The Principal-Agent Problem Revisited

The principal-agent problem revisited:

supercargoes and commanders of the China trade

MeikeFellinger, University of Warwick

Supervisor: Professor Maxine Berg

Introduction

Scholars have long been fascinated with the organizational structures that characterized early modern long-distance trade. The European joint-stock companies provide an attractive topic for economists, sociologists and economic historians alike forstudyingprincipal-agent problemsvia a combination of economic modelling and the qualitative analysis of historical records. Unsurprisingly, a number of recent studies have focusedon the different degrees of success or failure by which the competingEast India Companies of the 18th century exercised control over potentially malfeasant, self-interested and corrupt employees in geographically dispersed nodes of the Asian trading networks.[1]In this literature, private trade is consistently seen as an unavoidable feature of long-distance trade that was tolerated by the Companies to varying degrees in order to contain the damage for the Company monopoly.

This paper argues that such a ‘negative’ interpretation of private trade is problematic and at least partly misleading. By focusing on the role of merchant-mariners active in the Canton trade in the first half of the eighteenth century, this paper aims to challenge the assumed rigid divide of interests between ‘principals’ and ‘agents’ on the basis of an in-depth analysis of private and Company records.[2]By means of an exemplary case study, it will focus on the synergies between Company trade and private enterprise rather than on individual acts ofmalfeasance that form the usual focal point of the discussion. To be sure, there is much scholarly merit in analysing the firms’use of incentives to try to align the interest of the agent with those of the principal (shareholders and managing directors). There is, however, too much of an emphasison the costs for principals to uncover or limit acts of sabotage (such as smuggling, fraud, nepotism and so forth). As a consequence, the important contributions of the private trader for the Companies’ success have been silenced in most studies, contributions that werewell understood by Company directors at the time.It is argued that by focusing exclusively on the negative effects of the agents’ multi-tasking, there is a danger to overlooksomecrucialaspects of a trade system that lasted for more than two hundred years in different incarnations. Private enterprise was always a vital part of that trade.

Mariners as merchants

The size and scope of private trade in Chinese export wares has been greatly underestimated for the first half of the eighteenth century. One crucial reason for that is the very limited selection of archival material that is generally used to measure the flow of private goods on Company ships. Historians of the Canton trade have mostly relied on official records, Company by-laws, privilege trade regulations and registers for calculating the volume on board of individual ships, and for establishing long-term trends.[3] To be sure, this focus on official documentation (fragmentary as it is) can give us a clearer picture of the rules prevailing in different Companies and at certain points in time. However, it rarely tells us what was brought back in reality.Only the comparison between official records and the private correspondence and account books of China traders can reveal the significant gaps between formal ‘rule’ and economic reality, and thus provide us with a better understanding of the functions and importance of private trade activities for the China trade.[4]

One example may suffice to illustrate this point. In 1738/39, the Aberdonian merchant mariner Charles Irvine (1693-1771) acted as chief supercargo of the Swedish East India Company (hereafter: SEIC) in Canton. Irvine was one of perhaps fifty Britons who joinedthe Swedish Company during the first two decades of its existence, the majority of whom were Scottish-born like he himself.[5] Irvine’s mercantile career brought him first to Rouen, from thence to Ostend, from where he sailed to the East for the first time and further to Göteborg.[6] He made enough friends in East India circles to secure an offer to join the newly formed SEIC as a supercargo. In 1736/37, Irvine was permitted to bring back to Europe 20 chests or ‘2 ½ last’ of merchandise freight-free, a privilege that reflected his elevated rank on board.[7] Since Irvine’s business papers contain an unusually rich set of shipping records for several of his voyages, it is possible to reconstruct his private investments over several years. In 1738/39, Charles Irvine assembled a private cargo in China consisting of 273 chests and 48 tubs of different sorts of fine teas, 1424 pieces of Indian cotton textiles, 223 pieces of Chinese wrought silks and 70 bales of raw silk.[8]A long list of ‘speciality goods’ (including drugs and customized souvenirs) complemented his investment. Even if we consider the unlikely case that Irvine has bought up the entire ‘privilege’ cargo space of his colleagues to transport his goods to Europe, he would still have exceeded the space that was allocated to the entire crew according to the Company instructions. One might reasonably ask, then, why did the Company not dismiss Charles Irvine, but instead sent him to Canton for two more voyages, which were, as Irvine put it himself, ‘more for my Interest then for their Service’?[9]

In order to explain this incident, we must consider the possibility that Irvine’s private trade was thought to be beneficial to Company concerns, rather than ‘malfeasant’ – as is usually assumed.[10] There are a few important points to be made here that help to put into perspective Irvine’s seemingly rude infringement of private trade restrictions. On a purely economic level, exceeding one’s private trade yielded considerable income for the Company. The SEIC settled a ‘fine’ of 1000 silver dollars for every excess last (the equivalent to 2,448 kg) of privilege trade.[11] Thus, instead of preventing the growth of private trade, the SEIC simply charged those employees who had the capital to invest in additional goods.[12] On top of the freight-free cargo, China traders were usually permitted to import more goods if there was space left in the hold or their own cabin.[13] The payment of ‘indulgence’ fees for excess goods was worth the investment for many private traders and must be regarded as a matter of astute calculation rather than moral decay.[14] The Company also derived income from every private trade good that passed its public sales because warehouse fees, handling charges and commission had to be paid by the importer.In short, the Company profited directly from the trading activities of its servants through the introduction of duties and charges.

In addition, Charles Irvine’s private trade (whose case is exemplary) was important to the commercial success of the SEIC in a number of other, perhaps more subtle ways. Instead of thinking of private and Company trade as two antagonistic systems, there is strong evidence to believe that private trade actually contributed a great deal to the competitiveness of the Swedish East India Company. This concerned especially the need to attract foreign buyers, on whose purchasing power the Swedish venture essentially depended, since their home market was too weak to generate a seller’s market. A network perspective is key for understanding the individual contributions of supercargoes, commanders and officers to the success of the SEIC, especially during the critical phase of its first charter (1731-1746). After all, this was a period in which the Company was steered predominantly by foreign manpower, capital and expertise.[15] The multi-national composition of its staff did not only secure valuable overseas experience, but also widespread contacts to buyers and foreign markets.The reason was that the majority of the leading personnel of the SEIC had made previous experiences in the East India trade as servants of the EIC, the VOC or, most significantly, the Ostend Company.

Charles Irvine continued to rely on his connections to ‘old Ostenders’, such as his long-standing agents in the Low Countries (including George Clifford, Urbano Arnold, and Thomas Wilkieson), once he had joint the SEIC. At Company sales in Göteborg, Irvine bought tea and textiles on their behalf, but he also used them as agents to dispose of his own goods on the continent.[16] The leading merchant houses that had dominated the public sales of the Ostend Company still featured in the correspondence of these British China traders even when the latter had moved on to Göteborg, Copenhagen or London to seek new opportunities.[17] The personal networks of private traders to petty smugglers and major wholesale dealers in Britain, Spain, Northern Germany, France and the Netherlands were crucial to the Swedish venture as a whole, as these networks generated a strong base of customers, whose individual needs were known and attended to by individual employees.

There are a number of other ways in which private trade contributed to the mercantile success of the SEIC (as indirect beneficiary). Curatorial research on Chinese porcelain, wrought silks and other export wares revealed that private traders bought more expensive pieces, ready-made objects and novelties of all sorts in comparison with Company imports.[18]There are many goods that were imported exclusively through private trade channels, such as Chinese paper, soy sauce, rosewood furniture, mirror paintings, armorial porcelain and the most expensive types of black and green tea. Private trade imports thus greatly diversified the range of goods and qualities sold at Company auctions. The impressive trading portfolio of Charles Irvine clearly supports this assumption for the Swedish case. China traders (of all European East India Companies) did not normally specialise in any particular good, but traded in everything from golden snuffboxes and hand-painted wallpaper to rhubarb and gunpowder. By contrast, the SEIC and most other Companies focused on a much narrower range of imports and qualities, a trend that became even more pronounced in the second half of the eighteenth century.[19] It was no secret to informed contemporaries that private traders in the EIC also dealt in a stunning variety of Chinese export wares ‘by which the company either cannot gain at all by, or are not so gainful as others they prefer to engage in.’[20]In other words, private and Company trade effectively complemented each other to supply all strata of society and target dispersed markets across Europe with goods matching local demands.

Next to the argument of variety, there is also some consensus among curators and historians that private trade was the more dynamic, experimental and market-specific trade.[21] This is not to say, however, that the SEIC or any other chartered Company was blind to the wheel of fashion.[22] Yet, the Companies often picked up ideas only after they were ‘tested’ in private trade and promised safe returns. This is true for the introduction of high quality teas into European markets such as Souchon and Hysan, but also for many other items of trade including fans, lacquered furniture, painted Canton enamels and rhubarb. The commission trade that linked individual commanders or supercargoes to specific clients (who could be collectors, wholesalers, or shopkeepers) was a rich source for innovation and enabled the exchange of patterns, models, and instructions that created a continuum of novelties to travel from Canton to Europe and vice versa.

Conclusions

As this paper has shown, it is important to acknowledge the vital role that private enterprise played for the competitiveness of the Companies in the European marketplace. Firstly, private tradewas a key innovative force. Individual ‘agents’ diversified the market for Chinese export wares in Europe and experimented a great deal to secure novel goods and styles, which the Company often took over only after some time. Secondly, the Companies derived income from every private trade item that was sold at their auctions. On top of the ad valorem duties, private traders paid warehouse fees, extra charges of exceeding the value and tonnage, and so on. This meant that private trade was a large and reliable source of income for the Companies.Thirdly, Company servants were among the largest buyers at Company auctions in the first half of the eighteenth century. They operated as agents for wholesalers, shopkeepers and individual consumers, but they also bought goods on their own account. The involvement of China traders in the profitable re-export and wholesale trade in Europe strengthened their influence in Company circles. Thus, private traders were not only employees, but also vital clients for the Company.

Lastly, much of the Company literature that focuses on the principal-agent problem assumes a clear-cut line between the Company as ‘principal’ in metropolitan Europe and their ‘agents’ abroad. In reality, however, this line was very blurry indeed. Many of the managing directors of the Company were heavily involved in private trade. The close cooperation between Company directors and individual traders in the purchase of private cargoes has only started to be uncovered but promises to yield fascinating results. Such personal networks had an important impact on the ways in which private trade was conducted, tolerated and, indeed, nurtured.Supercargoes and commanders were agents for the Company, but they also acted on behalf of multiple other principals (including individual directors, wholesalers, investors, and individual consumers).When considering these double roles of each and every individual within the firm, it is key to identifythe synergies that arose from their business activities and information networks for the Companies’ commercial success, instead of focusing on conflicts alone.

[1]E.g. Julia Adams, ‘Principals and Agents, Colonialists and Company Men: The Decay of Colonial Control in the Dutch East Indies’, American Sociological Review, 61:1 (1996), pp. 12-28; SanthiHejeebu, ‘Contract Enforcement in the English East India Company’, Journal of Economic History, 65:2 (2005), pp. 496-523.

[2] The examples chosen derive from the English and Swedish East India Company records.

[3] Earl H. Pritchard, ‘Private Trade between England and China in the Eighteenth-Century (1680-1833)’, Journal of the Economic and Social History of the Orient, 1:1 (1957), pp. 108-37. H.B. Morse, Chronicles of the East India Company in China, Vol. V. Christian Koninckx made estimates in The First and Second Charters of the Swedish East India Company (1733-1766) (Kortrijk, 1980), esp. p. 267.

[4] H.V. Bowen’s work for the second half of the eighteenth century is an important exception; idem, ‘Privilege and Profit: Commanders of East Indiamen as Private Traders, Entrepreneurs and Smugglers, 1760-1813’, International Journal of Maritime History, XIX, No. 2 (2007), esp. 59-62.

[5] See, letter books and account books, legal documents and unclassified papers, Charles Irvine Papers, James Ford Bell Library [hereafter: FBL], University of Minnesota.

[6] On Irvine’s connection to Jacobite circles, Douglas Catterall, ‘At Home Abroad: Ethnicity and Enclave in the World of Scots Traders in Northern Europe, c. 1600-1800’, JEMH 8:3-4, p. 319-57.

[7]‘Instructions etc. for the voyage of ship Three Crowns, 1736-37’, letter books and account books, 1736-48, Irvine Papers, FBL.

[8] Calculated from ‘Invoice of Goods for my own Acc[oun]t’, Canton, 14 January 1739, Shipping Documents, 1733-1738, Irvine Papers.

[9] Charles Irvine (Canton) to Samuel Greenhough (Madras) 31 January 1746, letter book, 1746-47.

[10] Emily Erikson and Peter Bearman, ‘Malfeasance and the Foundations for Global Trade: The Structure of English Trade in the East Indies, 1601-1833’, American Journal of Sociology, 112:1 (2006), pp. 195-230.

[11]Koninckx, The First and Second Charter, pp. 155-56.

[12] Instruction nr. 15, in ‘Instructions (… )Three Crowns, 1736-37’, Irvine Papers.

[13] The total volume of private trade on board the Three Crowns (as noted by Irvine as chief supercargo) comprised of at least 836 boxes and chests, 139 bundles and tubs as well as a number of Jars and bulky items. ‘Copy of letters Ship Three Crowns 1736 a 1737’, letter books and account books, 1736-48, Irvine Papers.

[14]Pritchard, ‘Private Trade between England and China’, p.118.

[15]Koninckx, The First and Second Charter, pp. 335-341; Leos Müller, ‘Scottish and Irish Entrepreneurs in Eighteenth-Century Sweden’, in David Dickson et al. (eds), Irish and Scottish Mercantile Networks in Europe and Overseas (Gent, 2007) pp. 147-174; Andrew MacKillop, ‘Accessing Empire: Scotland, Europe, Britain, and the Asia Trade, 1695-c.1750’, Itinerario, 29:3 (2005), pp. 7-30.

[16] Irvine (Göteborg) to Urbano Arnold (Rotterdam), undated, letterbook and account books 1742-43, Irvine Papers.

[17] Conrad Gill, Merchant and Mariners of the 18th Century (London, 1961).

[18]For a fine overview concerning the main export arts in Canton see Margaret Jourdain and R. SoameJenyns, Chinese export art in the eighteenth century (London, 1950).

[19] The English East India Company stopped trading in Chinese porcelain and silks altogether by the end of the eighteenth century;Anthony Farrington, Trading Places: the East India Company and Asia, 1600-1834 (London, 2002), p. 87.

[20]MalachyPostlethwayt, The Universal Dictionary of Trade and Commerce (…), 2nd edition, vol. 1 (London, 1757), p. 683.

[21]For a good and concise discussion, David S. Howard, The Choice of the Private Trader, pp. 18-34.

[22] IOR/G/12/33, p. 37. ‘Diary and Consultation Book of George Arbuthnot(…) anno 1732.’