[Market Economy Guide] The First Joint-Stock Company

The Dutch East India Company, founded in 1602, was the first joint-stock company.

By raising capital through stock issuance, it ushered in the age of the corporate economy.

In the 14th century, Europeans were astonished when they read The Travels of Marco Polo, written by the Venetian merchant Marco Polo. The Yuan dynasty that Marco Polo described was a highly advanced and civilized nation. Europeans could not help but marvel at the standard of living and culture in China, which far surpassed that of Europe at the time, and they became captivated by a longing for the unknown world of the East.

A Unique Way of Raising Investment and China’s Decline

However, China’s status as an object of wonder and admiration for Europeans began to decline rapidly after the mid-1800s. While Europe achieved explosive economic growth and modern transformation from the mid-18th century onward, China remained stuck in its traditional economic system and fell behind in technological innovation and industrialization. The differing economic systems of Europe and China ultimately produced opposite outcomes: prosperity and decline.

The decisive difference between the two worlds can be found in the corporate economy. Europe pioneered a new world and achieved wealth and prosperity through the organization known as the corporation. China, by contrast, remained bound to a bureaucracy-centered system and suppressed private commercial activity, eventually being overtaken by Europe.

The 16th century was a period in which the center of European maritime trade shifted from the Mediterranean to the Atlantic, dramatically expanding both the scope and scale of trade. Portugal and Spain in particular achieved significant successes in opening new sea routes and discovering the New World, aided by advances in shipbuilding and navigation. Merchants profited by acquiring luxury goods such as spices and tea from Asian regions including India and China and reselling them in Europe, while also amassing wealth by procuring large quantities of silver from Latin America.

As the 17th century began, Portugal started to lose ground to Spain, and its dominance over East Asian trade gradually weakened. Seizing this opportunity, the Netherlands entered East Asian trade. In 1602, it established the first joint-stock company, the “East India Company,” and began in earnest to expand into East Asia. The Dutch East India Company was operated not through support from the royal family or a particular noble class, but by raising investment capital for East Asian trade from the general public and distributing trading profits according to each investor’s contribution. At this time, certificates were issued to prove the rights to the invested capital, and these were the first shares.

The Netherlands Overtakes Britain and Portugal

By introducing the concepts of stock and investment to Europe for the first time, the Dutch East India Company made possible large-scale trade that could not be financed by royal coffers alone, thereby truly opening the Age of Exploration. It soon rose to become the leading trading company, surpassing Britain and Portugal.

Underlying the success of the Dutch East India Company was a division-of-labor structure that separated management from investment. Large-scale trade yields great profits when successful, but it also carries great risks when it fails. In Shakespeare’s comedy The Merchant of Venice, Antonio nearly lost his life to Shylock because the ships carrying all his wealth were delayed by storms and failed to return on time. But in a joint-stock company like the Dutch East India Company, capital is raised by dividing investment among many shareholders, which has the effect of dispersing risk and makes more aggressive investment possible. More aggressive investment also increases the likelihood of generating enormous profits. In this way, the Dutch East India Company—that is, the joint-stock company—was able to achieve both risk diversification and high returns relative to risk, which was the key to its success.

After the 17th century, the Dutch East India Company continued to flourish, invigorating stock investment throughout Europe and opening a new chapter in the economy. Stock exchanges emerged as places to manage and trade shares, and inspired by the success of the Dutch East India Company, Britain, France, and other countries successively established their own East India companies. The corporate economy had truly begun.

■ Let’s Think About It

Underlying the success of the Dutch East India Company was a division-of-labor structure that separated management from investment. In a joint-stock company like the Dutch East India Company, capital is raised by dividing investment among many shareholders, which has the effect of dispersing risk and makes more aggressive investment possible. More aggressive investment also increases the likelihood of generating enormous profits.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 최초의 주식회사

Author: Sung-no Choi

Date: 2019-02-11

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=14&idx=11439