Convergent Evolution Toward the Joint-Stock Company

David Le Bris is an Associate Professor in Finance at the Toulouse Business School; William N. Goetzmann is the Edwin J. Beinecke Professor of Finance and Management Studies and Faculty Director of the International Center for Finance at the Yale School of Management; and Sébastien Pouget is Professor of Finance at Toulouse Capitole University. This post is based on their NBER working paper.

Understanding the genesis of joint-stock companies (JSCs) is crucial for identifying the essential factors that facilitated their emergence and flourishing. These factors remain absent in numerous countries that have not seen the development of the JSC. Even in developed nations, the dwindling number of listed firms raises questions about the actual presence of supportive conditions.[1]

The commonly accepted narrative attributes the first appearance of JSCs to the Dutch East India Company (VOC) and the English India Company (EIC). This presumed inception has prompted scholars to delve into the conducive elements behind this institutional innovation in North West Europe during that era. Potential explanations range from extensive maritime trade, relevant state interventions to prior institutional changes. The prevailing perspective also posits that, once invented, business organizations migrated to other regions and sectors (Harris, 2020).

However, the existence of JSC-like business entities in medieval southern Europe challenges this narrative. Legal scholars and historians acknowledge the presence of firms with legal personality, permanent capital, limited liability, freely transferable shares, entity shielding, and delegated management during that time. Notable cases include the Casa San Giorgio in Genoa and the milling companies of Toulouse. Such a multiple emergence is not inconsistent with the fact that once emerged in one place, a legal solution such as the JSC can then migrate.

Convergent Evolutions

To reconcile the existence of JSCs in medieval southern Europe with their reinvention for Asian trade in the 17th century, we turn in our recent paper to the theory of convergent evolution. Borrowed from evolutionary biology and cultural anthropology, this concept suggests that similar solutions can independently emerge in different lineages due to analogous circumstances through different evolutionary ways (wings have been independently developed by birds, insects and bats).

Applied to comparative law and economics, convergent evolution indicates that different legal systems can converged on similar solutions to common economic problems. In this framework, the JSC has not been invented once and diffused but has independently emerged in various times and places with distinct legal genealogies. Actually, a known case of convergent evolution toward the JSC through a different lineage is the limited partnership (Société en commandite). This legal solution provides about the same advantages as the JSC but evolved from a different legal origin (contracts derived from the commenda); major listed firms such as Hermès or Michelin are still limited partnership today.

To support our claim, we show that only very little evidence support migration from the southern medieval cases to north west later trade companies. The Casa San Giorgio, as a dominant financial actor of its time, was very famous (Christopher Columbus opened an account in this bank in between two travels to Americas) and Toulouse mills, the biggest mills of Europe, were quoted by Rabelais and Nostradamus. Moreover, financial technologies have indeed been imported in the north as shown for instance by the Italian writing of the first insurance contracts in London. However, despite our best efforts, only few traces of south to north migration are identified confirming the idea that the JSC concept re-emerged a second time with the Indian trade companies, supporting the view of convergent evolution rather than migration.

The legal genealogy also varied. The EIC and VOC, though similar in timing and state-organized final design, were actually issued from two different legal filiations. The EIC traced its roots to merchant guilds, while the VOC resulted from the merger of large-size commenda contracts (Gelderblom et al., 2013; Harris, 2020). Conversely, southern cases, emerging from the pariage contract, diverged fully. The pariage was a form of common property applied to various assets such as seigneuries, tolls and tax collection. The pariage form was also used to create the new towns called bastide and to settle legal dispute; the state of Andorra is still a pariage, between the Urgell bishop and the French president as heir of the Count of Foix, resulting from a legal arbitration in 1278.

The medieval southern path to the JSC and its lessons

The practice of pariage emerged to respect the Roman law (Corpus Iuris Civilis) of equal inheritance (Novelle 118) among all heirs (boys and girls). Rather than to divide or sell an asset, it was possible for the heirs to remain in common ownership through the division into theoretical shares that could be sold to deal with the need for liquidity and be divisible to allow the system to work over generations. For the same reason, the asset was commonly managed by a delegated agent. Pariages were recognized as universitas in the Roman law thus enjoying several key characteristics of the JSC such as perpetuity, legal personality, rights to own and contract, to regulate its internal affairs and to be managed by a representative; universitas was the status of religious organizations, guilds, cities and universitas of teachers and students forging the word university.

When an asset owned as a pariage required punctual investments and generated regular cash flows they look like a JSC. A dozen of Beziers bourgeois associated in 1248 into a pariage to drain the pound of Montady now a fertile land, the mint of Toulouse, several mines were examples of this kind. Due to their longevity and the magnitude their reached, Casa San Giorgio and the Toulouse mills are the best documented evolutions. Grouping in 1407, several comparia collecting public revenues of Genoa, the Casa San Giorgio became the dominant tax collector providing also banking services and managing territories; San Gorgio was for long the owner of the Corsica island. The four well documented mills in the Toulouse area were important firms collecting fees to mill the grains into flour. Facing large uncertainty from volume of grain milled, grain price volatility and flood destructions, they manage to survive for several centuries. One of them, the Bazacle, turn to electricity producing and became a standard société par actions at the eve of the 20th century listed in the Paris bourse until its nationalization to create Electricité de France after WWII.

From this medieval convergent evolution toward the JSC, several lessons can be drawn. First, these JSC were established only through private contracts, without the need for state involvement in design and granting rights as later observed in modern Europe. Second, civil law, as applied in southern Europe, was flexible enough to allow the emergence of JSCs, balancing the supposed negative effects of written law compared to common law. Third, the commune, ruled by elected magistrates, mainly from the merchant class, played a supportive role in the case of San Giorgio, this institution being the famous “state within a state” depicted by Machiavelli. However, the influence is less clear for Toulouse mills, except for similarities in governance structures (eight board members elected for one year, with two remaining in function to provide continuity). Fourth, WEIRD psychology was already present in medieval southern Europe, permitting numerous individuals without any kin link to cooperate on a large scale. Sixth, the JSC proved to be robust and flexible enough to adapt to very different businesses and contexts. Fifth, it also appears that the institutional context was pro-business enough to have the JSC flourishing in southern medieval Europe, but the critical economic take-off only occurred later in north-west Europe, emphasizing that good institutions are probably necessary but not sufficient to trigger decisive economic development.

Finally, regarding the contemporary background of a decrease in the number of listed firms, we have to note that once invented, the diffusion of the JSC is not automatic. Indeed, only a few cases of medieval JSCs are documented. In fact, the same holds true for the Dutch Golden Age, where only one other JSC was created, and very few JSCs existed in England before the mid-19th century, raising the question of why the JSC infrequently spread to many businesses. Our contribution helps us to accept that the crucial point is not just to invent such an institution as the JSC. The use of the JSC to do business does not only depend on the existence of this legal form, but it may also be influenced by a complex interplay of legal, economic, and cultural factors that remain to be better understood.


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