A Brief History of Globalization and Limited Liability, from Venice to Chiapas

Multinational organizations churn the wheels of the modern economy. Since the Great Recession, multinational corporations have received significant criticism, beginning with outrage at the financial sector immediately after the crash. Anti-corporate sentiment has been usurped by growing nationalist movements that denounce globalization and blame outsourcing and trade deficits for shrinking middle-class wealth and opportunity. Despite these criticisms, multinationals are more powerful than ever, and many question the extent to which national governments can still govern without outside influence.

Pessimism about the future is strong on any side of the political spectrum, but this is not a new phenomenon. The 1976 film Network was a good reflection of the public’s cynicism about the new world order, as shown by the following monologue by Network CEO Arthur Jenson ten years before Gordon Gekko proclaimed that “Greed is Good” at a shareholders meeting:

There is no America. There is no democracy. There is only IBM and ITT and AT&T and DuPont, Dow, Union Carbide, and Exxon. Those are the nations of the world today. What do you think the Russians talk about in their councils of state - Karl Marx? They get out their linear programming charts, statistical decision theories, minimax solutions, and compute the price-cost probabilities of their transactions and investments, just like we do. We no longer live in a world of nations and ideologies, Mr. Beale. The world is a college of corporations, inexorably determined by the immutable by-laws of business. The world is a business, Mr. Beale; it has been since man crawled out of the slime. And our children will live, Mr. Beale, to see that perfect world in which there's no war or famine, oppression or brutality - one vast and ecumenical holding company, for whom all men will work to serve a common profit, in which all men will hold a share of stock - all necessities provided, all anxieties tranquilized, all boredom amused.

Since 1976, the new corporate “nations” have only grown wealthier, fueling record income inequality. Since 1980, income growth of the bottom 50 percent of America’s households has grown only 1%, while the income of the top 1% has exceeded 200%. Today, CEO pay is three hundred times that of a typical company worker compared to “only” thirty times during the 1980’s, which is commonly known as the “Decade of Greed.”

Over the past few decades, the nations of the world have also lowered barriers to international commerce through measures such as the World Trade Organization, the North American Free Trade Agreement, the Trans-Pacific Partnership, and the European Common Market. Because these agreements have coincided with rising income inequality and the loss of blue-collar jobs, they have received a great deal of blame from people like Donald Trump and Boris Johnson.

Most economists still agree that on a macro level, globalization has had a net benefit to consumers and many workers. There is also a consensus that re-imposing trade barriers like tariffs would place a disproportionate burden on consumers and not necessarily benefit domestic industries. In the case of Trump’s trade war, a recent study by the National Bureau of Economic Research found that U.S. imports and consumers have born 100% of the cost of the increased tariffs. In the UK, the cost of Brexit is currently estimated at $260 billion dollars and the UK’s economic growth rate has been cut in half since the referendum. The top 1% of both nations are obviously not hurting from this pain.

Despite the undeniable wealth and productivity associated with free trade, there is no doubt that the increased power of multinationals in the global economy has caused a fair share of collateral damage, including job loss in specific sectors like the U.S. manufacturing sector and the Mexican agricultural sector (though technological innovation is largely responsible for this trend). Arbitration provisions in trade agreements, meant to help multinationals protect their investments abroad, also undermine local governments’ abilities to impose regulations to benefit their local constituencies and the environment.

The following two case studies illustrate the good and bad of globalization and its cousin limited liability, the latter a key feature of the corporate form.

The Rise and Fall of Venice

Though the modern corporate form was developed in the 19th Century, its roots span back nearly 1,000 years to medieval Venice. Throughout its history, Venice has been an important international trading post, ideally situated on the coast of the Adriatic Sea at the intersection of the Western and Eastern European empires. In the 9th Century, Venice became an independent city-state as the result of political factors such as its military assistance of the Eastern Byzantine Empire in defeating an encroaching Charlemagne form the West. Over the next couple of centuries, Venice gained more concessions from Byzantium that allowed it to trade more freely across the Mediterranean and establish outposts throughout this area, notably in Constantinople.

Before 1072, Venice was controlled by a powerful oligarchy called the “Doge” that consisted of three wealthy families that remained in power through hereditary succession. The increasing free trade through Venice created a new class of merchant entrepreneurs who eventually became powerful enough to replace the static Doge hegemony with a new parliament in 1072 called the Great Council. These reforms significantly limited the powers of the Doge and enacted democratic checks and balances to govern the new array of economic interests in Venice.

A combination of increased free trade and the more egalitarian system under the Great Council allowed for new legal innovations like increased private-property protections and limited liability, the latter necessary to mitigate the high risk associated with maritime shipping. During this period, shipping through sea was a highly risky venture. Valuable loads of cargo often perished from storms or piracy, and even if a ship returned to Venice, the voyages often took at least two months, a timeline made even more unpredictable by the weather. Even if the goods would return intact, travelling merchants might find the market for the goods had disappeared.

The colleganza was a contractual joint-venture agreement that helped to address the risks of international shipping. The colleganza was a predecessor to the joint-stock companies later developed by the Dutch and British to also address the challenges faced by maritime shipping. In a typical colleganza arrangement, a “sedentary merchant” remaining in Venice would front the entire capital for a voyage to a “traveling merchant” who would assume the risks of theft or death by piracy at sea. If the traveling merchant returned with the goods intact, the parties would split profits pursuant to the terms of the colleganza, and any disputes would be resolved by an emerging dispute-resolution process managed by the Great Council.

The colleganza helped spur investment, which further increased maritime trade and allowed poor yet industrious merchants to amass significant wealth and join the growing elite. This system lasted for about two centuries before it was abruptly halted by a coalition of old money discontent with their loss of influence and new money that sought to protect its new status. This coalition enacted regulations that increased the barriers to entry by new merchants, including a requirement that traveling merchants hold a minimum amount of personal wealth to be licensed to ship.

These restrictions on trade allowed for the resurgence of an oligarchy in the tradition of the Doge. Success under the new system again depended on inherited wealth and status rather than entrepreneurial merit, resulting in Venice declining as a maritime power and economic powerhouse over the next few centuries and allowing other cities like Genoa to emerge.

The New Empires Strike Back

Although the early glimmer of democracy and free enterprise receded in Medieval Venice, it rose again after the European Conquest of the Americas. Spain was first to the game of bringing tremendous wealth back to Europe, but its delay in enacting democratic and economic reforms allowed other nations like The Netherlands and England to assert dominance over the new Atlantic trade. The development of modern banking and credit facilities and protection of private property allowed these and other emerging nations to capture much of the American wealth exploited by Spain, the latter heavily indebted from Medieval crusades and mismanagement. Countries like the Netherlands and England also developed their own joint-stock companies that provided limited liability to facilitate highly risky investments associated with exploring unfamiliar new worlds.

As Eduardo Galeano eloquently documents in his magnum opus, Las Venas Abiertas de Latinoamérica, the immense wealth extracted from the Americas helped build the modern economies of Europe and promote democracy because of the rising merchant middle class. However, he discusses how this development was at the unfortunate cost of the exploitation and decimation of the indigenous populations and later the trans-Atlantic slave trade. This dark side of globalization has not disappeared in the 21st Century.

The Road from Madrid to San Cristobal de Las Casas

Galeano published Las Venas Abiertas in 1971, two decades before the Zapatista uprising in Southern Mexico. The Zapatistas’ primary call to arms was their objection to 500 years of foreign exploitation that began with Spain and later continued with the extensive economic and military intervention by the United States into Latin America over the past two centuries.

The Zapatistas seized several towns in the state of Chiapas beginning on January 1, 1994, the same day the North American Free Trade Agreement went into effect. The enactment of NAFTA coincided with the Mexican government’s removal of protections for communal indigenous land called ejidos that had been protected by Article 27 of Mexico’s 1917 Constitution. The Zapatistas feared that this change, combined with NAFTA’s opening of the country’s agricultural sector, would result in seizures of indigenous land and interference by competitors from the U.S. and Canada. These fears were not misplaced. Although NAFTA has brought tremendous growth to all member nations on a macro level, it initially decimated Mexico’s agricultural industry that could not compete with the heavily subsidized and technologically advanced U.S. counterpart. It is hard to ignore the irony that the deal Trump dubbed the “worst trade deal in history” was a win for his base of American agriculture at the expense of its Mexican counterpart, which incidentally caused an influx of Mexican migrants to the United States.

Certain portions of Mexican agriculture have rebounded (e.g. tomatoes, avocados, and limes), which are thriving in large part because of NAFTA’s lowered trade barriers. But there is no doubt that there are winners and losers anytime a country opens its gates to foreign competition. One the one hand, globalization has grown middle classes and decreased poverty in many regions, most notably in China where nearly $1 billion people were lifted out of poverty since the country embraced the global market. On the other hand, sectors like Mexican agricultural and U.S. manufacturing have taken a hit. However, the lessons from Venice and other places that have raised their walls to the world (e.g. Venezuela), show that isolationism is not the answer.

The new USMCA trade deal that is set to go into effect this year will bring new changes and challenges to North America, notably to Mexican labor and the automotive industry. Upcoming articles on this website will discuss these changes and suggest measures that may ease the growing pains of international trade, including a commitment to Fair Trade and adoption of new corporate vehicles like Benefit Corporations and Low-Profit Limited Liability Companies.

Please subscribe to the Camino Aztlán Newsletter for future updates.

Sources:

Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, “Distributional National Accounts: Methods and Estimates for the United States.” NBER Working Paper 22945. National Bureau of Economic Research, 2016.
Lawrence Mishel and Alyssa Davis, “Top CEO’s Make 300 Times More than Typical Workers,” Issue Brief 399, Economic Policy Institute, June 2015.
Mary Amiti, Stephen J. Redding, and David E. Weinstein, “Who’s Paying for the US Tariffs? A Longer-Term Perspective.” NBER Working Paper 26610. National Bureau of Economic Research, 2020.
https://markets.businessinsider.com/news/stocks/brexit-cost-reach-billions-highest-boris-johnson-uk-economic-study-2020-1-1028809389
https://www.businessinsider.com/the-economic-history-of-venice-2012-8.