In his 1994 paper, Avner Greif detected systematic cultural differences between two medieval trading societies: the ‘collectivist’ Maghribis and the ‘individualist’ Genoese. The Maghribis cooperated mostly with members of their own group, which tended to be less effective in the growing size of markets and when conducting business with diverse ethnic traders. In contrast, the Genoese utilized formal legal and political organizations for monitoring and enforcing agreements that allowed them to cooperate with members outside their group and hence to draw from a larger talent pool. As a result, they managed to pursue ever more complex forms of trade which led to increased prosperity.
Picture by Austin Kehmeier, Unsplash
From collectivist Maghrib to individualist Genoa
Recent research has indicated societal organization to be highly correlated with per capita income in contemporary societies: most of the developing countries are "collectivist," whereas the developed West is “individualist”. Investigating this issue, Greif examines two late-medieval traders' groups: the Maghribis in the ‘Muslim world’ and the Genoese in the ‘Latin world’.
Both groups faced a similar environment, employed comparable naval technology, and traded in similar goods. Crucially, their success depended on their efficiency in providing goods abroad. To do that, a merchant had to choose between two options:
Traveling himself between trade centers
Hiring over-seas agents in trade centers abroad to handle his merchandise
Employing agents was more efficient since it saved the time and risk of traveling and allowed diversifying sales across trade centers. Yet, without supporting institutions, there was always the risk that an agent could embezzle the merchant's goods. The societal organization of the Maghribis and the Genoese enabled them to mitigate this commitment problem – but in slightly different ways.
Evidence by Greif (1994) suggests that among the Maghribis a collectivist equilibrium was a natural focal point, whereas among the Genoese it was an individualist one. The former favored commercial cooperation which excluded nongroup members, while the latter allowed for the inclusion of different groups – like commoners and foreigners.
Two different ways of harnessing the power of international trade
As trade with more remote trade centers became possible, The Maghribis expanded their trade employing other Maghribis as agents. The descendants of Maghribis continued to cooperate with the descendants of other Maghribis. Parties held their agreements since they practically belonged to the same group.
Even though the Genoese merchants were also biased towards reflecting agency relations to their own, they nevertheless developed agency relations with non-Genoese. By 1155, around 18% of the total sent abroad was through non-Genoese agents. The Genoese merchant approach enhanced commercial flexibility as native agents possessed a better knowledge of local conditions. To the extent that the division of labor is a necessary condition for long-run sustained economic growth, the Genoese created an economic revolution.
The court of law
There was, however, a catch: non-group members would cooperate only if there were impartial parties that made sure that all sides upheld their commitments. In other words, the commitment problem in the Genoese setting required formal legal and political enforcement organizations that ensured everyone played by the rules, and a legal system that devised a reliable set of rules in the first place. And employing non-Genoese agents, Genoese merchants pushed in this direction.
In contrast, despite the existence of a well-developed local court system, the Maghribis entered contracts informally: such were their adopted code of conduct and their conflict resolution mechanisms. After all, who needs formal rules when mainly dealing with friends and relatives?
Genoese merchants could thus efficiently hire native agents with excellent knowledge of the local conditions that allowed their products to reach distant markets. On the other hand, the Maghribis’ access to talented agents was limited to the circle of their own group. This made their group less capable of capturing the efficiency gains from an ever-expanding trading sphere.
And thus was born international trade
The developments in Genoa were the first step to a new way of conducting trade. Soon it would reach unprecedented volumes as more Western states followed. It was a gradual change, but its implications slowly started to become evident. Most goods we now enjoy in our times of prosperity have traveled whole oceans before ending up in our hands. And for this we are also to thank an individualistic maritime city whose merchants succeeded in doing business with strangers and commoners.
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