What does the Hansa, a confederation of trade guilds in the Middle Ages, teach us about the modern middle class? How did the modern state evolve to take on so many roles in a country’s economy? Find out in this week’s episode of Baggage Allowance.
Hello everyone and welcome to the ninth episode of baggage allowance. This episode is going to be about the economy, but by that I don’t mean I will be doing a comparison of economic systems. I already explored that as much as I wanted to in the fourth episode, A Country’s Ideology. Instead, I want to talk about economic institutions, and how people try to bend them to their will and benefit. To start things off gently, I will begin with a historical example before moving on to more contemporary observations. So let’s begin in Lubeck.
Lubeck is a port city in Northern Germany and was the capital of the Hansa, a confederation of German merchants guilds in the Late Middle ages. They became the dominant trade power and left their imprint on nearly every city along the Baltic sea. Riga (the capital of Latvia) was founded by these merchants. Meanwhile in Tallinn (the capital of Estonia) and in Stockholm (the capital of Sweden), they built German neighborhoods that lasted well into the 19th century.
It was in Tallinn that I first learned about the Hansa. I was fascinated, because it addressed doubts I had about the three estates theory I learned a few years back. The three estates theory stipulated that power in medieval and early modern Europe was divided between three estates: the nobility, the clergy, and the burghers. These three groups competed with each other for power. While their respective influence changed over time, they were often presented as equals, which was a little confusing to me. The nobility controlled the land and the armies, so their power was obvious.
The church controlled some land and small armies, but their power mainly came from their ability to collect taxes on the peasant population. That isn’t necessarily something you think about when picturing the church in modern times, but back then they were an integral part of the government bureaucracy; they were the IRS. Part of the reason why kings during the protestant reformation abandoned the catholic church was because it allowed them to replace the catholic church with their own bureaucracies for the purposes of tax collection. Furthermore, churches controlled the pulpit, and by extension the power to sway the masses, which many kings also sought control of.
The third and final estates were the burghers, basically the urban middle class. Sometimes, especially in context of the French Revolution, the third estate is portrayed as representing all commoners, but the original theory was explicitly referring to urban tradesman. The commoners and peasants either did not have an estate, or in the case of Scandinavian and East European nations, were referred to as the fourth estate. The third estate bothered me because their power and wealth came from their professional skills, knowledge of markets, and control of institutions. However, they had no armies and their policing power was limited to urban areas. The Hansa was my first glimpse into how powerful the third estate can get. At their zenith, they were able to wage a navel war with the King of England and win. I wanted to visit Lubeck myself and observe how this merchant empire came to rule the Baltic sea, and a few years later, I got the opportunity and traveled to Lubeck. After enjoying the quaintness of the city, I headed straight for the Hansa museum.
The museum was fantastic and I spent nearly the whole the day there, and I learned a lot about medieval economies. The nobility had control of the land, so they had the power to control whether traders could enter the city, and naturally they imposed taxes and restrictions for their own profit. A lone trader was at the mercy of the nobles, but collectively it was possible to have some negotiating power, and this was how groups like the Hansa formed. They would demand lower taxes, deregulation, and permission to set up offices in prime real estate, and if the rulers did not comply, they would collectivly boycott the city or kingdom. Because the Hansa’s trade power was so great, this could devastate the local economy, and rulers couldn’t easily replicate the Hansa’s trade network themselves, even with force, so they often agreed to their demands either immediately or after a couple of years embargo. For more serious disputes, the Hansa engaged in navel piracy, like that navel war with the King of England I spoke about earlier. Which is another reason why the Hansa formed: to combat (or engage) in piracy in the Baltic sea.
When I left the museum, I was initially disappointed, not with the museum, but with the Hansa. Their power wasn’t as great as I thought it would be. They appear more like a protection ring or cartel, rather than a powerful force worthy of being called the third estate. What I failed to realize at the time, but appreciate more now, was that during the medieval period, there was no way to enforce contracts. Today if an employer or customer doesn’t pay you, you can take them to court, but back then, courts did not exist, so groups like the Hansa played the role of resolving disputes. If a member proved to be untrustworthy, they were expelled from the group, and all the benefits that came with it. Furthermore, the Hansa, and similar groups, were the only ones capable of negotiating with the nobility and the church, who otherwise had an almost draconian level of control over people’s lives. They were the only ones able to lobby for lower taxes, fair due process, public facilities, etc. Of course it wasn’t all good. While they may have lobbied for what we would today call “free market principles” and “good governance,” they were not above using their power to seek special privileges and strengthen their monopolies. That ultimately led to their downfall.
The nobility eventually realized that groups like the Hansa became powerful because they were being overly restrictive, and the only way to make a living was to join such groups. They began reducing restrictions not just for the Hansa and other powerful groups, but for everyone. They also set up special merchant courts that could quickly and fairly resolve disputes and built merchant fleets to protect trade in their waters. This attracted unaffiliated merchants, and soon they were numerous enough that the threat of embargo by the Hansa was no longer a concern. Combined with territorial consolidation that reduced cross-border tariffs anyway, the weakened Hansa gradually declined into obscurity.
This was in line with the general trend of economic power consolidating in the state and central government. As mentioned before, the church was initially responsible for tax collection and propaganda, but over time kings replaced them with their own bureaucracies. Meanwhile burghers and nobility merged as central governments took on a greater role in protecting and regulating trade, and handling contract disputes. By the 20th century, the modern state took on all the roles previously divided between the three estates: escorting ships, extracting resources, collecting taxes, regulating commerce, enforcing contracts, and providing job training, education, loans, and propaganda.
The biggest change in recent history came right after WW2. Until then, nations escorted their own ships. The French Navy escorted French cargo vessels. The Dutch Navy escorted Dutch cargo vessels, etc. This meant the ability of a nation to engage in trade was directly proportional to the size of its navy, which is bad news if you were not one of the major navel powers of the world, as your access to global markets is now restricted. After WW2, however, the USA promised that any nation who allied with them against the Soviet Union was guaranteed protection by the American navy. As a result, the United States patrols nearly all global trade networks, protecting ships from piracy, whether it be state-sponsored or not. Nations allied with the United States can engage in global trade at levels that in the past would have been unthinkable given their naval strength. This however also means the United States needs to maintain a disproportionately large and expensive navy and has put the country in the middle of all sorts of messy territorial disputes like the Suez Canal and the South China Sea.
That concludes the history lesson. The reason why I wanted to go through all that was because while the modern state is often seen as a monolith that is suppose to represent all people, there are still competing groups within the government, and it is easier to see that when you travel back in time to when these groups were still treated as separate estates. The nobility has given way to the military and government bureaucracy; they defend the land, control the extraction of resources, and collect taxes. The church has been replaced by politicians, the media, and think tanks; they control taxation policy and are engaged directly with the masses. And finally, we have the burghers, who today would be the educated class that controls the businesses, banks, courts and other institutions of society.
The educated class is the group I will spend the rest of this episode talking about, because when I made this group the contemporary allegory of groups like the Hansa, something clicked. In medieval Europe, groups like the Hansa used their power to gain special privileges and cement monopolies. If history rhymes, that should hold true today as much as it held true then.
And it does, starting with how licensing and accreditation works. Let’s begin with medicine. In the United States, students need 8 years of schooling (4 year undergrad, plus 4 years med school) before they can start residency. By contrast, in the UK and many European countries students can apply for a 5 year medical program right out of high school. In Japan, they can apply for a 6 year program right out of high school. Add to this the fact that these countries have lower or no tuition, and you realize that just the schooling is a huge hurdle for people who want to pursue medicine in the USA. In Sweden, not only do students not pay tuition, but they get paid by the government when they are in school. So while all these nations have anywhere from 3-4 doctors per 1000 people, the United States has a mere 2.3 doctors per 1000 people. Less supply equals higher costs. Doctors everywhere make good money, but American doctors make even more than most, especially in general practice.
Moving on to engineering, not long ago, in the USA it was possible to become a licensed engineer even without getting an engineering Bachelor’s degree. All you need to do is pass the engineering license exam and work under a licensed engineer for some years. Today though, the number of states permitting that is starting to dwindle. By contrast in Europe, to call yourself an engineer requires at minimum of a Master’s degree. The same applies to nursing. Not long ago, it was possible to be a nurse in the United States with only an Associate’s degree, but an increasing number of institutions are now requiring nurses to have a Bachelor’s degree at minimum.
Lawyers are even worse. The way regulations are set up, the number of tasks a lawyer can delegate to subordinates are minimal, resulting in exorbitant demand and prices. Some states like Washington are experimenting with new positions called limit license legal technicians, who are allowed to provide clients with legal advice in a narrow field, but not allowed to represent the client in court or in negotiations like a real lawyer would. The aim is to reduce the overall cost.
Moving on to investing, the United States has a concept called “accredited investor”. The criteria is simple: are you worth a million dollars? If you are, then you have access to a whole collection of investments that normal people don’t have access to.
Now I am not advocating an absence of all licensing and regulation. Doctors, nurses, lawyers, and engineers are making decisions where a mistake could kill someone, and regulating investments is necessary to prevent people from losing their money on high risk and crooked schemes. However, there is a lot of variation in regulations like this between countries, and while some regulations make sense, others seem like they are simply a way to exclude people and keep the supply down. Furthermore, it seems degree inflation is what’s driving the increase in educational qualifications, rather than a change to the underlying job itself. Furthermore, there is little effort put in to expedite the amount of time it takes to become qualified for a particular profession.
One of the most glaring ways this reveals itself is with how difficult it is for professionals to move across international boundaries, because an engineering license and degree in one country won’t be accepted in another. Many taxi drivers in Sweden are refugees. Once when riding to the airport, I asked the driver what he did back home. His response? He was a civil engineer. This is not uncommon. I even came across a staffing firm in Stockholm whose sole purpose is to find people like this, get them licensed in their trade, and hire them out as contract workers. For many though, it’s not that simple. Often, they need to start from zero, take classes, sit an exam, and work under a licensed professional like new graduates. When you are 45 years old with other obligations, that can be insurmountable and demoralizing. The ones who are lucky are teachers and doctors, because there is a shortage of both in Sweden, so the government created an expedited licensing process for them. It can be done.
Another way this reveals itself is in immigration policy. In many ways, it is actually harder to immigrate to a country as an educated immigrant than as an uneducated immigrant. Countries have special visas for seasonal workers, domestic workers, agricultural workers, etc. By contrast, trying to come into the country as a skilled professional is possibly the most difficult route. You need to get a company to sponsor you, which costs them and you a lot of money, and then you have to somehow prove you are the only person who could possibly complete this job and no local could have done it, a criteria that almost certainly dooms you.
When I speak with people, especially those who want stricter immigration, they all almost always say they are okay with educated people entering the country. That makes sense at face value, educated people tend to be less religious, speak English (which even in non-English speaking nations is often seen as a plus), and with time are most likely to integrated into society. An educated immigrant has more in common with an educated local, than an educated local has with an uneducated local.
In practice though, things operate differently. An Egyptian man, living in Finland, described the following experience. He applied for a job in a rather niche field in which had prior experience in. For this reason, he quickly passed the interview and the company was willing to sponsor his visa. However, one of the other employees had a friend apply for that position and was upset that he didn’t get the job. So he complained to the union, and the union demanded to know why they were hiring an immigrant when a local could have done the job. In response, the company explained to the migration agency that this is a niche field that the Egyptian had experience in and the local applicant did not. The union responded by going line by line through the job description and making the claim that prior experience in the niche field wasn’t needed to accomplish the duties stated in the job description. This went back and forth for sometime before finally the company gave up. They hired the local, but then created another position, and this time took great care in making sure the position could only match the Egyptian’s resume, and that’s how he got in. I observed something similar in American IT companies as well.
Notice that such a strict criteria does not apply to seasonal workers, farm workers, or other uneducated workers. An economist once explained to me the reason for this. More uneducated workers don’t depress wages or steal jobs, because they spend all the money that they make, creating new jobs. At the end of the day, everything evens out. However, educated workers put a lot of their money in savings and assets. Furthermore, educated workers are not as interchangeable as uneducated workers, and their arrival does not necessarily create new jobs in the same field. All put together, having more educated workers does depress wages, and they could potentially be seen as stealing jobs. And sense educated people know how to use their political power, politicians are careful.
And this brings me to the final way the educated class (or the burghers in the old days) maintained exclusivity to their wealth and power: their social network. Many groups like the Hansa required new members to work under the supervision of an existing member in order to join. As you can imagine, this means your ability to join depended upon whether you already have connections with someone on the inside. The modern world doesn’t operate any differently. LinkedIn was founded on the idea that your next job could come through your social network, and the biggest social network of all is university. Is it any wonder why the admissions process to universities are so controversial? And a good social network doesn’t just give you access to jobs. It also gives you access to investors and good creditors. It gives you connections to politicians who could lend support to your ideas. It involves you in conversations with people using the right terminology and asking the right questions, something you would never have come across from just browsing the internet.
This is why it’s called the Third Estate.
That’s all for now. Join me next time for the season finale, A Country’s Travelers. Until next time.
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