The British East India Company: A Case About Sovereignty

Adam Smith is, famously, no fan of power concentrated in the hands of businesses. Throughout the Wealth of Nations, he remains critical of various mercantile schemes, from tariffs and bounties to heedless undertaking, and irresponsible lending. However, one particular enterprise he levies his scorn at vehemently: the British East India Company (EIC). The British East India Company was what modern scholars have come to call a company-state: a corporation that had both a mercantile aim (to trade spices in the case of the EIC) and also acted as a sovereign over certain geographic areas. Smith denounces the EIC as “military and despotical” (Wealth of Nations, pg 638). He states 

Scholars, such as  Sankar Muthu, have pointed to Smith’s analysis as an early statement of antitrust policy; Smith is objecting to the monopoly power of the East India Company. While Smith does object to the monopoly position of the East India Company, it is incomplete to read Smith’s analysis as simply one of monopoly. We must look at the context. Smith was participating in a larger debate on both the role of the EIC within the British Empire and the alienability of sovereign power.

            The East India Company was akin to a 21st century multi-national corporation in that it operated in multiple nations. However, the EIC wielded many powers denied to modern corporations: the ability to negotiate and sign treaties, build fortresses, raise armies, provide courts of law and justice, mete out punishment, and establish and collect taxes. In many ways, the EIC, though a creation of the Crown, was an equal to the Crown at least in terms of power and right. Modern corporations do not have the powers and rights of the old company-states.

            The British East India Company was founded in 1600 when Queen Elizabeth I granted a charter to the corporation (then called the “Governor and Company of Merchants of London Trading Into the East Indies”). Initially, the company simply traded via ship with the Indians. However, in 1613, they established their first permanent factory at Surat. Over the next century, the company would slowly expand its base of operations in India through treaty with locals or war with European companies (such as the Dutch East India Company or the French). The growing wealth of the officers of the EIC eventually led Parliament to pass an act removing their monopoly in 1694 and effectively repealing the corporate charter. This Deregulation Act did not last long, however, with the charter being renewed in 1708 and EIC powers in India and monopoly on trade generally expanded in the 1700s.

            In the 1760s and 1770s, however, a series of scandals wracked the EIC, leading to increased opposition to renewing its charters and favoring more Parliamentary oversight. Parliament considered Adam Smith  and Adam Ferguson to explore the affairs of the EIC and their rule in India but  the job went to Sir James Steuart. These conversations dominated the political-economic world at the time, and Adam Smith was in the middle of them.

            Smith’s writings on the East India Company should be read in the context of this larger political debate. The Wealth of Nations engages with many of the policies of the day, from Corn Laws to American Independence. The governance of the East India Company is no different. For Smith, the East India Company was not merely about monopoly powers. Indeed, he grants that monopoly powers may be necessary “to establish a new trade with some remote and barbarous nation” (WN pg. 754). Any monopoly privileges must expire and any forts or garrisons must be handed over to the sovereign (WN pg 755). 

            The debate in Parliament is as much about the nature of sovereign powers as monopoly privileges of the EIC. In the Theory of Moral Sentiments, Adam Smith discusses at length the nature of the sovereign. The sovereign has the unique power to coerce its subjects to obey not only the rules of justice, but other virtues as well (TMS pgs. 80-81). This is a dangerous power, however, as to be pushed too far “is destructive of all liberty, security, and justice” (pg. 81). For Smith, the East India Company both pushed this power too far, but he also did not believe a non-government organization like the EIC could ever prudently possess sovereign power; it was contrary to the nature of a merchant and, perhaps, even unalienable from the Crown. In other words, Queen Elizabeth I and subsequent monarchs may have overstepped their authority by perpetually delegating power to the EIC. Indeed, he speaks with approval of the political power of Company officers being returned to the sovereign: 

            Adam Smith’s Wealth of Nations is timeless, but it is also a product of its time. Putting the discussion of the East India Company within a larger debate in Parliament and debates about sovereignty within liberalism helps us better understand Smith’s context and thoughts on monopoly. Smith was no fan of concentrated merchant power, but monopolies as an economic (as opposed to political) were not necessarily worthy of scorn. Indeed, monopolies may be necessary to undertake large foreign ventures, if their power in transitory. What led to his denunciation was the terrible mixture of merchant goals with sovereign powers. These different aims were necessarily contradictory and when mixed together became destructive.

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