(This essay was published in South China Morning Post on 16 July 2014)

The rise and decline of nations often offers lessons that resonate today. Venice is such a case. Before 1300 it grew through international trade to become the richest place in the world and the first modern republic to emerge from the Middle Ages. But it went on to pull down its shutters and lose its institutional dynamism.


Venice’s story started with the rising trade between Western Europe and the Eastern Mediterranean. As a nation of seafarers located in the middle of the Mediterranean, the city was well placed to benefit from this trade.


But long distance sea-borne trade at the time faced challenges in contract enforcement, as large capital outlays literally sailed out of sight. To resolve the risks, new business forms and legal innovations were developed to support the mobilization and allocation of capital. One famous innovation was the limited-liability partnership known as the colleganza in Venice. This was the direct precursor of the great joint stock companies that emerged later.


A colleganza involved two partners, a “sedentary” one who stayed in Venice and put up most of the capital, and a traveling partner who accompanied the cargo, typically a young entrepreneur who did not possess wealth and used this opportunity to get into the trading business.


The colleganza became a key channel of upward social mobility in Venice, creating a great number of rags to riches stories, and also some riches to rags.


Equally important as the trading contracts was the development of a supporting legal and enforcement framework. The Law Merchant was introduced which became universally accepted as the foundation of modern commercial law. It used a court of peers to adjudicate commercial disputes between merchants travelling in distant lands and so offered a direct and immediate response to their needs.


The economic openness and competition and the rise of new families through trade forced the political system to become more inclusive. Two key dates were 1032, (when the de facto hereditary Dogeship came to an end) and 1172 (when the parliamentary Great Council was established and became the ultimate source of political legitimacy).


The Great Council comprised officeholders and aristocrats and also nominated 100 new members each year. It had the power to nominate the Doge (the leader of Venice) and introduced checks on his power.


With both economic and political institutions open, competitive and inclusive, there followed a huge expansion of Venetian mercantile and naval power, and the rapid introduction of financial innovations such as the beginnings of modern banking.


But there were underlying tensions. Each new wave of enterprising young men who became rich via the colleganza or similar economic institutions tended to reduce the profits and economic success of the established elites – and to challenge their political power. The temptation for the elites sitting on the Great Council to shut these new people out of the system was too great, and thus began the fall of Venice.


The “Closure” of Venice, known as La Serrata, began in 1297-8, when membership of the Great Council was gradually closed to allow in only current members and their families. In effect it became a hereditary aristocracy. Those outside this nascent nobility put up a fight but they were soon overwhelmed with one of two choices: be co-opted or be repressed.


Having implemented a political Serrata, the Great Council then moved to adopt an economic Serrata. Among other things, it banned colleganza contracts, one of the great institutional innovations that had made Venice rich. This was not surprising since the contracts benefited new merchants, whom the established elites were trying to exclude.


By 1324 trade in Venice had been nationalized and individuals had to pay high taxes to engage in trade. Long-distance trade became the preserve of an increasingly narrow nobility, marking the beginning of the end of Venetian prosperity.


Venice could have been the world’s first open, competitive, and inclusive society, but it fell to a coup that plunged it into economic decline. Today its economy is almost solely based on tourism. Instead of pioneering trade routes and economic institutions, Venetians make pizza and ice cream and blow colored glass for foreign tourists. The former economic powerhouse is now a museum.


The political strife in Hong Kong today hopefully will not have a Venetian ending. Mr. Lee Ho-Yin’s massive compendium of documents on the drafting of the Basic Law provides ample evidence of the drafters’ original intentions. These are to ensure Hong Kong’s post-war economic miracle would continue. Let us not lose sight of them – these are among the core values of the community.

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