What if there were not two hundred countries but ten thousand city-states and independent territories worldwide? Or even one hundred thousand or more?
Customs barriers, taxes, and mismatched regulatory regimes would grind trade to a halt. Some states would constantly attack their neighbors, plunging the world into chaos. Shared standards and infrastructure would vanish. Right?
That’s the story, anyway.
History tells another tale. Central Europe offers a fascinating case study. Before there was a Germany, there was a German Confederation of 39 loosely related territories. Although they shared a language and culture, they governed themselves until unification in 1871. No central executive or judiciary existed.
Before this German Confederation was created at the Congress of Vienna in 1815, there was the Holy Roman Empire, a loose federation spanning much of central Europe—covering, at different times, parts of today’s Germany, Austria, the Czech Republic, the Netherlands, Belgium, Luxembourg, Switzerland, Liechtenstein, Monaco, Slovenia, northern and central Italy, and large parts of eastern France and western Poland. It lasted roughly a millennium and, at times, included more than a thousand semi-autonomous territories.
Medieval Europe was by no means a paradise. Nonetheless, the people of that era built institutions for long-distance trade, lending, and international payments. They created universities. Agricultural productivity and mechanization took root. Without these advancements, modern wealth would be nowhere near today’s level. The decentralized Holy Roman Empire, for all its flaws, was a major contributor of these innovations.
Finding Ways to Trade
The Holy Roman Empire was fragmented. Sometimes, the kingdoms, duchies, principalities, and free cities fought one another. Those who controlled a road or river imposed tolls and border dues. Shipping goods could mean paying dozens of different tolls and taxes before arrival.
There was no single market or centralized law enforcement.
But market participants found ways to make commerce work anyway. Merchant networks and city leagues were formed to facilitate the exchange of goods. Some cities solidified into major hubs and became nodes in a wider trade network.
They saw the value of free trade and built protected routes for long-distance commerce. Merchants traveling to the Leipzig Trade Fair, for instance, could receive protective-escort privileges.
Trade activity was concentrated at major fairs that gave buyers and sellers a place to meet safely. Imperial cities, generally run by town councils of oligarchs, competed to provide a market environment, stable rules, predictable courts, and standardized procedures. In the north, many port and market towns such as Hamburg, Bremen, and Lübeck formed the Hanseatic League, a commercial and defensive alliance.
Merchants increasingly relied on standardized practices across regions, and interregional courts emerged for dispute resolution and contract enforcement. Individuals who valued open markets and predictable rules built alternatives to centralized institutions.
Enforcement Through Incentives
In 1495, the Reichskammergericht was established as a supreme court of the Holy Roman Empire, and private war was formally outlawed. Feuding was formally banned, and disputes were supposed to be settled through the courts.
“But how would any laws be enforced without a central police?” an objection might go.
The system didn’t rely on blunt force but on leverage. Territories had a strong incentive to comply with and enforce a few shared rules. If a local ruler didn’t cooperate, he was stripped of legal protections, and neighboring states were free to invade.
John Frederick II, Duke of Saxony, offers a telling example: After supporting the outlaw knight Wilhelm von Grumbach in a scheme to regain the Saxon electorship, he was placed under the imperial ban in 1566. He was captured and spent the rest of his life in prison.
This incentive-based order worked reasonably well for centuries. Then larger blocs began to form.
The Thirty Years’ War
The Holy Roman Empire was never a picture of peace. Small conflicts and disputes simmered constantly. However, they were generally contained and didn’t touch most people’s daily lives.
This changed dramatically in the early seventeenth century. Although Catholic-Lutheran coexistence had been established decades earlier, Calvinists and other movements were excluded. Furthermore, conflicts simmered over whether ultimate authority lay with the emperor or the territorial estates.
Two large blocs, the Protestant Union and the Catholic League, started to form. Although they hadn’t been responsible for the initial set of disputes, they were a huge accelerant. Alliances hardened, and more estates were drawn in.
In 1618, the Defenestration of Prague ignited a long conflict, the Thirty Years’ War. The conflict began with a dispute over who would control religion and political authority in key territories. It then escalated to a wider European conflict with outside interventions by Spain, the Dutch Republic, Denmark-Norway, Sweden, and France.
After three decades, the Peace of Westphalia reset the imperial constitutional order and confirmed the broad autonomy exercised by the empire’s territorial princes. The war was brought to an end without a single central enforcer.
A Complex Web
All in all, the history of the Holy Roman Empire is complex. Since it consisted of more than a thousand estates, evidence is scattered, and no single narrative fits cleanly.
Bargaining, litigation, and coalition politics characterized relations within the empire over the centuries. The Holy Roman Empire resembled a modern intergovernmental organization. There were many internal conflicts, but overall, the system worked. Internal alliances fought for members’ common interests.
Practical technologies spread. The heavy plow, three-field crop-rotation system, and horse collar constituted leaps in farming effectiveness and food security. Watermills converted moving water into mechanical power. Exchange practices became more standardized, and long-distance postal networks were established. The printing press scaled up information distribution.
Important legal and market principles took hold. Religious coexistence was formalized. Private violence gave way to the rule of law. Diplomacy developed as an alternative to feuding. Long-distance commercial networks expanded, and early finance infrastructure developed. Combined with cross-border credit, large-scale capital allocation began financing innovation.
Interconnected World
Centuries ago, peaceful market actors, motivated by personal profit, worked around obstacles. They found ways to peacefully exchange products and services and push living standards upwards.
Given how compartmentalized life was, this becomes even more impressive. Territories didn’t depend on each other and were largely self-sufficient. Still, individuals found ways to improve their lives through trade.
While there’s a case to be made for limiting dependence on foreign powers, total economic autarky is neither possible nor desirable. Tariffs and export duties are hard to sustain in an interconnected world. They lead to increased costs, disrupted supply chains, and, often enough, to political backlash.
Specialization and the division of labor have made the world interdependent. Whether at the scale of a village or a planet, economic specialization is the main driver of economic advancement. Without it, we’d all be subsistence farmers eking out a lonely, hardscrabble existence.
If countries were to split into many territories, those that embraced free trade and cooperation would do best. Trade would not cease; it would simply adapt. And competition between jurisdictions would pressure rulers to keep rules simple and tolerable for the people who live and trade there.