Anton Howes, Age of Invention: Birth of the Business Corporation. He opens:
I discussed last time how the use of patent monopolies came to England in the sixteenth century. Since then, however, I’ve developed a strong hunch that the introduction of patent monopolies may also have played a crucial role in the birth of the business corporation. I happened to be reading Ron Harris’s new book, Going the Distance, in which he stresses the unprecedented constitutions of the Dutch and English East India Companies — both of which began to emerge in the closing years of the sixteenth century. Yet the first joint-stock corporation, albeit experimental, was actually founded decades earlier, in the 1550s.
A bit of this and that, then:
Before the 1550s, then, there had been plenty of unincorporated business associations that were joint-stock, and even more unincorporated associations that were not joint-stock. There had also been a few trade-related corporations that were not joint-stock. Sebastian Cabot’s innovation was thus to fill the last quadrant of that matrix: he created a corporation that would be joint-stock, in which a wide range of shareholders could invest, entrusting their capital to managers who would conduct repeated voyages of exploration and trade on their behalves.
Cabot’s reasons for this change are poorly documented, because many of the records of the resulting company were destroyed in the Great Fire of London in 1666. Nonetheless, I think a few facts may allow us to deduce why.
For a start, Cabot’s aim was to discover an elusive shortcut from England to China — one that he believed would be achieved by going northeast, around Scandinavia and Russia. He was thus asking people to invest in one of the riskiest ventures imaginable: a voyage into the icy unknown, to venture farther north and east than any Englishman had ever gone, and using unfamiliar techniques like celestial navigation. Although Cabot was involved in some other English explorations in the 1550s — across the Atlantic, to Morocco, and into the Mediterranean — all of those had at least been able to rely on experienced pilots, who already knew the routes. They had, to be sure, been risky, but nowhere close to what he was now proposing.
So, we've got a very risky venture. Howes goes on to say that the venture would be very expensive, and the state did not have the necessary funds. They would have to be privately raised. And to do that he needed to award stock in an entity that would outlive him:
Under normal circumstances, raising those funds might have been straightforward. Simple unincorporated partnerships backed the English voyages to Morocco and the Mediterranean. Yet those were known trade routes — it was just a matter of tapping into them. For a voyage northeast, the terms of the 1496 patent were crucial: it awarded him a monopoly only over the trade with any (non-Christian) lands he or his agents should discover, and, most crucially of all, for his lifetime. The only problem there was that in 1550 he was about to enter his 70s. He would thus have to offer investors something that might last longer than himself: a corporation that might outlive him, and which would be able to continuously exploit any discoveries made under updated patent terms. After all, commercial exploitation would require more than just a single voyage — especially if it had to go all the way to China, and with all the false starts that such an effort might entail.
Obtaining a copy of his 1496 patent turned out to be difficult. The voyage had to set sail before the transaction was complete and, as things worked out, Cabot died before the incorporation was final. Edward VI had died and it wasn't until Mary I was on the throne that the company was incorporated.
Although it officially kept its much longer name, it was soon known simply as the Muscovy Company, or Russia Company — it had not got anywhere close to China, but had at least managed to make contact with Tsar Ivan the Terrible, opening a direct trade route with Russia via the White Sea.
Thus, in the 1550s, Cabot leveraged the patent monopoly on invention to create a whole new institution for funding innovation and discovery. And once he did so, despite the Muscovy Company’s financial troubles, the precedent was set.
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