Agency problems and slave-run business

Slavery is a very old economic institution. Why it is so long lasting is an interesting question given the obvious problems with it as a form of economic organisation. Adam Smith noted that

[Tlhe work done by slaves, though it appears to cost only their maintenance, is in the end the dearest of any. A person who can acquire no property, can have no other interest but to eat as much, and to labour as little as possible.

This highlights the moral hazard (or agency) problems that arise with slavery. For slavery to have been such a long lasting organisational business form these agency problems have to been overcome, at least to a degree.

In a new working paper Agency Problems and Organizational Costs In Slave-Run Business, Barbara Abatino and Giuseppe Dari-Mattiacci look at how such problems were dealt with in ancient Rome. The abstract reads,

We examine the economic organization of slave-run businesses: slaves endowed with certain assets (the peculium). The evidence points predominantly to businesses of small or medium size, suggesting that there must have been some constraints to growth. We identify both agency problems arising within the business organization (governance problems) and agency problems arising between the business organization and its creditors (limited access to finance). We show that, although the praetorian remedies had a remarkable mitigating effect, agency problems operated as a constraint to the expansion of these business organizations, both in terms of individuals involved and in terms of capital invested.

The idea that slavery was inefficient became the standard view in economics following Smith. As Robert Fogel has written in his book "The Slavery Debates, 1952-1990: A Retrospective",

Since a long list of public figures, historians, and economists, dating back to Benjamin Franklin and Adam Smith, had argued that slave labor was quite inefficient, and since this view was in varying degrees embraced by all of the reigning historians, we had little reason to doubt that this was the case.

He goes on to say,

Early in 1968, [Stanley] Engerman and I decided to measure just how much less efficient southern slave agriculture was than the northern system of free family farming. The project seemed straightforward. Economists had for some time been working on the problem of how to compare the relative efficiency of two economies or two sectors of the same economy. In this connection they had devised an index (called "the geometric index of total factor productivity") that was relatively easy to compute. We did not feel that we needed a very precise version of this index. Something that gave us a rough idea of the relative level of the inefficiency of southern agriculture was good enough. For such a task, we thought, the data on agricultural production in the published census of 1860 would do. The whole enterprise could be completed in a few weeks.

The only problem was the result of the enterprise. Their crude index showed that southern slavery based agriculture was 9% more efficient than free northern agriculture. Not what Smith would have thought. And not what Engerman and Fogel thought. So they set about reworking their analysis, only to find that the advantage of slave agriculture rose to 39%. Fogel continues,

Still, the result did not sit well with us and we did not rule out the possibility that we had fallen into some unsuspected analytical trap. Our instincts continued to resist the implications of our findings. How could a system so impoverished in labor skills be efficient? How were the masters and the overseers able to overcome the indisputable sluggishness of the slave labor force, whether this sluggishness was because slaves had been reduced to Sambos, as Stanley Elkins believed, or because of their resistance to exploitation, as Kenneth Stampp argued. How could one account for the peculiar dichotomy under which slave labor apparently was quite efficient in an agricultural setting but by all accounts so inefficient in the city that urban slavery was on the verge of collapse?

The effort to resolve these issues led to Engerman and Fogel's controversial book "Time on the Cross" and the now huge literature that followed.

But the basic point is that if slavery is as efficient as Engerman and Fogel suggest then the moral hazard problems involved with it have to have been overcome to a large degree via institutional and organisational innovation.