Category Archives: Guest contribution

Computers and Business History: Mira Wilkins Prize Winner

IBM Rebuilds Europe: The Curious Case of the Transnational Typewriter
By Petri Paju (Turku) and Thomas Haigh (Wisconsin, Milwaukee).

Abstract: In the decade after the Second World War IBM rebuilt its European operations as integrated, wholly owned subsidiaries of its World Trade Corporation, chartered in 1949. Long before the European common market eliminated trade barriers, IBM created its own internal networks of trade, allocating the production of different components and products between its new subsidiaries. Their exchange relationships were managed centrally to ensure that no European subsidiary was a consistent net importer. At the heart of this system were eight national electric typewriter plants, each assembling parts produced by other European countries. IBM promoted these transnational typewriters as symbols of a new and peaceful Europe and its leader, Thomas J. Watson, Sr., was an enthusiastic supporter of early European moves toward economic integration. We argue that IBM’s humble typewriter and its innovative system of distributed manufacturing laid the groundwork for its later domination of the European computer business and provided a model for the development of transnational European institutions.

Enterprise & Society 17(2, June 2016): 265-300

DOI: https://doi.org/10.1017/eso.2015.64

URL: https://www.cambridge.org/core/journals/enterprise-and-society/article/ibm-rebuilds-europe-the-curious-case-of-the-transnational-typewriter/35D5A3FD95F5948F12754DBE07E9D89F

Free download (for limited time): https://www.cambridge.org/core/services/aop-file-manager/file/59e769bb60a7c0f73791cd84

Review by James W. Cortada (Charles Babbage Institute, Minnesota)

Prizes are awarded all the time for “best article” in a particular field, calling our attention to a well-executed, thoughtful one. But, occasionally, a prize winning article signals bigger shifts in a discipline than might otherwise be noticed. With this year’s award of the Business History Conference’s “Mira Wilkins Prize,” for the best article published in Enterprise & Society, we have such a signal.

Petri Paju and Thomas Haigh wrote “IBM Rebuilds Europe: The Curious Case of the Transnational Typewriter,” published in June 2016. They were recognized for “the best article on international business history,” the objective of this prize, but it is far more than good international business history.

The article chronicles how IBM created an internal network across eight national electric typewriter plants in post-World War II Europe to manufacture parts and to assembly these products. While electric typewriters were in great demand and IBM made what many considered to be the best one, the company created an internal network for their manufacture and distribution that transcended international borders in the decade after the war, presaging what would happen for some European products after the establishment of the European Union. But that was never solely the point—to create a European-wide market by governments—rather, it was to drive down production costs, increase demand for and the ability to deliver enough machines, while promoting IBM management’s belief that “World Peace through World Trade” could be a global objective for nations and companies. The authors trace how parts were made in one country, shipped to another, put together then sold, called the “Interchange Plan.” This experience taught IBM management how to create a more formal pan-European wide, later worldwide organization in 1949 that could manufacture, sell, and support its products called IBM World Trade. Within a half generation, World Trade did as much business as the American side of IBM.

Lessons learned in forming a pan-European typewriter business made it possible for IBM to develop a pan-European computer business that quickly dominated the mainframe business in Western Europe and in other parts of the world. Just as important, when IBM moved into the computer business, it already had factories, sales offices, and experienced employees in those countries that would become its best customers. These include Great Britain, France, West Germany, the Nordics, Italy, Spain, and a sprinkling presence in every country that eventually became part of the EU. The authors explain how the company created and learned from its “Interchange Plan,” operationally and strategically. They explored the accounting level to explain how money and budgets were exchanged across borders when governments had yet to sort out those issues, let alone even allow such exchanges.

The benefits to IBM were both obvious and extraordinary. Obvious ones included reduced operating costs for the manufacture and increased sale of typewriters. Less obvious, but ultimately more important, “this system would also foster interdependence among the various national [IBM] firms,” while spreading capabilities across multiple countries so that if one nation were to nationalize or block local IBM production, as occurred during World War II, another plant could pick up the slack. The company used its system in its public relations campaign to promote international trade through American managerial leadership and “to meet the challenges of communism” in the Cold War. Other American corporations—all of them with close ties to IBM’s management—took note of what IBM was learning and applied those lessons as well. IBM’s country organizations could also claim to be local, since each employed nationals, Fins in Finland, French in France, and so forth.

The lesson urged by these two young historians is an appropriate one at the moment: “think more carefully about the assumption that postwar globalization of European trade can be reduced to ‘Americanization’,” because IBM’s experience reflected a “hybridization of U.S. technology and management in postwar Europe.” Apply their suggestion worldwide. IBM was also prepared to experiment and operate in ways that valued expansion into new markets even at the costs of profits. That is one reason why it came to dominate the mainframe market so fast and for so many decades. The wisdom of today’s corporate fixation on shareholder value is challenged by this study of how IBM ran its typewriter business.

Perhaps the greater lesson, the more significant observation for why this prize this year is so important, lies elsewhere. For the past two decades, a month has barely gone by without an historian or economist publishing on the interactions of computing technology and business management. E&S is not alone in doing so; Technology & Culture has published some two-dozen similar articles in the new century, and Information & Culture is rapidly becoming another journal with a mix of business/information technology conversations. Petri Paju and Thomas Haigh are more than two gifted prolific article writers, they are teaching a new generation of scholars how to understand the role of information technologies and of management, business operations, and corporate strategy in a world filled with computers. Simply put, this article is seminal, worthy of being studied across multiple disciplines. The Mira Wilkes Prize Committee is to be congratulated for not letting this paper slip through the cracks.

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Governance structures and market performance

Contractual Freedom and Corporate Governance in Britain in the Late Nineteenth and Early Twentieth Centuries

by Timothy W. Guinnane (Yale University), Ron Harris (Tel-Aviv University), and Naomi R. Lamoreaux (Yale University)

Abstract: British general incorporation law granted companies an extraordinary degree of contractual freedom. It provided companies with a default set of articles of association, but incorporators were free to reject any or all of the provisions and write their own rules instead. We study the uses to which incorporators put this flexibility by examining the articles of association filed by three random samples of companies from the late nineteenth and early twentieth centuries, as well as by a sample of companies whose securities traded publicly. Contrary to the literature, we find that most companies, regardless of size or whether their securities traded on the market, wrote articles that shifted power from shareholders to directors. We find, moreover, that there was little pressure from the government, shareholders, or the market to adopt more shareholder-friendly governance rules.

Business History Review, Volume 91 (2 – Summer 2017): 227-277.

DOI: https://doi.org/10.1017/S0007680517000733

Review by John Turner (Centre for Economic History, Queen’s University Belfast)

Tim Guinnane, Ron Harris and Naomi Lamoreaux are three scholars that every young (and old) economic historian should seek to emulate. This paper showcases once again their prodigious talent – there is careful analysis of the institutional and legal setting, a lot of archival evidence, rigorous economic analysis, and an attempt to understand how contemporaries viewed the issue at hand.

In this paper, Guinnane, Harris and Lamoreaux (GHL) examine the corporate governance of UK companies in the late nineteenth and early twentieth centuries. The UK liberalised its incorporation laws in the 1850s and introduced its first Companies Act in 1862. From a modern-day perspective, this Act enshrined very little in the way of protection for shareholders. However, the Appendix to the 1862 Companies Act contained a default set of articles of association, which was the company’s constitution. This Appendix, known as Table A, provided a high level of protection for shareholders by modern-day standards (Acheson et al., 2016). However, the majority of companies did not adopt Table A; instead they devised their own articles of association.

The aim of GHL’s paper is to analyse articles of associations in 1892, 1912 and 1927 to see the extent to which they shifted power from shareholders to directors. To do this, GHL collected three random samples of circa 50 articles of association for 1892, 1912 and 1927. Because most (if not all) of these companies did not have their securities traded on stock markets, they also collected sample of 49 commercial and industrial companies from Burdett’s Official Intelligence for 1892 that had been formed after 1888. However, only 23 of these companies had their shares listed on one of the UK’s stock exchanges.

GHL then take their samples of articles to see the extent to which they deviated from the clauses in Table A. Their main finding is that companies tended to adopt governance structures in their articles which empowered directors and practically disenfranchised shareholders. This was the case no matter if the company was small or large or public or private. They also find that this entrenchment and disenfranchisement becomes more prominent over time. However, GHL unearth a puzzle – they find shareholders and the market appeared to have been perfectly okay with poor corporate governance practices.

How do we resolve this puzzle? One possibility is that shareholders (and the market) at this time only really cared about dividends. High dividend pay-out ratios in this era kept managers on a short leash and reduced the agency costs associated with free cash flow (Campbell and Turner, 2011). Interestingly, GHL suggest that this may have made it more difficult for firms to finance productivity-enhancing investments. In addition, they suggest that the high-dividend-entrenchment trade-off may have locked in managerial practices which inhibited the ability of British firms to respond to future competitive pressures and may ultimately have ushered in Britain’s industrial decline.

Another solution to the puzzle, and one that GHL do not fully explore, is that the ownership structure of the company shaped its articles of association. The presence of a dominant owner or founding family ownership would potentially lessen the agency problem faced by small shareholders. In addition, founders may not wish to give too much power away to shareholders in return for their capital. On the other hand, firms which need to raise capital from lots of small investors on public markets may adopt more shareholder-friendly articles. The vast majority of companies in GHL’s sample do not fall into this category, which might go some way to explaining their findings.

A final potential solution is that the vast majority of firms which GHL examine may have raised capital in a totally different way than public companies, and this shaped their articles of association. These firms probably relied on family, religious and social networks for capital, and the shareholders trusted the directors because they personally knew them or were connected to them through a network. Indeed, we know precious little about how and where the multitude of private companies in the UK obtained their capital. Like all great papers, GHL have opened up a new avenue for future scholars. The interesting thing for me is what happens when private firms went public and raised capital. Did they keep their articles which entrenched directors and disenfranchised shareholders?

Unlike the focus of GHL on mainly private companies, a current Queen’s University Centre for Economic History working paper examines the protection offered to shareholders by circa 500 public companies in the four decades after the 1862 Companies Act (Acheson et al., 2016). Unlike GHL, it takes a leximetric approach to analysing articles of association. Acheson et al. (2016) have two main findings. First, the shareholder protection offered by firms in the nineteenth century was high compared to modern-day standards. Second, firms which had more diffuse ownership offered shareholders higher protection.

How do we reconcile GHL and Acheson et al. (2016)? The first thing to note is that most of Acheson et al’s sample is before 1892. The second thing to note is that in a companion paper, Acheson et al. (2015) identify a major shift in corporate governance and ownership which started in the 1890s – companies formed in that decade had greater capital and voting concentration than those formed in earlier decades. In addition, unlike companies formed prior to the 1890s, the insiders in these companies were able to maintain their voting rights and entrench themselves. This corporate governance turn in the 1890s is where future scholars should focus their attention.

References

Acheson, Graeme G., Gareth Campbell, John D. Turner and Nadia Vanteeva. 2015. “Corporate Ownership and Control in Victorian Britain.” Economic History Review 68: 911-36.

Acheson, Graeme G., Gareth Campbell, John D. Turner. 2016. “Common Law and the Origin of Shareholder Protection.” QUCEH Working Paper no. 2016-04.

Campbell, Gareth and John D. Turner. 2011. “Substitutes for Legal Protection: Corporate Governance and Dividends in Victorian Britain.” Economic History Review 64: 571-97.

Linking the Growth of Globalisation with the Evolution of Transport Technology

The Rise of American Ingenuity: Innovation and Inventors of the Golden Age
By Ufuk Akcigit (University of Chicago), John Grigsby (University of Chicago) and Tom Nicholas (Harvard Business School)

Abstract: We examine the golden age of U.S. innovation by undertaking a major data collection exercise linking historical U.S. patents to state and county-level aggregates and matching inventors to Federal Censuses between 1880 and 1940. We identify a causal relationship between patented inventions and long-run economic growth and outline a basic framework for analyzing key macro and micro-level determinants. We find a positive relationship between innovation and drivers of regional performance including population density, financial development and geographic connectedness. We also explore the impact of social structure measured by slavery and religion. We then profile the characteristics of inventors and their life cycle finding that inventors were highly educated, positively selected through exit early in their careers, made time allocation decisions such as delayed marriage, and tended to migrate to places that were conducive to innovation. Father’s income was positively correlated with becoming an inventor, though not when controlling for the child’s education. We show there were strong financial returns to technological development. Finally, we document an inverted-U shaped relationship between inequality and innovation but also show that innovative places tended to be more socially mobile. Our new data help to address important questions related to innovation and long-run growth dynamics.

URL: http://EconPapers.repec.org/RePEc:nbr:nberwo:23047

Circulated by NEP-HIS on: 2017-01-29

Review by Tom Spain (Bangor University)

In this paper Akcigit, Grisby, and Nicholas highlight the advancement of transportation technology in the United States between 1880 and 1940, while better transport responded to the need to link the more developed and innovative regions of the country. Akcigit, Grisby and Nicholas find that the American transport links were much stronger and of better quality between more developed regions in terms of finance and innovation, which, in turn, Hart and Milstein (2003) point to as key aspects for a successful capitalist society.

BrooklynBridge

Brooklyn Bridge, took 14 years to be constructed (1869-1883). Source: Museum of the City of New York/Getty Images, found in The Guardian, “Brooklyn Bridge under construction – picture of the day,Brooklyn Bridge under construction – picture of the day,” May 24, 2013. 

Research by Akcigit, Grisby and Nicholas is in line with others such as Harris (2015), who highlights that there is a direct link between advancements in technology and the growth of globalisation. The findings by Akcigit, Grisby and Nicholas, therefore, can be seen as the starting point for the globalisation of the American model of capitalism.

Akcigit, Grisby and Nicholas state that during the 1880s emerged a belief that “geographic connectivity” should increase for there to be a rise in innovation: this increase would open up new markets for businesses to sell to. Here Akcigit, Grisby and Nicholas rehearse a well-recognised argument that improvements in geographic connectivity lead to an increase in globalisation, and, therefore, advancements in transport technology are also an important factor for globalisation (Rodriguez 1999).

Another aspect discussed by Akcigit, Grisby and Nicholas is the link between the amount of investment of American states on transport infrastructure and the amount of innovation emerging from said states. Here it is shown that the more a state invested on transport infrastructure the more innovations came from that state. For instance, the authors mention that in the golden era of innovation the Midwest played a big part in US innovation via manufacturing. However, due to the constant value-seeking attitude towards capitalistic globalisation the contemporary Midwest is not as prosperous as it once was (Castle 1995). However, the question as to whether these states developed in terms of overall population is unanswered. As Banister and Berechman (2001) argue, the geographic connectivity aspects of globalisation may see areas lose resources, skills and, in turn, become poorer.

In terms of what could be improved in the paper by Akcigit, Grisby and Nicholas, the first thing to note is that it only highlights the level of innovation in terms of the amount of granted patents. This is unlike works conducted by the likes of Feldman and Florida (1994) who not only seek to see the level of innovation in each state but also what particular sector the innovations were in. The paper by Feldman and Florida (1994) also provides more detail of how many of the innovations were successful in terms of whether they were the technological underpinnings for future developments in a specific sector.

Akcigit, Grisby and Nicholas suggest that all of the American states where transport and innovation increased also saw a reduction in inequality. In fact, in many cases inequality amongst the most innovative of states rose. This concurs with other research which suggests that inequality is a by-product of globalisation (Piketty and Saez, 2003).

A possible venue of research along the lines suggested by the paper is the importance of the advancement in transport technology and the role that it played in being able to create geographic connectivity. This link can be seen in the work of Usselman (2002).

References

Banister, D. and Berechman, Y., (2001). “Transport Investment and the Promotion of Economic Growth.” Journal of Transport Geography 9(3), pp.209-218.

Castle, E.N., (1995). The Changing American Countryside: Rural People and Places. Lawrence, KS: University Press of Kansas.

Feldman, M.P. and Florida, R., (1994). “The Geographic Sources of Innovation: Technological Infrastructure and Product Innovation in the United States.” Annals of the Association of American Geographers 84(2), pp.210-229.

Harris, J., (2015). “Globalization, Technology and the Transnational Capitalist Class.” Foresight 17(2), pp.194 – 207.

Hart, S.L. and Milstein, M.B., (2003). “Creating Sustainable Value.” The Academy of Management Executive 17(2), pp.56-67.

Piketty, T. and Saez, E., (2003). “Income Inequality in the United States, 1913–1998.” The Quarterly Journal of Economics 118(1), pp.1-41.

Rodriguez, J.P. (1999). “Globalization and the Synchronization of Transport Terminals.” Journal of Transport Geography 7(4), pp.255-261.

Usselman, S.W. (2002). Regulating Railroad Innovation: Business, Technology, and Politics in America, 1840-1920. Cambridge: Cambridge University Press.

The Data We Have vs. the Data We Need: A Comment on the State of the “Divergence” Debate (Part II)

How Well Did Facts Travel to Support Protracted Debate on the History of the Great Divergence between Western Europe and Imperial China?

By: Kent Deng (London School of Economics), Patrick O’Brien (London School of Economics)

Abstract: This paper tackles the issue of how reliable the currently circulated ‘facts’ really are regarding the ‘Great Divergence’ debate. Our findings indicate strongly that ‘facts’ of premodern China are often of low quality and fragmented. Consequently, the application of these ‘facts’ can be misleading and harmful.

URL: http://econpapers.repec.org/paper/pramprapa/77276.htm

Distributed by NEP-HIS on: 2017-03-19

Review by: Kenneth Pomeranz (University of Chicago)

(continued)

Comparative Consumption

 

This brings us, finally, to consumption.  As noted at the beginning of this comment, I agree that this is the most promising area for future research that might illuminate comparative living standards.  It is hard to know where really definitive data would come from: since the Chinese state did not systematically tax any major consumer goods except salt, and very little that ordinary people used was imported, we are unlikely to find data anywhere near as reliable as what we have for liquor, sugar, tobacco, etc., in various European countries.  Nonetheless, it is not that hard to imagine data that would help us make some progress in this area.[1]  And the area where O’Brien and Deng concentrate here – calories from grain – is, of course, fundamental, and there are various ways to generate estimates.  (It should be noted, however, that in unequal societies, the grain consumption of the poor is likely to be a lagging indicator of overall economic divergence –changes in the lives of the first and second quartiles of the income distribution could produce significant differences in average incomes well before the food intake of the poor in one society began to significantly outpace that of their counterparts in another.)  Thus, I applaud the attempt to see what we can learn by focusing on estimates of poor people’s incomes in kilocalories.  I have strong doubts, however, about the conclusion that Deng and O’Brien reach about this matter.

First, it is worth noting that various estimates have been made, which suggest that at least in this area, Chinese poor people (and perhaps some others elsewhere) were no worse off than their Western European counterparts. I have discussed several of them elsewhere, and little would be served by repeating that effort here.[2] 

O’Brien and Deng disagree, and rely upon a paper they published  in Journal of World History (2015).  That paper takes estimates of the likely income from a typical-sized tenant farm in the 18th-19th century Yangzi Delta, as calculated by Philip Huang, Robert Brenner and Christopher Isett, Robert Allen, and myself, and suggests that they converge upon a range of likely incomes that falls considerably short of the incomes of English laborers at the same time. I do not think that that is the most reasonable inference to be drawn from this data.

As they note in their current publication, I wrote to O’Brien and Deng after their  paper was published, largely agreeing with their methodology but questioning their data.  They apparently do not think the difference over data is important, since quickly continue “Nevertheless, these procedure provided us with figures for levels and changes in the standard of living for peasant households in Jiangnan from circa 1600 to circa 1829.” This, I think, misses the significance of the disagreement on data, which is easily stated.  Allow me to quote from the letter I wrote at the time, adding only some boldfaced type for emphasis, and a few explanations of reference in square brackets::

    “…    The key is Row 3 [of Table 4, pages 248-253]: ‘Area cultivated: mu,’ where you suggest that Huang, Brenner and Isett and I all accept an average farm size of 7.5 mu.  Brenner and Isett, of course, simply accepted Huang’s figure: they were all working together,  Brenner reads no Chinese and Isett (B and H’s student) had never worked on the Yangzi Delta.  So that is really one assertion that the farm size was 7.5 mu.  In your notes to that row you suggest that I also accept that figure; there is no direct citation for that point, but earlier you cite my “Facts Are Stubborn Things” essay.   But here’s what I wrote there, referring back to my essay in the first round of our debate [that is, my debate with Huang] (“Beyond the East-West Binary):

‘  …while I accepted Huang’s average farm size of  7.5 mu for purposes of our initial discussion, this  prevailed (if at all) only in the Delta’s most crowded prefectures, where people mostly grew cotton or mulberries.  The larger Delta I discuss had 59,000,000 registered cultivated mu circa 1770, or 10.5 mu  per 5-member farm family. [1]   This confirms Li Bozhong’s estimate that mid-Qing Jiangnan farms averaged 10 mu…’

 

And indeed, the 7.5 mu figure seems very unlikely to be right.  Consider, just for starters, that the sources you cite for 1820 give farm sizes of either 9.0 or 10 mu (depending on what definition one uses for Jiangnan);  it is widely agreed that there was no new land cleared in Jiangnan after the mid-18th century (further intensification took the form of more double-cropping), and while population figures are not very reliable, there was almost certainly some increase.  (Cao Shuji’s figures (2000, 5:691-92)  suggest a 38% increase from 1776 to 1850, with the rate of increase faster in the earlier years,  for instance; I think that is probably too high, but you see the point.) It thus seems pretty implausible that farmed acreage per family would have been anywhere from 1/6 to ¼ less in 1750 than it would be 70 years later.

Since I think you [Deng and O’Brien] have accurately reported the other figures in your table, the consequences of this one change would be quite significant.  Using 10 mu per family for 1750 would raise the estimate of caloric income in my data from 2,438 to 3,251; using 10.5 raises it to 3,413.  Thus, instead of more or less agreeing with Brenner and Isett, my numbers come to be 30-40 % above theirs – and over 80% above Huang’s (rather than about 33%). Perhaps more importantly, if you turn to your table 6, making this change would mean that instead of having a rough consensus on Jiangnan caloric intake that had already fallen a bit below English farm laborers (if one assumes they ate wheat) or significantly behind them (if they ate oats), you would be back to two views: one based on Huang’s data, that suggested what I have just said, and one which placed the caloric intake of Jiangnan farmers even with English farm laborers if they consumed oats, and still well ahead of them if they consumed wheat.  Significant divergence on this particular measure (admittedly one that lagged others) would be pushed well into the 19th century.  (In fact, if we accept Li or Allen’s work, as summarized in your column for 1800-1849, it would still not have happened in that period.).The difference is therefore quite significant…”

 

Moreover, I would add,  the adjustment I suggested in this missive would sharply alter the picture of change over time in the Yangzi Delta, yielding a more likely picture that has different comparative implications.  Without the correction, Deng and O’Brien’s data suggest a fairly sharp decline in living standards between 1600 and 1750, with a recovery to roughly 1600 levels by 1829.[3]   This, however, seems unlikely, since it was widely agreed that 1750 was near the middle of a prosperous era, while 1829 was (as already noted) part of an era of crisis.  (Whether the 1620s were part of a good period or not is less settled.[4] )     If we instead adjust the 1750 farm size figures as I have suggested, we have a probable improvement of living standards between 1620 and 1750 (perhaps even a large improvement), followed by either stasis or decline between 1750 and the 1820s; this would be much more in line both with the testimony of contemporary voices and the views of most historians.  And if that is right, it would also fit the picture of an East/West divergence  that came late but gathered steam quickly: not only because first Britian and then other parts of Northwestern Europe surged, but because the most prosperous parts of China began to fall into crisis.

Obviously, we would like comparisons of living standards, even among the poor, to go beyond caloric intake; and attempts have been made, by a number of us, to look quantitatively at cloth, sugar, tea, and a few other goods, and more impressionistically at tobacco, various forms of entertainment, and so on.   But for the time being, those discussions are nowhere near consensus; and in the world of the late 18th century, basic calories still loomed quite large in any case.  And there, I would respect, correcting the error noted above suggests that the balance of available research still suggests comparability until quite late. (Huang’s numbers have other serious problems, which I have discussed elsewhere.[5])    Until we get beyond basic calories in discussing the poor – and get much better estimates, on the Chinese side, of the distribution of income,[6] so we know more about what comparisons of the poor do and do not tell us, our picture of comparative consumption will remain quite inadequate for settling our debates, even if it remains the most promising area for further research; and as long as our understanding of consumption remains so inadequate, I would be loath to shut the door on the other approaches that Deng and O’Brien encourage us to abandon.

Bibliography


Allen, Robert.  2000. “Economic Structure and Agricultural Productivity in Europe, 1300 – 1800,” European Review of Economic History 4:1 (April, 2000),

Allen, Robert. 2004. “Mr. Lockyer Meets the Index Number Problem: The standard of Living in Canton and London in 1704,”  July 2004, available at http://www. iisg.nl/hpw/papers/allen.pdf, accessed December 7, 2008

Allen, Robert. 2009a. The British Industrial Revolution in Global Perspective. Cambridge: Cambridge University Press.

Allen, Robert. 2009b. “Agricultural Productivity and Rural Incomes in England and the Yangzi Delta, ca. 1620-1820,” Economic History Review 62:3 (August), pp. 525-550.

Allen, Robert et.al., 2011.  Robert Allen, Jean-Pascal Bassino, Debin Ma, Christine Moll-Murata, and Jan LuitenVan Zanden, “Wages, Prices and Living Standards in China 1738-1925: In Comparison with Europe, Japan, and India,” Economic History Review 64:1 (February), pp. 8-38.

Baten, Joerg. et al.  2010.  Joerg Baten, Debin Ma, Stephen Morgan and Qing Wang, “Evolution of Living Standards and Human Capital in China in the 18th – 20th Centuries: Evidences From Real Wages, Age-Heaping, and Anthropometrics,” Explorations in Economic History 47, pp. 347-359.

Benedict, Carol. 2011.  Golden-Silk Smoke: A History of Tobacco in China 1550- 2010. Berkeley: University of California Press.

Brenner, Robert and Christopher Isett. 2002. “England’s Divergence from the Yangzi Delta: Property Relations, Microeconomics, and Patterns of Development,” Journal of Asian Studies 61:2 (May), pp. 609-662.

Broadberry, Stephen, Hanhui Guan and David Daokui Li. 2014. “China, Europe, and the Great Divergence: A Study in Historical National Accounting, 980 – 1850,” http://eh.net/eha/wp-content/uploads/2014/05/Broadberry.pdf.

 

Chang Chung-li (Zhang Zhongli). 1962. The Income of the Chinese Gentry.  Seattle: University of Washington Press.Deng, Kent G., and Patrick K. O’Brien. 2015. “Nutritional Standards of Living in England and the Yangtze Delta (Jiangnan), circa 1644 – circa 1840: Clarifying Data for Reciprocal Comparisons,” Journal of Wor;d History 26:2 (June), pp. 233-267.

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Huang  Philip. C.C.  2003. “Further Thoughts on Eighteenth-Century Britain and China: Rejoinder to Pomeranz’s Response to My Critique,” Journal of Asian Studies 62:1 (February), pp. 157-167.

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Li Wenzhi and Jiang Taixin, 2005.  Zhongguo dizhu zhi jingji lun (Essays on the Chinese Landlord Economy). Beijing: Zhongguo shehui kexue chubanshe,

Liu, William Guanglin. 2015.  The Chinese Market Economy 1000-1500,  Albany: State University of New York Press.

 Ma,Debin. 2004. “Modern Economic Growth in the Lower Yangzi in 1911-1937: a Quantitative, Historical, and Institutional Analysis” (Discussion paper 2004-06-002, Foundation for Advanced Studies on International Development, Tokyo.

Maddison, Angus. 2001.  The World Economy: A Millenmial Perspective.  Paris: OECD.

Maddison, Angus. 2003. The World Economy: Historical Statistics. Paris: OECD.

 

Moll-Murata, Christine. 200. “Chinese Guilds from the Seventeenth to the Twentieth Centuries: An Overview,”  International Review of Social History 53, Supplement, pp. 213-247.

 

Morgan, Stephen. 2004.  “Economic Growth and the Biological Standard of Living in China 1880-1930,” Economic and Human Biology 2:2

Pomeranz, Kenneth. 2000.  The Great Divergence: China, Europe, and the Making of the Modern World Economy.  Princeton: Princeton University Press.

Pomeranz, Kenneth. 2002 “Beyond the East-West Binary: Resituating Development Paths in the Eighteenth Century World,”  Journal of Asian Studies 61:2 (May, 2002), pp. 539-590.

Pomeranz, Kenneth.  2003“Facts Are Stubborn Things: A Response to Philip Huang,”  Journal of Asian Studies  62:1 (February, 2003).: 167-181.

Pomeranz, Kenneth. 2006.  “Standards of Living in Rural and Urban China: Preliminary Estimates for the Mid-18th and Early 20th Centuries.”  Paper for Panel 77, World Economic History Congress, Helsinki.

Pomeranz, Kenneth. 2011. “Development with Chinese Characteristics?” Convergence and Divergence in Long-Run and Comparative Perspective.” European University Institute (Florence) Max Weber Programme, Working Paper 2011/06.

 

Pomeranz, Kenneth. 2013. “Skills, Guilds, and Development: Asking Epstein’s Questions to East Asian Institutions,” in Maarten Prak and Jan Luiten van Zanden, eds., Technology, Skills, and the Pre-Modern Economy in the East and West: Essays Dedicated to the Memory of S.R. Epstein  (Leiden: E.J. Brill), pp. 93-127.

 

Rawski, Evelyn.  1972.  Agrarian Change and the Peasant Economy of South China.  Cambridge: MA: Harvard University Press.

 

Xue Yong. 2006. . “Agrarian Urbanization: Social and Economic Changes in Jiangnan from the Eighth to the Nineteenth Century” Yale University Ph. D. dissertation.

Yang Guozhen, Ming Qing tudi qiyue yanjiu  (Research on land contracts in the Ming and Qing)  Beijing: Renmin chubanshe, 1988,

Zhang Peiguo. 2002.   Jindai Jiangnan xiangcun diquan de lishi renleixue yanjiu. (A Historical Anthropology of Rural Village Land Rights in Jiangnan.)  Shanghai: Renmin chubanshe.

 

 

 

 

 

 

[1] See Benedict 2011:49, lending cautious support to my conjecture that tobacco acreage stagnated or declined between the late 18th and early 20th centuries, greatly reducing per capita output (and thus allowing us to use early 20th century figures to conservatively approximate 18th century consumption).  Thomas Rawski has suggested that we could approach this issue more rigorously if we found a long run of tobacco prices to compare with those for grain: something which hasn’t happened yet, but is certainly possible.

[2] See Pomeranz 2000:36-40,Pomeranz 2002, and Pomeranz 2003.. See also Lee, Campbell and Wang 2002. More recent work on height, longevity, etc., is largely restricted to the 19th and 20th centuries, and has little to say about the Yangzi Delta in particular, but tends to suggest that the parts of China that are represented in the data were at or above the middle of a European distribution in the early 19th century.  See for instance Morgan 2004; Baten et. al. 2010..

[3] This effect is partly the result of the choice of data discussed here, but it is also partly the result of the fact that the data for 1600 and 1829 include estimates from Li Bozhong, who tends to be optimistic in his view of Delta conditions, while the section of the table for 1750 does not; at the same time, Philip Huang, the most pessimistic of the scholars in this debate, is cited in the 1750 section of the table, but not in the other two.

[4]For a recent overview that takes a relatively dour view of the late Ming (though it does accept that it represented a very significant recovery from ehat it considers a catastrophic early and mid-Ming), see Liu 2015.

[5] Pomeranz 2002, 2003.

[6] I made an extremely quick and crude attempt in Pomeranz 2003.  An earlier and partial attempt is Chang 1955.

The Data We Have vs. the Data We Need: A Comment on the State of the “Divergence” Debate (Part I)

How Well Did Facts Travel to Support Protracted Debate on the History of the Great Divergence between Western Europe and Imperial China?

By: Kent Deng (London School of Economics), Patrick O’Brien (London School of Economics)

Abstract: This paper tackles the issue of how reliable the currently circulated ‘facts’ really are regarding the ‘Great Divergence’ debate. Our findings indicate strongly that ‘facts’ of premodern China are often of low quality and fragmented. Consequently, the application of these ‘facts’ can be misleading and harmful.

URL: http://econpapers.repec.org/paper/pramprapa/77276.htm

Distributed by NEP-HIS on: 2017-03-19

Review by: Kenneth Pomeranz (University of Chicago)



Kent Deng and Patrick O’Brien have done us all a service by taking a step back from the conclusions drawn by different participants in the so-called “great divergence debate” to focus  on the types and quality of our data, and on some conceptual problems with the application of modern measurements such as GDP to economies that were radically different from ours – in part because they were incompletely monetized.  I find myself agreeing with most of their criticisms of both GDP and real wage comparisons, and have some of my own to add. Not surprisingly, then, I share their preference for research on comparative consumption – which was a big part of my approach in The Great Divergence – and agree that this is where we have the best prospects for making further progress on these issues.  But I am not as ready as they seem to be to completely discard approaches based on GDP or real wage estimates; and perhaps more importantly, I would significantly modify their assessment of where our discussion of consumption and popular living standards currently stands.

We are, quite simply, unlikely to find any data that is good enough to lay these disputes  to rest.  I agree that the chances of finding significantly better consumption data are higher than are our chances of finding everything we would need to construct truly persuasive GDP estimates, and that the problems with treating wages as representative of living standards in a society like 18th century China are quite severe,  even if we could resolve the more narrowly empirical problems with the wage data themselves (e.g. unstated but significant in-kind components, differences in the currencies in which Chinese wages and prices are often quoted, uncertainty about the length of the “day” in day wages, and so on).  But at the moment, the consumption data also have significant problems; so while this may well be where we want to concentrate future research efforts, that  does not mean that this is the only metric we should be tracking as we make our best guesses about the current state of this controversy.  (We could, of course, theoretically all agree not to comment on this controversy until we  know more, but that seems unrealistic, given how many other issues it touches upon.)   So I would be inclined to keep the wage data, and even the GDP estimates, in play in this discussion, even though I share Deng and O’Brien’s sense that the consumption data are stronger (and even though those data are more favorable to the position I took in my 2000 book).  Let me briefly review each of these areas.

 

Comparative GDP Estimates

 

I would not disagree with Deng and O’Brien’s critique of the GDP approach, or of Maddison’s figures in particular: the latter were based on far too narrow an evidentiary base for much of the world and much of history.  I think, however, it is worth noting that there have been some more recent attempts to estimate GDPs, which have the advantage both of somewhat better data and of attempting to construct GDP figures for the Yangzi Delta, rather than for China. Given the points that some of us have made repeatedly about the vastly different scales of China and any single European nation, and about the advantages of comparing the most developed region of a continent-sized China with the richest regions of Europe rather than insisting on national units, these numbers seem to be worth at least some attention.
For instance, a recent paper by Stephen Broadberry, Hanhui Guan and David Daokui Li suggests that Britain must have overtaken the Yangzi Delta in per capita GDP by the first quarter of the 18th century.[1]  This is, of course, materially different from my claim in The Great Divergence that the Yangzi Delta had not fallen significantly behind until well into the second half of the 18th century, and maybe not until 1800 (though my conclusions were based on estimates of consumption, longevity, and basic human well-being, rather than GDP).  Nor has this paper found a way around all the problems with historical GDP and comparisons between very different societies to which Deng and O’Brien have pointed.(These include the radically different market baskets of these two societies, which had relatively little trade between them, the very different degree to which the government tracked various kinds of production, and others; to which I would add, large differences in the degree to which various goods and services passed through the market.)  Still, I would not want to simply discard such work, given the difficulties that dog other approaches. Moreover, I think it is noteworthy that a debate between an early and a late 18th century divergence represents a considerably different intellectual landscape than the one we would have if we relied on Maddison’s GDP numbers,[2] or on the non-quantitative work of David Landes, Deepak Lal, and various others – or for that matter, on an earlier attempt by Guan and Li to estimate comparative GDPs, which had previously claimed that a huge gap already existed in the 15th century.[3]  An earlier paper by Debin Ma suggested that the per capita GDP of the Lower Yangzi  — which he defines slightly more broadly than I do, so that it includes some poorer areas – probably exceeded that of China in general by about 50% in 1750:[4] such an adjustment, patched onto Maddison’s data, would leave the Delta behind Britain, but by considerably less (in percentage terms) than, say, Germany lags Norway today, or the U.S. lags Luxembourg (when nobody argues that this makes either Germany or the U.S. a “backward” economy fundamentally different from the “advanced” ones, as we used to think China was relative to early modern Europe.). Similarly, a study by Li and Van Zanden, based on data for the 1820s, finds Holland well ahead of two counties in the Delta for which there are particularly good data in those years; but as  they note, the 1820s were a period of both agricultural crisis due to natural disasters and depression in the cloth trade, the second biggest sector of that region.  They suggest that if we had data for 1800, it would show a smaller gap, but still a significant one, with Holland perhaps 50 or even 70% higher in per capita GDP.[5] Admittedly, that is far from the rough parity I had originally suggested at 1800, and would now be inclined to put at somewhere around 1750 instead; there are some plausible adjustments that I think would narrow the gap further, but that is not really the point for now.  Instead I would emphasize that despite continuing disagreements and continuing data problems – the latter of which will probably never be fully solved – we have made some progress in narrowing the range of plausible answers about when and how much divergence occurred in these terms.  Even if GDP is a seriously flawed measure for purposes of this debate, I am not sure we want to throw it out entirely.

Real Wage Comparisons

The wage data is similarly vexed, and Deng and O’Brien have, I think, explained very convincingly some reasons for skepticism.  But let me add two more, extend the discussion of another, and suggest a possible implication of how we might read this imperfect data in conjunction with the even more imperfect GDP data.

The first additional cause for skepticism in Robert Allen’s own reconstruction of real wages based on prices and wages recorded by the supercargo of an East India Company ship docked in Guangzhou during the trading season of 1704.  Using the same basic approach as he and his co-authors use on the larger data set they compiled a bit later, Allen arrives at the conclusion that the real wages here were roughly equal to those in London at the same time – and Guangzhou, it is generally agreed, was not quite as wealthy as the Yangzi Delta.  (Allen 2004).  Let me make clear that I am not saying that these data give the correct picture,  and the other data a false one: there are certainly reasons why the Guangzhou data could be unrepresentative.[6] But these are at least prices and wages that we know were actually paid by individuals in private markets, and that should be relatively free of unreported in-kind benefits.  (Chinese workers would certainly not have lived on a British ship, and are unlikely to have eaten British food.) By contrast, the Chinese data in the later and better-known 5 author paper on early modern wages around the world are from administrative reports of prevailing wages, with no evidence that the reporters actually made any sort of survey, and no data at all on in-kind compensation.  I would thus not be quick to throw out the Guangzhou material just because it is a smaller database – and that it gives a figure which is so much higher than those derived from the other data seems lke a good reason to doubt the data overall.  There is also something highly suspicious about the lack of difference between the wage rates for different parts of China in the administrative data, when every qualitative source we know of agrees that there were very large regional differences in material living standards.  Again, this is not sufficient reason to discard these data when we have so few; on the contrary, they represent the best large-scale data set that we have, and the authors have used them to make interesting claims.  But I think we need to be very careful about how we use them for this particular debate.

It is crucial that most Chinese did not rely on wages for their income – as O’Brien and Deng note.  But we also know quite a bit about  the likely relationship between these wages and peasant earnings.  All our evidence suggests that tenant farmers earned a great deal more than agricultural laborers, even if the latter were able to find year-round employment. This conclusion is confirmed whether we look at estimates of money earnings, convert wages into cash and compare to farm yields net of rent and other expenses, or consider key social indicators – including the especially lowly status of wage laborers, and the fact that most tenants were able to marry and raise families, and most agricultural laborers could not.[7]  And in a society without strong guilds or unions, there is no reason to think that unskilled wages in town would be much higher than in the countryside.  (This would be particularly true in the Yangzi Delta, where towns were very densely distributed across the map, so that almost any rural resident could bid for an unskilled job in a town without going very far.[8] )  Indeed, in the admittedly limited data we have, the difference between the earnings of a farmer with an average-sized tenancy and a wage laborer are on the order of 2.5 – 3.0:1.  Under the circumstances, wages are a very poor guide to popular living standards: and comparing them to wages in England or Holland, where proletarians made up a large portion of the labor force by the 18th and especially the 19th century, represents a comparison between the bottom of the income distribution in one place and something approaching to middle in the other. [9]

But even if these wages do not tell us much about comparative living standards, they might nonetheless tell us something about trends in comparative labor productivity. Significantly, estimates of rural incomes and rural labor productivity suggest that the Yangzi Delta was still on a par with England and Holland on these measures even as late as the 1820s.[10] This would place it far above the rest of Europe – including, of course, a number of countries that began mechanized industrialization and sustained per capita growth well before China did.[11]  Delta agriculture was also still well ahead in total factor productivity in agriculture as late as 1820.[12] When taken together with the evidence already discussed which suggests a relatively late divergence, and therefore a fairly sudden widening of the gap once it manifested itself  – since nobody doubts that it was quite large by the mid-19th century – this would at least suggest that we should not probably be looking at agriculture to explain the divergence.  It also suggests, as Robert Allen has argued in his discussion of British industrialization, that it was higher wages in the growing urban sector that pulled up rural wages, necessitating labor-saving innovations in agriculture, rather than agriculture creating an enlarged urban work force by shedding workers on its own.[13]  It does not appear that urban demand exerted a comparably strong effect on rural Chinese wages, even though the barriers to rural-urban migration – whether in the form of exclusionary institutions or urban dis-amenities – were comparatively weak in Qing times;[14] instead, the most likely reason not to leave was that, as noted above, most rural people earned far more than unskilled wage laborers in either city or countryside, and nothing was pushing up urban wages fast enough to overcome this disincentive.  A significant gap in urban real wages – if confirmed by further studies that can more fully overcome the problems described by Deng and O’Brien – might then be significant not as a sign of a difference in living standards that already existed, but as a sign of urban changes in Europe that were beginning to create such differences.

(to be continued…)

Notes

[1] Broadberry, Guan and Li 2014..

[2] Maddison 2001: 42, suggesting that Western Europe overtook China ca. 1300.

[3] Guan and Li  had previously argued (2010) that China was far behind by the 15th century, if not earlier, and had fallen even further behind over the succeeding centuries. See also Landes 1998, Lal 1998.

[4] Ma 2004. Compare Maddison 2003: 262.for an interpellated UK figure.

[5] Li and Van Zanden 2012:973,

[6] It is true, for  instance, that not every Chinese worker in Guangzhou was able to offer his services to the  foreigners who docked there, perhaps reducing competition and driving up wages.  Bt quite a few could – numerous memoirs from foreigners who visited Guangzhou in this period speak about foreigners being besieged by crowds of potential porters and other service providers. Nor is it clear why any restrictions would have driven up the price of labor more than it did that of the many kinds of provisions for which Lockyer records prices paid, and which Allen uses to create the denominator of his real wage.

[7] I review some of this data in Pomeranz 2006, and Pomeranz 2011. On the strength of tenant rights, which helped make this income differential durable, see  for instance Rawski 1972 Li Wenzhi and Jiang Taixin 2005;Yang Guozhen 1988; Zhang Peiguo 2002.

[8] On the distribution of towns across space see Xue Yong 206: 319, and 302-346, 432-475 for a discussion of various estimates of urbanization in the Yangzi Delta more generally.

[9] Pomeranz 2011.

[10] Allen 2009b; Li and Van Zanden 2012.

[11] For intra-European comparisons, see Allen 2000..

[12] Li and Van Zanden 2012:975; Allen 2009b.

[13] Allen 2009a.

[14] On Chinese guilds in this period, see Moll-Murata 2009, Pomeranz 2013. Though our data is thus far inconclusive, China does not appear to have had a pronounced “urban graveyard effect” – that is clear evidence of worse health and higher mortality in cities, providing a disincentive to migration that had to be overcome by significant wage differentials, as was the case in early modern and industrializing Europe.

Contingencies of Company Law: On the Corporate Form and English Company Law, 1500-1900

The Development of English Company Law before 1900

By: John D. Turner (Queen’s University Belfast)

Abstract: This article outlines the development of English company law in the four centuries before 1900. The main focus is on the evolution of the corporate form and the five key legal characteristics of the corporation – separate legal personality, limited liability, transferable joint stock, delegated management, and investor ownership. The article outlines how these features developed in guilds, regulated companies, and the great mercantilist and moneyed companies. I then move on to examine the State’s control of incorporation and the attempts by the founders and lawyers of unincorporated business enterprises to craft the legal characteristics of the corporation. Finally, the article analyses the forces behind the liberalisation of incorporation law in the middle of the nineteenth century.

URL: http://econpapers.repec.org/paper/zbwqucehw/201701.htm

Ditributed by NEP-HIS on: 2017-02-19

Review by Jeroen Veldman (Cass Business School, City University)

 

The article provides an overview of the development of English company law in the four centuries leading up the 20th century, showing how five key legal characteristics, i.e. separate legal personality, limited liability, transferable joint stock, delegated management, and investor ownership developed.

What may be most striking about Turner’s account is the way in which it shows the contingency of the development of these distinct concepts and the configurations in which they appear. As Woodward (1985a: 12), quoted by Turner, says it is “shocking how non-laissez-faire are the roots of the corporation – a quintessentially laissez-faire institution”. Turner shows how James I needed the money from corporate charters, as they provided an attractive source of revenue for the Crown that allowed to bypass Parliament. (Turner, 2017: 5), making the grant of such corporate charters the object of an ongoing war between Crown and Parliament in the 16th and 17th Century. Subsequently, he shows how the Bubble Act in the 18th Century was not so much a means to keep companies from forming, but rather  a means “… to limit alternative investment opportunities so that capital would be diverted towards shares in the South Sea Company.” (Turner, 2017: 8).

eastindia

Arms of the East India Company (New York Public Library. Digital ID: 414409). Retrieved from http://www.victorianweb.org/history/empire/india/eastindia.html.

The contingent development of company law is also apparent in the use of corporations as an important instrument for colonial administrative organization overseas and the use of trading monopolies as a key instrument in foreign policy (Turner, 2017: 5). Furthermore, the establishment of specific Companies, such as the Bank of England in 1694 was pivotal for the lending of money to the State, and the raising and administration of the public debt (Turner, 2017: 9). The conceptual development of the modern corporation was thus connected to and contingent upon the simultaneous development of ideas about sovereignty, the state, and the representation of group rights and obligations (Kantorowicz, 1997; Maitland, 2003).

Turner then shows how the further development of the corporation in the 19th century is driven largely by the growing power of an emerging enriched middle class looking for outlets and protection for its investment. The development of the five key legal characteristics provided an architecture for the public corporation that functioned as an excellent vehicle to accommodate the wealth accruing to this new class, as it allowed to drop managerial obligations and to focus on a liquid share market instead (Ireland, 1996 and 1999; Veldman and Willmott, 2017).

Turner concludes by saying that “…the common law judiciary in the 18th and 19th centuries was extremely conservative and did not respond in a dynamic fashion to the new business environment which had arisen” (Turner, 2017: 22). His account therefore shows how, contrary what is commonly believed in the law and economics debate, common law did not develop as a highly dynamic and pragmatic practice-following type of law. What Turner convincingly shows, then, is that the development of English Company Law started to change from the 19th century, that this development led to development and acceptance of the five key legal characteristics and that the specific configuration of these elements that come together in the modern corporation. He also shows how the changes in English Company Law that allowed for these elements and their configuration were related to the institutionalization of particular political and economic interests.

In relation to the contingent development of the elements and configuration that make up the core characteristics of the modern corporation that Turner describes we may ask a number of questions of the specific model of the modern corporation that was developed during the 19th century and which still provides a template that is very much followed worldwide.

The first question is whether we can imagine a coherent alternative, in which the elements and their configuration had developed differently. Can we imagine limited liability, perpetuity, transferable joint stock with fully paid up shares and a secondary share market, the removal of ultra vires, separate legal personality, the development of delegated and professional management, rentier investment by shareholders with a shielded position largely external to the architecture of the modern corporation and, later, the development of holding companies and transnational operations as the outcome of the institutionalization of legal privileges for specific groups? And can we still imagine the institutionalization of these privileges as contingent and conditional?

The second question is whether we can rethink the presumed optimality of the current configuration of the corporation. It may be argued that the arrangements developed for the modern public corporations were developed in a specific political and economic context that provided a strong background for the development of ideas about minority shareholder protection at the time (Freeman et al., 2011; Johnson, 2010), for instance. The question is, how the specifics of that configuration relates to more recent changes in the corporate governance environment, such as the phenomenal rise of institutional and activist investors, increases in foreign ownership and high frequency trading, and the development of transnational group structures.

More specifically, we may consider that the development of the elements and configurations of the core characteristics of the modern corporation have had large effects on subsequent macro-economic developments (Chandler, 2003; Hannah, 2010), and continue to impact on the distribution of social wealth (Ireland, 2005). Turner observes that “The evolution of corporate law after 1900 … was chiefly concerned with resolving the agency problems which arose out of conflicts created by the coming together of these characteristics, i.e., shareholders vs. managers, shareholders vs. shareholders, and shareholders vs. other constituents (e.g., creditors and employees).” (Turner, 2017: 3). Considering that the present configuration that defines the modern corporation is based on the interests of an emerging class of rentier investors in the mid-19th century we may need to consider whether those agency problems have been sufficiently resolved and whether the specific configuration that developed during the 19th century still delivers an optimal configuration for all parties involved in corporate governance arrangements and outcomes (Veldman et al., 2016).

In the light of the description of the contingent nature of the development of company law and corporate governance theory, it is interesting to note that Turner chooses to describe the development of ‘the corporate form’ and its five key characteristics as an almost teleological process in which “the evolution of company law in England up to 1900 was all about the struggle to enable business enterprises to have all five of the core structural characteristics outlined above” and that this evolution was hampered by “the efforts of the legal system and the political elite to stifle the development of particular characteristics during most of this era.” (Turner, 2017: 3). Such a teleological approach to the development of company law has been criticized more broadly as naturalizing the development of existing corporate governance configurations into a necessary or optimal end point, and ignoring the development of company law as the institutionalization of particular interests (Ireland, 2005; Johnson, 2010).

Turner’s account provides all the necessary ingredients to engage with the development of the five key legal characteristics and their configurations as the result of the capacity for countervailing powers to engage in the corporate governance debate. In this light, the continuous absence of particular characteristics and configurations in the debate pre-19th century can be viewed, not as the ‘stifling’ of a necessary or optimal ‘evolution’, but rather as the result of a different configuration of interests. Such a view of the development of the elements and configuration that make up the modern corporation as a contingent and interest-inflected development makes an interesting contribution to the current debate on corporate governance, and allows to relate the debate on the historical institutionalization of these choices to current debates on the broad opportunities and risks that are associated with choices about the institutionalization of privileges, rights and obligations for specific groups in a theory of corporate governance (Veldman and Willmott, 2016).

 

References

Chandler, A. D. (2002). The Visible Hand: The Managerial Revolution in American Business. Cambridge, USA: Harvard University Press.

Freeman, M., Pearson, R., & Taylor, J. (2011). Shareholder democracies?: Corporate Governance in Britain and Ireland before 1850. Chicago: University of Chicago Press.

Hannah, L. (2010). The Rise of the Corporate Economy. Oxon, UK: Routledge.

Ireland, P. (1996). Capitalism without the Capitalist: the Joint Stock Company Share and the Emergence of the Modern Doctrine of Separate Corporate Personality. The Journal of Legal History, 17(1), 41–73.

Ireland, P. (2005). Shareholder Primacy and the Distribution of Wealth. Modern Law Review, 68(1), 49–81. http://doi.org/10.1111/j.1468-2230.2005.00528.x

Ireland, P. (1999). Company Law and the Myth of Shareholder Ownership. Modern Law Review, 62(1), 32–57. http://doi.org/10.1111/1468-2230.00190

Johnson, P. (2010). Making the Market: Victorian Origins of Corporate Capitalism. Cambridge: Cambridge University Press.

Kantorowicz, E. H. (1997). The King’s Two Bodies : A Study in Mediaeval Political Theology. Princeton ; Chichester: Princeton University Press.

Maitland, F. W. (2003). State, Trust and Corporation. (D. Runciman & M. Ryan, Eds.) Cambridge Texts in the History of Political Thought. Cambridge: Cambridge University Press.

Turner, J. D. (2017). The Development of English Company Law before 1900 (No. 2017–1). Belfast: Queen’s University Centre for Economic History. Retrieved from https://www.econstor.eu/handle/10419/149911

Veldman, J., & Willmott, H. (2016). The Cultural Grammar of Governance: The UK Code of Corporate Governance, Reflexivity, and the Limits of “Soft” Regulation. Human Relations, 69(3). http://doi.org/10.1177/0018726715593160

Veldman, J., Morrow, P., & Gregor, F. (2016). Corporate Governance for a Changing World: Final Report of a Global Roundtable Series. Brussels and London: Frank Bold and Cass Business School.

Veldman, J., & Willmott, H. (2017). The Corporation in Management. In G. Baars & A. Spicer (Eds.), Critical Corporation Handbook. Cambridge, UK: Cambridge University Press.

Woodward, S. (1985). The Struggle for Fungibility of Joint-Stock Shares as Revealed in W.R. Scott’s Constituion and Finance of English, Scottish, and Irish Joint-Stock Companies to 1720 (No. 377). UCLA Economics Working Papers. UCLA Department of Economics. Retrieved from https://ideas.repec.org/p/cla/uclawp/377.html

 

No man can serve two masters

Rogue Trading at Lloyds Bank International, 1974: Operational Risk in Volatile Markets

By Catherine Schenk (Glasgow)

Abstract Rogue trading has been a persistent feature of international financial markets over the past thirty years, but there is remarkably little historical treatment of this phenomenon. To begin to fill this gap, evidence from company and official archives is used to expose the anatomy of a rogue trading scandal at Lloyds Bank International in 1974. The rush to internationalize, the conflict between rules and norms, and the failure of internal and external checks all contributed to the largest single loss of any British bank to that time. The analysis highlights the dangers of inconsistent norms and rules even when personal financial gain is not the main motive for fraud, and shows the important links between operational and market risk. This scandal had an important role in alerting the Bank of England and U.K. Treasury to gaps in prudential supervision at the end of the Bretton Woods pegged exchange-rate system.

Business History Review, Volume 91 (1 – April 2017): 105-128.

DOI: https://doi.org/10.1017/S0007680517000381

Review by Adrian E. Tschoegl (The Wharton School of the University of Pennsylvania)

Since the 1974 rogue trading scandal at Lloyds’s Lugano branch we have seen more spectacular sums lost in rogue trading scandals. What Dr Catherine Schenk brings to our understanding of these recurrent events is the insight that only drawing on archives, both at Lloyds and at the Bank of England, can bring. In particular, the archives illuminate the decision processes at both institutions as the crisis unfolded. I have little to add to her thorough exposition of the detail so below I will limit myself to imprecise generalities.

Marc Colombo, the rogue trader at Lloyds Lugano, was a peripheral individual in a peripheral product line, in a peripheral location. As Schenk finds, this peripherality has two consequences, the rogue trader’s quest for respect, and the problem of supervision. Lloyds Lugano is not an anomaly. An examination of several other cases (e.g. Allied Irish, Barings, Daiwa, and Sumitomo Trading), finds the same thing (Tschoegl 2004).

In firms, respect and power come from being a revenue center. Being a cost center is the worst position, but being a profit center with a mandate to do very little is not much better. The rogue traders that have garnered the most attention, in large part because of the scale of their losses were not malevolent. They wanted to be valued. They were able to get away with their trading for long enough to do serious damage because of a lack of supervision, a lack that existed because of the traders’ peripherality.

In several cases, Colombo’s amongst them, the trader was head of essentially a one-person operation that was independent of the rest of the local organization. That meant that the trader’s immediate local supervisor had little or no experience with trading. Heads of branches in a commercial bank come from commercial banking, especially commercial lending. Commercial lending is a slow feedback environment (it may take a long time for a bad decision to manifest itself), and so uses a system of multiple approvals. Trading is a fast feedback environment. The two environments draw different personality types and have quite different procedures, with the trading environment giving traders a great deal of autonomy within set parameters, an issue Schenk addresses and that we will discuss shortly.

Commonly, traders will report to a remote head of trading and to the local branch manager, with the primary line being to the head of trading, and the secondary line being to the local branch manager. This matrix management developed to address the problem of the need to manage and coordinate centrally but also respond locally, but matrix management has its limitations too. As Mathew points out in the New Testament, “No man can serve two masters, for either he will hate the one, and love the other; or else he will hold to the one, and despise the other” (Matthew (6:24). Even short of this, the issue that can arise, as it did at Lloyds Luggano, is that the trader is remote from both managers, one because of distance (and often time zone), and the other because of unfamiliarity with the product line. A number of software developments have improved the situation since 1974, but as some recent scandals have shown, they are fallible. Furthermore, the issue still remains that at some point the heads of many product lines will report to someone who rose in a different product line, which brings up the spectre of “too complex to manage”.

The issue of precautionary or governance rules, and their non-enforcement, is a clear theme in Schenk’s paper. Like the problem of supervision, this too is an issue where one can only do better or worse, but not solve. All rules have their cost. The largest may be an opportunity cost. Governance rules exist to reduce variance, but that means the price of reducing bad outcomes is the lower occurrence of good outcomes. While it is true, as one of Schenk’s interviewees points out, that one does not hear of successful rogue traders being fired, that does not mean that firms do not respond negatively to success. I happened to be working for SBCI, an investment banking arm of Swiss Bank Corporation (SBC), at the time of SBC’s acquisition in 1992 of O’Connor Partners, a Chicago-based derivatives trading house. I had the opportunity to speak with O’Conner’s head of training when O’Connor stationed a team of traders at SBCI in Tokyo. He said that the firm examined too large wins as intently as they examined too large losses: in either case an unexpectedly large outcome meant that either the firm had mis-modelled the trade, or the trader had gone outside their limits. Furthermore, what they looked for in traders was the ability to walk away from a losing bet.

But even small costs can be a problem for a small operation. When I started to work for Security Pacific National Bank in 1976, my supervisor explained my employment benefits to me. I was authorized two weeks of paid leave per annum. When I asked if I could split up the time he replied that Federal Reserve regulations required that the two weeks be continuous so that someone would have to fill in for the absent employee. Even though most of the major rogue trading scandals arose and collapsed within a calendar year, the shadow of the future might well have discouraged the traders, or led them to reveal the problem earlier. Still, for a one-person operation, management might (and in some rogue trading scandals did), take the position that finding someone to fill in and bring them in on temporary duty was unnecessarily cumbersome and expensive. After all, the trader to be replaced was a dedicated, conscientious employee, witness his willingness to forego any vacation.

Lastly, there is the issue of Chesterton’s Paradox (Chesterton 1929). When a rule has been in place for some time, there may be no one who remembers why it is there. Reformers will point out that the rule or practice is inconvenient or costly, and that it has never in living memory had any visible effect. But as Chesterton puts it, “This paradox rests on the most elementary common sense. The gate or fence did not grow there. It was not set up by somnambulists who built it in their sleep. It is highly improbable that it was put there by escaped lunatics who were for some reason loose in the street. Some person had some reason for thinking it would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable.”

Finally, an issue one needs to keep in mind in deciding how much to expend on prevention is that speculative trading is a zero-sum activity. A well-diversified shareholder who owns both the employer of the rogue trader and the employers of their counterparties suffers little loss. The losses to Lloyds Lugano were gains to, inter alia, Crédit Lyonnais.

There is leakage. Some of the gainers are privately held hedge funds and the like. Traders at the counterparties receive bonuses not for skill but merely for taking the opposite side of the incompetent rogue trader’s orders. Lastly, shareholders of the rogue traders firm suffer deadweight losses of bankruptcy when the firm, such as Barings, goes bankrupt. Still, as Krawiec (2000) points out, for regulators the social benefit of preventing losses to rogue traders may not exceed the cost. To the degree that costs matter to managers, but not shareholders, managers should bear the costs via reduced salaries.

References

Chesterton, G. K. (1929) ‘’The Thing: Why I Am A Catholic’’, Ch. IV: “The Drift From Domesticity”.

Krawiec, K.D. (2000): “Accounting for Greed: Unraveling the Rogue Trader Mystery”, Oregon Law Review 79 (2):301-339.

Tschoegl, A.E. (2004) “The Key to Risk Management: Management”. In Michael Frenkel, Ulrich Hommel and Markus Rudolf, eds. Risk Management: Challenge and Opportunity (Springer-Verlag), 2nd Edition;