Tuesday, July 26, 2011

Padgett, Part II: Emergence of Partnership

A previous post described the basic outline of one of the most important ideas I've come across in the past decade: Padgett's use of multi-network perspective to explain organizational invention. This post provides a concrete illustration of that perspective in action through the emergence of a system of economic partnership in Renaissance Florence. Future posts, exploring the theory in more abstract terms, will refer back to this material as a way of making the ideas more understandable. For more details .... read on.

Florentine Italy was the birthplace of a novel, and profoundly important, organizational form: the partnership system. Crudely put, the business model shifted from a) one general company run by a family and delivering a diversity of products (think the classic general store found in the western US during the 1880s) to b) a variety of specialty stores focusing on particular product -- hardware store, dry goods store, vegetable stand -- with individual managers and a common ownership.
The partnership system was an innovation in company ownership in which a single controlling partner (or a small number of partners), if he did not manage the branch himself, made a set of legally separate partnership contracts with branch managers in different locations and/or industries. This new “network-star” ownership structure largely displaced earlier legally unitary companies, often built collectively by patrilineage families, which were common in the early 1300s (Sapori 1926; Renouard 1941). Viewed formally, this splintering of a unitary company into overlapping parts was decentralization because it allowed various branches and business markets to be managed separately, through legally independent account books. Viewed operationally, this devolution was centralization because it dissolved unitary committees of numerous owner directors and substituted dominant ownership by just one or at most a few persons (de Roover 1966, p. 78).

The shift was significant for two reasons: "it protected owners (to some extent) against the unlimited-liability risk of complete financial ruin, and it easily allowed diversification into multiple product markets."

In the early 1300s in Florence there was a stark division between local and international finances. Local banking (money changing, deposit banking) was provided the guild dominated cambio bankers while international trade (primarily in woolen cloth) was dominated by high-status merchants organized into family firms. Following the Ciompi revolt of 1378, the cambio bankers were systematically "pulled up into the “jet stream” of international trading, thereby injecting domestic banking organizational forms and accounting practices into international trading. ... The new partnership systems were constructed by cambio bankers reaching overseas to construct new trading branches abroad." Many of the cambio bankers also became city counselors.
As cambio bankers were transported into new settings, both economic and political, they brought with them their old master-apprentice logics of contracts and careers but then adapted these to the new international trading setting, blending with the patrilineage family logics already there. The result was a modularized hybrid—short-term contracts with both family and nonfamily branch managers—in other words, the partnership system.

Padgett treats the emergence of the partnership system as a corollary of elite transformation associated with the Ciompi revolt in which a "republican oligarchy" replaced the "guild corporatism" of the previous era. This
brought economic partnerships into tighter correlation with elite marriages. And this in turn established sinews for the percolation of partnership-system economic techniques, like current accounts, out into the broader network structure of the ruling social elite at large, making that elite itself more mercantile in character. For markets, this new correlation of partnership with marriage provided social foundations for fiducia (trust) within the merchant community to make the credit system function. The final product, on the one hand, was a vibrant financial system that dominated European international finance for a century and, on the other hand, was an intensely status-conscious but politically permeable merchant elite that created generalists (“Renaissance men”) for whom economics, politics, family, art, and philosophy were all refractions of each other.
The “rise of financial capitalism” for us is not a grand teleological process of inevitable modernization. It was rooted instead in particular places and histories, which refashioned their own multiple-network social structures in crucial punctuated-equilibrium moments. Florence was unusually creative in part because of its tumultuous political history, which repeatedly transposed and refunctionalized its underlying social networks. Florentine elites invented not because they wanted to, but because they had to, conservatively to preserve their threatened positions. Naturally there is more to explaining organizational invention than political turmoil, but in the case of Renaissance Florence that was the core mechanism that recomposed its economic, political, and kinship networks into tipping.

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