Going the Distance

In my recently published book Going the Distance: Eurasian Trade and the Rise of the Business Corporation, 1400–1700 (published by Princeton University Press as part of its The Princeton Economic History of the Western World)  I explains why the business corporation first developed in the context of long-distance Eurasian trade, why around the year 1600, why only in England and the Dutch Republic. I also assert that four of the major attributes of the modern business corporation, joint-stock equity finance, lock-in of investment, transferability of interest and protection from expropriation by rulers, were designed in this formative period. Only two attributes, separate legal personality and collective decision making appeared in the pre- 1600 non-business corporation while limited liability, was formulated in a later period. In order to study the formative period in the history of the business corporation, the 17^th century, I expanded my research to earlier centuries and to other regions of Eurasia.

Around the year 1400, long-distance oceanic and overland trade along the Eurasian landmass was still mostly conducted over short trajectories. Porcelain, making its way from China to the Middle East or Europe, changed hands many times in various ports in the South China Sea, the Indian Ocean, and the Arabian Sea and its gulfs. Silk and spices were exchanged between merchants in oases along the overland Silk Route. Merchants from several major regions of Eurasia—Chinese, Indian, Persian, Arab—and from a number of ethnic groups, such as Jews and Armenians, were major players in this high-value trade in tropical goods. Europeans were marginal to this commerce.

Business was generally conducted by sole traders or organized around small-scale enterprises: stationary and itinerant agents, family firms, small partnerships, and ethnic networks. But by 1700 the scene had changed completely. Goods were making their way directly from China, Japan, and the Indonesian archipelago to northwestern Europe. They were transported mostly by sea, across the Indian Ocean and around the Cape of Good Hope into the Atlantic. Trade was controlled by English and Dutch merchants, organized on a much larger scale and in an impersonal, organizational form: the joint-stock business corporation. Two such corporations, the English East India Company (EIC) and the Dutch East India Company (VOC), dominated the growing oceanic Eurasian trade.

In the fifteenth century there was no regular trade between Europe and Asia around the Cape of Good Hope. In the sixteenth century, following Vasco da Gama’s discovery of the Cape Route, 815 ships—most of them Portuguese and none operating on behalf of a business corporation—took this route. But in the seventeenth century, no fewer than 3,187 ships took the route, close to 95 percent of them operating on behalf of business corporations. Of these, 2,577 ships were operated by the VOC and EIC alone.

From another perspective, that of organizing business more generally, until around 1500 business enterprises throughout Eurasia were organized quite similarly in family firms, partnerships, and ethnic networks. Thereafter, Western Europe diverged. Its larger businesses—first in trade, then in finance, later in infrastructure and transportation, and later still in manufacturing—were organized in the form of business corporations, many of them with joint-stock capital. This new organizational form remained exclusively European for three hundred years, before it slowly migrated to other parts of Eurasia and the globe.

Another, more abstract perspective identifies the shift from personal to impersonal exchange as a key developmental stage that was essential to the economic rise of Europe. Personal exchange, or cooperation, was based on family, locality, or ethnic kinship ties. Impersonal exchange between strangers was traditionally confined to simple and instantaneous bartering or cash transactions. The shift in Western Europe from family firms and closed partnerships to the joint-stock corporation constituted more than just a switch from one organizational form to another. It was a shift from personal cooperation to impersonal cooperation. This shift amounts to what can be termed an organizational revolution.

The book’s core arguments are made on two levels. The first level of argument aims to explain the emergence of the business corporation in Western Europe and the shift to impersonal cooperation in the context of Dutch and English corporations. It contributes to the history of business organizations, while the second contributes to the history of trade and of economic development. The organizational design of the EIC and VOC, the first long-lasting joint-stock corporations, enabled for the first time in human history the formation of large-scale, multilateral, impersonal cooperation. More concretely, it enabled a huge amount of capital to be raised voluntarily from thousands of passive investors. In order for such large-scale, impersonal cooperation to be possible, credible commitment had to be conveyed on two levels of relationships. The first commitment needed was that of the ruler not to expropriate the newly pooled, tangible capital. Such a commitment could be credibly conveyed around 1600 only in England and the Dutch Republic due to the restrained characteristics of their governments, which we take here as exogenous. The second commitment needed was that of the entrepreneurs not to cheat or shirk the outside passive investors. The commitment devices designed for the VOC and EIC governance provided outsiders with a reasonable mix of participation in decision making, exit through the selling of shares, access to information, and share in the profits. Without such institutionalized and credible commitments, the outsiders would have refrained from investing with the new, strange, and impersonal institution known as the business corporation. The ability to convey credible commitment to strangers through the corporate form was a breakthrough on the way to impersonal investment and, ultimately, the modern economy. Impersonally pooled capital was used for regular voyages by numerous large and well-equipped ships on journeys that lasted several years. What is important for this line of argumentation is that the organizational revolution brought about around 1600 by the EIC and VOC in the context of long-distance trade was a turning point in the history of business organization. It formed the basis for the future use of the joint-stock business corporation in the financial, transportation, colonial, and even industrial revolutions. The first level of argumentation can explain Europe’s later, longer-term rise in the eighteenth and nineteenth centuries, when the model of the joint-stock business corporation, together with the supplementary stock market, played a major role in the financial, transportation, colonial, and industrial revolutions.

The second level argument aims to explain the rise to dominance of Western Europe, in general, and England and the Dutch Republic, in particular, in long-distance Eurasian trade and eventually global trade. The second-level argument makes claims with respect to a more immediate economic and political impact of the organizational revolution on English and Dutch maritime trade performance. It argues that shipping, navigation, warfare, and the motivation to resort to violence cannot fully explain the rise to dominance in long-distance trade by the English and Dutch. The new organizational form enabled the English and Dutch to deploy more capital, more ships, more voyages, and more agents than other organizational forms. It had a longer-term bearing on the history of trade, and the globalization and imperialism that accompanied it.

The book is available in print, ebook and Kindle versions from Princeton University Press, Amazon and other book stores.