Sunday, July 20, 2008

Adam Smith on The Chartered Tradng Companies

In this week’s Economist an anonymous author has linked problems with the financial problems at ‘Fannie Mae’ and ‘Freddie Mac’ with Adam Smith’s well known strictures against the East India Company in the 18th century:

‘Toxic fudge’ (17 July): (HERE)

Chartered by Congress; out for themselves
“ADAM SMITH thought that private companies chartered to fulfil government tasks had “in the long run proved, universally, either burdensome or useless”. That has not stopped them thriving.”

Slinging in a quotation from Adam Smith is a lazy way of writing about today’s problems and in this case the author betrays a limited knowledge of both Adam Smith and the 18th century private Trading Companies and the nature of Smith’s criticism.

It’s the bit about these private companies being “chartered to fulfil government tasks” that is almost completely misleading, as if they are like the ‘off balance sheet’ steps of modern governments to get government debt off the national accounts to mislead voters about the amount of public debt and effective breaches of the so-called ‘Golden Rule’ much lauded by the Prime Minister when he was Chancellor (and similarly in the US with student and mortgage debt).

The 18th-century Trading Companies were wholly private enterprises in which large capitals were necessary to fund their global operations. They were established by Royal Charter direct from the King or by Act of Parliament.

Their Royal Charters gave them in British Law legal rights to enforce a monopoly of the territory for which they were Chartered. [Incidentally, all British universities are appointed as such by Royal Charter, which is their legal accreditation to award degrees; without a Royal Charter no organisation in Britain may call itself a university, nor may it award degrees.]

The British government had no jurisdiction over these territories, and didn’t seek any. The initiative for securing a Royal Charter was wholly sourced from among their private investors in ‘joint stock companies’, who sought their charters from the King, with an unspoken passing of gold between the petitioners and those who had access to the King, some of which gold passed to the hard up King. Similarly, there were expenses to persuade legislators to support a Bill for an Act of Parliament.
The process was driven by the desire for a monopoly of the trade with certain territories and to keep out independent ‘adventurers’ who would take trade away from the company. A similar process of seeking Charters was associated with the setting up of colonies in North America, supported by Cromwell’s Navigation Acts that created a monopoly of shipping trade for British boats, manned by British crews and serving British ports.

While Smith defended the Navigation Acts for the secure defence of an island country ('defence is more important than opulence'), he did not approve of the monopoly nature of the Royal Charters for territorial trade (except in the initial stages to start the trade off, but not indefinitely as in the East India Company.

For a flavour of Smith views of these arrangements look up these pages in Wealth Of Nations (they contain some of the best and clearest writings of Adam Smith in polemical mood):

The private interest of our merchants and manufacturers may, perhaps, have extorted from the legislature these exemptions as well as the greater part of our other commercial regulations.” (WN IV viii.3. 643)

But the cruellest of our revenue laws, I will venture to affirm, are mild and gentle in comparison of some of those which the clamour of our merchants and manufacturers has extorted from the legislature for the support of their own absurd and oppressive monopolies. Like the laws of Draco, these laws may be said to be all written in blood.’ (WN IV.viii.18. 648)

It is unnecessary, I imagine, to observe how contrary such regulations are to the boasted liberty of the subject, of which we affect to be so very jealous; but which, in this case, is so plainly sacrificed to the futile interests of our merchants and manufacturers” (WN IV.viii.47: p 660)

It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has been so carefully attended to; and among this latter class our merchants and manufacturers have been by far the principal architects. In the mercantile regulations, which have been taken notice of in this chapter, the interest of our manufacturers has been most peculiarly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it.” (WN IV.viii.54. p 661)

It is upon this account that joint stock companies for foreign trade have seldom been able to maintain the competition against private adventurers. They have, accordingly, very seldom succeeded without an exclusive privilege, and frequently have not succeeded with one. Without an exclusive privilege they have commonly mismanaged the trade. With an exclusive privilege they have both mismanaged and confined it”. (WN V.i.3.18: p 741)

The joint stock companies which are established for the public-spirited purpose of promoting some particular manufacture, over and above managing their own affairs ill, to the diminution of the general stock of the society, can in other respects scarce ever fail to do more harm than good. Notwithstanding the most upright intentions, the unavoidable partiality of their directors to particular branches of the manufacture of which the undertakers mislead and impose upon them is a real discouragement to the rest, and necessarily breaks, more or less, that natural proportion which would otherwise establish itself between judicious industry and profit, and which, to the general industry of the country, is of all encouragements the greatest and the most effectual.” (WN IV.i.e.40: p 758)


Blogger Jon Sandor said...

That's a good post, but one small problem:

The British government had no jurisdiction over these territories, and didn’t seek any.

The British government obviously did end up with juristiction over the territories in question. That's how the Empire came about, with solders and goverment administrators following close on the heels of the traders. The Duke of Wellingtons initial claim to fame was his leadership of the British army in India.

As for whether they sought it, well, they did not exactly resist it. They acquired an empire as an accidental by-product of developing mercantillist trade relationships with foreign countries.

4:33 am  

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