The Economics Book

38

See also: Economic equilibrium 118–23 ■ Corporate governance 168–69 ■

Institutions in economics 206–07^

M

erchant ships have

always raised funds for

voyages by promising

a share of profits. In the 1500s the

rewards could be huge, but these

high-risk ventures tied up money

for years before a profit was

realized. The answer was to

share the risk, and so joint-stock

companies were formed, where

investors injected money into a

company in return for becoming

joint holders of its trading stock,

and a right to a proportional share

of the profits.

East India Company

An early joint-stock company,

formed in 1599, was the East

India Company (EIC), launched

to develop trade between Britain

and the East Indies. Its rights to

free trade were so ably defended

by the “father of mercantilists,”

London merchant Josiah Child,

that it became a global

phenomenon. By the time of his

death the company had about

3,000 shareholders, subscribed

to a stock of more than $14 million,

and was borrowing a further

$28 million on bonds. Its annual

sales raised up to $10 million.

The idea of the public limited

company—in which shareholders

are protected from liability beyond

their investment—developed from

joint-stock companies. The selling

of shares is an important way of

raising funds. Some argue that

shareholders’ power to sell shares

leads to a lack of commitment, but

the joint-stock company remains

at the heart of capitalism. ■

LET FIRMS

BE TRADED

PUBLIC COMPANIES

The high-risk, high-reward potential

of merchant shipping was shared by

joint-stock companies. Vessels such

as the John Wood, seen here in Bombay

in the 1850s, brought home the goods.

IN CONTEXT

FOCUS

Markets and firms

KEY THINKER

Josiah Child (1630 –99)

BEFORE

1500s Governments grant

merchants the monopoly of

trade within specific regions.

1552–71 The Bourse in

Antwerp and Royal Exchange

in London are set up for

shareholders to buy and sell

stock in joint-stock companies.

AFTER

1680 London stock “brokers”

meet in Jonathan’s Coffee

House to arrange share deals.

1844 The Joint Stock

Companies Act in the UK

allows firms to be incorporated

more quickly and easily.

1855 The idea of limited

liability protects investors in

joint-stock companies from

scams such as the South Sea

Bubble of 1720 (p.98).