Thursday, September 28, 2006

The 18th-Century Chartered Companies Were Not 21st Century 'International Trading Companies'

Three contributors remain to be discussed in the remaining reports of the Columbia University Conference, ‘Reclaiming Adam Smith’. They all cover political economy in the 18th-century sense, i.e., about politics and economics.

I start with Sankar Muthu (Princeton) who delivered (in first-class teaching form) ‘Adam Smith’s critique of International trading Companies: theorising ‘globalisation’ in the age of Enlightenment’, which was a well-based study of Smith’s thoughts on an aspect of international trade.

The protocols of the conference prohibit my commenting directly on what Professor Muthu said (and wrote in the accompanying paper distributed to participants). This rule is particularly unhelpful on this occasion as there is much I wish to say directly about Professor Muthu’s paper but doing so without citing directly from the paper weakens my comments from the point of view of readers of Lost Legacy, because there were nuances in his actual statements not represented in my comments. I spoke directly to Professor Mutu during Saturday morning’s coffee session about my concerns and he responded positively, without rancour, as typifies a serious and courteous scholar, which he clearly is.

Let me speak generally then about the subject of Smith’s critique of the 18th century ‘international trading companies’. My main point is that we have to be careful in reading Wealth of Nations (Books III and IV) to downplay the limited modern relevance of Smith’s criticism of the nature of the trading companies about which he wrote. The Charetred Companies were not in fact analogous to the modern ‘international companies’ that operate across the world today in many countries (IBM, Microsoft, Boeing, John & Johnson, BP, Shell, Mobil, and so on). ‘Globalisation’ should be used with great care when back-projecting the term to the 18th century.

On the surface they had analogous forms: joint-stock company structures, run by boards of directors on the basis of share capital are prominent similarities, but like the Carronades retrofitted to 74-gun warships of the Royal Navy in Nelson’s time, they are not usefully analogous to satellite-guided cruise missiles fitted to modern warships and nuclear submarines.

Their similarities hide many significant structural and situational differences. In the 18th century the common form of business ownership was ‘co-partnery’, where the owners risked their capital and were liable to the full extent of all their personal property for business debts. The owners managed the business (or risked their capital to someone else’s decisions and behaviour). Overseas trade was similar in investors taking a share in the ‘venture’ that fitted a ship and loaded it with cargo for a single voyage for sale abroad, purchase of return cargoes and a share in the profit of the voyage on its return, whereiupon the venturer's liabilities were dissolved. If the ship sank, was taken by pirates or the captain ‘ran’, they lost their money. In short, overseas business (and domestic) was very risky – investors could lose everything.

The 17-18th centuries joint-stock company alternative was viable (not as in today’s version, a 19th-century legality open to any business, with risk confined to limited liability for the investment in shares), only because of its Chartered status, awarded by the King, which protected the shareholders to the extent of their share capital only. For this reason they raised considerable capital sums for what were risky ventures in foreign lands, aided by the additional proviso that the King’s Charter gave them an absolute monopoly of trade in a foreign country or region. Without their Royal Charters it is most unlikely that these companies would have attracted financial support, except on a much smaller scale of single-ship ventures of little economic significance, except over the very long run.

The East India Company, the salient target of Smith’s biting criticism in Wealth of Nations had a particularly special monopoly of all trade from India (defined as commencing east of the Cape of Good Hope and west of Cape Horn). Bear in mind too, that the Pacific was hardly explored - Cook’s three voyages of ‘discovery’ (Australia, New Zealand, Hawaii, Behring Straits) took place in the third quarter of the 18th century – and the Dutch were extremely secretive (and violent) about protecting the location of, and routes to and from, the Spice Islands in their part of [Indonesia]. The only ships that always passed unhindered in the area under the Royal Charter were ships of the Royal Navy - who would dare try to stop them? (The East India Company made silly efforts after 1788 to prevent the King's new penal colony of New South Wales from trading because this breached, it claimed, the East India Co’s monopoly.)

Hence, when we extrapolate much of the language (and with it the criticism) of Wealth of Nations to modern ‘globalisation’ we must take case to recognise their different contexts.

Meaningful similarities between the Chartered Companies do not include their joint stock structures or the separation of directors from shareholder owners. One of the most powerful ingredients of criminality in the East India Co was the distance in miles and time between London government and Company activities in India. It took seven to nine months to send by sea letters of instruction and similar time to receive replies and reports. For much of the time the Company was independent of supervision and the remedies to the circumstances (largely provoked by Company staff) occasioned by their behaviour. Death rates from disease were high, encouraging Europeans to remove restraints on their appalling and rapacious behaviour of outright plundering to make their money and get out as quick as they could. In short, these were special circumstances that are not attributable to today’s highly mobile communications (24-hour news cycles) and free media, inquisitive governments - and oppositions - and investigative agencies.

Constant use of the nomenclature of ‘international trading companies’, as if Smith was talking of specific traits inevitably associated with 18th century Chartered Corporations could be misleading. Modern corporations may be exposed to critiques today, but such critiques should not be supported by Wealth of Nations as if Smith and today's researchers are talking about the same phenomenon.

Smith criticised the Charter Companies, both when they were committing extreme cases of malfeasance (and worse), like in the East India Co, and when they were just bad loss-making investments from their incompetence or lack of commercial opportunities. The answer was not to apply co-partnery rules to the trading companies, nor to ‘clean up’ the Chartered companies; it was to allow in open competition by private adventurers, and to withdraw from the Chartered companies their monopoly status, and back-up such changes with the resources of the Royal Navy (as with enforcing the end of the slave trade).

This means disconnecting Smith’s perfectly accurate critique of Chartered Trading Co’s from modern debates about ‘globalisation’, by highlighting the differences, and not the nominal similarities. Unfortunately, this was not done at the time in the 18th and 19th centuries and the East India Company slid into the ad hoc adventures of the British Empire, possibly the worst mercantile decision in three hundred years of mercantile political economy.

Sankar Muthu is the author of Enlightenment Against Empire (Princeton 2003) and he is working on a new book, Globalisation in Enlightenment Thought: commerce, communication and crossing borders.

Tomorrow’s report will cover Gareth Stedman Jones and Istvan Hont’s contributions.


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