Trust and Scale

I am enjoying the History of the Germans Podcast by Dirk Hoffnan-Becking. Along with endless "Game of Thrones" style dynastic struggles among countless counts, dukes, princes, and emperors, there is a fair amount of business economics. A recent episode described the emergence of an early joint stock corporation to solve a thorny asymmetric information problem. The episode compared trade within the Baltic based Hanseatic League, which came to prominence in the 13th-14th century, with Great Ravensburg Trading Society dominant in Southern Germany in the 15th century. Long distance trade requires trust since your trading partner has many ways of cheating you. As Dirk notes:

In the Hanse system, this problem was solved through an elaborate surveillance operation. Each merchant would have several correspondent agents in each city that he or she would trade with. These correspondent agents would not only keep an eye on the market, but also on the behaviour of the other correspondents. That way a merchant would know fairly quickly if say the creditworthiness or honesty of one of his agents was placed in doubt. And the higher a merchant rose within their city, the more access he would gain to information. As a member of the city council, he would hear about the state of negotiations with kings and princes, where pirate activity was most intense and what would be done about it etc. And finally, long standing relationships, intermarriage and the fact that Hanse traders all spoke Low German created trust between the participants in that network.

The Hanse system limited the size of each trader's operations since its hallmark was engaging multiple traders in each location keeping an eye on each other. In contrast, the Great Ravensburg Trading Society, employed agents throughout its network, each with a stake in the company's fortunes.

The main constraints to this model were the number of family members and trustworthy business partners one could recruit. That is likely one of the reasons the three firms of Humpis, Mötteli and Muntprat joined forces in Ravensburg in the early 15^th century. They all had been extremely successful merchants, but growth has hit a wall as they had run out of individuals they could send out as their representatives. By pooling their resources, they could establish a much larger network of agents than they could set up individually. Another key benefit was that the combination reduced competition, increased pricing power with suppliers and customers and reduced risk.

Every three years a full account of the books was made to determine the dividend payments and bonuses. The company expanded to as many as 90 smaller partners and grew into a truly pan-European network. The founders' wealth eventually became many multiples even of nearby Kings.