The Incorporated Towns Were Bad, but the East India Company Was Worse

Sam Smith, who covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964 edits
UNDERNEWS (‘the online report of the Progressive Review’) (30 October) HERE:

“RECOVERED HISTORY: MEET THE REAL ADAM SMITH”

“…Adam Smith is routinely and thoughtlessly invoked as the founder of modern capitalist though, based on unrestrained trade, limited government, and the mechanics of market economies. To this day, The Wealth of Nations is held up as the espousal tome for free-market ideology that decries government regulation, excessive taxation, and wealth redistribution (in whatever contrived shapes it may take).

As Chomsky notes, Smith saw the East India Company and other stockholding corporations as bending state policy towards the good of the few at the expense of the many. Smith to this end was in favor of heavy-handed government regulation to prevent financial and corporate powers from manipulating government policy for their own ends. This led him to conclude on the nefarious impulse of corporate manipulation, that when "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary."

Comment
Much as I agree with the drift of Sam Smith’s post – after all, it recognises that the Adam Smith myth was invented in the 20th century (and the 19th century before that with assertions that Smith supported laissez-faire, though he never said so himself) – I am compelled to apply the same standards of accuracy as I would demand of a modern purveyor of the myth.

The East India Company was a private company, granted a Royal Charter by government on behalf of the sovereign, which operated nearly a year’s sailing away (nearly two years there and back) in India, and, thereby, well-beyond the ability of the government, and, as important, the ordinary shareholders, to monitor, by Smith’s accounts, the appalling behaviours of its officers and servants. Smith’s strictures against the Company are detailed in Wealth Of Nations (Book IV and V).

However, the quotation offered is quite separate from his discussion of the behaviours of the Chartered Companies in Book V. It comes from Book I, on an entirely different subject:

“This led him to conclude on the nefarious impulse of corporate manipulation, that when "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” (WN I.x.2.27: 145)

This is part of a discussion of the role of the ‘towns corporate’ in Britain, where the old Trade Guilds still held sway: ‘Inequalities occasioned by the Policy of Europe’ (WN pp 135-59).

The inequalities that Smith speaks of were those associated where “the policy of Europe, by not leaving things at perfect liberty, occasions other inequalities of much greater importance” (WN 135), in particular ‘the “exclusive privileges of corporations”, or the “incorporated trades”.

To be employed in commercial activity in towns, the person had to serve a seven-year apprenticeship under a master, who was restricted to two apprentices only. Without an apprenticeship, served in the town, nobody could open a shop for trade (this happened to James Watt in Glasgow – he had served his apprenticeship elsewhere; Smith got a job for him at the University of Glasgow, just across the town boundary).

It was to these ‘tradesmen’ that Smith referred – small, single-trade shopkeepers and artisans, who owned their own little businesses and who exercised a monopoly of their trades in an “incorporated town”, who tended to exact monopoly prices for their merchandise or artisan services, and who swore to only buy from other incorporated tradesmen for any other items that they required, even where unincorporated tradesmen could supply at lower, more competitive prices.

In short, the Incorporated trades were a cabal of monopolists, living of their monopoly prices at the expense of the public.

But, be clear, these incorporated town monopoly trades and the tradesmen running them had nothing to do with Chomsky’s version of the East India Company, a massive international monopoly company operating East of the Cape of Good Hope to India and beyond,and behaving appallingly.

The local tradesmen who met for “for merriment and diversion” were small fry compared to the East India Company. Chomsky, apparently, conflates the two monopoly cases together.

Sam, a well-experienced journalist, knows of the importance of accuracy. So should Chomsky.

On Smith’s Approach to Corporate Governance

[This is a long post because it requires a proper presentation of some of the evidence.]

At the History of Economics Society annual meeting in the University of Colorado, Denver this year, I attended one of the sessions at which there was a small eruption of differences between myself and the distinguished scholar, Professor Amos Witzum (London Metropolitan University), a brilliant lecturer, given to an upbeat, enthusiastic style of delivery. He also betrays hints of an almost abrasive disposition when faced with minor dissent. However, I have always found Amos a most likeable educator with a friendly personality and the kind of colleague I tend to find both admirable and companionable.

Amos delivered a typically robust account of the inequities of joint-stock companies as part of his lecture on “Incentives, Ownership and Motivation”, during the course of which he made several remarks about the failings of joint-stock companies, calling on support for some of his views from Adam Smith’s well-known criticisms of the 18th-century version of them in Wealth of Nations (Books IV and V).

Amos did not make any incorrect statements about Smith’s criticism – I recognised his references as I am sure most of the other listeners did too – but I did think that Amos generalised too far from Smith’s specific remarks about the 17th-18th century joint stock companies that he covered in his later editions of Wealth Of Nations, the histories of which companies Smith went into in considerable detail, leaving some choice quotations that have proved popular ever since.

Now this is not something unique to Amos. I reported on Lost Legacy, 28 September 2006, comments on a paper by Professor Sankar Muthu (Princeton University ) 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, at a conference I attended (“Re-thinking Adam Smith”) in New York. Sankar Mathu applied Smith's criticisms directly to modern coporations.

The protocols of the Conference prohibit my commenting directly on Professor Muthu’s paper, so I wrote in Lost Legacy only generally about the subject of Smith’s critique of the 18th-century international trading companies. (Readers can read my comments in the Archives for September 2006, by clicking the month and year in the right-hand column on this page).

My main point is that we have to be careful in reading Wealth of Nations (Books IV and V) so as to downplay the limited relevance of Smith’s criticism with modern joint-stock companies. Smith's condemnatory comments are so pertinent to the targets of his ire that it is too easy to quote wholesale, out of context, and transfer them to present times.

That, basically was my comment after listening to Amos Witzum’s, otherwise excellent, paper. I probably made the debating mistake of saying that Smith’s criticism of the chartered trading joint-stock companies was really about their “distance” from supervision, though it clearly played a part. It was not just their structure; “distance” magnified the foibles of managers operating more that a year in sea journeys to and from India. To which Amos immediately interupting said adamantly that I was “wrong”. Fair enough, if I was wrong, I was wrong, but I didn’t think that my objection could simply be dismissed by repeating emphatically the words, “you’re wrong”, several times, no matter what I tried to say.

Let us look at Wealth Of Nations. First of all Book IV.

Smith discusses the mercantile system and notes the practice of Dutch traders with the Spice islands, who burnt the ‘speceries’ after they had loaded their ships with produce, so that they limited the quantity of spice entering Europe in a season (WN IV.vii.c. 101: 636). This “destructive plan” also impoverished the local people by lowering their “annual produce” (WN IV.vii.c.102: 637).

“Nothing can be more completely foolish than to expect the clerks of a great counting-house at ten thousand miles distance, and consequently almost out of sight, should upon a simple order from the masters, give up at once any sort of business on their own account, abandon for ever all hopes of making a fortune, of which they have the means in their hands, and content themselves with the moderate salaries which those masters allow them, and which moderate as they are, can seldom be augmented, being commonly as large as the real profits of the company trade can afford.” (WN IV.vii.c.105: 638-9)

[Smith is careful to not expose himself to the risk of legal action: “I mean not, however, by any thing which I have here said, to throw any odious imputation upon the general character of the servants of the East India company, and much less upon that of any particular persons.” WN IV.vii.c.107: 641]

In “Of the Public Works and Institutions which are necessary for facilitating particular Branches of Commerce” (WN V.i.e; added to the last edition of Wealth Of Nations, 1790), Smith sets the scene, first with the regulated Companies):

“Some particular branches of commerce, which are carried on with barbarous and uncivilized nations, require extraordinary protection” (WN V.i.e.2: 731).

“These companies, though they may, perhaps, have been useful for the first introduction of some branches of commerce, by making, at their own expence, an experiment which the state might not think it prudent to make, have in the long-run proved, universally, either burdensome or useless, and have either mismanaged or confined the trade” (WN V.i.e.5: 733) … “they are called regulated companies” (WN V.i.e.6: 733).

“But though such [regulated] companies may not, in the present times, be very oppressive, they are certainly altogether useless. To be merely useless, indeed, is perhaps the highest eulogy which can ever justly be bestowed upon a regulated company; and all the three companies above mentioned seem, in their present state, to deserve this eulogy” (WN V.i.e.9: 734).

“The object, besides, of the greater part of the bye-laws of all regulated companies, as well as of all other corporations, is not so much to oppress those who are already members, as to discourage others from becoming so; which may be done, not only by a high fine, but by many other contrivances” (WN V.i.e.10: 736).

Then with the Joint-stock companies:

“The directors of a joint stock company, on the contrary, having only their share in the profits which are made upon the common stock committed to their management, have no private trade of their own of which the interest can be separated from that of the general trade of the company. Their private interest is connected with the prosperity of the general trade of the company, and with the maintenance of the forts and garrisons which are necessary for its defence. They are more likely, therefore, to have that continual and careful attention which that maintenance necessarily requires” (WN V.i.e.11: 737).

“Joint stock companies, established by royal charter or by act of parliament, differ in several respects, not only from regulated companies, but from private copartneries” (WN V.i.e.15: 740).

“In a joint stock company, on the contrary, no member can demand payment of his share from the company; but each member can, without their consent, transfer his share to another person, and thereby introduce a new member” (WN V.i.e.16: 740).

“Secondly, In a private copartnery, each partner is bound for the debts contracted by the company to the whole extent of his fortune. In a joint stock company, on the contrary, each partner is bound only to the extent of his share” (WN V.i.e.17: 740-41).

“The trade of a joint stock company is always managed by a court of directors. This court, indeed, is frequently subject, in many respects, to the control of a general court of proprietors. But the greater part of those proprietors seldom pretend to understand anything of the business of the company, and when the spirit of faction happens not to prevail among them, give themselves no trouble about it, but receive contentedly such half-yearly or yearly dividend as the directors think proper to make to them. This total exemption from trouble and from risk, beyond a limited sum, encourages many people to become adventurers in joint stock companies, who would, upon no account, hazard their fortunes in any private copartnery. Such companies, therefore, commonly draw to themselves much greater stocks than any private copartnery can boast of … The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. 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.e.18: 741).

“But a joint stock company, consisting of a small number of proprietors, with a moderate capital, approaches very nearly to the nature of a private copartnery, and may be capable of nearly the same degree of vigilance and attention” (WN V.i.e.21: 744).

“But the loss occasioned by the negligence, profusion, and malversation of the servants of the company had probably been a tax much heavier than all those duties. That a joint stock company should be able to carry on successfully any branch of foreign trade, when private adventurers can come into any sort of open and fair competition with them, seems contrary to all experience” (WN V.i.e.25: 746).

“It is merely to enable the company to support the negligence, profusion, and malversation of their own servants, whose disorderly conduct seldom allows the dividend of the company to exceed the ordinary rate of profit in trades which are altogether free, and very frequently makes it fall even a good deal short of that rate. Without a monopoly, however, a joint stock company, it would appear from experience, cannot long carry on any branch of foreign trade” (WN V.i.e.30: 755).

Smith’s very detailed critique of the joint-stock companies in foreign trade is the main source of his quotable comments about their management (the principal–agents’ problem as it is known today). However, he turns to possible exceptions where joint-stock companies may be viable and honest:

“The only trades which it seems possible for a joint stock company to carry on successfully without an exclusive privilege are those of which all the operations are capable of being reduced to what is called a routine, or to such a uniformity of method as admits of little or no variation. Of this kind is, first, the banking trade; secondly, the trade of insurance from fire, and from sea risk and capture in time of war; thirdly, the trade of making and maintaining a navigable cut or canal; and, fourthly, the similar trade of bringing water for the supply of a great city” (WN V.i.e.32: 756).

“Except the four trades above mentioned, I have not been able to recollect any other in which all the three circumstances requisite for rendering reasonable the establishment of a joint stock company concur … 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 V.i.e.40: 758).

Readers may note all of these positive example given by Smith operated in Britain, under English or Scottish law, and were within ‘sight’ of their shareholders and creditors.

Given the alternative institutions available in the 18th century and the experience of these, as detailed by Adam Smith, for as long as these impediments persisted, Smith’s conclusions are inescapable.

That much I can agree with Amos Witzum (and did), but to extract Smith’s criticisms of the performances of the East India Company managements in London and Calcutta (more than a year’s sail out and back) with today’s 24-hour news cycle, internet messages in seconds and the far great public regulation and reporting requirements, that dominate global and national businesses alike is at least questionable without an emphatic “you’re wrong!” as the only response.