This Explains Why Modern Markets Developed Where They Did

Tracy Alloway (0:08)

Hello, and welcome to another edition of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:15)

So Joe, we obviously talk a lot about markets on the show, and we talk a lot about stock markets, but do we ever stop and consider how stock markets came into being?

Joe Weisenthal (0:28)

We really don't talk about the origins of these markets all that much, why the stock market was created.

We sort of take it for granted. I'm very interested in the subject because I often wonder, if you were to go around to market participants and ask them why do we have a stock market in the first place, why did we invent this thing? I'm always curious what the answers would be because I still don't think I have a solid grip on why they exist.

Tracy Alloway (0:56)

Yeah, and if you think about it, if you think real hard about it, it's kind of a weird construction, right? The idea that a bunch of strangers are going to get together and share or sell each other shares in particular companies or things. Like, why do we do that? And why do we trust the other participants involved?

Joe Weisenthal (1:18)

Totally, like every time there's an IPO or something, and it's like, wait, if you're selling and you know more about the company, like if you think of the insiders in the company are selling, why should I be buying? I guess is that a bad sign? And of course, there's various mechanisms that we've built to learn about companies, mandatory regulatory disclosures, quarterly reports, earnings calls, presentations, outside auditors.

But we're still essentially buying into companies that at best we only have partial information of what's really going on.

Tracy Alloway (1:52)

Right, so that's the other side of the story, right? There's two things, there's trust and there's information involved.

So we are going to take a journey back in time for this particular edition of Odd Lots and figure out how those two things kind of came together at a particular moment in time to create some of the first modern markets really.

Joe Weisenthal (2:15)

I can't wait because as hard as it is right now to really have a grip on what's going on with the companies we invest in, you think back to hundreds of years ago and how much worse disclosure would have been and auditing and standards of data reporting. Right now, we all basically all-

Tracy Alloway (2:34)

Accounting, think about accounting in like the 1600s.

Joe Weisenthal (2:37)

Yeah, accounting and P&L statements and balance sheets. We have machines that can parse this in very standard ways of reporting this stuff. But at the beginning, how did anyone believe anything?

Tracy Alloway (2:48)

Exactly. All right, so I'm glad you're on board. So to discuss all of this, we have Prateek Raj for our guest.

He is a PhD student over at the University College London. He's also a research fellow at the Stickler Center for the Study of the Economy and the State at the University of Chicago Booth School of Business. And he is also the author of a paper called The Origins of Impersonal Markets in Commercial and Communication Revolutions of Europe. And it's gonna be really interesting, I promise.

Let's bring him on.

All right, Prateek, thanks for joining us today.

Prateek Raj (3:32)

Hi Tracy and Joe, great to be here.

Tracy Alloway (3:34)

So did we get the intro right? Were trust and information kind of the two pillars of importance when it came to creating the first modern market?

Prateek Raj (3:46)

So when you think about trust, trust is generally a much more complicated construct, right? Because you can have trust in your family members, and you can have trust in strangers.

So I think trust gets created when you have, one, some incentives to really trust strangers. So if you don't have any incentive to go out and do business with people who you don't know, why would you need to trust them?

So incentives really matter. And then on the other hand, of course, you need to know about something about them, something about the markets they work in. You need to have certain trust in the markets and so forth. So yes, trust is really important. But then the key question is, how do you create that trust?

Joe Weisenthal (4:31)

So in your paper, and before we talk about how impersonal markets or stock markets were created, you talk about the pre-existing structures that were in place to essentially solve the trust problem or to partially solve it. And you talk about the role of I think trade guilds in this. So can you explain what these guilds were, what they did, and their importance to commerce?