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Going the Distance: Eurasian Trade and the Rise of the Business Corporation, 1400-1700

Author(s):Harris, Ron
Reviewer(s):Artunç, Cihan

Published by EH.Net (September 2020)

Ron Harris, Going the Distance: Eurasian Trade and the Rise of the Business Corporation, 1400-1700. Princeton: Princeton University Press, 2020. xiii + 465 pp. $40 (hardcover), ISBN: 978-0-691-15077-2.

Reviewed for EH.Net by Cihan Artunç, Department of Economics, Middlebury College.

 

In 670 CE, a merchant in Turfan, Central Asia, disappeared while traveling to trade goods he received on a loan from another, foreign, merchant. The debtor’s demise (and with him, one copy of the contract) called into question whether the terms of the loan could be satisfied. The question was finally settled, remarkably in the creditor’s favor. In 1469, Jakob the Elder, the managing partner of the Fugger family firm — one of the largest commercial enterprises in Europe at the time — passed away. Despite being wildly successful, the business almost collapsed as it convulsed through ad hoc arrangements for 43 years until finally transitioning to Jakob the Rich’s stewardship in 1512.

These are just some of micro case studies Ron Harris elegantly weaves to demonstrate the many different problems firms faced in long-distance Eurasian trade. Some risks were outside of merchants’ control. Pirates, bandits, and storms were real threats. But price fluctuations could be just as ruinous. It was difficult to verify any one associate’s claim. In a world with incomplete information, and where information flowed slowly, monitoring different agents, ships, partners, or branches became vital for any growing business. The risks were immense but so were the rewards. But, even if the firm successfully solved these problems and enjoyed growth, it could simply dissolve after the death of its controlling members, with no heir willing to take the reins and risk the fortune they inherited.

Today, businesses wrestle with many of the same issues. To solve the problems of information, agency, and different sources of risk, firms have to come up with a way to effectively monitor agents, coordinate the actions of different actors in the organization, and assign liability to members appropriately. Harris, a legal and economic historian at Tel Aviv University, takes advantage of his expertise in these literatures that are not always in conversation with one another. His careful study combines insights from contract theory and institutional economics with the rich body of evidence the history literature produced to show the similar and different ways in which societies responded to the organizational challenges involved in Eurasian trade, one of the most capital-intensive and risky economic activities before the 1700s.

Some solutions were simple and addressed related problems; these institutions appeared spontaneously in many places. Single ownership like itinerant traders (“peddlers”) or plain bilateral contracts such as loans or agency were endogenous to many areas and endemic across Eurasia. They became the building blocks of more sophisticated institutional arrangements.

Other solutions, like the commenda or the sea loan, emerged in one place but migrated all across Eurasia, through the expansion of empires or religion, the movement of people, and the merchants involved in Eurasian trade themselves. The sea loan allowed for more flexible assignment of liability. The lender took up the sea risk, the borrower assumed the business risk. It permitted the use of ships or goods as collateral. Originated in Phoenician and Greek practices, it was integrated into Roman law, survived Christian rules against usury, and spread across the Mediterranean and much of Eurasia. It remained an attractive way of organizing maritime trade until the arrival of the commenda. In its simplest version, the commenda resembled other bilateral contracts between an investor and a traveling partner to share profits from a venture. Commenda’s innovation was in separating the invested capital from both parties. Creditors could only make claims on the commenda capital, effectively giving both the investor and the traveling partner limited liability. One traveling partner could pool capital from many different investors by combining different commendas and could even entrust these pooled assets to another traveling partner through a new commenda. The form’s flexibility made it a popular organizational choice across Eurasia. Wherever the form migrated, the form could be adapted easily depending on that region’s institutional setup. The profit-sharing rule varied from place to place, as did what the investor could actually invest. But the broad contours remained the same.

Other institutions were so entrenched in the context where they first emerged, they could not migrate easily. The grand example Harris stresses is the business corporation. The idea of a legal person was developed in Western Europe within the Catholic Church. The Eastern Orthodox Church did not enjoy the same robust separation from a higher secular authority; Islam was too decentralized and non-hierarchical to make the corporate form an attractive option. The corporation migrated from the Catholic Church to European cities, which came to be somewhat autonomous as they became independent from the rural feudal system. Municipalities, universities, and guilds all took advantage of the corporate form. In other parts of the world, cities did not enjoy the same level of independence. But it was only the English and the Dutch who innovated by attaching joint stock to the corporation for a commercial objective. Harris argues that the commitment of the government to not arbitrarily expropriate assets was vital for this development. The corporation’s equity, a large pool of assets drawn from many investors, would be a tempting target for the executive. The firm had to convince its potential subscribers that their investment would be safe from expropriation or unexpected taxation, thus locking in capital for long periods of time. Harris further argues the business corporation, by allowing the English and the Dutch to scale up their operations and set up repeatable voyages from East Asia through the long and expensive Cape route, led to their ascendance in Eurasian trade at the expense of the Portuguese and the local players.

Perhaps the book’s most important contribution is the new typology of indigenous, migratory, and embedded institutions. Previous arguments on why certain institutions emerged or were adopted in some places but not others inevitably focused too much on the supply side. Harris improves on the existing views by comparing the complexity of said institutions and their reliance on other building blocks. It’s not that the Islamic Middle East or the Chinese Empire lacked sophisticated solutions. Far from it, the institutions that these regions developed — the waqf or the family lineage organization — also depended on the Islamic or the Chinese institutional complex to function effectively. These institutions, just like the business corporation, could not migrate alone without other complementary institutions. And because these regions had their own alternatives, they did not necessarily need the corporation until the corporation’s advantage in exploiting scale and scope became clear. The book thus develops a nuanced argument that demonstrates the depth of institutional solutions that different societies created and distances itself from the essentialist, Eurocentric arguments that unfortunately characterize some of this literature.

In explaining the corporation’s embeddedness in English and Dutch institutions, the analysis falls back to the all-too-familiar claims about commitment and checks on the executive. The recent reevaluation of that literature notwithstanding, this raises a question about whether the success of the English and Dutch East India Companies can be truly attributed to their organizational advantage or to some other English or Dutch institution that allowed the corporation to emerge there in the first place. Harris is careful in not pushing this line of argument too far and admits that private-state partnerships might have been functionally similar. Disentangling the state’s role from the organizational efficacy of the corporation will be an important question with which future research will have to grapple. Going the Distance makes an important step in this direction and provides an important analytical framework that will be useful in taking up this question.

 

Cihan Artunç is an Assistant Professor of Economics at Middlebury College. Recent publications include “Partnership as Experimentation” (with Timothy W. Guinnane), Journal of Law, Economics, and Organization (2019).

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Subject(s):Business History
International and Domestic Trade and Relations
Geographic Area(s):Asia
Europe
Time Period(s):Medieval
16th Century
17th Century