Small is Beautiful: Why Small Northern European Firms Survived in the Late Middle Ages

"The economic dynamism of the middle ages did not generate uniform business structures. The Italian firms which emerged from the Commercial Revolution were not only large, but they also seemed to have all the advantages, leading the way in such crucial commercial techniques as bookkeeping, insurance, banking (including the development and utilization of letters of exchange) and finance. While these techniques were rapidly adopted firms in South Germany, they did not find universal favour. In particular, Hanseatic businesses remained tiny, undercapitalized and ignorant of double-entry bookkeeping, insurance and banking. Nonetheless, they survived quite handily. I propose to examine the reasons for this paradox by taking a close look at the Hanseatic firm, which had a number of advantages not immediately apparent. The small size of Hanseatic partnerships helped to spread risk, and the firms themselves were not only flexible, but also ideal for maritime commerce which did not require huge, long-term capital investment like the big industrial plants characteristic of the South German economy. On the face of it, however, Hanseatic firms could not perform two crucial functions: gathering information on a world-wide scale and making business decisions based on the big picture. However, the Hanseatic response to the currency crisis of 1399-1402 in Bruges shows that the Hansards had found another way to achieve the same aim. Depending on how serious the problem was, Hanseatic merchants would bring in expertise on a cooperative basis, with ever larger assemblies – ranging from informal consultations of merchants in the counter in Bruges to regional diets and finally the Hanseatic Diet itself – deliberating and developing appropriate strategies. Dealing with crises on an ad hoc basis gave Hanseatic firms a crucial cost advantage. While Italian and South German companies were forced to rely on expensive salaried factors, with whom they corresponded unceasingly, Hanseatic firms cut fixed organisational costs to the bone without sacrificing functionality. Therefore, the Hanse was not backward, as scholars have tended to assume, but merely different. More generally, large corporations are not eo ipso better than small firms, as Coase showed in 1937. As he showed, increasing size tends to generate management errors, while the ideal size of the firm is dictated by the relative cost advantage of out-sourcing and conglomeration within a given framework of technology, communications and management science."