And now, back to our regularly scheduled programming: Adam Smith’s 1784 pamphlet Additions and Corrections to the First and Second Editions of Dr. Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations. Last week, we surveyed the first 18 paragraphs of the last part (Part #13) of Smith’s pamphlet, where Smith compares and contrasts two different types of overseas trading companies: regulated companies and joint stock companies. For reference, below are the relevant links:

1. Adam Smith’s second dire warning (paras. 1 to 5 on pp. 47-49 of Part #13)
2. Adam Smith and the economics of corporate governance (paras. 6 to 15 on pp. 49-58)
3. Adam Smith’s rebuke of corporate boards (paras. 16 to 18 on pp. 58-60)

In the next ten paragraphs (19 to 28) of Part #13 of his pamphlet, Smith surveys four specific overseas trading companies that were organized as joint stock companies: (i) the Royal African Company, (ii) the Hudson’s Bay Company, (iii) the ill-fated South Sea Company, and (iv) the “old” English East India Company. (Before proceeding, please note that these particular four joint stock companies are not to be confused with the “regulated companies” (see here, for example) that Smith had previously surveyed in paragraphs 8 to 14 on pages 50-58 of his pamphlet, including the Hamburgh Company (see para. 9), the Russian Company (para. 9), the Turkey Company (para. 10), and the Africa Company (paras. 12 to 14), the successor of the Royal African Company.)

First off (para. 19), Smith cites a pivotal turning point in British political history — the Glorious Revolution of 1688 and the Declaration of Rights of 1689 — to compare and contrast the corporate charters of these four specific joint stock companies:

“The Royal African Company, the predecessors of the present African Company, had an exclusive privilege by charter, but as that charter had not been confirmed by Act of Parliament, the trade, in consequence of the Declaration of Rights, was, soon after the revolution, laid open to all his Majesty’s subjects. The Hudson’s Bay Company are, as to their legal rights, in the same situation as the Royal African Company. Their exclusive charter has not been confirmed by Act of Parliament. The South Sea Company, as long as they continued to be a trading company, had an exclusive privilege confirmed by Act of Parliament; as have likewise the present United Company of Merchants trading to the East Indies.” (Smith 1784, p. 60)

In other words, the Glorious Revolution and the Declaration of Rights not only shifted the center of political power in Britain from the monarchy to Parliament; these historic events also ended up producing a “natural experiment” of sorts by removing overnight the previously-established legal monopolies of the Royal African Company (RAC) and the Hudson’s Bay Company (HBC). Although the RAC and HBC had been awarded royal monopolies in their respective overseas markets, both of these companies lost their monopoly rights in the aftermath of the Glorious Revolution of 1688. After 1688, a trading company’s charter would have to be approved by an official act of Parliament in order to obtain the exclusive right to an overseas market, and of the four companies listed above, only the last two — the South Sea Company and the English East India Company — were able to obtain this official approval.

So, how did these four joint stock companies fare? More specifically, did the firms with exclusive trading rights outperform the ones without such legal rights? Or was it the other way around? Did the companies without the exclusive rights outperform the monopolies? As it happens, Smith will survey all four joint stock companies in great detail in the next nine paragraphs of Part #13 (paragraphs 20 to 29 on pp. 60-74 of Part #13) as follows:

• The Royal African Company (para. 20 on pp. 60-62)
• The Hudson’s Bay Company (para. 21 on pp. 62-63)
• The South Sea Company (paras. 22-25 on pp. 63-65)
• And last but not least, the English East India Company (paras. 26-30 on pp. 65-76)

For my part, I will follow Smith’s sequence, beginning with the Royal African Company, in my next post. (To be continued …)