Average-Transaction Costs and Risk Management during the First Globalization (Sixteenth-Eighteenth Centuries)

Impact Objectives

• Investigate economic institutions and their impact on economic development through the
  use of general average (GA) as an analysis tool
• Contribute towards several current historiographical debates about the early modern period

Historical transaction costs and risk management

Professor Maria Fusaro explains how the research of her team aims to understand the legal framework of European maritime trade over the longue durée through an assessment of transaction costs and risk management during the First Globalisation.

Could you offer a brief overview of the project and explain how the results will benefit our understanding of current and future economic developments?

Maritime trade, and its daily interactions supporting the practical functioning of trade and connected litigation, remains an essential element of the contemporary global economy. Investigation of the early development of its polycentric legal framework can help us to find solutions for today’s economic and political challenges. This is particularly important in two areas: the extent of a state’s jurisdiction in regulating maritime trade, and the management of a supremely international workforce such as seamen. Let us not forget that the maritime sector was the first truly global sector, and seafaring was the first global profession.

Can you briefly explain general average (GA)? Why do you think it has generally been overlooked by scholars until now?

‘General average’ (GA) is defined as the expenses affecting ships and cargoes from the time of loading until their unloading (due to accidents, jettison, capture and unexpected costs). GA was (and still is) a crucial mechanism for the redistribution of costs in maritime trade. Averages have a strong element of procedural convergence as a result of trade necessity. For example, in the event of a loss of cargo, a damage report had to be completed in the first port encountered after the accident, and certified by local authorities. This report then had to be accepted by the authorities of the destination port, hence the embedded trans-nationality of these legal instruments.

Several reasons lie behind the scholarly neglect of GA. History is a modern discipline shaped in the 19th century and, for a long time, it was centred on creating ‘national narratives’. This was even more evident in economic history. Fiscal and custom records
were preferred as evidence, because they also had the advantage of providing serial figures. Now the discipline is moving towards transnational analyses. Several new approaches are being developed to answer these new queries, and General Average fits very well within these developments.

GA is also thought to remain static over time, therefore the complex demands of analysing large data sets focusing on a supposedly unchanged phenomenon have not been appealing to many scholars.

This project stands at the intersection of several different disciplines, such as history and economics. How does this affect the study and how did you overcome any issues?

Dr Dave De ruysscher of the Vrije Universiteit Brussels (Belgium) and Tilburg University (Netherlands), one of the research associates, comments on how: ‘Challenges have occurred in the research due to the difference of paradigms and debates. For example, in the early modern period, the cultural aspects of law are emphasised among legal historians, whereas economic historians tend to focus on legislation as the primary source of law. Economic historians’ law analysis is generally considered softer than that of legal historians. Conversely, legal historians give little attention to the socioeconomic causes of legal change. The interdisciplinary approach allows for an optimal combination of these approaches: attention to the causes of legal change with a view on the diverse components of law.’

What do you consider the most important challenge to overcome in order to move your research forward?

Interdisciplinary work has been a very fashionable concept in academia for some time now, but the practical challenges of working across different methodologies act as a break on these endeavours. Overcoming these challenges was the reason I invited colleagues across several disciplines to work together, as teamwork is the best way to solve these problems. Currently, the biggest challenge for us is the administrative aspect of putting together such a large international project in the time of Brexit.

Understanding European maritime trade

The Average Transaction Costs and Risk Management Project (AveTransRisk) is using general average in a collaborative research effort to focus on economic institutions and their impact on economic development.

Maritime trade remains a vital element of the current global economy. Investigation into the historical development of its polycentric legal framework may aid us in resolving many of today’s economic and political challenges. The Average – Transaction Costs and Risk Management during the First Globalization (Sixteenth- Eighteenth Centuries) project is an interdisciplinary, international study that uses general average (GA) as a tool to assess the redistribution of costs involved in maritime trade. This is key in examining the extent of states’ jurisdiction in regulating maritime trade, as well as the management of an international workforce.

Interdisciplinary Research

Research funded by the European Research Council (ERC) under the EU Horizon 2020 Research and Innovation Programme is supporting a complex history and socioeconomic collaborative project involving scholars from the UK Universities of Exeter and Edinburgh, and the Centre for Financial History (University of Cambridge), the Dutch Vrije Universiteit Amsterdam, the Belgian Vrije Universiteit Brussels, the Spanish Universidad Nacional de Educación a Distancia (UNED), and the Italian Universities of Genova, Pisa, and Parma. (Full details on the team are available here).

The project is funded through the Consolidator Grant scheme as the followon from an ERC Starting Grant’, explains Professor Maria Fusaro, Director of the Centre for Maritime Historical Studies at the University of Exeter. ‘The results of my previous ERC-funded project were pivotal to me designing this project.’ The ERC assesses projects based on excellence as the sole criterion, and Fusaro recognises that the project would not be possible without the collaboration of a pan-European interdisciplinary team of researchers. ‘I have a large and excellent team working with me,’ Fusaro says. They include socioeconomic historians,  economic historians, legal historians, and an expert in financial accounting, as well as several doctorial students.

‘Such a large and interdisciplinary team allows us to use specific internal expertise to address all the complex issues which are emerging from the original documents under analysis,’ she notes. ‘We already know that the actual functioning of GA is put into question whenever new players enter the system. This happened with the English and Armenians in the 17th century, and is happening with the Chinese on the global scale today.’ Evidence suggests that periodic attempts to discuss, and possibly reform, the mechanisms underpinning mutual cost allocation is proof of the cultural specificities of risk analysis. This further stresses the crucial importance of trust within business activities, an issue of extreme topicality today. Fusaro suggests that: ‘What is  emerging from our work is the existence of substantial variations across different cultures in both “risk perception” and in the legal mechanisms created to minimise the financial consequences.’ When new, important economic players enter the field, their attitudes towards risk management strongly affect the practical development of the instruments designed to manage and control risk. This study will recognise European variation in business culture, trade regulation, risk perception, as well as levels of trade. The project seeks to investigate how these factors impacted on business structures, and on the varied institutional developments which underpin the global expansion of the European economy from the sixteenth century, to provide baseline data for future research.

Learning From The Past

The objectives of the project include the historical assessment of European economic and legal developments across the European maritime sector, and comparing the balance between private commercial enterprise and state intervention across a number of European states. The research also analyses the development of legal institutions and commercial legal systems, and the management of risk by different trade participants. The role played by formal and informal trade dispute resolution will also be analysed. Evidence suggests that economic historians tend to focus on the study of expanding economies, whilst Fusaro comments that she likes to: ‘Shift attention to the investigation of how crises were confronted in the past’. Fusaro also recognises that: ‘Today international (and indeed commercial) law has moved beyond a Westphalian state-centred form to include non-state actors, even if states remain principal actors in global governance, with the interaction of these two levels
of governance being one of the most stimulating and controversial fields of both political and legal activity.’ She also adds that: ‘It is my belief that the 17th century was at the opposite side of the cycle, as states were confronted with the need both to exercise their authority outside and to strengthen it within their borders.’

Today, GA is regulated globally by the York-Antwerp Rules (YAR), which have recently been revised and are currently being ratified by states. This is providing the research team with opportunities for active engagement with practitioners, thereby fostering a  creative dialogue on the historical study of GA and its future development, to better face the challenges of maturing globalisation.

Long-Term Commitment To Maritime Global Trade

Fusaro suggests that, for the long-term outcomes and future of the research, ‘a contemporary issue of great relevance is the relationship between political actions and economic developments. Taking the long-term view will provide us with answers about the practical ways in which political interventions shape international trade, and vice versa.’ Charting and analysing historical development and changes over a long period of time, across several countries and legal systems, through the development of a single legal concept such as GA, will enhance understanding of institutional development and changes. This project seeks to identify what affects economic institutions, as well as determine the relationship between institutions and legal frameworks.

Fusaro highlights a comment from team member Dr Sabine Go from the Vrije Universiteit Amsterdam (the Netherlands), who underlines that: ‘GA is a complex concept, including legal, financial, institutional and mathematical issues. It encompasses long-distance trade, risk perception, risk management and valuation issues. But there is another crucial dimension, that of governance – GA started as a method of self-governance. In time, an institutional layer was added, third party enforcement.’ Current debates, both scientific and political, deal with the effectiveness of governance constructs. Todiscuss the scope and effectiveness or even the desirability of governing constructs, Fusaro fully supports recognition by Dr Go that from an economic perspective: ‘We can learn a great deal from the long-term development of GA to analyse the best possible way to govern transactions and markets.’

Fusaro argues that ‘from the quantitative side, one of the big problems in studying early modern economic development is the paucity of reliable and consistent figures, especially on transaction costs and commodity prices.’ Such figures are also found in data outlining cargo value, and these exist for both insurance claims and GA declarations. In the case of insurance, these figures are not always reliable as insurance became a speculative instrument from the middle ages, and both over- and under-valuing goods have been (and still are) common practices which could benefit speculators. GA procedures were designed as a protection against risk, and remained a fully mutualistic form of protection. Fusaro underlines that the ‘result of this is thatthe quantitative data produced during GA analysis provides scholars with values closer to the ‘real’ ones – the values perceived to be ‘real’ by all involved – simply because all who were involved in GA were active participants in the business venture, and therefore the over- or underestimation of costs would have affected all parties, each with substantially different interests within the venture.’