The British East India Company: Hero of Free Trade?

international trade mercantilism monopoly colonialism imperialism

Walter Donway for AdamSmithWorks

Over two centuries, the arguments of corporations for monopoly “remained remarkably static,” but the experience of the corporations brought to bear in the debate “certain moments of conceptual innovation that trading corporations spurred and shaped.”

December 7, 2022
For much of 250 years (1600-1858), the British East India Company (EIC) could claim to be the world’s largest, richest, and most powerful corporation. Today, we view it as a forerunner of modern corporations—though it was like no corporation in today’s market economies. What the EIC did was ignite and sustain a rigorous dialogue for centuries about the proper nature of the corporation and its relationship to the state. Those questions are still debated today, with assumptions—and competing theories—bequeathed to us by that great debate.
Adam Smith (1723-1790) the Scottish economist, philosopher, and author of The Wealth of Nations (1776)—the theoretical foundation of Classical Economics, economic liberalism, and capitalism—was an influential voice in the running argument about the EIC. The reason for his involvement is not difficult to discern.

The East India Company
The EIC, founded in 1600, sought and received a Royal Charter from Queen Elizabeth 1 giving the Company a monopoly on trade in the Indian Ocean region- first the Indian subcontinent and Southeast Asia (the East Indies), which led to EIC control of Southeast Asia and Hong Kong as well as trading posts and colonies in the Persian Gulf region.
The company accounted for half the world’s trade during the mid-1700s and early 1800s. Eventually, it maintained its own forts and armed forces, totaling about 260,000 soldiers, twice the size of Britain’s army. As a joint-stock company, it was the international instrument of the mercantilist era that preceded free-market economies. Consistent with mercantilist doctrine, such companies were intended to increase national wealth (in gold and silver).

Adam Smith joins the debate 
This was not Adam Smith’s idea of a corporation befitting a liberal economy free of government regulation and other intervention, in which individuals could pursue their own economic goals, joining in any combinations they wished, producing and selling goods for which customers were willing to pay, and, in pursuing their own interest, benefit society as a whole and drive economic development. Wrote Smith,
As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security…” (WN IV.2.9)
Smith returned repeatedly to the danger of cabals or monopolies, which would appeal to businessmen wishing to fix and impose the highest prices. A political system dominated by business interests would favor this conspiracy of businesses against consumers by influencing enabling legislation. The public must be ready to oppose all political schemes originating with branches of trade or manufacturers. If business could not obtain special protections or privileges from the government, then in general it served the interests of all society.
This is not the place to narrate even the barest outline of the 250-year span of the EIC. As it spread across Asia, then into Africa, and its factories and trading systems burgeoned—along with its profits and influence on the politics and economics of the mother country—the EIC’s vast and aggressive activities occasioned wars, brought on attacks from Indian military rulers, and involved it in the slave trade. Its history is not without stains, including grievous suppression of revolts and protests with much loss of life. Its territories and responsibilities finally were taken over by the British government under the Government of India Act of 1858 with ample compensation for shareholders in the company. Its successor was the British Raj, which continued until India became independent.

Up from mercantilism: the trading companies fuel the debate.
Throughout the entire period, however, an impassioned dialogue continued between defenders of the company—its powerful executives and directors, politicians with financial interests in the company, legions of paid and unpaid pamphleteers, and the Crown (to whom the company lent millions of pounds)—and opponents—potential competitors (“interlopers”), Parliamentary free-market advocates like Edmund Burke, and a long succession of economists like Adam Smith. Interest became intense in the second half of the eighteenth century, when the EIC became the ultimate governing body in India. The private corporation had become the imperial ruler. Adam Smith always had opposed the company’s territorial expansion, but consistent with his views he did not join the calls for nationalization of the company.
At the time, the debate focused chiefly on the benefits and achievements of a politically supported, government-enabled corporation versus the damage to the operation of markets—at home and abroad—of a monopoly operated by businessmen but with the coercive power of government.
But even at the time, there were commentators, defenders, and opponents alike who made observations and arguments calling attention to how the company advanced the liberal economic order—and pointed to a path to further advancements. Although they vigorously advanced these arguments, the theme of progress for economic liberalism under the EIC seems not to have been articulated contemporaneously.
More recently, however, economists and historians far removed from the debate have discerned just that theme and provided, in a sense, a more balanced assessment of the legacy of the EIC. An article by British economic history William A. Pettigrew, in The Corporation as a Protagonist in Global History, c. 1550-1750, narrates EIC history and adds to the contemporary debate from the point of view of “the influence that trading corporations had over this process of separating economic and political phenomena. The end result of this separation allowed for the emergence of classical economic theory…”
Pettigrew begins with Adam Smith on the “contradiction between a trading corporation’s nationalist governmental responsibilities and the private, profit maximizing interests of the merchants who largely financed and managed such companies…”
The contradiction became a foundational concern for Smith, who perceived “a strange absurdity” in corporate political economy. “As sovereigns, their interest is exactly…that of the country they govern [e.g., India]. As merchants, their interest is directly opposite to that interest.”
Pettigrew argues that in the transition from mercantilism to the liberal economic order “the distinctive global sociology of trading corporations played a central role….” He traces the outlines of the long debate in Parliament, the press, and academic/intellectual circles. Over two centuries, the arguments of corporations for monopoly “remained remarkably static,” but the experience of the corporations brought to bear in the debate “certain moments of conceptual innovation that trading corporations spurred and shaped.”
For example, debates brought to light experiences of non-European people under mercantilism and critical scrutiny of those reports fed back to how the trading companies came to view their local markets. Not a few authors, such as Richard Hakluyt, focused above all on ways to improve commercial policy based on experience and expertise in global contexts.
Pettigrew sketches the process “on the ground” that informed the debates then and reflected, in turn, upon practice. Overseas corporation officials were autonomous enough to comprehend the challenges and opportunities on site and translate them into commercial advantages. These new political-economic models, however local, could enter the political (and public) dialogue over ideas and practices of mercantilism.

Five impacts of an “empiricism of empire”
For example, companies could be discredited in the debate for overbearing treatment of non-European peoples. But those who traveled to the non-European locales harvested an “empiricism of empire” that called into question mercantilist prescriptions. Pettigrew concludes with five “categories of change” in economic perceptions and practices stimulated by the trading companies:
1. The role of rapidly increasing population
Central to the debate was the question of population’s role. Did it stimulate economic growth or challenge political stability? English corporations, including the Virginia Company, challenged the corporate orthodoxy that excess population made for instability. Movement to the Virginian environment changed the culture of English immigrants in ways that increased physical prowess and enterprise and lessened rigid social rituals and prevailing interpretations of gender and race. This led to popular calls for merchants to take the reins in the colony. Captain John Smith became a champion of productive labor in the new-world context. Through economists like William Petty, back home, the debate began to change over population and national wealth.

2. General taxation
As commodities and goods poured into England from the trading companies, economists proposed new sources of taxation to finance welfare. There arose persistent advocates of an excise tax, a tax on the population, not on wealth (such as trading profits). Throughout the seventeenth century, writers and corporate leaders like Josiah Child, a head of EIC, urged the excise tax in England following experimentation with it abroad in trading towns. If populations could be attracted to trading posts, settlements could be less dependent on the metropolitan (mother country) origins of a corporation’s capital.
Advocacy of taxation became mainstream in the eighteenth century as it provided an increasing share of state revenues. Raising taxes in this manner had been essential to EIC merchants at Madras to finance what became the trading corporation’s key construction: the fort and defense of the city. Local rulers appreciated both the trade and the protection.
In Britain “the domestic excise tax was…most controversial. Twenty years later…[it] had become a notoriously ‘easy and productive’ tax…Successive regimes retained the excise because commodity taxation had proven the most flexible mechanism for ensuring access to money markets via financial intermediaries.”

3. The dogma of bullionism
The core mercantilist conviction that national wealth is best expressed in full vaults of precious metals was contradicted by the chartering of the EIC, which was given the right to export specie to India and then elsewhere. Although the EIC had this privilege from the outset, it took decades for a political economy argument to develop for its benefits. An EIC director, Thomas Mun, in his now famous “Discourse of Trade” (1621), made the case that money should be viewed not as a substance but as a process. Species, he said, simply took new shapes around the trading world of Europe and its colonies. The silver mutated into textiles and back into specie and back into European silver. And at each stage the amount of silver increased. The exchange rather than the conservation of wealth was the best way to increase it. The argument continued and developed over the century. By 1663, the EIC succeeded in bringing about the liberalization of bullion exports with the Act for the Encouragement of Trade.

4. The natural right to access to international trade
Another continuing argument about mercantilist policy was individual license. As early as 1604, Sir Edwin Sandys made a case for protecting the access of individuals to international trade as a “natural right” as well as to ensure “equal distribution” of wealth. International corporations like the EIC advanced this cause, although not intentionally. An early case involved an employee of the EIC trading for his own account who ended up in the court of Chancery. He used the moment to argue that his experience overseas taught him the EIC could not succeed commercially if officials were not permitted to trade for their own account. This was a frontal attack on the EIC monopoly, but the company was persuaded to liberalize restrictions on private trade to benefit the company. This then applied as well to “interlopers” as the EIC called any who tried to trade in the company’s territory.

5. Changes in the anti-monopoly argument
Parallel with the protection of rights to trade arose changes in the anti-monopoly argument. Printed exchanges between pro and anti-corporate interests flew back and forth in the late fifteenth and early sixteenth centuries. Here, debate switched to the Royal Africa Company, an easier target for free-trade arguments than the EIC. The Company exported raw materials and imported enslaved people. The trading companies had defended their role in Parliament by arguing that they brought a necessary “governmentality” to the sensitive and strategically important trade. Leave that to the whim of any individual trader and you put the national interest at risk.
Opponents of trading company monopolies took on the argument. They argued that individual self-interest and profit-seeking is a better guarantee of continued trade than any political will of government. The argument, later popularized by Bernard de Mandeville, was given more precision by writers like Henry Martyn, an Anglican priest and missionary to India, in Considerations of the East-India Trade. He argued that free trade with Asia, not a monopoly, would enable lower-cost goods from India to reach the English market.
Others, long in service to the corporations, like Dudley North, pointed to the less regulated Mediterranean, where the Levant Company allowed individual merchants to trade their own accounts if they paid membership dues. And, said North, his observation of the Ottoman Empire’s strong, interventionist state had taught him that “law is a sorry fence against common convenience”—the self-interested individual was a better manager of the economy.

The end and beginning
By the early eighteenth century, parliamentary assault on corporate privilege had left the corporations in existence but much reduced in their hold over international trade. By then, the pro-free trade argument had become mainstream and the connection between trade deregulation and trade expansion accepted as more or less self-evident.
Political economists began to promulgate a different view of non-Europeans as participants in markets. Their view, argues Pettigrew, remained “still-condescending, but more sympathetic…[with] non-Europeans as primitive victims of international markets.”
A period ensued in which corporations were expected to protect non-Europeans from the market and create mutually beneficial commercial alliances with them.
Pettigrew concludes that while official policy on corporate political economy in the seventeenth and eighteenth centuries was rather static, corporations engaging in a world of cross-cultural activities mounted arguments that shaped debates about “money, trading rights, economic theory, labour, taxation, and the morality of commerce.”
These theories had not yet become all-powerful, but those corporations that survived the debate embraced ideas that could protect rather than coerce non-European peoples. And corporate political economy as it emerged from this period shaped both the market- and state-led sides of the debate into the nineteenth century and beyond.