The Simplified Wealth of Nations of Adam Smith, Book 5, Chapter 1q: Intellectual Property and Corporation Rules
Chapter 1q: Intellectual Property and Corporation Rules
119 When a mercantile company establishes a new trade with a barbarous nation at their own risk and expence, it may be reasonable to:
incorporate them into a joint stock company, and
grant them a monopoly for a certain number of years in case of their success.
It is the easiest and most natural way the state can recompense them for hazarding a dangerous and expensive experiment.
The public will afterwards reap the benefit of their experiment.
This kind of temporary monopoly may be vindicated on the same principles of:
a monopoly of a new machine granted to its inventor, and
a monopoly of a new book granted to its author.
But after the term's expiration:
the forts and garrisons should be transferred to the government, and
their value should be paid to the company.
The trade should be laid open to all the state's subjects.
By a perpetual monopoly, everyone else is taxed very absurdly in two ways:
By the high price of goods which could be cheaper in a free trade
By their total exclusion from a business which might be convenient and profitable for them
"It is for the most worthless of all purposes, too, that they are taxed in this manner."
"It is merely to enable the company to support the negligence, profusion, and malversation of their own servants,"
Their disorderly conduct seldom allows the company's dividends to exceed the ordinary profit rate in free trades.
They even make the company's dividends fall much below that rate.
Without a monopoly, a joint stock company cannot long carry on any foreign trade.
Free trade is a species of warfare:
which aims to buy in one market to sell with profit in another while taking into account:
the occasional variations in the demand of both markets
the competitors in both markets
the much greater and more frequent variations in that competition
the quantity and quality of goods suitable to all these circumstances
where the operations:
are continually changing
require dexterity, judgment, and unremitting exertion of vigilance and attention.
These qualities cannot be long expected from the directors of a joint stock company.
Upon the redemption of their funds and the expiration of their exclusive privilege, the East India Company, by an act of parliament, has a right:
to continue a corporation with a joint stock
to trade in their corporate capacity to the East Indies with the rest of their fellow-subjects
But in this situation, the superior vigilance and attention of private adventurers would probably soon make them weary of the trade.
120 Abbé Morellet is an eminent French expert in the political economy.
He lists 55 joint stock companies for foreign trade established in Europe since 1600.
According to him, these have all failed from mismanagement despite having exclusive privileges.
He was misinformed with regard to the history of two or three of them.
These were not joint stock companies and have not failed.
He omitted several joint stock companies which have failed.
121The only trades which seems possible for a joint stock company to do successfully without an exclusive privilege are those where all the operations are routine or where all operations are so uniform that it has little or no variation.
These trades are:
Building and maintaining a navigable canal
The similar trade of bringing water for a great city
122"Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to strict rules."
"To depart upon any occasion from those rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous, and frequently fatal, to the banking company which attempts it."
The constitution of joint stock companies renders them more tenacious of rules than any private copartnery.
Such companies seem extremely well fitted for banking.
The principal banking companies in Europe, accordingly, are joint stock companies.
Many of them manage their trade very successfully without any exclusive privilege.
The only exclusive privilege of the Bank of England is that no other English banking company shall have more than six persons.
The two banks of Edinburgh are joint stock companies without any exclusive privilege.
123 The value of the risk from fire, loss by sea or by capture perhaps cannot be calculated very exactly.
It is capable however of a gross estimation.
This renders it reducible to strict rule and method.
Insurance, therefore, may be carried on successfully by a joint stock company without any exclusive privilege.
The London Assurance and the Royal Exchange Assurance companies do not have any such privilege.
124 The management of the following becomes simple and easy after they have been made:
a navigable canal
a great pipe for supplying water to a great city
It is reducible to strict rule and method.
Even making a canal is so reducible that each mile and lock may be contracted to undertakers.
Such undertakings may be and frequently are managed very successfully by joint stock companies without any exclusive privilege.
125 It would certainly unreasonable to:
establish a joint stock company merely because it might be able to successfully manage an undertaking
exempt particular dealers from some general laws which affect all dealers so that those particular traders may thrive
Aside from its operations being reducible to strict rule and method, two other circumstances are needed to make the establishment of a joint stock company perfectly reasonable:
It should have the clearest evidence that its undertaking is of greater and more general utility than most common trades
It should require more capital than can easily be collected into a private co-partnery
If a moderate capital were sufficient, a joint stock company would not be needed because private adventures would be able to supply the little demand the company produced for.
In the four trades above mentioned, both those circumstances concur.
126 Book 2 explained banking's great and general utility, when prudently managed.
But a public bank requires more capital than any private co-partnery when it:
supports public credit, and
advances to government on emergencies the total tax of millions per year before it comes in.
127 The insurance business gives great security to private fortunes.
It divides among many the loss which would ruin an individual.
It makes that loss fall light and easy on the whole society.
The insurers should have a very large capital to give this security.
Before the establishment of the two joint stock insurance companies in London, a list was laid before the attorney-general of 150 private insurers who had failed within a few years.
128 That navigable canals and the works which supply a great city with water are of great and general utility.
They frequently require more expence than what private people are capable of.
129 Except for the four trades mentioned, I cannot remember any other trade which would justify the establishment of a joint stock company.
The goals of the English copper company of London, the lead smelting company, the glass grinding company do not even have:
any great or singular utility, and
do not require any expence beyond what the fortunes of many private men are capable of.
I do not know:
whether the operations of those companies are reducible to such strict rule and method, or
why those companies boast of their extraordinary profits.
The mine-adventurers company has been bankrupt long ago.
A share in the British Linen Company of Edinburgh presently sells very much below par, though less than it did some years ago.
The joint stock companies established for the public-spirited purpose of promoting some manufacture does more harm than good over and above mismanaging their own affairs.
They reduce the society's general stock.
Despite the most upright intentions, their directors are unavoidably partial towards particular manufactures.
Their undertakers mislead those directors and impose on them, discouraging other manufactures.
They break that natural proportion which would otherwise establish itself between judicious industry and profit.
That natural proportion is the greatest and most effectual encouragement to the country's general industry.