The Roman Market Economy Peter Temin Princeton University Press Princeton & Oxford PUP_Temin_The Roman Market Economy_FM_v1.indd iii Achorn International 06/05/2012 07:22AM Copyright © 2013 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TW press.princeton.edu All Rights Reserved ISBN 978-­0-­691-­14768-­0 <~?~FULL CIP TO COME> British Library Cataloging-­in-­Publication Data is available This book has been composed in <~?~DES: Please add typeface(s)> Printed on acid-­free paper. ∞ Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 PUP_Temin_The Roman Market Economy_FM_v1.indd iv Achorn International 06/05/2012 07:22AM 1 2 3 4 5 Contents 6 7 8 9 10 Preface and Acknowledgments vii 11 12 1. Economics and Ancient History 1 13 14 Part I: Prices 15 Introduction: Data and Hypothesis Tests 27 16 2. Wheat Prices and Trade in the Early Roman Empire 29 17 3. Price Behavior in Hellenistic Babylon 53 18 Appendix to Chapter 3 66 19 4. Price Behavior in the Roman Empire 70 20 21 Part II: Markets in the Roman Empire 22 Introduction: Roman Microeconomics 95 23 5. The Grain Trade 97 24 6. The Labor Market 114 25 7. Land Ownership 139 26 8. Financial Intermediation 157 27 28 Part III: The Roman Economy 29 Introduction: Roman Macroeconomics 193 30 9. Growth Theory for Ancient Economies 195 31 10. Economic Growth in a Malthusian Empire 220 32 Appendix to Chapter 10 240 33 11. Per Capita GDP in the Early Roman Empire 243 34 35 References 263 36 Index 287 37 38 39 40 41 v PUP_Temin_The Roman Market Economy_FM_v1.indd v Achorn International 06/05/2012 07:22AM 1 2 3 4 5 Chapter 5 6 7 8 The Grain Trade 9 10 11 12 13 ong-­distance trade in the many centuries before the telegraph was beset by 14 information problems. There was the uncertainty present to all when ships 15 Lset out and people awaited their return with little or no news in the interim. 16 There also was the need to transact business at a distance when information 17 traveled slowly, often by using an imperfectly controlled agent. The problem of 18 finding good agents and providing proper incentives for them has been studied 19 for the early modern world and even occasionally for the medieval world. I 20 extend this exploration back into the ancient world in this chapter, analyzing 21 how Roman merchants dealt with asymmetric information in the centuries 22 surrounding the beginning of the Christian Era. 23 Rome was the largest city before London at the time of the Industrial 24 Revolution as noted earlier. The multitudinous Romans ate a great deal of 25 grain, much of it wheat. This simple fact becomes more surprising when one 26 considers how easily and conveniently Romans could buy that grain. Shipped 27 from distant provinces, the grain changed hands many times before it reached 28 Rome. This trade was organized by the state and private merchants who did 29 not have the benefit of modern means of transportation or communication, 30 and merchants faced high transaction costs from several sources. At times, 31 merchants had to wait weeks to find out if their ships had sunk or if a harvest 32 had wiped out the grain supply in a particular location. The Roman govern- 33 ment cleared the Mediterranean of pirates in 67 BCE, completing a process 34 reducing greatly one major source of risk for merchants. 35 In addition to these problems resulting from incomplete information, 36 merchants in Rome had to rely on potentially corrupt agents—­whom they 37 could not monitor—operating­ in faraway provinces for months at a time. This 38 arrangement created adverse selection and moral hazard problems from the 39 asymmetric information available to merchants and their agents. I reconcile 40 in this chapter the success of the Roman grain market described in chapter 2 41 97 PUP_Temin_The Roman Market Economy_Ch05.indd 97 Achorn International 06/02/2012 02:37AM 98 Chapter 5 1 with the apparent barriers to that success, arguing that grain merchants used a 2 sophisticated set of institutions to mitigate their information problems. 3 Roman grain merchants contended with the consequences of highly lim- 4 ited information and of adverse selection and moral hazard, called collectively, 5 principal-­agent problems. There were large barriers of distance and time be- 6 tween merchants and their agents, making the coordination of buying and sell- 7 ing difficult to manage. Merchants could not ascertain quickly when the price 8 of grain in Egypt, Africa, or Rome might be high or low, or even if their ship 9 had sunk in a storm. The advent of the telegraph and then the wireless would 10 reduce some of those problems in the nineteenth century, but merchants had 11 dealt with these problems for several millennia before then. 12 Adverse selection comes about when people have choices whether to par- 13 ticipate in an activity. If the nature of the activity attracts undesirable people, 14 then we say there is adverse selection. For example, Adam Smith argued for 15 usury limitations on interest rates on the grounds that only crooks and scoun- 16 drels would borrow money at high interest rates. Once people have decided 17 to participate in an activity, they have choices in their actions. If the incen- 18 tives promote choices injurious to other people, we say there is moral hazard. 19 For example, insurance may cause people to take excessive risks because they 20 know they are insured. Asymmetric information is shorthand for one party to 21 a transaction knowing more than the other. An agent on the spot may know 22 more than the merchant who sent him on a voyage, and this gives him an 23 advantage in making choices we identify as asymmetric information. All of 24 these concepts arise when we discuss the relations of principals who furnish 25 resources or make rules and agents who are asked to act for the principal. They 26 are the ordinary settings for the questions of the New Institutional Economics. 27 Roman grain merchants, like merchants in other times and places, had 28 to find capable, trustworthy agents under conditions of adverse selection. As 29 Akerlof (1970) explained in his famous “lemons” paper, when the buyer of a 30 good or a service (the merchant in our case) has no clear way of discerning 31 the quality of the good or service itself (the agent), the buyer typically faces an 32 adverse selection of goods. The provider of goods and services (the agent) has 33 an incentive to provide only lower-quality­ goods, and so the market for that 34 product may even disappear entirely. Stiglitz and Spence, who shared a Nobel 35 Prize in economics for analyzing the effects of adverse selection, both outline 36 modern examples of the screening problems that have become particularly 37 pertinent recently in areas such as the management of American health main- 38 tenance organizations (Altman, Cutler, and Zeckhauser 1998). 39 The merchant-­agent relationship also established conditions for moral haz- 40 ard, a problem closely related to adverse selection. Agents working in distant 41 and therefore unobservable settings could skim profits or steal cargos from PUP_Temin_The Roman Market Economy_Ch05.indd 98 Achorn International 06/02/2012 02:37AM The Grain Trade 99 owners with little fear of reprisal. The moral hazard was exacerbated by adverse 1 selection, since the merchants might hire agents with an inclination to cheat. 2 This problem has been mitigated from time immemorial by using family and 3 friends as agents whenever possible. This proclivity to use known agents is 4 pervasive in all societies; only the details change. The Rothschilds succeeded in 5 part because Mayer Amschel had five trustworthy sons, and president of the 6 United States George W. Bush was helped in business by family connections 7 (Ashton 1948; Mathias 1999; Ferguson 1998; Phillips 2004). 8 Many papers have demonstrated that institutions play a critical role in re- 9 ducing the costs of these asymmetric and incomplete information problems 10 when family or household connections are not enough. Akerlof (2002) sug- 11 gested that business institutions such as warranties, brand names, and reputa- 12 tion provide means to reduce the problem of adverse selection because those 13 types of “signaling”—proactive­ identification of quality or ability—increase­ the 14 available information. Sixteenth-­ and seventeenth-­century North American 15 merchant groups hired people from within specific families or communities 16 that were already considered trustworthy and promoted people from entry-­ 17 level positions once their level of ability was clear (Carlos and Nicholas 1990; 18 Jones and Ville 1996). Similarly, Greif argues that the Maghribi Muslim trad- 19 ers in early medieval times depended on a different kind of social signaling—­ 20 membership in a common religious group—­to mark the reputable agents. 21 Genoese traders, on the other hand, relied on the enforcement mechanism 22 inherent in their legal framework to ensure a selection of honest agents (Greif 23 1994). In general, common ways to reduce moral hazard include paying high 24 wages to raise the costs of being fired for cheating and implementing peer-­ 25 monitoring institutions (Shapiro and Stiglitz 1984; Arnott and Stiglitz 1991). 26 Early trading companies relied on those monitoring systems and also required 27 agents to take oaths to work solely in the best interests of the company (Carlos 28 1992).