Thank you Scot. I read Chapter 2 in Tan’s book, ‘The Use and Abuse of Tax Farming’, and found it really interesting. What I didn’t find, though, is any evidence that tax farmers discounted future earnings — in Rome and elsewhere. In your post, you write that
Tax farmers kept all taxes/tithes they recovered, and it turns out that tax farm contracts were extremely profitable, so one would think there was some form of discounting (capitalization) going on.
Well, from Ch. 2 in Tan’s book it seems that historians of tax farming know relatively little, if anything, about the profitability of tax farmers. One guesstimate puts the rate of profit of Roman publicani in a certain region between 8-215%, while another speculates it was 30% (pp. 57-8). But no one really knows. Similarly, judging by this chapter, nobody knows what calculations contract bidding was based on. The chapter does not mention discounting/capitalization of future earnings, let alone offers any evidence that such discounting/capitalization took place. Reading between Tan’s lines, my impression (again, nobody really knows) is that contract bidding was largely a matter of arms wrestling. When the tax farmers overcame their mutual disdain and acted in unison, prices were low and they could make a bundle; when they bickered, prices were high and they earned little or even lost (and sometimes demanded retroactive rebates, no less). There was no need for any risk coefficients and raising the normal rate of return to the power of five. It was simply a matter of strongmen groping for what the ‘Republic will bear’. This isn’t an area I know enough about, and there may be other studies where discounting of tax farming is discussed and assessed. But without such evidence, the claim that these contracts reflected discounting seems to me unsubstantiated.
Jonathan,
Here is a link to a 1977 article by Roger Bagnall entitled “Prices in ‘Sales on Delivery'” from the journal of Greek, Roman, and Byzantine Studies.
The transaction Bagnall describes at pages 91-92, which occurred in the 4th century CE, is similar to a medieval bill of exchange, i.e., a disguised loan at interest, but the money is delivered before the goods. The interest (or discount) rate (r) is 50%, resulting in a discounting of the price of the goods at the time of delivery by 33%. Implicitly, according to Bagnall, the 4th century lender appears to have calculated the discount (d) of 33% using the discounting formula, or its equivalent, that Faulhauber and Baumol claim Italian merchants invented in the 14th century CE, i.e., d = r/(1+r); when r = 50%, d = 33%.
At page 287 of his 2013 book The Roman Market Economy, Peter Temin cites to the Bagnall article to argue that such contracts were used in Rome in the 3rd century BCE.
Please review and let me know what you think. Thanks.