Wild sheep were more hairy than woolly. Although sheep were domesticated 9 to 11 thousand years ago, archaeological evidence from statuary found at sites in Iran suggests selection for woolly sheep may have begun around 6000 BC,[13][14] with the earliest woven wool garments having only been dated to two to three thousand years later.[15] Woolly-sheep were introduced into Europe from the Near East in the early part of the 4th millennium BC. The oldest known European wool textile, ca. 1500 BC, was preserved in a Danish bog.[16] Prior to invention of shears—probably in the Iron Age—the wool was plucked out by hand or by bronze combs. In Roman times, wool, linen, and leather clothed the European population; cotton from India was a curiosity of which only naturalists had heard, and silk, imported along the Silk Road from China, was an extravagant luxury. Pliny the Elder records in his Natural History that the reputation for producing the finest wool was enjoyed by Tarentum, where selective breeding had produced sheep with superior fleeces, but which required special care.

In medieval times, as trade connections expanded, the Champagne fairs revolved around the production of wool cloth in small centers such as Provins. The network developed by the annual fairs meant the woolens of Provins might find their way to Naples, Sicily, Cyprus, Majorca, Spain, and even Constantinople.[17] The wool trade developed into serious business, a generator of capital.[18] In the 13th century, the wool trade became the economic engine of the Low Countries and central Italy. By the end of the 14th century, Italy predominated, though Italian production turned to silk in the 16th century.[17] Both industries, based on the export of English raw wool, were rivaled only by the 15th-century sheepwalks of Castile and were a significant source of income to the English crown, which in 1275 had imposed an export tax on wool called the "Great Custom". The importance of wool to the English economy can be seen in the fact that since the 14th century, the presiding officer of the House of Lords has sat on the "Woolsack", a chair stuffed with wool.

Economies of scale were instituted in the Cistercian houses, which had accumulated great tracts of land during the 12th and early 13th centuries, when land prices were low and labor still scarce. Raw wool was baled and shipped from North Sea ports to the textile cities of Flanders, notably Ypres and Ghent, where it was dyed and worked up as cloth. At the time of the Black Death, English textile industries accounted for about 10% of English wool production;[19] the English textile trade grew during the 15th century, to the point where export of wool was discouraged. Over the centuries, various British laws controlled the wool trade or required the use of wool even in burials. The smuggling of wool out of the country, known as owling, was at one time punishable by the cutting off of a hand. After the Restoration, fine English woolens began to compete with silks in the international market, partly aided by the Navigation Acts; in 1699, the English crown forbade its American colonies to trade wool with anyone but England herself.

A great deal of the value of woolen textiles was in the dyeing and finishing of the woven product. In each of the centers of the textile trade, the manufacturing process came to be subdivided into a collection of trades, overseen by an entrepreneur in a system called by the English the "putting-out" system, or "cottage industry", and the Verlagssystem by the Germans. In this system of producing wool cloth, until recently perpetuated in the production of Harris tweeds, the entrepreneur provides the raw materials and an advance, the remainder being paid upon delivery of the product. Written contracts bound the artisans to specified terms. Fernand Braudel traces the appearance of the system in the 13th-century economic boom, quoting a document of 1275.[17] The system effectively bypassed the guilds' restrictions.

Before the flowering of the Renaissance, the Medici and other great banking houses of Florence had built their wealth and banking system on their textile industry based on wool, overseen by the Arte della Lana, the wool guild: wool textile interests guided Florentine policies. Francesco Datini, the "merchant of Prato", established in 1383 an Arte della Lana for that small Tuscan city. The sheepwalks of Castile shaped the landscape and the fortunes of the meseta that lies in the heart of the Iberian peninsula; in the 16th century, a unified Spain allowed export of Merino lambs only with royal permission. The German wool market – based on sheep of Spanish origin – did not overtake British wool until comparatively late. The Industrial Revolution introduced mass production technology into wool and wool cloth manufacturing. Australia's colonial economy was based on sheep raising, and the Australian wool trade eventually overtook that of the Germans by 1845, furnishing wool for Bradford, which developed as the heart of industrialized woolens production.

Due to decreasing demand with increased use of synthetic fibers, wool production is much less than what it was in the past. The collapse in the price of wool began in late 1966 with a 40% drop; with occasional interruptions, the price has tended down. The result has been sharply reduced production and movement of resources into production of other commodities, in the case of sheep growers, to production of meat.[20][21][22]

Superwash wool (or washable wool) technology first appeared in the early 1970s to produce wool that has been specially treated so it is machine washable and may be tumble-dried. This wool is produced using an acid bath that removes the "scales" from the fiber, or by coating the fiber with a polymer that prevents the scales from attaching to each other and causing shrinkage. This process results in a fiber that holds longevity and durability over synthetic materials, while retaining its shape.[23]

In December 2004, a bale of the then world's finest wool, averaging 11.8 microns, sold for AU$3,000 per kilogram at auction in Melbourne, Victoria. This fleece wool tested with an average yield of 74.5%, 68 mm long, and had 40 newtons per kilotex strength. The result was A$279,000 for the bale.[24] The finest bale of wool ever auctioned was sold for a seasonal record of AU$2690 per kilo during June 2008. This bale was produced by the Hillcreston Pinehill Partnership and measured 11.6 microns, 72.1% yield, and had a 43 newtons per kilotex strength measurement. The bale realized $247,480 and was exported to India.[25]

In 2007, a new wool suit was developed and sold in Japan that can be washed in the shower, and which dries off ready to wear within hours with no ironing required. The suit was developed using Australian Merino wool, and it enables woven products made from wool, such as suits, trousers, and skirts, to be cleaned using a domestic shower at home.[26]

In December 2006, the General Assembly of the United Nations proclaimed 2009 to be the International Year of Natural Fibres, so as to raise the profile of wool and other natural fibers.

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