The Roads of International Trade | The Legal Construct that Created the Commercial World

The Suez Canal recently made headlines for a traffic jam that happened out at sea. It was a traffic jam that disrupted the global supply chain and whose ripples spread across the world of commerce and into our homes. The Ever Given container ship, which had been lodged across the canal for six days, blocked hundreds of ships and disrupted the flow of international trade. The Suez Canal Authority demanded $916 million in compensation to cover salvage efforts, reputational damage and lost revenue, before publicly lowering the request to $550 million.

The Suez Canal, which we all took for granted till it broke down, was heralded as one of the engineering marvels of the 19th century. In fact, the idea that the Mediterranean could be linked with the Red Sea went back to the time of Darius, the Persian Emperor who once attempted to create it. In 500 BC, Darius, who had conquered Egypt, began building a canal along that same route. He had meant for his canal to swing west at the mid-point and link with the Nile near Cairo. But Darius’s experts, much like Napoleon’s experts many centuries later, had reached the erroneous conclusion that the Red Sea was higher than the Mediterranean and that creating a canal would result in disaster.

So neither Darius nor Napoleon ended up creating the canal.

But every canal has its day and in 1869, the Suez Canal was completed under Ferdinand de Lesseps’s leadership. The French had wanted a shipping route from the Mediterranean to the Red Sea for a long time as well as a shortcut from Marseilles to the Orient. At the time, many thought that it would give the French an advantage over England. While this later turned out to be false, the construction of the canal did begin in 1859 and was successfully completed a decade later.

While the idea and the creation of the Suez Canal continues to revolutionise the roads of international trade, the financing structure of large-scale projects such as these were often fraught with difficulty. When Ferdinand de Lesseps first obtained a concession from Said Pasha, the viceroy of Egypt, it was to create a company to construct a canal open to ships of all nations. The company was to operate the canal by leasing the relevant land for 99 years. Although the British recognised the canal as an important trade route, they objected to the use of forced Egyptian labour to build it and perceived the French project as a threat to their geopolitical and financial interests.

In More by Philip Coggan, he states that the Egyptian government put up half the capital and around 400,000 Egyptians laboured on the project, working up to 17 hour days. The Egyptian government, which was heavily dependent upon cotton exports, struggled to pay its debts and in 1875, ended up selling its 44% stake in the canal to Britain for the bargain price of 4 million pounds. By 1889, British ships comprised 75% of shipping through the Suez Canal and France just 8%.

While modern commerce celebrates the entrepreneur as a creative economic force, our predecessors did not feel the need to celebrate the early pioneers of industry.

What changed?

Who will foot the bill?

Perhaps there is something about being a pioneer in a field that has a way of creating a deluded sense of glory that does not necessarily translate into profit. After all, it takes a certain stomach to strike out against conventional wisdom and take on the leadership responsibility as one attempts to succeed at something where all prior predecessors have failed.

These days, we celebrate the innovator and the entrepreneur, but in the heyday of risk-taking with inadequate risk management, the early pioneers who heralded a new era were often laden with debt or ended up with heavy losses. Inequality has been a part of society ever since mankind shifted its economic activities from hunter-gathering to farming; and historically, we did not see the need to reward the pioneer for risk-taking.

In the earliest days of capitalism, emerging entrepreneurs often operated on their own, or in small groups, with money borrowed from family and friends. But for the purposes of a large-scale economic development such as the Suez Canal, this model is insufficient. While joint ventures and partnerships have been in use since ancient times, there have also existed government-sponsored companies like the English and Dutch East India companies. However, the fact remained that any funding structure that required government approval remained out of reach for a vast majority of people.

The real breakthrough came in the 19th century when the limited liability company sprang into existence. This concept had three important facets:

1. A company was ‘an artificial person’ that had the same ability to do business as a real person
2. The company could issue shares to a wide range of investors
3. The investors themselves could have limited liability.

The last point itself proved to be the most crucial factor in the funding and financing of new projects and enterprises. While many claim that it is because few people would be willing to back a business venture controlled by someone else, the real reason may well lay elsewhere. The limited liability legal structure, in essence, prevented exponential losses from occurring or spiralling out of control. By eliminating this particular risk, the limited liability corporation encouraged more people to invest, effectively reducing the cost of capital. This allowed more companies to form and boosted the possibility of long-term economic growth.

Capitalism, which had once been the domain of a small group of land-owning individuals and families, now held within it the potential for the common man to flourish within the world of commerce. It was this legal construct that would go on to form the basis of the modern economy. But like all fantastic ideas that create fantastic solutions, new problems arose in its wake.

Since the capital requirements of these giant companies were much larger than a single individual or family could supply, the founders had to give an ownership stake to outside investors. This, in turn, led to a very common present day scenario where the management and ownership of large companies grew increasingly split into two factions. The biggest issue that arises here is the principal-agent problem: the misalignment of interests between the owners and the intermediaries of the corporation. This can be true of executives, who have an incentive to boost their salary and perks at the expense of the shareholders, and of fund managers, who have the incentive to pursue short-term interests to retain clients.

Historical precedents are only useful when dealing with problems that have occurred before. They are not always useful when dealing with new issues that arise out of changes in technology. Is failure the key to financial success? Well, without failure there can be no success. Two arguably great celebrated leaders of their time–Darius and Napoleon–concluded that the Suez could not be created. A few centuries later, Ferdinand de Lesseps would prove them wrong.

But does being a pioneer translate into being a profiteer? Or is that a question that we delegate and relegate to bean-counters and mathematicians?

I’m afraid not.

It is a truism in commerce that not all great ideas will make money. The world of international trade has always existed. It will continue to exist and perhaps it will never cease to do so. As long as we have stomachs to feed and a roof we feel the need to put over our heads, there will exist the potential for a business transaction. But a business transaction does not make one a pioneer. Even as an entrepreneur, you do not have to be a pioneer to make money.

But if you choose to be a pioneer, know that the adventure of a lifetime awaits you. To a pioneer, what appears as a calm, rational and safe experience is a nightmare in the making.

Action requires us to take a risk. Sometimes it pays off and sometimes it doesn’t. But that doesn’t give us the authority to align with the energy of non-action. After all, confidence wins more often than it loses. If we want something, we will have to go after it–even if it means risking failure again and again.

For entrepreneurs, the truth remains that we will always gain more by taking a risk than we ever do by standing still.

And money, sooner or later, will come pouring in…