The Article „Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi Traders“
by Anver Greif is analyzing the economic situation and institution during the eleventh century of the Middle ages. It is based on documents of that period, found in hidden storage places in some synagoges. These documents are also called „Geniza“. This safe-places are cemetery designated for the temporary storage of worn-out Hebrew-language books and papers on religious topics prior to proper cemetery burial. From there we know, nowadays, how the eleventh century economic system worked ・based on coalitions and organisations based on reputation mechanism utilized
by Mediterranean traders to confront the organizational problem associated with
the exchange relations between merchants and their overseas agent.
Firs of all, we have to know what is the meaning of „Maghribi“ There are three definitions of that word. The first is the „northwest part of Africa“ from Lybia to Morocco and Mawrithania. The second „just Morocco, in fact the name Morocco“comes from french, but in all arabic and berber languages the name of the country and the official name of the state is المغرب (al-Maġrib), which mean West“ The third definition, with which this article works is basicly a non-oficial group of traders from jewish origin, who spread upon all the Mediterranean.
It is important to know, that in the Middle Ages, most of the South, East and West Mediterranean was controlled by the Fatmids Caliphate. North Africa, the Middle east, Spain and Sicily were in the hands of this big muslim-arabic empire. That gives the opportunity of a trader to opperate in vast space without to pay transit taxes and etc. Today we would say a „common single market”.
Trade usually also means or its precondition of economic growth. The spread of this trade depended, to a large extent, upon traders’ ability to employ overseas agents or to let business associates function as overseas agents. The employment of overseas agents was vital during the Middle Ages, since goods were sold abroad only after being shipped to their destination. Since, absent contractual problems, a merchant can decrease cost by sending goods to an overseas agent rather than traveling with his goods, a large efficiency gain could potentially be achieved by employing overseas agents.
Some scholars pointed out that the contractual problems associated with agency relations could be resolved neither by the legal system nor by the anonymous market. For example: what if the trader is cheated? The agent who traded using someone else’s capital „could easily have disappeared with the capital or cheated in business conducted in far-off markets where none of his associates had any control. So The traders faced an organizational problem: cooperation leads to efficiency gains that the anonymous market for agents’ services fails to capture.
The uniqe in that period is acctualy the establishment of „trust“ relations among traders, focusing in particular on the role of social control systems and ethics. It is also important the relations between such natural groups like tribes, clans and families.
So the article examines the economic institution that enabled eleventh-century Mediterranean merchants to deal with the contractual problems that arose from the fact that neither a merchant nor the judges possessed all the information available to „overseas agents,“ individuals who provided trade-related services to geographically remote merchants. The evidence suggests that the observed „trust“ reflects a reputation mechanism among economic self-interested individuals.
The eleventh-century Mediterranean traders arranged agency relations through a peer organization that may be referred to as a coalition. Members of the coalition provided each otherwith agency services that increased the value of a member’s capital. Each trader benefited from being a coalition member more than he could have by establishing agency relations based upon a reputation mechanism outside the coalition.
The agent acquired a reputation of being honest, the merchant could trust him. In short, the traders utilized a „perpetuum mobile” the contractual relations among them reduced the transaction cost associated with agency relations and thus motivated each coalition member to follow these contractual arrangements.
Unlike the feodal european states in the Middle ages, the fatmid rulers tried to promote trade inside the empire and no official restrictions fettered migration or the transfer of raw materials, finished goods, or money across the Mediterranean. It was really easy for a merchant to rent a storage space or to rent a ship, becouse of the competative privite system of the economy. The trade within each trade center was free and competitive, with many buyers and sellers interacting in bazaars and storehouses, where they negotiated and competed over prices, using brokers, open-bid auctions and direct negotiation.
But there is still a major problem in the scheme. There are a lot of uncertainties in a long-way shipment, like he condition in which the goods would arrive, the price at which the goods would be sold, and the cost of the goods. A journey from Egypt to Sicily can take form 15 to 50 days, not always the goods are sheltered well, and the captain is not responsible for the conditions of the trasported stuff. There was a hige incertanty of the prices going up or down due to many reasons.
So one for example one merchant learned that a larg flax crop was expected in Egypt, he advised his business associate in Tunisia to sell all the flax he had as quickly as possible. With such a ties soon a large network or a coalition was developed. The importance of trust and reputation here is crucial. For example if one oversea agent cheated his merchant, soon all the members of the coalition wherever they are will know that and wont trade with him. Yes, it is possible for one agent to cheat and steal his partners profit, but its going to be for once – a small profit. But infact if he is not cheating and has a really good reputation – everybody will want to work with him and he will make a good long-term profit. And if a maghribi trader wanted to impose some social sanctions against another trader, he has only to make a public appeal infront of the Jewish-Maghribi communities.
The Maghribi traders coped with the uncertainty and complexity of the trade-they reduced the cost of trade-by operating through business associates, whom they relied upon to handle some of their business dealings abroad.
The merchants exploited this advantage by allocating risk better through diversification and shifting trade activities across trade centers, goods, and time; by operating assedentary traders, thus saving opportunity costs and the expense and risk of a journey; and by enjoying the expertise of their business associates. Partnerships enabled the traders to diversify their capital while retaining the benefits of economies of scale and scope. Another form of business association, the commenda, regulated relations between a business associate who was ready to bear the risk and the effort of travel but was unable to commit himself to return the capital in case of loss. Additional efficiency was achieved by the mere fact that a merchant could rely on someone else to handle his affairs in his absence, an important factor for those merchants who sailed between trade centers.
The relations between business associates reflected in the geniza suggest that these relations were based upon mutual trust. Many, if not most, of the business associations mentioned in the geniza were conducted without relying upon the legal system. Many business associations were not based upon legal contract. How this system worked we can see in the reply by one trader who wrote to his business associate, „all profit occurring to me comes from your pocket,“ while another trader remarked that in trade „people cannot operate without people.
Organization theory predicts that when cooperation leads to efficiency gains which the market and the legal system fail to capture, „private order“ economic institutions will be established. Since agents were employed by the Maghribi traders, and „trust“ prevailed in agency relations, it seems reasonable that they established a „private order“ institution. Where contractual relations are expected to be repeated, reputation may provide the base for such an economic institution.
To make this position attractive, the merchant must create a gap between the expected lifetime utility of an agent employed by him and the agent’s best alternative elsewhere. To do so the merchant has to provide the agent a premium; for example, he can pay him a wage premium. Of equal importance is the implicit contract established between merchant and agent, under which the merchant threatens to fire the agent and never operate through him again if he discovers that the agent has ever cheated.46 Given a premium and the implicit contract, a dishonest agent can earn a short-run gain by cheating while an honest agent will earn a long-run gain by being paid a premium. A agent acquires the reputation of an honest agent if it is known that the long-run gain is not less than the short-run gain. The agent cannot increase his lifetime utility by cheating. The merchant will offer the agent an optimal premium-the lowest cost premium for which the long-run gain is not less than the short-run gain.
The theory points to an arrangement which can improve upon this simple reputation mechanism. Agency relations can be organized within an economic institution that may be referred to as an rganisation or „coalition.“
That is a nonanonymous organizational framework through which agency relations are established only among agents and merchants with a specific identity („coalition members“). Relations among the coalition members are governed by an implicit contract which states that each coalition merchant will employ only member agents and will pay them the optimal premium. Moreover, all coalition merchants agree never to employ an agent who cheated while operating for a coalition member. Furthermore if an agent who was caught cheating operates as a merchant, coalition agents who cheated in their dealing with him will not be considered by other coalition members to have cheated.
In addition to direct evidence, the geniza also contains indirect evidence on the functioning of the coalition. A rational and consistent explanation can be provided for trade-related phenomena reflected in the geniza under the assumption that agency relations were organized
within a coalition. This suggests that the Maghribi traders indeed organized agency relations within a coalition. The Maghribi traders were familiar with five forms of business association: sea loan, commenda, partnership, formal friendship, and factor relations. A sea loan was a loan for fixed interest. Its repayment was contingent upon safe arrival of a ship or successful completion of a voyage. Commenda was usually established between two parties, one who provided the capital, and one who provided the work, in form of traveling and selling the merchandise overseas.The parties allocated the profit and loss according to a sharing rule specified at the time the commenda was established.
A partnership brought together two or more parties, who invested capital and labor though not necessarily in equal shares. The partners became joint owners of the capital and shared profit and loss in proportion to their share of the capital. Usually only one of them (or a
third party) handled the joint capital at a time, or each of them handled part of the joint capital at the same time.
In conclusion we can say that the Maghribi traders in the Fatmid Caliphate formed the basis of the pre-modern pre-capitalism and developed a system of „anarchic cooperativism”. A good example is the functioning of the italian Mafia in USA in the early XX century. System based on reputation and trust, based on a „organisation” or „coalition” of members, that may even dont know each other, but still capable to „trade”.