Economic consequences of state failure; Legal capacity, regulatory activity, and market integration in Poland, 1505-1772

With use of innovative proxies and new annual data, I demonstrate that relatively high legal capacity and regulatory activity of the early-modern Polish parliament in the 16 century was positively associated with deeper commodity market integration. Conversely, subsequent lack of effective lawmaking empowered centrifugal regional forces that fostered market fragmentation. This indicates that early parliamentary regimes might have required legal capacity to harmonise domestic institutions and reduce the transaction costs. The Polish case suggests a hypothesis that the pre-1800 ‘Little Divergence’ between European parliamentary regimes could be potentially partially explained by differences in their capacities. JEL CODES N43, N73


INTRODUCTION
What factors allowed certain regions of Europe to develop their market economies early and what were the reasons for the relative stagnation of the less successful areas? Specifically, what was the role of the early-modern transition from feudalism to semi-centralised and relatively powerful territorial states in setting the stage for modern economic growth? Political institutions are critical determinants of prosperity (e.g. Acemoglu & Robinson 2012). Many scholars identify the parliamentary form of governance and the rule-of-law as preconditions for the market economy (e.g. North & Weingast 1989).
The 'Little Divergence' in pre-1800 economic development between England, the Netherlands, and the rest of Europe is often linked to the formation of territorial parliamentary regimes in the two successful countries (e.g. Van Zanden et al. 2012;Broadberry and Wallis 2017). However, the fact that not all preindustrial parliamentary regimes succeeded economically demonstrates that the limitation of the authority of the king and the consolidation of power around a parliament is an insufficient condition for sustained economic growth. According to Besley and Persson (2011), a state can promote prosperity only if it possesses (1) legal capacity denoting the authority and infrastructure to create and enforce the law and (2) fiscal capacity representing the means to finance its operations. This study contributes to the growing literature on the role of state capacity in promoting economic growth before 1800 (Bonney 1995;O'Brien 2011;Dincecco & Katz 2016;Johnson & Koyama 2017). It complements the earlier studies that predominantly focused on fiscal capacity with an original study of the impact of legal capacity. With use of innovative proxies and new annual data, I analyse the role that the parliamentary regime played in developing a domestic commodity market in the First Republic of Poland. The results indicate that legal capacity and regulatory action were both positively associated with deeper integration of the domestic commodity market. Conversely, governmental inaction was associated with a rise in the transaction costs.
Early-modern Poland is uniquely suited to study the economic impact of parliamentary regime.
In the 16 th century, Poland both limited the authority of the king and experienced, relatively speaking, a golden age of political centralization under a strong parliament, the Seym. At the time, the Polish(-Lithuanian) Commonwealth became the biggest state in Europe covering the territories of present-day Poland, Lithuania, Ukraine, Latvia, Estonia, and Belarus. Simultaneously, the Seym issued numerous regulations that began to change and unify the dissimilar, historical, regional, economic institutions across this vast country. This was followed by a growing opposition to the state's power, propelled by the ideology of 'Golden Freedom' from the king and the government. The mounting opposition towards a strong centralized state led to introduction of the right of a single delegate to discontinue the Seym's proceedings and nullify its decisions, liberum veto. By bribing the delegates to the parliament, Prussia, Austria, and Russia made frequent use of the veto to abort the Seym's sessions. This led to a lack of effective law-making at the central level of the state. I use the historical record to understand how the gradual weakening of the Polish state affected the market economy between the formation of the country's parliamentary system in 1505 to the first partition of the country by its neighbours in 1772.
In more detail, contrary to most European central governments that enjoyed stable or increasing incomes, the Polish state had a right to collect only minuscule permanent taxes (Karaman & Pamuk 2010;Filipczak-Kocur 1995). The Polish king, due to his limited authority, could not raise any funds nor create laws without the approval of the Senate and the House of Delegates that, together with the ruler, formed the Seym. Contrary to most other European countries that retained a relatively strong and independent monarch, Polish parliamentary activity captures (a) all law and tax creation on the central level of the state, (b) protection of the rules and property from predation, and (c) enforcement of the law by the parliamentary court and commissions. When the Seym was inactive, the Polish state had no ability to take legal action and influence the markets. The decision-making power was fragmented and left to the traditional regional assemblies, Seymiks, which after 1717, were themselves constrained and dominated by powerful local magnates. This period of low legal capacity of both central and regional governments is known in Polish historiography as the 'Era of Anarchy' and can be interpreted as state failure of Poland. Moreover, because the vetoes that aborted the parliamentary sessions were mostly sponsored by foreign powers and inspired by international politics, the changes in state capacity were largely exogenous to domestic market conditions. This 'historical experiment' offers a rare opportunity to test if legal capacity and regulatory activity of central institutions of governance stimulated pre-1800 market development. Only researching successful historical England and the Dutch Republic is insufficient to falsify the hypothesis that strong parliamentary regimes promoted markets.

THEORETICAL FRAMEWORK
Here I outline the most relevant economic-historical literature concerning the links between economic growth, domestic market integration, feudalism, state formation, institutional harmonization, parliamentarism, and legal capacity of the state. I combine parts of this literature into a heuristic model and derive a testable hypothesis to reinforce the core relationships of the model empirically.
Markets are widely regarded as crucial factors influencing prosperity. The First Welfare Theorem states that the unlimited ability to exchange brings about optimal allocation of resources. The lower the transaction costs are, the more inter-connected and efficient the economy, and the richer its inhabitants. An increase in trade and economic specialization forms the bases of the 'Smithian' economic growth (Kelly 1997). According to Jeff Davidson and Alfons Weersink (1998), any prospective exchange needs personal property rights, means of transferring the ownership, and a guaranteed enforcement of contracts. Transaction costs are also influenced by various barriers to trade like taxation, transportation costs, imperfect information, and institutional differences, such as differences in regulations, measurements, and monies (see Epstein 2000). The process of extending the geographical size of a market by lowering the transaction costs is known as market integration.
According to the orthodox view that focused on the transportation costs, market integration was driven mostly by technological and infrastructural advancements, such us the railway, that brought costs reduction in the 19 th century (e.g. O'Rourke 1997). More recently, various studies set to measure the extent of market integration in preindustrial Europe (Shiue and Keller 2007;Bateman 2011;Frederico 2012, Chilosi et al. 2013Malinowski 2016a). This new research confirms that, after a period of medieval disintegration, markets only became effectively integrated in the 19 th century. However, this new literature also identified that there were numerous incidents of greater integration that, due to the lack of significant changes in the modes of land transportation in the early-modern era, cannot be simply explained by technological advancements. This suggests institutions played a crucial role in the process of preindustrial market integration (Uebele 2013).
According to Joseph Strayer (1970) and Nicholas Henshall (1992), the modern concept of a state is not applicable to medieval and feudal Europe characterised by fragmented political authority, overlapping and competing legal jurisdictions, and private armies. Medieval Europe was a mosaic of semi-independent historical regions ruled by feudal landlords and powerful cities that were bonded by a titular ruler into broader territorial political entities. The authority within these structures was dispersed. According to Otto Hintze (1975, p. 192), feudal regional lords lacked the attributes of sovereignty defined as independence and exclusive rights within borders. Under the system of vassalage, the legitimisation of their position came from the titular territorial rulers. However, the capacity of these 'poor kings' to rule the whole state was limited because many legal and fiscal prerogatives rested with the local lords (see: Johnson and Koyama 2017;'t Hart et al. 2018). The central governments also lacked developed bureaucracies capable of effectively controlling their vassals (Anderson 1974;Henshall 1992). The weakness of the titular rulers and their inability to constrain the regional elites prevented contract enforcement, when trading between lands, and allowed the local lords to create new rents (Epstein 2000). Moreover, there were ancient institutional differences between these semi-independent feudal political entities resulting from, for example, different locations, resource endowments, and idiosyncratic histories. Vested interests incentivized the feudal lords to preserve these dissimilarities.
Differences in laws, currencies, and measurements allowed them to collect various rents and make other speculative gains. Stephan Epstein (2000) famously argued that this parcellation of power, regional rentseeking, and institutional differences caused high transaction costs between the lands and that this form of double marginalisation contributed to the economic underperformance of the late Middle Ages.
In the Early Modern era, most territorial states in Europe begun to replace the feudal political fragmentation with centralization of authority defined here as the power to give orders, make decisions, and enforce obedience by the central government. The governments consolidated the power that used to be held by regional lords and assemblies. This led to an increase in taxation and top-down regulation.
The central authority had not yet been divided between executive, legislative, and judiciary branches.
Instead, the power was shared between kings and parliaments and its balance determined whether regimes were more absolutist or parliamentary. This laid the foundations for the modern nation states.
The rise of state capacity of the early modern states has been demonstrated by Kamil Kıvanç Kareman and Şevket Pamuk (2010) and recently discussed in detail by Johnson and Koyama (2017).
Did this progressing centralisation and increase in state capacity result in the formation of a more integrated domestic markets? According to Epstein (2000), economic growth in preindustrial Europe was primarily Smithian and dependent on low transaction costs. Based on Douglass North (1981), Epstein argued that the transaction costs are a function of the clarity of the 'rules-of-the-game'.

Convergence in institutions under both parliamentary and absolutist regimes makes the terms and
conditions of an exchange clearer and lowers the transaction costs. Uniform monetary, legal, and measurement systems ease the interaction between the trade partners. According to Epstein, the centralisation of sovereignty can help enforce convergence of institutions. Political centralisation deprives local elites of jurisdictional power and displaces rent-seeking from the local to the 'national' arena. This makes rent-seeking more transparent and therefore harder to implement. Transparency and third-party enforcement also mitigate the prisoner's dilemma problem. Furthermore, political centralisation reduces the costs of coordination, allowing for concerted decisions and policies. This should result in a convergence of market institutions. According to Stephen Broadberry and Joseph Wallis (2017), creation of uniform impersonal rules by the state was essential for market development.
Conversely, weak central authority transfers the power to the local elites who benefit from institutional differences and personalised privileges. Similarly, Johnson and Koyama (2017) argued that centralised and strong governments of early modern France and Prussia managed to suppress the attempts by local elites to extract rents by which they decreased exchange costs on the domestic market. The negative effects of tax predation and political fragmentation in preindustrial German and Italian lands were identified by Mark Dincecco (2010). On the other hand, it has been argued that political and institutional fragmentation provided economic actors with exit options and therefore forced competition between different institutional technologies that fostered their development (compare Tilly 1990;Cox 2017). Epstein (2000) argued that both absolutist and parliamentary regimes could achieve centralisation of institutions and harmonization of laws. The literature advocates that parliamentary regimes that constrained the executive but still provided order are superior to those that left the king unconstrained; According to Douglass North and Barry Weingast (1989), the Glorious Revolution in England (1688) limited the extractive potential of the rulers and fostered protection of property rights that inspired investment and innovation (see also Van Zanden et al. 2012). The authors see impersonal market institutions a necessary condition for economic development (North & Weingast 1989, p. 831).
Daron Acemoglu and James Robinson (2012) argued that parliamentary regimes are generally better at forming inclusive economic institutions. Similarly, Broadberry and Wallis (2017) argued that parliamentary regimes were much more likely to create impersonal rules and promote prosperity than the feudal or absolutist ones that tended to produce more personalised privileges. Furthermore, David Stasavage (2011) demonstrated that parliamentary control led to an increase in fiscal state capacity that allowed for better provision of public goods. Dan Bogart (2011) demonstrated that parliamentary supervision encouraged investment in infrastructure that arguably stimulated development of integrated domestic markets.
The idea that the centralisation of power around a parliament should lead to economic development has received considerable criticism from many angles (e.g. Barro 1997). Most notably, North and collaborators (2009) argue that in the 'limited-access orders' or 'natural states', the elite can use the diet to further their own corporate agenda, create rents, and perpetuate an extractive political order. Moreover, Besley and Persson (2011) argue that governments can influence the economy only if they have the legal and fiscal capacity to act. Differences in the degree of state capacity and interest of the elites may therefore partially explain why certain parliamentary regimes managed to integrate their domestic market and promote growth while others did not (see Johnson & Koyama 2017). Considering the institutional literature and to flash out the core idea, I propose that parliaments may be regarded as 'engines' of economic growth, which require state capacity ('fuel') to function. Active parliaments affected the economy via three main channels. Firstly, parliamentary control increased the accountability of the king and the elites, obstructed the creation of personal privileges, and stopped predatory extraction by the powerful individuals like kings and magnates. Secondly, centralization of power by the parliament led to the implementation of uniform, impersonal 'rules-of-the-game' across the country. This overcame the over-taxation brought about by the feudal fragmentation of authority that split rule across trade routes thereby inducing regional institutional differences and rent-seeking of the local elites. The mutually reinforcing (a) accountability of the elites and (b) existence of uniform impersonal rules form the bases for (c) the rule-of-law. Finally, parliamentary supervision over the national budget led to using the state's resources to finance utilitarian public goods, such as safety, rather than the frivolous consumption by the elites. This was crucial in early-modern Europe where frequent warfare demanded defence spending. These three factors supported competition, free-movement of goods, protection of property rights, and prohibitions on the use of violence to obtain goods or to coerce others, thus lowering the transaction costs and forming the bases for 'Smithian' economic growth. This process is endogenous because economic growth increases the tax base. The proposed model predicts that low capacity of the parliament/central parliamentary regime would resolve in a shift of power to the local level dominated by unconstrained powerful individuals who would use their authority to create personalised and/or region-specific rents. Without governmental coordination, regional political assemblies would make decisions independently and thus increase the transaction costs. After the reunification, the prerogatives of the king were gradually limited by a range of privileges given to the nobility, Szlachta, the political ancestors of medieval knights who accounted for around ten per cent of the population (Jędruch 1998, p.24 see Jędruch 1998, p.29). The bills agreed on by the House of Delegates and Senate became legal acts only after the King gave the royal ascent to all of them jointly at the end of Seym's session. Laws agreed on centrally were valid on the local level. However, the principal of regional self-governance allowed the Seymiks to issue their own by-laws next to the central laws. If a session of the Seym ended prematurely, it failed to produce any legally binding acts.
In such cases the Seymiks had to issue their own consent to the issues independently.
The the institutions were constructed to create rents for the elite. The king and the rank-and-file nobles counterbalanced the magnates. The nobles were interested in harmonising the institutions across the country to the benefit of their social class; Export of grains via the Baltic was the main source of income of the nobility, which promoted policies aimed at lowering the transaction costs on the commodity market (Rybarski 2015). At the same time, the nobility created rents that extract resources from the other social classes (serfdom). Conversely, the magnates who, via the system of clientelism, hold significant authority on the local level, had vested interest in obtaining personal, rather than corporate, privileges and opposing state's influence on the regional level. In very broad terms, the king and the nobility supported political centralisation while the magnates benefited from feudal-like fragmentation of authority (Mączak 1982).
This political conflict was initially won by the king and the middle nobility. The This constitutional change set the country on a different path to most of other European states that either developed absolutist structures at the costs of the parliaments (France, Spain, Sweden before the 18 th century) or empowered their central representative institutions but also kept the relative continuity of the main ruling families (the Netherlands and England). Van Zanden et al. (2012) proposed to proxy the involvement of an early modern parliament by counting how many days it was in session each year. 1 In the context of most of the Western European countries that retained the power of the rulers to perform some forms of legal actions independently, parliamentary activity captures the bargaining between the ruler and his subjects. However, in the Polish context where the King, Senate, and House of Delegates were complementaries, parliamentary activity represents the state's capacity to take legal action. Figure 2 shows new data on the number of days between the opening and closing of the Seym's sessions each year. It distinguishes between the conclusive sessions that produced acts and the ones that were aborted before the royal ascent.   (Jędruch 1998, p.156). Termination of session was, therefore, largely unrelated to domestic market conditions but was driven by international politics.
The inability of the parliament to conclude many of its sessions led to petrification of the government. The king could not, as it was to a varying degree in the case in the absolutist countries, serve justice, rule by decree, nor collect new unauthorised taxes. This resulted in the decline in both legal and fiscal state capacity. Figure 3 denotes revenue of the central government in a range of countries and depicts that after the 16 th century Poland not only began to lag behind other European states that were becoming increasingly centralised, but also collected less funds in absolute terms. and Golden Freedom meant opposing both the royal and state's power (see Jędruch 1998). As discussed, the legal power of the king had been already limited to proposing and vetoing legislation.
Initially this meant a shift of power from the central to the regional level that retained its effective means of independent self-governance. The episode from the mid-17 th century till the beginning of the 18 th century, is known in historiography as the Period of the Rule of the Seymiks. By 1600, there were 74 of these regional assemblies in the country representing 118 lands and counties (Jędruch 1998, p.26; see Figure 4). Since 1573, dietines had already begun electing their own tax collectors and since 1613, raising their own taxes next to the agreed central taxes. After 1681, central taxes paid by the lands for military purposes that constituted the lion share of the state's budget, were no longer collected by the Seym but were raised and spent at the regional level. Seymiks served as 10. 100. 1000.
1550s 1600s 1650s 1700s 1760s Poland Ottoman Lands France England Dutch Republic regional courts and, in times of no effective central leadership, regulated the economic policy of their lands. Of notable importance were the so-called economic Seymiks that assembled annually to deal with the distribution of national tax assessments, voting and the collection of local taxes, as well as the approval of local expenditures (Jędruch 1998, p.43). Seymiks also begun opposing the royal suggestions and prioritised their regional interests. According to Wojciech Kriegseisen (1991), who studied the diaries of the participants of the Dietines, whereas in the 16 th century the deities tended to be positive towards the king and his writs of summons, in the 17 th and 18 th century the rhetoric was increasingly  The success of the centrifugal forces led to a shift of power from the middle-income nobility towards the magnates. This transformation was greatly facilitated by economic inequality among the nobility that rose sharply after the wars of the middle of the 17 th century (Mączak 1982). According to Antoni Mączak (1982), due to the system of clientelism, i.e., trading political loyalty of Szlachta on the Seymiks for support by the magnates, the Seymiks were, in practice, often controlled by the richest families.
Moreover, the most powerful magnates owned vast territories, latifundia, some of them stretching across many lands. The areas controlled by the most powerful magnates were known as 'duchies' (księstwa) or 'countries' (państwa). These internationally recognised political entities existed parallel to the state and there was no formal division of the state into smaller autonomous political units (Kowalski 2013).
The ideology of anarchy was especially promoted by the magnates who, due to their unmatched wealth and influence, had most to lose by parliamentary control and most to gain from the regional autonomy.
Due to these changes, the 18 th century is known in Polish historiography as the period of informal 'magnate oligarchy'. On the central level, the country was pacified by several families that were chiefly interested in securing their local interests. They used the Seymikswhich were filled with their clientsto execute and legalise their local power. The ideology of anarchy, i.e., constraining the central institutions of governance, reinforced their local authority (Mączak 1982). This parcellation of power and the decline in the power of the central state is closely related to the rise of labour duties of the peasants, i.e., serfdom, who lacked the legal protection of the state (Malinowski 2016b). Poniatowski. The attempts to heal the political system alerted the neighbouring powers. Russia, Austria, and Prussia used the Polish centrifugal forces to partition the country and gradually incorporate its parts to their own more centralised states between 1772 and 1795.

HISTORICAL MECHANISMS
How did the Seym impact the economy? When the Diet was in session it was responsible for serving justice, enforcing existing laws, and constructing new ones. The acts of the Seym were legally binding everywhere in the country as opposed to the by-laws of the Seymiks that were recognised locally. The index of parliamentary activity from Figure 2 represents the potential to pass new acts and the degree as to which the state was serving justice and enforcing laws; The Seym was the highest court in the country monitoring the state's officials and other powerful individuals. 2 Moreover, it elected parliamentary commissions that travelled around the country to enforce the Seym's regulations, such as the toll sizes.
These courts and commissions were only active when the parliament was in session .
Therefore, in principal, longer sessions potentially enforced the laws better. Conversely, premature termination of its sessions by the liberum veto upset the operations of the court and the commissions.  (Ohryzko 1859-89). I am interested in the laws that were relevant for the economy. I group the regulations imposed by the Seym into ten areas of economic activity that stand out in the source material, i.e., laws regulating: (1) tolls, (2) transportation, (3) measurements, (4) production, (5) marketplaces, (6) property rights, (7) monetary policy, (8) credit, economic life of the cities, (10) regional courts. I study only the universal and impersonal laws that applied across the country. I do not list the laws that gave personal or regional privileges. The details regarding the creation of the underlying dataset are available in the online appendix. The index of regulatory activity ranges from 0, indicating no regulatory activity, to ten, i.e., Seym's acts regulating 2 Next to the Seym there was also the Tribunal-an appeal court in cases concerning the nobility. It rarely dealt with economic cases, however. at least one aspect of all the above-mentioned areas of economic life. Figure 5 shows the index of regulatory activity. It depicts the regulatory crisis since the late 17 th century and the revival of the Seym in the 1760s. The index correlates well with the index of parliamentary activity/legal capacity in Figure   2. The Pearson's correlation coefficient of the two indexes is 0.5. This is mostly because the Seym could not create new laws when it was not in session or when the session was aborted.
The regulations were important for a harmonious operation of the markets. They affected the markets either instantly, i.e., within a year, or gradually. For brevity, I discuss only a sample of mechanisms. For an even more detailed description the historical mechanism see Malinowski (2018).
Regarding the regulations that might have affected the economy in the long-term. Furthermore, Table 1 presents the development of the Polish monetary system. Minting privileges were given to individual mint-masters who were expected to hold to the Seym's instructions rather than freeride on the system by putting less metal into coins than indicated by the official seigniorage. They faced the prisoner dilemma problem, as they did not know if the other mints were also going to uphold the Lastly, the parliament was responsible for keeping the official exchange rate between silver and gold in sync with the market prices. The increase in the annual supply of silver was typically greater than the increase in the supply of gold (Palma 2016). For this reason, the exchange rate required frequent adjustments. An update to the exchange rate might have benefited the operation of markets quickly.

METHODOLOGY
I test the hypothesis that legal capacity and regulatory action influenced the development of the integrated domestic market with use of the regression analysis. The complex concept of market development is operationalised by market integration proxied by price convergence. Market integration relates to a decline in transaction and transportation costs and a gradual transformation of a range of discrete independent regional markets into one economic unit. According to the literature, assuming ongoing efficient arbitrage, low price gaps between cities located in different regions should indicate low transaction costs (for discussion see Federico 2012). Conversely, an increase in the price gap should proxy market fragmentation. I utilise this intuition and investigate if there was a relationship between the size of the price gaps between pairs of Polish cities and the operations of the Seym. I investigate rye, the most traded grain with an unregulated price on the market (Wyczański 1969).
The price gap data are based on annual silver prices of 100 litres of rye in Gdańsk, Warsaw, Cracow, Lublin, Lviv, Konigsberg, and Wrocław (21 city-pairs). Gdańsk, Warsaw, Cracow, Lublin, Lviv were in the Kingdom of Poland. Konigsberg was in Ducal Prussia, which was a fief of the Polish king (see Figure 4). Wroclaw was not reunified with Poland after the Middle Ages, but, according to Wolański (1961), it remained in close economic ties with the country. The price data has been taken from a compilation made by Malinowski (2016a). (3) interest rates indicating costs of credit (data from ; (4) silver content of the currency (grosz) that partially accounts for the long-term changes in the value of silver and the quality of the coins (data from ; (5) and the size of grain export from Gdańsk (data from Biernat 1962, series start in 1650 and used only as a robustness check). The variable of interest 'S' is either the legal capacity (Figure 2), i.e., parliamentary activity denoted as the number of days the Seym was in session that concluded, or the regulatory activity representing the number of areas of economic activity that were regulated in Seym's acts ( Figure 5). Because regulatory activity is a form of parliamentary activity they are never estimated in the same equation. Because the grain prices come mostly from the first quarter of the year (Adamczyk 1935), i.e., before any session would be concluded, and because parliamentary acts needed to be printed, distributed and acknowledged by the Dietines before they could be implemented, Equations 1 to 3 look at the lag of 'S'. The timeperiod dummies differentiate between reigns of 13 different kings. As the parliamentary activity and the control variables are not city-pair specific, the analysis is vulnerable to common year-to-year shocks.
To account for this, the standard errors in all equations are clustered around both the city-pairs and individual years. Additionally, Equation 1 will be also used to study all the city-pairs individually. The hypothesis is that 1 is negative and statistically significant. The effects of the regulations were likely to last for more than one year and cumulate over time. This article does not tackle this empirically. For the sake of feasibility, the empirical model focuses on the aforementioned short-term mechanisms and assumes that the impact of Seym's actions lasted one year. Note that Figure 7 below identifies the longterm relationship. identifies a strong first-order autocorrelation in the price gap data (coefficient 0.56; p-value 0.00). This violates the assumption of independent error-terms needed to run a valid linear regression. Second, Figure 6 shows that both price gap and parliamentary activity data are not normally distributed (same comes for the levels of regulatory activity). This can result in misspecification of the model and heteroscedasticity. Third, the price gaps are denoted in silver that was subject to long-term changes in value due to the imports of American silver to Europe (Palma 2016). To address these problems, Equation 2 denotes the first difference (FD) specification that focuses on changes in values, '∆'. The transformation mitigates the problem of autocorrelation, change the distribution of the variables, and shift the conceptual focus to year-to-year changes that were unlikely to be driven by long-term shifts in the purchasing power of silver (see Figures 9 and 10 below).
Due to data limitations, all the control variables used in Equations 1 and 2 are country specific and have the same values for all the city-pairs. To incorporate city-pair specific variance of the independent variables into the panel, as well as, limit the possibility of identifying a spurious relation, Equation 3 models the international impact of the Seym's operations. It interacts the change in 'S' with 'PL': a dummy variable equalled one if both cities in a pair were in Poland. I will base the comparison on the control group of Munich, Augsburg, and Leipzig located in the German Lands (selection based on availability of rye prices in Allen 2001). The expectation is that Seym's operations only affected the Polish domestic market, i.e., ' 1 ' is statistically insignificant while ' 2 ' is negative and significant.
The analysis faces the conceptual problem of endogeneity. As discussed, the use of the liberum veto, the main driver of the volatility of the indexes of parliamentary activity/legal capacity and regulatory activity, was related to constitutional and international issues and was not caused by changes in market conditions. However, the model in Figure 1 indicates the theoretical endogeneity from market conditions and economic growth to state capacity. The use of a lag of Seym's operations already partially mitigates the problem as it is unlikely that future market conditions influenced the past political decisions.
However, to address the conceptual part of the problem, I instrument the measures of parliamentary and regulatory activity with an index indicating the stage of royal tenure. The index varies from 0 in the year the king was elected and progresses linearly to 1 in the year of his death. The years of death/election will be excluded from the analysis. The index of royal tenure should correlate with Seym's operations because the upcoming death of a monarch rekindled the constitutional conflict over the terms of the election that triggered the use of the liberum veto while there was no pressure to contest the political order soon after the election (see Jędruch 1998). Conversely, it is unlikely that market operations and economic growth were impacted by the age of a monarch directly. The statistical relevance of the instrument will be assessed with the use of the two-stage-least-square procedure.    Table 3 shows the results of the estimation of Equations 1 to 3 that focus on short-term effects.  Note: Included only the city-pairs with at least 10 observations. 'All pairs' based on Specifications III and V.
Specifications V and VI based on Equation 2 analyse changes rather than levels. The specifications identify the same effect in the case of the parliamentary activity and a smaller but still statistically significant impact of the regulatory activity. Figure 8 shows the coefficients of interest obtained from estimation of variations of Equations 1 and 2 for all the city-pairs independently. It shows that the relationship between parliamentary activity/legal capacity in the previous year and the decline in the transaction costs was consistent across the city-pairs (the same applies for the regulatory activity; not included). The seemingly unrelated regression procedure indicates that these individual coefficients are jointly statistically different to zero (details of all post-estimation tests are available upon requests).    As the study of levels is constrained by the already-discussed serial-autocorrelation problem, I treat Specification VIII, which is based on first differences and analyses only years after the concluding sessions, as the base-line specification. As in the previous cases, the specification identifies that the average change in Seym's activity influenced the standard deviation of the change in the square root of the price gap by approximately 15 percent.  robust to the fixed effects specification and applies also to the whole sample of data (not included).

CONCLUSION
The economic-history literature on the role of the state in long-term economic development of preindustrial Europe is divided into two opposing streams. The first argues that constraining governments helped avoid harmful predation, while the second demonstrates that strong governments often played a crucial role in setting up institutions crucial for well-operating markets. These two points of view rarely speak to one another. The case of the British Glorious Revolution led to the, sometimes contested, conventional knowledge that constraining the ruler should promote economic growth. The Polish case problematises this by demonstrating that constraining the monarch had negative political and economic consequences. The Polish king had too few prerogatives to oppose centrifugal forces and bind the country together in the absence of a well-functioning parliament. The power vacuum was filled by regional lords that effectively divided the country into various zones of influence. Inter alia, the lack of control allowed them to raise tenurial rents and sharpen serfdom in the country. This demonstrates that limiting the king and forming a parliamentary regime was not a sufficient condition to initiate sustainable economic growth. It, at least, had to be accompanied by mechanisms preventing the regional elites from hijacking the extractive power.
Initially, in the 16 th century, this was ensured by a central territorial parliament representing the interest of the landed nobility. The Seym favoured lowering of the transaction costs on the grain market to allow the nobility to export the grain cheaply. To this end, the Seym issued numerous regulations that harmonised economic institutions and fostered market integration. However, the constitutional conflict, foreign intervention, and the interest of the richest of the nobles, magnates, to ensure their unsupervised regional influence gradually broke the Seym and resulted in political fragmentation (possibly even refeudalisation) that eventually led to market fragmentation. To prove this hypothesis, one would have to develop standardised and comparable proxies of market integration and legal state capacity. There have been few attempts to conduct cross-sectional studies of market development across early-modern Europe, but they suffer from the problem of standardisation (Federico 2012). Regarding measuring legal state capacity, Van Zanden et al. (2012) constructed the index of parliamentary activity for a range of European countries. However, because the power in the West was often exercised by both the ruler and the representative institutions, a coherent picture also requires accounts of the legal action of the rulers. Preindustrial Poland, due to the unique complementarity of its political institutions, provides a valuable insight into the relationship between states and markets, but much remains to be done to fully understand the road European states took to develop their domestic markets and how market integration impacted economic growth. PRICE DATA The basic unit of observation is a series of annual retail rye prices in a specific market. Rye was chosen for this study as it was the most commonly traded grain on the domestic market and the main export commodity.
Furthermore, next to beer, it was the most basic source of calories for the population (Wyczański 1969). The study uses price series for Gdańsk, Konigsberg, Warsaw, Cracow, Lublin, Wrocław, and Lviv. Konigsberg was located in the Ducal Prussia, which was a fief of the Polish king after 1525. Wrocław was located in the historical region of Silesia, which had been a part of the domain of the Polish king back in the 11 th century. At that time, it was considered one of the main capitals of the Kingdom. In 1335 it became part of the Czech domain and in 1526 it was claimed by the Habsburgs. Subsequently, in 1742 the city was assimilated by Prussia. According to Wolański (1961), in spite of the border, Wrocław remained in close economic ties with Poland. Furthermore, Warsaw was incorporated into the Polish Kingdom in 1526. Lviv had been located in the Grand Duchy of Lithuania until 1569 when it became a part of the Polish Kingdom. All the other cities were continuously located in Poland between 1500 and 1772.
Annual grain price data for Gdańsk, Cracow, Lviv, Warsaw, Cracow, Lublin and Wrocławthe latter only until 1618have been collected from paperback editions Furtak 1935;Adamczyk 1935;1938;Siegel 1936;Pelc 1935;) and standardised to a uniform measure of a price in grams of silver for one litre by the Global Price and Income History Group. Prices for Wrocław for the 18 th century were taken from David Jacks' webpage (http://www.sfu.ca/~djacks/data/prices/Poland/index.html). This data required standardisation. It was presented in silbergroschen per Berliner Scheffel. 1 Spesieztaler was 30 silbergroschen. In the late 17 th century the taler contained 25.9839 g fine silver. From 1740 onward 1 taler was 19.4879 g fine silver.
In 1750 Prussia debased the taler further to 16.7039 g and kept the level till the end of the studied period. The silver content in the period 1756-1763 is unclear and was left out from the data. after the period of anarchy discussed in the main article, to compile the laws that had been published by the Seym since the 15 th century. The original edition of the laws included an index of all the phenomena discussed in all the acts of the Seym since its creation (volumes 10 and 11). This included economic issues. For example, for each phenomenon, for example 'credit' or 'roads', the index indicated when each law pertaining to that phenomenon was made and what exactly it stipulated.
By studying individual acts of the parliament and the index of its acts, I constructed a complete database of economic laws and regulations. These were general, i.e., pertaining to the whole country, or local, i.e., relating to a specific individual, city, or region (for example the staple rights). The database notes only the acts that were impersonal and general, except for infrastructural projects, such as bridges, that were commissioned by the Seym.
The database is in Polish and is a part of a complementary article (Reference hidden to protect anonymity).
For this article, the database was used to construct an index of regulatory activity. The main goal of the index is to visualise that the Seym, when active, regulated many different aspects of economic activity throughout the country. To transform a qualitative database into a quantitative index I grouped the economic phenomena regulated in the acts into 10 different areas of economic activity. The index increases by one score for each additional area of activity regulated by at least one act. If at least one phenomenon pertaining to each of the areas of activity was regulated, the index scores 10 (as it was the case in 1611). If no regulation economic regulation was passed, the index scores 0 (as in the years when the veto was used). The index weights all the areas of economic activity equally. Additionally, it does not distinguish how many acts were issued within each area of activity. The index is intended as a first exploratory measure of long-term changes in regulatory activity of a pre-industrial economy. It is used as a complementary measure of Seym' activity intended for more robust regression analysis.
The 10 areas of economic activity are:

General tax
This category consists of the 'universał podobory', a general tax that regulated the size of taxation throughout the country. Each concluding Seym published such a document.

Tolls
This category captures country-wise regulation pertaining to the size, collection, and supervision of tolls.

Transportation
This area consists of the acts that instructed construction of new infrastructural projects, setting up new trade-lines and cattle routs, instructing maintenance of roads and rivers, combating bandits, etc.

Measurements
This area groups consists of regulations pressuring standardisation of measures used in Poland-Lithuania.

Industry
This group deals with the general rules regulating operation of the industry. For example, general rights and duties of the guilds, production standards, etc.

Trade
This category groups regulation of trade. For example, prohibition of transportation of different types of goods to varying locations, exceptions from taxation for the nobility, regulation of international trade and fairs, etc.

Property rights
This category deals with property rights in agriculture and codifications of labour relations, regulations of the right to buy and sell property, inheritance, regulation of what is considered a contract etc.

Monetary policy
This area groups all the monetary reforms in the country and changes to the nominal value of the currency.

Debtors and creditors rights
For example, regulation of how the obligations ought to be divided after the death of a debtor.

Judiciary
This area grouped all the information about operation of courts, their prerogatives, modes of appointment of judges and other state representatives, etc.