It is difficult to identify the cornerstone of modern capitalism. If you were to hold a survey on this topic (if indeed it would make sense to do so), respondents would most certainly mention private property, individual freedom, self-interest, competition, free markets, freedom from state interference, and more. However, all this already existed to a certain extent during a period in history that we do not think of as being capitalist. One answer that seems to be chronologically more accurate is the principle of limited liability, which underlies the vast majority of businesses and corporations today. This principle implies that a business’ shareholders who have invested a certain amount of money in a company to make a profit, in the event of the latter’s bankruptcy, would only lose the share of their assets tied to that company and nothing more. Although we do sporadically come across the concept of limited liability in Renaissance Europe and modern England, it was somewhat of an exception and only became an integral part of the business world in 1855.
Nevertheless, like the other components of capitalism, the principle of limited liability is much older than capitalism itself. And, surprisingly, even more so than feudalism. The first manifestation of this principle known to me happened in Rome during times of slavery.
Let us agree in advance that slavery is unjustifiable and an unforgivable sin, and let’s look at the following from the perspective of an economist (or if you like, a lawyer). A slave is an owner’s property, and thus the owner must be responsible for the actions of the slave. On the other hand, if a slave decides to retaliate against an owner and ends up burning down someone’s house or sinking someone’s ship – what should the “poor” owner do? Roman law, therefore, limited the liability of the slave owner unless the slave’s actions were as a direct result of the owner’s instructions.
Over time, limited liability spread to financial activities, resulting in a rather strange and interesting innovation in the form of a business established by a wealthy Roman citizen and headed by one of his slaves. The slave was given freedom of action, and something resembling a savings account (to use modern terminology) was opened in his name – a so-called peculium. If the slave failed to manage the business properly, a creditor could take possession of the peculium, but only that. The liability of the slave owner was limited to the peculium if he could prove that the slave was acting freely in their business decisions.
Slaves aside, this model closely resembles today’s corporate limited liability. In addition to the fact that the investor’s losses are limited, their involvement in business operations is minimal, and they can diversify their activities, so long as they have “slaves” with financial education.
Several conclusions can be drawn from this story. First, despite what we often read in school textbooks, slaves in ancient Rome were not only laborers and domestic servants. Success in business depends on knowledge, skill and talent – this is as true today as it was in ancient Rome. Secondly, such an institutional arrangement requires a guarantee that the interests of the slave and the owner match. Thus, a slave needed an incentive to maximize the profits of their owner’s business. That was easily achievable, considering that the primary interest and dream of any slave was their freedom. A successful slave manager received an income that was tied to a business’ success, and, most importantly, they had the right to buy their freedom.
On the one hand, it was seemingly not in the owner’s interest to free a successful slave – if nothing else, who would willingly release a source of generous income? But the Romans also had a solution for this – freed slaves had a duty to work with their former owners. Accordingly, the interests of the owner and the slave were in sync, and by freeing the slave, the owner would acquire an already successful business partner in return. Over time, this practice became quite popular – slaves managed real estate and conducted commercial and banking transactions on behalf of their owners. Perhaps this explains the bizarre fact that it was pretty common for the Romans to sell themselves into slavery, as this gave them an opportunity for career advancement that they might not otherwise have had. What is the need for legal reform if the interpretations of the existing institutions can be stretched as far as possible?
As we can see, even the ancient Romans had a financial innovation that reduced an investor’s risk, allowed them to diversify, created an incentive for the identification and effective use of managerial talent, and was a crucial factor in developing trade and economic growth. Everything new is well-forgotten old.
