Adam Smith and the British East India Company: a perspective on competitiveness

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Adam Smith was an arch-critic of the regime-hopping strategies of the exclusive stockholding corporations, the forerunners of today’s multinational corporations. The British East India Company, granted a Royal Charter, was supposed to be acting on behalf of the sovereign to meet the country’s commercial objectives. The free hand given to the Company would presumably be couched, in modern parlance, as a ‘competitive’ strategy for Britain.

This post by Matthew Watson, showing how rude Smith was about these corporations’ strategies, is the latest in our series exploring the intellectual history of the modern ways people talk about the ‘competitiveness’ of national economies.

Matthew Watson

Matthew Watson

Adam Smith and the British East India Company: a perspective on competitiveness

Cast your mind back to all those political consultants hawking Ronald Reagan’s message about the perils of ‘Big Government’ around Washington, DC in the 1980s. The fashion item of choice to top off their shiny double-breasted suits was so often an Adam Smith necktie. Think also of the role of the Adam Smith Institute in the UK at the same time. Its members were less likely to physically adorn themselves in images of their great hero. But they were just as committed to wearing his ostensibly pro-market heart on their sleeves.

“The idea that companies should just be left to do as they please because they are, after all, the geese that lay the golden eggs of economic growth. Such a view is today regularly attributed to Smith, following a strategic reading-in of modern-day competitiveness concerns to his concept of the ‘invisible hand’. Yet nowhere is it evident in his own published work.”

In both instances the appeal to Smith as an authority figure was intended to lend some gravitas to the often-repeated cliché of ‘letting business be business’. Clear the decks of self-defeating corporate regulations, they said, and follow instead the teachings of the eighteenth-century master who argued that the profit motive stood alone as the only credible piece of the regulatory jigsaw. Cut unhelpful red tape, end restrictive practices that cost companies money, and unleash the wealth creators to bring all sorts of goodies to the otherwise overly burdened national economy.

This is a very well-known story. It is familiar as a rule-of-thumb history linking the political upheavals of the 1980s to their supposed intellectual underpinnings. It is also familiar as an early pre-emption of the competitiveness discourse that casts such a shadow over political debate today.

But now try to park in one corner of your mind this popular image of Adam Smith. It is always more interesting to see what Smith actually said for himself rather than allowing to go unchallenged the words that were put into his mouth nearly 200 years after his death. This brings to light some important differences, none more so than in relation to the idea that companies should just be left to do as they please because they are, after all, the geese that lay the golden eggs of economic growth. Such a view is today regularly attributed to Smith, following a strategic reading-in of modern-day competitiveness concerns to his concept of the ‘invisible hand’. Yet nowhere is it evident in his own published work.

Smith simply did not believe that corporations should be left to their own devices: there is no underlying message anywhere in The Wealth of Nations about ‘letting business be business’. This is because in his framework corporations, like all actors either individual or collective, have a responsibility to those around them. The whole of his economics is based on a moral theory which suggests that people flourish only in the context of widespread deference to a structure of duties. Smith reserved his most biting criticism of individual action for instances in which that structure is not respected.

The modern-day view that the only responsibility of business is to make money is anathema to Smith’s moral theory. Duties for him are something that one person owes to another and, within a societal context, something that everyone owes to everyone else. The notion that a corporation might have a duty to extract profit from the economy is therefore completely meaningless in this strictly interpersonal setting. The modern-day notion residing within competitiveness discourse that a corporation has a right to extract profit any way it likes therefore cannot be constructed out of Smith’s texts.

“What tends to be depicted today as a totalising attack on all political interventions into the economic realm was actually a specific attack on the capture of political activity by certain economic actors. This is a very important distinction both when thinking through the historical origins of competitiveness discourse and when fast-forwarding two-and-a-half centuries to the way in which the political agenda appears to have become transfixed by the underlying desire to always be seen promoting competition.”

The Wealth of Nations has latterly been portrayed almost exclusively as a bible for anyone who wants to position themselves as an enemy of government. Sure enough, it is possible to cherry-pick its contents to cite various passages in isolation and out of context to make it appear that way. The Liberty Fund, for instance, has produced a whole book of fragmented quotes of this nature. The reality, though, is much more subtle. Smith did not line up government per se in his crosshairs, so much as particular misuses of the apparatus of government which allowed for economic self-interest to suspend the structure of societal duties. What tends to be depicted today as a totalising attack on all political interventions into the economic realm was actually a specific attack on the capture of political activity by certain economic actors. This is a very important distinction both when thinking through the historical origins of competitiveness discourse and when fast-forwarding two-and-a-half centuries to the way in which the political agenda appears to have become transfixed by the underlying desire to always be seen promoting competition.

Smith’s views on the self-interested capture of the political agenda are best illustrated by the caustic things he had to say about the activities of the British East India Company. Remember that he was a proponent of eighteenth-century sentimentalist philosophy, where politeness was one of the primary bourgeois virtues. In this context the strength of feeling contained within his words is doubly significant.

The British East India Company was granted an English Royal Charter in 1600. This allowed it pretty much free licence to behave as it pleased so long as it could make the after-the-fact argument that it had acted on behalf of the sovereign to meet the country’s commercial objectives. From where, though, did those objectives originate? They were laid down from 1622 by the Standing Commission on Trade, which just so happened to have as one of its founding members Thomas Mun, who was also the Director of the British East India Company. The public governance of the basic rules of economic engagement therefore became very difficult to separate from the private governance of the company’s profit-seeking activities.

As with all subsequent enactments of the modern-day competitiveness discourse, this allowed the entity looking to ‘compete’ a significant hand in determining the way in which it would be allowed to do so. Abuses followed, as they continue to do today in analogous circumstances.

The potential for these abuses was magnified in the case of the British East India Company, because it operated at a significant distance from the oversight that could be applied to it. If it did not wish to be bound by the structure of interpersonal duties which, for Smith, constituted the bedrock of a functioning society, it did not need to be so. When the whole of the round trip was taken into consideration, the Company’s sphere of activities was as much as two years’ sailing time removed from home. Neither British public opinion nor political statutes laid down by the British Parliament could act as the Company’s conscience. Instead, it enjoyed a large amount of autonomy, which it used to seize for itself monopoly rights in the territories in which it was active. Knowing that this would help to line the pockets of its shareholders – which, incidentally, included a large proportion of the country’s MPs – it was happy to treat those territories as colonial possessions. It undertook asset stripping to the nth degree, relieving each colony of its resources and each colony’s people of their ability to be economically self-sufficient. It also adopted the classic colonialist’s strategy of imposing a form of martial law, denying local people their social and economic rights along the way. All of this was in the interests of repatriating balance of trade surpluses to England.

The specific details of this example belong to a bygone era, but the general outline of the strategy is likely to be eerily familiar. Here was a company released from a structure of duties so that it could do its service to the country by increasing its rate of return through carefully managing its cross-jurisdiction activities. Would we not be told today to celebrate this as a successful enhancement of national competitiveness?

“Here was a company released from a structure of duties so that it could do its service to the country by increasing its rate of return through carefully managing its cross-jurisdiction activities. Would we not be told today to celebrate this as a successful enhancement of national competitiveness?”

This is what Smith had to say on the matter. He argued that to prohibit a people “from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind”. This is a rather wordy quote and is dressed up in the specific language of Smith’s economic theory. But its meaning is very clear. It says that when a company legislates into existence free rein to do as it might please we should not be surprised when anti-social results ensue. [update: see the comment on this, and Prof. Watson’s response, on the TJN cross-post of this article.]

Smith was always a critic of empire and opposed colonisation in all its forms. He found the British East India Company’s activities particularly distasteful for its wilful neglect of the most basic assumption of moral equality: namely, that no right can be claimed unless first there is symmetry in the enactment of responsibilities between one person and another. He called it, as well as other exclusive stockholding corporations which, like it, profited handsomely from cross-jurisdiction activities, “nuisances in every respect”. They were presented to the public by their supporters in Parliament as an example of the economic efficiency to which everyone should aspire. Yet for Smith they were exceptionally poor role models. The money that they were eventually able to stuff into their supporters’ pockets had nothing to do with inbuilt efficiency advantages, being solely down to the exercise of unconstrained power.

Smith called these companies “nuisances in every respect.”

Smith broadened his critique to suggest that everyone else apart from its shareholders lost from the British East India Company’s cross-jurisdictional activities. The loss of autonomy, dignity and self-esteem experienced by the colonised population needs no further explanation.

In addition, though, the crowding out of local economic activity by the exclusive stockholding corporations meant that consumers back at home could be held hostage by the companies’ monopoly pricing. Smith argued that British consumers “must have paid in the price of the East India goods … for all the extraordinary profits which the company may have made upon those goods in consequence of their monopoly”.

Smith’s final word on the subject was to call the continuing toleration of the power of such companies an “absurdity”. When thinking how similar the situation looks today under the influence of competitiveness discourse, we at Fools’ Gold can only nod in despairing agreement.

Matthew Watson is Professor of Political Economy in the Department of Politics and International Studies at the University of Warwick and an Economic and Social Research Council Professorial Fellow.

This will be permanently stored in our history files and in our ‘What is competitiveness‘ series.

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