactions costs. See, for example, Niehans, J.“Money and Barter in General Equilibrium with Transactions Costs,” The American Economic Review, LXI (December 1971), pp. 773–783Google Scholar; Karl Brunner and Allen Meltzer, “The Uses of Money: Money in the Theory of an Exchange Economy,” Ibid, pp. 784–805. For this paper,’ such a distinction would serve no useful purpose.

⁹ For example, an agricultural society characterized by a small population relative to vast quantities of equal quality land should exhibit a low demand for transactions between its members.

¹⁰ Barbour, Violet, “Dutch and English Merchant Shipping in the Seventeenth Century,” Economic History Review, II (1929–1930), p. 282Google Scholar.

¹¹ It should be noted that for exchange to take place, a number of items in addition to price must be negotiated. The quality of the goods to be exchanged must be agreed upon as well as where and when the exchange will occur. Also, it must be determined how and when and in what form payment will be made. Although perhaps a special category, the cost of making and receiving payment has been included under negotiation costs. Hence the inclusion of bills of exchange and letters obligatory as devices that reduced negotiation costs. The rise of the Bank of Amsterdam in 1609 might also have been included.

¹² Notaries thus replaced local magistrates in performing this function, increasing by specialization the efficiency with which contracts were enforced.

¹⁸ See North, Douglass C., “Sources of Productivity Change in Ocean Shipping, 1600–1850,” The Journal of Political Economy, LXXVI (Sept/Oct. 1968), pp. 953–70CrossRefGoogle Scholar.

¹⁴ See footnote 3.

¹⁵ This last point implies that expansion in the commercial sector would be characterized by a growing number of small firms in contrast to internal growth in a few large firms. This expectation is consistent with the rise of’ an “immense” plurality of small firms and partnerships in seventeenth century Dutch commerce. Corporate forms were found in high risk, long-distance trading ventures. See Barbour, Violet, Capitalism in Amsterdam in the Seventeenth Century (Baltimore: Johns Hopkins Press, 1950)Google Scholar.

¹⁶ See for example, Davis, R., A Commercial Revolution (Historical Association Pamphlet, No. 64, London, 1967)Google Scholar; “English Foreign Trade 1660–1700,” Economic History Review, 2nd ser., VII (1954), pp. 150–166Google Scholar.

¹⁷ In late seventeenth century England, the ratio of home to foreign trade in the major trading centers was 3:1. See Wilson, C., England's Apprenticeship 1603–1763 (New York: St. Martins Press, 1965), p. 189Google Scholar. Foreign trade, of course, accounted for a higher percentage of total trade in Holland.

¹⁸ This possibility is to some extent reflected in Charles Wilson's warning that “preoccupation with exports may obscure and undervalue the growth of home markets.” C. Wilson, England's Apprenticeship 1603–1763, p. 185. See also Donald McCloskey's recent attempt to analyze the extent to which change in nineteenth-century British national income can be explained by foreign trade. McCloskey concludes that even though export receipts comprised 27 percent of national income (they comprised only 10 percent at the end of the seventeenth century), “Britain's income ‘depended’ not on the great changesin the international economy of the late 19th century, but on the pace of technological change and enterprise at home.” McCloskey, Donald, “Britain s Loss From Foreign Industry: A Provisional Estimate,” Explorations in Economic History, VIII (Winter, 1970–1971), pp. 141–152CrossRefGoogle Scholar.

¹⁹ Even though income generated by seventeenth-century colonization was small relative to national income, the existence of colonies may have had a significant effect on relieving domestic population pressure and thereby helped to avoid the fourteenthc-century solution to long term population growth. For the source of this argument see Fisher, F. J., “The Sixteenth and Seventeenth Centuries: The Dark Ages in English Economic History?” Economica, XXIV (February, 1957), p. 16Google Scholar.

²⁰ This was the percentage used by E. H. Phelps-Brown and Sheila V. Hopkins in their construction of a cost of living index used for the sixteenth and seventeenth centuries. See Phelps-Brown, and Hopkins, , “Seven Centuries of the Prices of Consumables, Compared with Builders’ Wage-rates,” Economica, XXIII (November 1956), p. 297Google Scholar.

²¹ The actual extent of the market in seventeenth-century Holland and England is difficult to measure. If contemporary accounts are any guide, however, they may have been quite extensive. F. J. Fisher quotes the following description of the English internal market. “The inland or home trade of England is an ancient establishment of business, form'd from the beginning in the mere nature and consequence of things, from the situation of places, the growth of materials, and other conveniences of the manufacturers. This method of trade consists not in the bare producing or manufacturing the first principles of our trade, such as the wool, leather, metals and minerals, in which our country abounds, but in the buying and selling, carrying and re-carrying the goods from place to place for sale. This is very significantly called the circulation of trade, by which every part of the island is fully supply'd with what they respectively want. Trade going on in this happy progress has for many ages increased to a mighty degree, so that manufactures of one kind or another are carried on in every county, shops are open'd in every comer, and in the most remote parts well furnished with goods of all needful kinds, as well of our own produce as of foreign importations. The shops, with the wholesale dealers and manufacturers who supply them are infinitely numerous, and being generally kept by the most substantial people, are the support of the whole trade of the kingdom, v … See F. J. Fisher, “The Sixteenth and Seventeenth Centuries,” p. 11.

²² Wrigley, E. A., “A Simple Model of London's Importance in Changing English Society and Economy 1650–1750,” Past and Present, XXXVII (July 1967), p. 44CrossRefGoogle Scholar.

²³ For a summary of the evidence see Homer, S., A History of Interest Rates (New Brunswick: Rutgers University Press, 1963), pp. 106–143Google Scholar.

²⁴ This extended use of intensive agricultural and manufacturing methods did not rest on the creation of new knowledge, but rather the diffusion of known medieval technology. See Slicher Van Bath, The Agrarian History of Western Europe A.D 500–1850, p. 244; Lilley, Samuel, “Technological Progress and the Industrial Revolution 1700–1914,” The Fontana Economic History of Europe, Vol. 3, Section 3 (London: Collins, 1970), pp. 5–9Google Scholar.

²⁵ These supply assumptions reflect the relative absence of diminishing returns in manufacturing. Expansion and contraction of this sector had little effect on factor prices because of its relatively small size.

²⁶ One problem with the above analysis is that the assumption of relatively greater demand elasticity for manufactures has the opposite implication for relative price movements. This makes the total implication about relative price movements from declining transactions costs somewhat ambiguous. If, however, the difference in supply elasticities was greater than the difference in demand elasticities, the argument in the text holds.

²⁷ deVries, Jan, “Peasant Demands Patterns and Economic Development: A Case Study.” Presented at the Conference on Economic Issues in European Agrarian History,April 20–21, 1972, Yale University, New HavenGoogle Scholar, Connecticut.

²⁸ Hobsbawn, E. J., “The Crisis of the Seventeenth Century,” in Crisis in Europe 1560–1660, ed. Asten, Trevor (Garden City: Doubleday, 1967), p. 17Google Scholar.

²⁹ C. Wilson, England's Apprenticeship, 1603–1763, p. 89; Taylor, Harland, “Trade, Neutrality and the English Road, 1630–1648,” Economic History Review, XXV (May 1972), pp. 259–260Google Scholar.

³⁰ Violet Barbour, “Dutch and English Merchant Shipping in the Seventeenth Century,” p. 285. This difference cannot be explained simply by the cost advantages of the Dutch flyboat, since these cost advantages were not significant in the pirate infested waters off the colonial coast. See Walton, Gary M., “Obstacles to Technical Diffusion in Ocean Shipping, 1675–1775,” Explorations in Economic History, VIII (Winter/1970–1971), pp. 123–140CrossRefGoogle Scholar.

³¹ C. Wilson, “Trade, Society and the State,” p. 536.