Part 3o of Chapter 1 of Book 5 of The Wealth of Nations Simplified

Intellectual Property and Corporation Rules Icon

August 1, 2021

119 When a mercantile company establishes a new business 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,
  • the company should be compensated for them, and
  • the trade should be opened to all the citizens.

*Superphysics Note: This is similar to the Build-Operate-Transfer scheme

By a perpetual monopoly, everyone else is taxed very absurdly in 2 ways:

  1. By the high price of goods which could be cheaper in a free trade.
  2. By their total exclusion from a business which might be convenient and profitable for them.

This tax is merely to enable the company to support the negligence, profusion, and malversation of their own staff. Their disorderly conduct:

  • seldom allows the company’s dividends to exceed the ordinary profit rate in free trades.
  • even makes 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 executives of a joint stock company.

Upon the reimbursement 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 guild with a joint stock,
  • to do business as a guild to the East Indies with the rest of the British citizens.

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.

121 The only businesses that a joint stock company can 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:

  • Banking
  • Insurance
  • Building and maintaining a navigable canal
  • Bringing water for a big city

122 The principles of banking might seem esoteric. But the practice can be reduced to strict rules.

Departing from those rules, in consequence of some speculation of extraordinary gain, is almost always extremely dangerous and frequently fatal to the bank that attempts it.

The constitution of joint stock companies makes 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 6 persons.

The 2 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.

However, it can be estimated.

This renders it reducible to strict rule and method. Therefore, insurance can be done 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,
  • an aqueduct,
  • 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 can be subcontracted.

Such undertakings are frequently managed very successfully by joint stock companies without any exclusive privilege.

125 It is unreasonable to:

  • establish a joint stock company merely because it might be able to successfully manage an undertaking
  • exempt specific dealers from some general laws which affect all dealers so that those specific traders may thrive.

Aside from its operations being reducible to strict rule and method, a joint stock company should:

  • have the clearest evidence that its business has larger and more general utility than most common businesses
  • 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 address the little demand.

These requirements also apply to the 4 trades above-mentioned.

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, making 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 2 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 Navigable canals and waterworks are of great and general utility. They frequently require more expence than what private people are capable of.

129 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 for monopolized manufacturing does society more harm than good.

  • They reduce the society’s general stock.
  • Despite the most upright intentions, their executives are partial towards their own manufactures.
  • Their undertakers mislead those executives and discourage 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 effective encouragement to the country’s general industry.

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