Author Archives: stephdeck1

About stephdeck1

I am a historian of business and Africa. Most of my research lies on the intersection of social sciences and historical approaches, with a focus on developing and emerging economies.

The institutional co-evolution of proto-multinationals

The Formative Years of the Modern Corporation: The Dutch East India Company VOC, 1602-1623

By Oscar Gelderblom (University of Utrecht), Abe de Jong (Erasmus University Rotterdam) & Joost Jonker (Universities of Amsterdam and Utrecht)

URL: http://ideas.repec.org/p/ems/eureri/32952.html

Abstract

With their legal personhood, permanent capital with transferable shares, separation of ownership and management, and limited liability for both shareholders and managers, the Dutch East India Company (VOC) and subsequently the English East India Company (EIC) are generally considered a major institutional breakthrough. Our analysis of the business operations and notably the financial policy of the VOC during the company’s first two decades in existence shows that its corporate form owed less to foresight than to constant piecemeal engineering to remedy original design flaws brought to light by prolonged exposure to the strains of the Asian trade. Moreover, the crucial feature of limited liability for managers was not, as previously thought, part and parcel of that design, but emerged only after a long period of experimenting with various, sometimes very ingenious, solutions to the company’s financial bottlenecks.

Reviewed by Stephanie Decker

The Dutch East India company may be among the best researched businesses of all time, but it is testament to its importance as a proto-multinational and the quality of its archive that research on this firm continues to inform contemporary research debates. The working paper by Gelderblom, De Jong & Jonker (NEP-HIS 2014-01-17), which has since been published in the Journal of Economic History, is interesting as it deals with the early years of the VOC (Vereenigde Oostindische Compagnie), and presents both a historical narrative as well as some distinctive challenges to previous assumptions. Their paper has to be seen as both an interesting contribution to other researches on the VOC, as well as some more general debates.

The continued interest in this very old company is due to a variety of reasons. Even a short sweep of recent work that relates to the VOC shows a remarkable breadth of themes. Wim van Lent has compared management policies of the VOC with its competitor, the English East India company, to understand some problems of its organizational evolution (Sgourev & Van Lent, 2011). This comparison is so intriguing not just because of the Dutch-English colonial competition during this time period, but also because the two East India companies were organized very differently, and almost provide a naturally occurring counterfactual for each other in a laboratory that tests organizational effectiveness at long distance.

As both firms date back to the seventeenth century, and were among the first well-documented examples of how organizations dealt with the challenges of managing across vast distances, their corporate histories are of great importance in and of themselves. Both provide organizational solutions to some of the perennial problems of multinationals, which struggled with poor communication and oversight of operations, especially the difficulties of enforcing control and monitoring the trustworthiness of its agents.

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Gelderblom et al. discuss the attitudes and conflicts within the Dutch Republic over the control of the VOC, the world’s first modern corporation

But despite all of these similarities to the multinationals of later stages, the East India companies were also fundamental different, and creations of their own time. The companies, especially the VOC, often took on roles that made them quasi-governmental bodies. As a result, they were involved in some of the day-to-day issues of governance of empire, which made these archives particularly rich. Thus they have been researched beyond the narrow confines of business history, and the particular insights that can be gained from those files have been discussed in great detail by Ann Laura Stoler (2009), a well-known postcolonial historian of gender and empire. The conduct of business often involved the company in political and personal issues well beyond what one would usually expect to see in a business archive, which offers rich contextual insights into the time period and its attitudes.

It is in this regard that the paper by Gelderblom et al. is interesting, as it discusses the attitudes and conflicts within the Netherlands over the control and financing of the VOC, and the exact rights and obligations of its directors. The paper takes core historical values such as contextualization and contingency (O’Sullivan & Graham, 2010) seriously, and paints a rich picture of the time period and some of the characters that influenced the decision-making within and beyond the VOC. The importance of these issues lies in more conceptual debates about the evolution of limited liability in the West (as opposed to other commercially vibrant areas such as the Middle East). Gelderblom et al.’s analytically structured narrative (Rowlinson, Hassard & Decker, 2014) highlights that although the VOC possessed some important legal features that we commonly associate with modern corporations, others developed only during its first years of operations in response to external pressures.
Consequently, having acquired two key features of the modern corporation (the split between ownership and management and transferable shares) from the outset, the VOC obtained three more (a permanent capital, limited liability for directors and by extension legal personhood) step-by-step over a period of some twenty years. Thus the five features did not come as a package, as a coherent logical set.

Their narrative shows how most of these pressures reflected financial constraints, as the large-scale trading activities in conjunction with military expeditions were a far larger undertaking than anything that had hitherto been financed on the Amsterdam money markets. This is an important contribution, and their short discussion in the conclusion quite sensitively highlights that some assumptions about the superiority of the Western institutional frameworks, such as argued for by Kuran (2010), are perhaps too ethnocentric to fully understand not just the different evolution of institutions in other cultures, but can also blind researchers to the historically contingent development of the legal frameworks that we now take for granted.

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Gelderblom et al. hide much of their contribution in their paper’s appendix

In light of the above, it is noticeable that the actual narrative takes up the largest part of the paper, and that it is only at particularly important junctures that the historiographical literature is challenged, while the framing in the introduction and conclusion is more heavily conceptual. These insights that can only be developed from a careful, in-depth historical investigation perhaps deserve better highlighting. This extends to the title, which does not quite do justice to the large themes that inform the historical narrative. Finally, it is only in the appendix that it becomes clear for readers not familiar with the nature of the VOC archive that this early period that the paper deals with is indeed not as well-researched as the later period, especially in terms of its financial performance. All of this adds up to another interesting angle of research on the VOC, which as a company and an organizational archive is clearly a case of great importance for the history of business and its institutional developments.

References:

  • Kuran, T. 2010. The Long Divergence: How Islamic Law Held Back the Middle East. Princeton: Princeton University Press.
  • O’Sullivan, M., & Graham, M. B. W. 2010. Guest Editors’ introduction: Moving Forward by Looking Backward: Business History and Management Studies. Journal of Management Studies, forthcoming.
  • Rowlinson, M., Hassard, J., & Decker, S. 2014. Research Strategies for Organizational History: A Dialogue between Historical Theory and Organization Theory. Academy of Management Review, 39(3).
  • Sgourev, S. V., & van Lent, W. 2011. The Right Amount of Wrong? Private Trade and Public Interest at the VOC European Group of Organization Studies. Gothenburg, Sweden.
  • Stoler, A. L. 2009. Along the Archival Grain: Epistemic Anxieties and Colonial Common Sense. Princeton: Princeton University Press.

Slavery and the Modern World

The transatlantic slave trade and the evolution of political authority in West Africa

by: Warren C. Whatley (wwhatley@umich.edu)

Abstract:

I trace the impact of the trans-Atlantic slave trade on the evolution of political authority in West Africa. I present econometric evidence showing that the trans-Atlantic slave trade increased absolutism in pre-colonial West Africa by approximately 17% to 35%, while reducing democracy and liberalism. I argue that this slavery-induced absolutism also influenced the structure of African political institutions in the colonial era and beyond. I present aggregate evidence showing that British colonies that exported more slaves in the era of the slave trade were ruled more-indirectly by colonial administrations. I argue that indirect colonial rule relied on sub-national absolutisms to control populations and extract surplus, and in the process transformed absolutist political customs into rule of law. The post-colonial federal authority, like the colonial authority before it, lacked the administrative apparatus and political clout to integrate these local authorities, even when they wanted to. From this perspective, state-failure in West Africa may be rooted in a political and economic history that is unique to Africa in many respects, a history that dates at least as far back as the era of the transatlantic slave trade.

URL: EconPapers: Africahttp://econpapers.repec.org/paper/pramprapa/44932.htm

Review by Stephanie Decker

Last Sunday 12 Years a Slave (2013) won best picture at the Oscars ceremony. A timely reminder that slavery remains a subject of contemporary relevance. But researchers have also been concerned with the long-term impact of slavery on the modern world, with some, like Bill Cooke (2003), arguing that ante-bellum plantation slavery was one of the earliest instances of modern management. If you are wondering why people draw this parallel, have a look at this infographic: 

Spot the difference: slave owners and modern managers. Source: http://www.topmanagementdegrees.com/slave-management/

The careful management of slavery and the slave trade meant that slavery produced a large number of records, and in particular, statistically relevant material. But these figures are often sketchy and frequently problematic to assess Africa’s economic development. This remains a problem even for twentieth century quantitative sources as Morten Jerven has shown in his recent book Poor Numbers (2013).

Notwithstanding the inherent difficulties of using statistics for African history, Warren Whatley’s working paper (distributed in a special issue of Nep-His on 2013-11-07) contributes to a growing literature in economic history which seeks to show the effects of an historical event (loosely defined) on the institutional development of a region. The main assumption underlying this research is “path dependence”, and that these “initial conditions” determine subsequent institutional weaknesses which in turn affect economic development. Inspired by the influential work of Acemoglu, Johnson & Robinson (AJR) on the colonial origins of institutions (2001) and the reversal of fortunes (2002), a new line of research was developed by Nathan Nunn (2008, 2009) on the impact of the slave trade on the long-term determinants of economic development. Warren Whatley’s paper takes a slightly different approach to the literature, but this paper develops a similar argument.

Overall, when Africa’s poor long-run economic performance is attributed to its institutional weaknesses, there are, broadly speaking , three major explanations. AJR (2001) famously argued that the imposition of colonialism, which was a form of conquest and thus an illegitimate form of rule, created extractive institutions in non-settler colonies. However, Gareth Austin (2008) has also pointed out that it is not that easy to label all non-settler colony institutional frameworks as purely extractive, e.g. in West African peasant agriculture. An alternative explanation is of course that it was not so much colonial institutions that were extractive, but the trans-Atlantic slave trade. It is hard to argue with the essentially extractive nature of enslavement, but the question is whether it had a long-term effect.

Statistics on African development are often flawed even for twentieth century historical data

The third explanation is labour scarcity (Hopkins, 1973; Austin, 2008), which Whatley seems to find compelling, but links to the slave trade as an economic shock in a way that is hard to follow. Confusingly, he suggests that the slave trade would provide evidence for the labour scarcity hypothesis, but evades the question of whether the slave trade created labour scarcity (which he appears to be saying on p. 4) or whether it exacerbated it to the point of being a major economic shock (more likely in my view). As he also evades the question of why a territory chooses to export a crucial resource that is already scarce, Because if labour was already scarce but was exported nevertheless, one could argue that political institutions were already dysfunctional before the trans-Atlantic slave trade. Not only does the working paper claim to show that slave exports are a better explanation of cross-sectional variation than environmentally induced labour scarcity (p. 4), but that is also shows that the slave trade caused the spread  of absolutism (i.e. authoritarian political systems, p. 6). It is questionable whether cross-sectional data can be used as evidence of a process that took place over a period of time (more than a century, in this case).  This snap-shot of one point in time also does not appear suitable to prove causality, only correlations (p. 12). It is equally plausible that predatory states facilitated the slave trade, an argument that is easily supported by the geographic distribution of specific slave ports.

But causality becomes a really thorny issue with claims such as: “British colonies that exported more slaves were ruled more indirectly by colonial administrations (p. 6).” While in itself a nonsensical statement (slave trade and indirect rule in formal British colonies did not co-exist in time), it is based on the argument that slavery-induced institutions persisted throughout the colonial era and beyond. Nowhere in the paper is this demonstrated convincingly, and the evidence and analysis in figure 2 that supposedly support this claim are deeply anachronistic.

Figure 2 tries to show that the impact of the slave trade continued its influence throughout the colonial period, by linking slave exports to indirect rule (with post-colonial states as the unit of analysis – why not use colonial states?). The slave trade peaked in the eighteenth century, while indirect rule was only developed in the late nineteenth century and continued into the first half of the twentieth century. Post-colonial states (the unit of analysis) were created in the latter part of the twentieth century, and were often criticised for their total lack of connection to pre-colonial polities. These phenomena were not co-existing, and unless one assumes that an institutional framework that had its inception during the slave trade carried through colonialism into independent states, it really makes no sense connecting two sets of data separated by a century via a unit of analysis that did not even exist until much later still.  The argument of the paper is to prove that the slave trade had a long run historical legacy because of institutional inertia and path dependence, but figure 2 does not prove this, and instead just assumes this to be true without considering alternative explanations.

Labour scarcity due to environmental constraints is a far more straightforward explanation, and pretty much spans the entire time period under consideration. It is quite simply the most parsimonious argument, as it does not require any postulated mechanism that carries the institutional shock of the slave trade through colonialism into the post-colonial period. That seems to take the cause-effect relation seriously, whereas this “causal history” simply presents logical tautologies by equating institutions with historical legacies (p. 6), thus making the mechanism (institutions) the same as the effect (long-run historical legacies). And suddenly causation in history seems no longer that complicated.

In summary, I have two major issues with this research: firstly how “causal” history understands institutions (making it both the explanation and what is to be explained), and secondly how the evolution of institutions (diachronic) is supposedly tested by cross-sectional data (synchronic). Causal history in fact dispenses with history and substitutes it with path dependence. But this kind of institutional history has very little to say about why and how institutions change. This is an area in which history could make a real contribution, but not if institutions are reduced to static phenomena. Claims such as that “the political structure of many post-colonial nation-states in Africa is rooted in a political history that […] stretched […] back [to] the era of the transatlantic slave trade” are obviously appealing but remain difficult to prove.

References

Acemoglu, D., Johnson, S. & Robinson, J.A. (2001). “The Colonial Origins of Comparative Development: An Empirical Investigation.” The American Economic Review 91(5): 1369-1401.

Acemoglu, D., Johnson, S. & Robinson, J.A. (2002). “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution.” The Quarterly Journal of Economics 117(4): 1231-1294.

Austin, G. (2008). “The ‘reversal of fortune’ thesis and the compression of history: Perspectives from African and comparative economic history.” Journal of International Development 20: 996–1027.

Cooke, B. (2003). “The Denial of Slavery in Management Studies.” Journal of Management Studies 40(8): 1895-1918.

Hopkins, A.G. (1973). An Economic History of West Africa, London: Longman.

Jerven, M. (2013). Poor Numbers: How We Are Misled by African Development Statistics and What to Do about It, Cornell Studies in Political Economy, Ithaca, N.Y.: Cornell University Press.

Nunn, N. (2008). “The Long-Term Effects of the African Slave Trades.” The Quarterly Journal of Economics 123(1): 139-176.

Nunn, N., Wantchekon L. (forthcoming). “The Slave Trade and the Origins of Mistrust in Africa.” The American Economic Review.

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Brit Steve McQueen becomes first black director to win Best Picture for “12 Years a Slave”. Source: The Independent (2014-3-3 http://ow.ly/uaRZF)