Reading through Medieval trade history brings up a lot of interesting Game Theoretical scenarios. This is a followup to the Money in middle age Europe post and based on the excerpts taken from Power and profit — The merchant in Medieval Europe by Peter Spufford.

Building a Bridge

“Tolls never made bridge-building a profitable proposition. It always remained a good work, a charitable enterprise for public benefit, whether undertaken by religious bodies or by princes and communes”

Why do infrastructure projects almost never achieve positive ROI ?

I would argue that a good explanation is the explicit-implicit benefits structure.

When a middle-age town wished to build a bridge, it has done so to attract merchants to travel through it. As travel by ferry was significantly more expensive than crossing a bridge — more on that later — this would indeed attract merchants to the town. Of course, this would enrich the inns, restaurants and shops of the town. This comes with no cost to the merchant, as he would need to spend this kind of money anyway. This will come at the cost of other towns, that previously served the merchants flowing to the bridged town.

Levying tolls, on the other hand, will indeed come at the cost of the merchants, and may deter them from coming at a certain price level. Thus, when a town comes to negotiate the toll prices with the merchants, considering possible competition from other towns, and given an efficient enough tax system that would be able to connect financiers with future implicit revenues, the town government might decide to finance the bridge at an explicit loss — that is, the tolls will not cover the funding of the bridge, while the overall ROI which includes the implicit benefits will justify the decision.

There are many problems with relying on implicit benefits when doing infrastructure projects:

They are hard to measure. You may see an increase in tax revenues, but you don’t know how much of it to attribute to the infrastructure improvement. Thus you can’t estimate if the project was at all beneficial, and if so at what interest rates, etc.

There is no perfect overlap of these financing the projects and these benefitting from them. You could have a company going bankrupt after building an infrastructure project, while others who did not contribute benefitting immensely.

Notice that many of the game theoretical settings of Middle age bridge building that might force explicit revenues to be low DO NOT apply to modern infrastructure projects:

If a state-government finances infrastructure development in some city or region, it will indeed implicitly benefit out of whatever new foreign businesses that will be attracted to it. But it will not gain tax revenue by having more business in one city on the expense of the others. So the implicit benefits of the new infrastructure should be much lower and so the pressure to keep explicit costs low should also be much lower.

The weird thing about Bridge building is you could imagine a scenario where all towns build bridges to attract merchants, and so the balance of merchant traffic between them stays the same as before. But now unless the explicit benefits justify the bridge building, this will all be done at a loss to all players besides the merchants.

A similar modern scenario to that of bridge building is the tax benefits offered by local government to international corporations such as Amazon or Intel.

Roads for carts and the monetization problem

While charging toll for bridges is an easy operation — you put your guards there and charge a toll, there were other infrastructure projects in Medieval Europe that were much harder to monetize. Consider the case of paved road for carts — we’re talking long roads that may stretch all the way from Florence to Pisa, wide enough for two carts to pass through, and paved with finely shaped stones — otherwise the cart wheels would get entangled and accidents will occur.

Now, carts may use different segments of this road — and unlike modern toll roads, you can’t place your cameras at all road intersections and have a backbone computer system issuing automated invoices to car drivers based on their plate number, right ?

So we have a situation where the technology to allow the infrastructure existed, but the technology to make its monetization operable in a cost effective manner might have not.

Why should a ferry be more expensive than a bridge ?

Ferries require constant men working hours. But so does the initial building of a bridge, fixes and operation, and dealing with floods as at high rainy seasons bridges might act as dams. While it’s hard to quantify it, I believe there is a premium paid in ferries for the safety of the passengers from kidnapping / robbing, as waterways are less safe than land travel, even by bridge. The opportunity for the ferry operator to do something nasty is greater than in the case of the bridge crossing, and he’s compensated for it through the higher toll.

It has the same property of reputation systems — good actors gain constant compensation from the possibility of bad behavior — they’re compensated for behaving nicely.

A unified Courier system

“In 1357 seventeen Florentine merchant companies agreed together to found a common courier service, the scarsella dei mercanti fiorentini. The implication in surely that, until then, the companies had run their own individual services. Running a regular courier service was an expensive business. It involved not only the payment and maintenance of an adequately sized group of couriers for each route, but also access to an enormous number of horses, which had to be available for frequent changes of mount at suitable intervals all along the routes” (Spufford, p. 25)

The missing part in that compelling description is the fact that competing companies can not unify their messaging services without running into information safety problems.

Some methods must have been applied to prevent information leaking and information omittance. While encryption and untamperable seals might solve information leaking and meddling with the contents of the letter, there is no solution to information omittance besides compensating the messenger for his good behavior and reputation. The scenario being that knowing there is a big market demand for silk embroiders, two firms are issuing letters to their representatives to buy silkware, but then one firm also offers the messenger a bribe to omit the letter of the second firm. While this omittance will be discovered eventually, a critical time was gained. The question now is what punishment might the messenger face, and will his loss of credibility be worth the bribe offered to him.

Another solution in this case would be to send the same message with many different messengers, believing they won’t all collude to omit it.

International justice without an international commerce court ?

“There was also a survival from an earlier period of the custom of legal ‘reprisal’. By this custom it was possible for someone who had been defrauded or unpaid by a foreigner to sue in a local court to have goods up to the value in question seized for his benefit from any person of the same origin as the person who had failed to pay him. The person who had had his goods seized in this way was then expected to go home and recoup his money from the original defaulter” (Spufford, p. 221)

In my opinion it’s a quite elegant solution. Without a direct lever over the rogue merchant, you are able only using local courts to produce a system of levers to bring justice. The injustice built into this system though is the fact that there is injustice brought upon a totally innocent merchant in the process. What I would argue should have been a better refinement of the process, is to have a notice given of the confiscation act. Merchants of this town would then know they have a chance of having their merchandise confiscated and this could be calculated into insurance prices. Say if there is a 400 ducats confiscation court rule between Florence and Siena, and a merchant is responsible for 1% of the trade between the two cities, the merchant should pay a 4 ducat premium as insurance. Then the insurance company could handle the court case against the original defrauder. The problem with this system, while more just and predictable, is that small merchants might avoid trade altogether when they have full knowledge of what expects them in the other town. For enforcement purposes it is better to remain vague and unpredictable.

Bandits or Kings ?

While it doesn’t seem like bandits and merchants have a shared interest, a bandit that would rob ‘too much’ would see merchants choosing to go through alternative routes. That means that there is a price point when a local lord in control of a certain route would want to make sure the merchant goes through safely without paying further fees or without his chances of getting robbed exceeding a certain probability. The problem is it depends on the structure of power if such a solution can be achieved. If it is maintainable to hold a large enough policing force given fees collectible in the route in order to deter bandits, this may be achieved. If a policing force can’t be maintained, then every bandit will make his own calculation, and there is no guarantee that merchants won’t get robbed ‘too much’ and stop using the route.

It might also happen that the policing fee will actually be greater than the costs of an unprotected road, and there are actually evidence of medieval merchants complaining the fees are unjustified. There are many factors going into this game, and it is basically a game in policing entrepreneurship — reducing the costs of policing, choosing whether to make one-time large-scale bandit eradication efforts or make constant low-scale patrols, etc. This creates a kind of a free market of governance methods, armaments and tactics between the different territory holders along the trading routes.