The Rise of Modern Business

Great Britain, the United States, Germany, Japan, and China

Mansel G. Blackford

• Publisher: The University of North Carolina Press
• Year: 2012
• ISBN:
  9781469600208
• Edition: 3
• Topic: Business
• Subtopic: Business Development
• Index: Business

The Rise of Modern Business compares and analyzes the development of business and business institutions in several countries from the preindustrial era to the present. Paying close attention to connections between business development and political, social, and cultural changes, Blackford addresses both manufacturing and nonmanufacturing firms, small firms as well as big businesses. For this third edition, he updates his study in light of new scholarship, with special attention paid to the structural diversity of business firms and with a timely discussion about the reciprocal relationship between business and the environment. The business history of Germany is extensively updated, and there is entirely new coverage of the business history of China, a country whose growing political and economic prowess on the world stage demands the historical and contextual understanding of business scholars today.

CHAPTER 1
Preindustrial Businesses

The Time of the Merchant

Directions to clerks in the London merchant house of Herries & Company in 1766 required that they keep the business fully informed of where they lived and ate so that they could be summoned immediately to the merchant house in times of emergencies, such as fires or other accidents, at any time of the day or night. As this directive suggested, the world of the preindustrial merchant, in whatever land, was a world of personal business. Merchants, their clerks, their competitors, and their customers were bound together by personal and kinship connections. Merchants like those at Herries & Company were the leading business people of preindustrial times. Through their control of foreign and domestic trade, the merchants provided much of the direction for the economic growth of their nations and regions. For all the similarities, however, there also existed important differences in how merchants operated in various lands.

In many ways, the preindustrial business world was vastly different from the business world of industrial and modern times. In the preindustrial era the pace of business activity was relatively slow, and the volume of goods produced and distributed was relatively low. In this situation traditional business methods, based on ties of friendship and family, dominated the business scene. Such ties were needed to overcome the tremendous risks of doing business in preindustrial years. With communications generally slow and unreliable, merchants had to rely on connections of blood and friendship to do business, especially if they sought to conduct trade beyond their localities. With market information spotty and uncertain, they had to rely on the judgment of friends and relatives beyond their local regions to make decisions on the buying and selling of goods.

Yet the preindustrial economies of Great Britain, North America, Japan, and China were anything but stagnant. They were vibrant commercial economies whose expansion prepared the way for further economic changes during industrialization. Government policies and actions were important in this economic growth. Throughout the world, economic, political, and cultural changes have always been intertwined. Business has never, and does not today, exist in a vacuum. Rather, business has always been influenced, and has influenced, its external environment. Thus, the development of preindustrial business can best be understood by first examining the political and economic frameworks within which it grew up, ones favorable to business development.

Political Frameworks

Great Britain, North America, Japan, and China were all characterized by growing degrees of political unity and domestic tranquility in preindustrial times, which in turn stimulated economic growth and business development. Conversely, a lack of political unity retarded economic growth in Germany.

Great Britain and Germany

Great Britain has had a long existence as a unified nation ruled by one crowned monarch. However, civil wars shattered this political unity on several important occasions in preindustrial times. Most divisive was the English Revolution, a civil war in the mid-1600s. This major conflict had both religious and political origins, pitting the king against Parliament and Anglican (the Church of England) against Nonconformist (Puritan). It was a bloody conflict that sorely divided Englishmen, but the Restoration Settlement of 1689 reunified the country. Never again would England be divided by civil war. The Restoration Settlement had several major terms. First, at the invitation of Parliament, William, Prince of Orange, the leader of the military forces of the Dutch Republic, became king of England and his wife, Mary, became the queen. England acquired political unity under one set of monarchs. However, a Bill of Rights clearly subordinated monarchs to Parliament. The king now ruled “in Parliament.” Second, the Toleration Act of 1689 began healing religious differences. Religious toleration, the right to hold their own public services and so forth, was given to Nonconformists by this law.

Great Britain also began building an empire in the late 1600s and early 1700s. By an Act of Union in 1707 Scotland became part of Great Britain (England already controlled much of Ireland). England acquired the origins of an overseas empire as well. British control of this empire was either direct, as in the case of many of the North American colonies, or indirect, as in the control the British East India Company exercised over India.

By way of contrast, there was no united German nation until the early 1870s. Instead, there were several large German principalities and many more small ones. Substantial economic growth took place in Prussia, a large northern German state, which in the nineteenth century became home to many railroads and much heavy industry. However, the economic growth of Germany as a whole was hindered for decades by the region’s division into many states, which erected trade barriers against each other, making internal trade and market development difficult. Even after a customs union partially united the some of the German states in 1834, other principalities remained outside that union. And, of course, there existed no uniform laws, no commercial laws across national boundaries, again impeding business development.

North America: The British Colonies

In North America there existed some political unity, though not true national unity. The British colonies possessed the unity that derived from their membership in the expanding British Empire. Only later, with the American Revolution of 1776 and the adoption of the United States Constitution in 1789, was real national political unity achieved.

British merchants and investors established some of the most important colonies as profit-making enterprises. However, because of unexpected problems the colonies faced (none made a profit initially) and because of a desire by the British government to increase its power, most colonies had become royal colonies with governors directly responsible to the king and Parliament by the late 1600s and early 1700s. Or, they were proprietary colonies in which the English crown gave large grants of land in North America to various Englishmen in return for their friendships or favors. Of whatever type, the colonies were integrated into the British Empire.

The most important political mechanism unifying the British Empire was the Navigation Acts, pieces of legislation passed by Parliament in the mid-1600s. The goal of the Acts was to regulate trade — indeed, the entire economy — of the British Empire. The major terms of the Navigation Acts, which applied to all of the empire, not simply North America, were fourfold. First, most trade between England and its colonies had to be carried in English or colonial ships manned by English or colonial crews. Second, most goods going to the colonies had to pass through England, even if they originated elsewhere. Third, many goods exported from the colonies had to pass through England, even if bound somewhere else. Finally, many forms of manufacturing were restricted in the colonies, for the colonies were supposed to act as sources of raw materials for British industry and as markets for English manufactured goods. The object of the Acts was to build up the economic and military might of the British Empire, at the expense of its rivals, France and Spain.

Japan and China

Like Great Britain, Japan has long existed as an independent nation. The Japanese traditionally date the origin of their nation to 660 B.C., with the accession of their first emperor Jimmu, reputedly the great-grandson of the Sun Goddess. By the third century A.D. the Chinese, who received tribute-missions from Japan, reported that the Empress Pimiko was unifying Japan from her base in Kyushu. By the sixth and seventh centuries much of Japan was unified under one emperor, who ruled as both the religious and political leader of the nation. Yet, as in Great Britain, this was a fragile unity. Different families and clans struggled for control of Japan and in doing so reduced the real power of the emperor, so that the emperor often ruled in name only. After 1185 the real power rested with the leader of the most powerful military family, who became known as the shogun. Civil strife, common from the fourteenth century, reached an extreme during the Sengoku period, the years 1468 through 1573.

It was from this conflict between warring noble houses that Japan began to emerge as a unified nation. Tokugawa Ieyasu defeated his rivals in a climactic battle in 1600 and assumed the title of shogun in 1603. The years 1603 through 1867 are called the Tokugawa period, a time of relative unity and peace in Japan. In theory, the shogun was the military ruler of Japan, acting on behalf of the divine emperor, who lived in Kyoto. In practice, the emperor remained a figurehead with little political power.

The type of government established by Tokugawa is termed the baku-han system. Under this system the Tokugawa family ruled all of Japan. All the local lords, called daimyo, owed allegiance to the Tokugawa family. The daimyo, in turn, ruled their provinces, called han (or domains). There were about 260 domains. Both the Tokugawa family, which owned outright about one-quarter of Japan, and the daimyo depended on a rice tax amounting to about 40 percent of the crop for most of their income. To gather the rice and administer their lands the Tokugawa family and the daimyo relied on their former warriors, called samurai, now turned into administrators.

Throughout the Tokugawa period, there existed tension between the centralizing tendencies of the ruling Tokugawa family based in Edo and the decentralizing tendencies of the many daimyo striving to preserve their autonomy in their domains. Many of the stronger daimyo were able to maintain a high degree of independence from the shogun, and much of the political and military power of the nation continued to reside in the daimyo. Daimyo often maintained local governments, armies, and sometimes even currencies. Domain governments often promoted economic development in agriculture, crafts, and early-day industry. The Saga domain in southern Japan pioneered in the development of modern iron smelting, used in making guns. Centralization of government, while under way in the Tokugawa period, progressed slowly and was far from complete.

The baku-han was a personal form of government, based on bonds of allegiance and controls imposed on the personal behaviors of the daimyo more than upon institutions. The daimyo were required to take personal oaths of allegiance to the shogun and had to spend every other year living in Edo, where the shogun maintained his court and could watch over them. When the daimyo were absent from Edo, they had to leave family members as hostages. Only in the late Tokugawa period did a national government begin developing, as the shogun took responsibility for expanding regional coordination of flood control, putting down peasant revolts, and resolving regional disputes.

Unlike the situation in England or the North American colonies, Tokugawa Japan did not favor most foreign trade. Japan had long had a flourishing trade with the Asian mainland and, from 1543, a growing trade with the West. However, worried about outside political interference in Japan and the spread of Christianity, the Tokugawa government ended most trade with the West by 1640. Limited commerce continued through the southern Japanese city of Nagasaki.

Like Japan, China was a united nation in preindustrial times. Ruled by imperial dynasties, the Ming dynasty (1368–1644) and the Qing dynasty (1644–1911), China underwent a commercial revolution in the 1500s and 1600s and experienced something of an economic boom in the 1700s. China had a national real estate market from around 220 and a fully monetarized taxation and economic system by the mid-1500s, perhaps the first in the world. Engaging in foreign trade by land and sea, China also developed extensive internal commerce. However, Chinese merchants did not fully develop many of the legal and financial institutions important for economic development in the West. China lacked much in the way of commercial law (including incorporation laws), modern banks, and modern financial instruments until the twentieth century.

Even so, there was considerable customary law, which smoothed the way for business transactions and which, more specifically, permitted lineage estates to thrive from the time of the Song dynasty (960–1126). Lineage estates, basically extended families, were central to much of the business development in China. Thus, Chinese merchants contracted with each other more as members of lineage groups than as individuals. Whether as parts of lineage estates or on their own, traditional merchants sometimes established considerable enterprises. For instance, thirty major merchants oversaw extensive salt-making ventures in east-central China from their headquarters in Yang-Chou during the 1700s, with an additional thirty large merchants in charge of salt distribution and sales. They were accounted to be among the wealthiest people in China at that time.

Political Unity and Regionalism

By the late 1600s and early 1700s preindustrial Great Britain, North America, China, and Japan were either themselves becoming unified political bodies characterized by domestic tranquility or, as in the case of the North American colonies, parts of such a body. Political unity provided stable frameworks upon which economic growth and business development could be based. Yet there were differences. Political unity was most pronounced in Great Britain and China. In North America and Japan, local regions maintained considerable freedom from control by the central government, with attendant economic results. Disunity retarded economic growth in the region of Europe which later became Germany.

The Economic Setting

One major point stands out about the preindustrial economies of Great Britain, North America, Japan, and China: they were commercial rather than subsistence economies. That is, people lived to a significant degree by buying and selling goods in markets, not by simply consuming what they grew or made. Only on the farthest frontiers, such as the Kentucky country in America in the 1750s and 1760s, were subsistence economies dominant, and then only until political and transportation developments allowed localities to be linked into larger regions.

Several elements characterized these commercial economies. First, agriculture was becoming market-oriented. Second, both domestic and (except in Japan) foreign trade were growing. Third, this trade both resulted from and stimulated regional specialization. Fourth, urbanization, the growth of cities, was proceeding. These four characteristics were related to the development of political unity, for political unity and stability stimulated the spread of the commercial economies.

Commercial Agriculture and Regional Specialization

Agriculture became increasingly commercialized. No longer did farmers simply raise food for their own consumption. They sold significant portions of their crops in markets, and they were able to raise larger crops for their markets because of increases in land and labor productivity.

Some forms of commercial farming had existed in England from the Middle Ages — raising sheep for wool, with the wool being used in trade with continental Europe, for example. By the late 1600s and early 1700s wheat and livestock were being raised for consumption in Great Britain’s expanding cities. Improvements in agricultural techniques — the drainage of swamps, increasing crop rotation, the use of manure for fertilizer, land enclosures that made land parcels larger and easier to farm, and the introduction of mechanical devices such as seed drills — increased the agricultural output of Great Britain fivefold between 1400 and 1700.

In the North American colonies the story was similar. The use of horses and improvements in agricultural implements boosted output. As in Great Britain, much of this growing output found urban markets, either in colonial cities and towns such as Philadelphia, New York, and Boston or abroad, with 10 to 20 percent of all of the crops grown in the colonies finding overseas markets.

Japanese and Chinese agriculture also became more and more market-oriented. In Japan the daimyo needed funds to cover their many expenses, especially their attendance on the shogun in Edo, and they sold the rice collected in their rice taxes through merchants in Osaka. Related to this point, the growth of cities as consumption centers stimulated the commercialization of agriculture. As in Great Britain and North America, productivity increases allowed agricultural development to proceed in Japan. Particularly important were the development of new strains of rice seeds, which allowed multiple plantings of rice each year in many areas, the spread of new farm implements, the use of night soil, plants, and fish cakes as fertilizers, improvements in irrigation and flood control techniques, and the development of better ways to plant rice. Similarly, Chinese agriculture was market-oriented and diversified from at least the 1500s onward.

In Great Britain and North America agriculture developed along the lines of regional specialization, as did industry at a later date. In England regional specialization was noticeable in agriculture as early as the years 1450 through 1650. Grain grown in Kent or East Anglia found markets in London, while cattle raised in the North and West were driven to fattening areas in the Midlands and South. This trend became more pronounced over the next century, 1650 through 1750. The West Country became famous for apples and pears, Kent for apples and cherries, Lancashire for potatoes, and the area around London for vegetables. Colonial American farmers also engaged in regional specialization. The southern colonies grew rice and indigo (a plant from which blue dye was made), the Chesapeake areas of Virginia grew tobacco, the middle colonies like Pennsylvania grew wheat, and New England specialized in fishing, shipbuilding, and producing naval stores.

Regional specialization also occurred in China and Japan. For example, in Japan rice was the main crop grown throughout much of nation. However, from the mid- and late 1600s peasants also grew mulberry bushes (whose leaves were food for silkworms), tea, lacquer trees, paper mulberry bushes, along with hemp, safflower, and indigo plants — according to the part of Japan in which they lived. In China, as well, different regions produced different goods, which were then exchanged in trade.

As regional specialization occurred, each nation’s economy became more efficient and productive, and standards of living rose. Accompanying the commercialization and regional specialization of farming was the growing employment of farmers in nonagricultural tasks. For instance, Japanese peasants increasingly earned a considerable proportion of their income from making handicraft products, the forerunner of some forms of later industrialization, such as the weaving of tatami mats. In some areas village enterprises with five to twenty employees were common in the sugar, salt, oil, silk reeling and weaving, and cotton textile industries.

Trade

An increase in trade accompanied regional specialization. Trade both permitted regional specialization and was, in turn, stimulated by it. Great Britain, North America, Japan, and China were all fortunate in being able to carry on trade via coastal shipping, for until the coming of canals and railroads inland transportation was very expensive (and in Japan was constrained by mountainous topography). Trade allowed each area to develop its comparative advantage in economic development. Each region did what its resources best allowed and traded with other regions for that which it did not produce.

Britain’s domestic commerce and foreign trade increased as time passed. Between 1720 and 1749 some 130 turnpike companies were established to build new roads, spurring the inland transportation of goods. Harbor improvements invigorated the coastal trade, which grew in volume and diversity. Foreign trade went beyond Europe, as English merchants joined in a general expansion of European trade with other parts of the world. As Great Britain’s trade became oriented away from Europe, the commodities making up the trade changed. Raw wool declined in significance. Exports of manufactured goods — metal products, cotton textiles, and woolen textiles — to the colonies rose in importance, as did imports of raw materials from the colonies.

In the North American colonies internal trade was less important than in Great Britain, largely because of the poor state of inland transportation facilities. Even in the late colonial period there was four times as much trade between England and the American colonies as there was trade among the colonies themselves. Trade went overseas. In the 1760s Great Britain took 55 percent of all the exports of the North American colonies, and the British West Indies (British islands in the Caribbean) took ano...