Efficient Transactors or Rent-Seeking Monopolists? The Rationale for Early Chartered Trading Companies

Abstract

India companies, established in 1600 and 1602, respectively, with a national monopoly of trade with Asia. Other English companies to be granted trading monopoly charters included the Muscovy Company (1553), the Hudson's Bay Company (1670), and the Royal African Company (1672), and similar rights were granted to foreign companies by the governments of France, Spain, Sweden, and Denmark. The grant of exclusive trading rights to particular areas had long been enjoyed by chartered companies, a notable example being the Company of Merchant Adventurers. The earliest companies, which handled well-established trades, were organized as regulated companies in which the governing body, having negotiated trading treaties and established warehouse facilities, merely set broad operational parameters within which members traded on their own account. Entry to the regulated companies was relatively unimpeded, often through payment of a small fine. The companies that appeared from the middle of the sixteenth century were rather different, their monopoly status being seen as encouragement and recompense for forging new trading links. Entry was by the purchase of shares in a joint-stock company, which exploited monopoly powers by trading as a corporate enterprise. Some shareholders were merchants actively engaged in trade, but others were passive investors who delegated management to paid officials directed by a governor and assistants elected from amongst their ranks. Adam Smith, no friend of the chartered companies, argued that this separation of ownership from control contributed to gross administrative inefficiency, inattention to detail, and the pursuit of managerial goals, which raised prices to consumers and reduced returns to shareholders. He believed that only the extraction of monopoly rents ensured the success and continuance of such companies.1 In a recent series of articles, Ann Carlos and Stephen Nicholas have cast doubt upon this traditional interpretation. They argue that the joint-stock chartered companies, far from being comparatively inefficient institutions, represented the optimal organizational form for conducting long-distance trade. The chartered companies' business, like that of the late-nineteenth-century multinationals, was characterized by a large volume of transactions in many different locations, which prompted a similar organizational response, namely, the adoption of a vertically integrated structure and an administrative hierarchy that enabled them to economize on transaction costs and overcome the limits to management encountered by owner-managed firms. Like modern multinationals, the chartered companies adopted control systems that were intended to limit opportunistic