The idea of a collection of Mages, Sorcerors, and assorted Mystics pooling their resources and talents for the purpose of research and public charity was a revolutionary concept in the early years of the 2nd era. The closest organization to what we today know as the Mages Guild was the Psijic Order of the Isle of Artaeum. Magic was something to be learned by individuals, or, at most, in intimate covens; mages were, if not actual hermits, usually quite solitary.
The Psijic Order served the rulers of the Sumurset Isle as counselors, and chose its members by a complex, ritualized method not understood by the common people. Its purposes and goals were likewise unpublished, and its detractors attributed the worst evil as the source of its power. The religion of the old order could be described as ancestor worship, an increasingly unfashionable philosophy in the 2nd Era.
When Vanus Galerion, a Psijic of Artaeum and student of the famed Iachesis, began collecting mages from around Sumurset Isle, he attracted the animosity of all. He was operating out of Firsthold, and there was a common (and not entirely unsensible) attitude that magical experiments should be conducted only in unpopulated areas. Even more shocking, Galerion proposed to make magical items, potions, and even spells available to any member of the general public who could pay. No longer was magic to be limited either to the aristocracy or intelligensia.
Galerion was brought before Iachesis and the King of Firsthold, Rilis XII, and made to state the intentions of the guild he was forming. The fact that Galerion's speech to Rilis and Iachesis was not recorded for posterity is a tragedy, though it does allow the opportunity for historians to amuse one another with lies and persuasions Galerion might have used to found the ubiquitous organization. The charter was approved.
Almost immediately after the guild was formed, the question of security had to be answered. The Isle of Artaeum did not have to have a force of arms to shield it from invaders interested in stealing its treasures -- when the Psijic Order does not wish someone to land on the island, the island and all on it become insubstantial. The new Mages Guild had to hire guards. Galerion soon discovered what nobles have known for thousands of years: money alone does not buy loyalty. The knightly Order of the Lamp was formed the following year.
Like a tree from an acorn, the Mages Guild grew branches all over Sumurset Isle and then to the mainland of Tamriel. There are many records of superstitious or sensibly fearful rulers forbidding the Guild in their kingdom, but their heirs or their heirs' heirs recognized the wisdom of allowing the Guild to practice. The Mages Guild was a powerful force in Tamriel, a dangerous foe if a somewhat disinterested ally. There have been only a few rare incidents of the Mages Guild actually becoming involved in local politcal struggles. On these occasions, the Guild's participation has been the ultimate decider in the conflict.
By tradition begun by Vanus Galerion, the Mages Guild as a singular institution is presided over by a council of six Archmagisters. Each guild location is run by a Guildmagister, assisted by a counsel of two, the Master of Incunubula and the Master at Arms. The Master of Incunubula presides over a counsel of an additional two mages: the Master of Academia and the Master of the Scrye. The Master at Arms also has a counsel of two: the Master of Initiates and the Palatinus, the leader of the Order of the Lamp.
One need not be a member of the Mages Guild to know that this carefully constructed order is often nothing more than an illusion. As Vanus Galerion himself said bitterly, leaving Tamriel to travel to other lands, "The Guild has become nothing more than an intricate morass of political infighting."