September 18th, 2016 by Hafiz Noor Shams
I read a nice little article on the New York Times today on the history of British foreign trade policy during Elizabeth I. Here is an excerpt:
Elizabeth’s Islamic policy held off a Catholic invasion, transformed English taste and established a new model for joint stock-investment that would eventually finance the Virginia Company, which founded the first permanent North American colony. [Jerry Brotton. England’s Forgotten Muslim History. New York Times. September 17 2016]
There is more to the part where the author writes “established a new model for joint stock-investment that would eventually finance the Virginia Company, which founded the first permanent North American colony…”
Before that, we need a digression:
On to business.
I think I would trace the evolution of joint-stock company up to 500s-600s Arabia, where the model was innovated in the 1000s-1300s by early Renaissance era Italian cities, and later improved in England (and in the Netherlands?) by the 1500s-1600s.
The development was not random. They had a common origin in Arabia. The Italians imported the model through their trades with the Arab world, and later, the Italian way became the northern European law.
Arab traders formed temporary partnerships to finance long-distance trade. This preceded Islam. Muhammad participated in several before he became a prophet. It was especially a venture capitalist-merchant partnership. While this kind of economic cooperation probably happened elsewhere too, in Arabia it was a common successful institution and that distinguished it from other common partnerships that might have existed in the 500s-600s or earlier elsewhere.
Italian merchants made the partnerships more permanent in the 1000s-1300s. Theirs was a merchant partnership although these merchants later became bankers themselves. Again, there was nothing extraordinary about such partnership except for one key feature: this was the first time in the world that a company could outlive the lifespan of its partners, leading to the possibility of intergenerational capital accumulation. Previous partnerships would usually dissolve once a partner quit or died. This very idea, commonplace now, was revolutionary and one of several components that gave birth to modern finance directly. Proof: when calculating the value of a company through its long-term dividend, we will take the timeline as going infinitely into the future. The method is called the discounted dividend model. We use the geometric series — ‘1/(1-r)’, an infinite series — to calculate the present value of dividend streams.
The English later refined it by introducing the joint-stock company, the first true company in the modern sense, taking to heart the Arabic and the Italian traditions and making ownership of wealth more democratic. I can recommend two books to explain the evolution. Kocka’s Capitalism and Koehler’s Early Islam and the Birth of Capitalism.
I like this article because it sets the context and explains why England needed a joint-stock company law: the monarch had no money to finance trade with the Ottomans and Morocco to bypass Catholic lands. Funny how history ties its ends. It meanders so violently.
And, British involvement in these Ottoman lands would escalate beyond trade one or two centuries later.
The same kind of law — company — did not evolve in China until much later during modern times. All Chinese foreign trades were done and financed by the Chinese emperor. There was no room for private initiative that much (that only changed several decades before the Opium War, and that company was (largely?) the East India Company, a British joint-stock company).
I’m unsure about company history/tradition in India or other places though. But we all know, the EIC ruled India for a long time.