The Competitiveness of Nations in a Global Knowledge-Based Economy
John R. Commons
COMMERCIAL REVOLUTION
Lecture before
Mr. Penman’s Class, July 16, 1920
in Warren J. Samuels (ed.)
Research in the History of Economic Thought
and Methodology,
Archival Supplement 4
JAI Press, Greenwich, Connecticut, 1994, 227-233
We all know what the industrial revolution is,
it is the revolution of the 19th century, following inventions of machinery and
steam power; the invention of the cotton textile machinery of 1767, the
invention of the steam engine in 1776. These did not begin to have economic influence
until the Napoleonic wars, I should date it from the
year 1800.
The first millionaire who arose out of the industrial revolution was
Robert Owen who made his fortune during the Napoleonic wars, that is, he was
the first millionaire to make his fortune out of manufactures as against
commerce, out of industry as distinguished from commercial purposes.
The industrial revolution consisted in supplanting hand labor by
machinery and brought in division of labor etc., with which you are familiar.
The commercial revolution of the 17th century I date from the year 1599
and its completion in the year 1700. The
commercial revolution brought in modern capitalism as distinguished from
feudalism. It brought about the
foundation of our modern business arrangements; all the institutions necessary
for capitalism to expand and conquer the world were created in England during
that period. It took two violent
revolutions to accomplish it: the revolution of the Commonwealth in 1640 and
the revolution of 1688 which ousted the Stuart regime. But it took the year 1700 to establish
Parliamentary government. The Act of
Settlement in the year 1700 provided that the King should no longer issue
orders, but that all orders should be issued jointly by the two houses, the
House of Lords and the House of Commons. In other words, our modern constitutional
government was established in the year 1700 when England ousted the Stuart
regime and brought in William of Orange and Mary.
That Parliamentary regime accomplished this great thing. It made the courts independent of the King, that was the essential thing. The King no longer could change the courts. Previously, when he did not like the way the
decision went, he could remove the chief justice - which he did. Our modern capitalism as built up on the
independence of the judiciary has given the judiciary power, during the 18th
century, to work out a great many changes in the law necessary to make the
shift from feudalism to capitalism.
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Two or three illustrations. First, the feudal notion of property and the
common law notion of which went along with it was that property was physical
things, the right of a person to own for himself a piece of land or chattels,
movable goods. Property was the
exclusive holding of physical things for one’s own use. The definition of property now has changed. The most essential thing in property nowadays
is what the business man considers to be a going business. That is his property.
What is a going business? If you
sell your stock of goods to individuals you retain the right to continue in
business. If you sell that stock of
goods as separate from the business it is not worth very much. You could get what it would inventory. You could sum up the cost of the different
items and that would be the physical property. That would come under the old definition of
property or goods on the shelves. But it
you want to get a real good price for it, you sell your equipment plus
goodwill. Goodwill is the other item
which makes modern business worth while. That goodwill has come to be more valuable
than the physical property. Goodwill is
the right to buy and sell in the future and to be protected against unfair
competition.
The courts have built up, since the year 1618, a new kind of property
which we call goodwill or a going business. Our stocks and bonds of a corporation do not
represent a railroad bed or buildings, but the future earning power of a going
business. That is the really valuable
thing. It is not a tangible thing, but
the future money income.
Prior to the year 1599 the
guild system prevailed in England as it did throughout Europe. A number of small
manufacturers, which meant literally hand workers, who wanted to make shoes or
clothes and conduct an independent business, formed an association and went to
the King and got a charter. That
charter gave them certain privileges - three in number; it gave them the
privilege of regulating the quality of the product that each one of them should
turn out; it gave them the power to regulate the qualifications of membership;
and it gave them the power to call on the courts of the government to imprison
and fine anybody who violated their rules and regulations. The King granted a charter to the guild. It was not like our modern trade unions. It was a labor organization
with power to make rules and with power to have the courts enforce those
rules by penalty.
There were two great decisions in 1599 and 1608 which deprived guilds
of that power. That latter was Dr.
Bonham’s case. He was a physician who
had set up practicing medicine in London. There was a guild in London which had a
charter from King Henry VIII, dated about 1560. He had given them something very valuable, the
right to make by-laws, the right to say who can practice medicine and who
cannot. Dr. Bonham claimed he was a good
physician, had graduated from the University of Cambridge. But
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the guild said he could not practice and he was committed to
prison by the court on the strength of the charge of violating the rules of the
doctors’ guild. He appealed to the Kings
Bench. On the Bench at that time was the
great founder of our modern jurisprudence, Sir Edward Coke. (A few years later the King removed Coke from
the Bench because he stood up for the rights of the people as against King
James.) Coke said that a by-law which
excluded any person from exercising his natural right in practicing his
profession was unlawful; that the charter which Henry VIII had granted was
illegal in giving a guild that authority to restrict trade. He established there the modern doctrine of
liberty of trade.
Coke had also taken part in the decision of 1599 which affected the same thing. Henry VIII had granted to a guild of tailors a
similar privilege in the city of London. These tailors made a by-law that if any tailor
got more cloth than his fellow tailors and was doing more work than the others,
or if he did work outside of the guild, he had to share that with his fellow
guildsmen. They had a closed shop, nobody could be a tailor unless he was a member of the
guild. They adopted a rule of fair
competition.
At this time the court decided that a by-law of that kind was unlawful.
Thus they repealed the guild charter;
that everybody had a natural right to have his clothes made by any tailor that
he wanted; and that every tailor had a natural right to go out and get business
wherever he wanted to and could not be restrained by a guild. Coke substituted natural law and liberty for
guild regulations and closed shops based on the grants of sovereign power of
the King.
The liberty doctrine was changed by Coke .
Liberty had formerly meant, under Magna Carta,
privilege. When the
Barons got their liberties from the King that did not mean our modern liberty.
What they got was privileges to tax the
people, privileges to run their own business, their own courts. It meant sovereignties. Coke changed the meaning and it now means the
natural right of any individual to do as he pleases. Any freeman could buy where he pleased,
practice medicine where he pleased, etc.
Under that doctrine of natural rights and the change in the definition
of liberty, Coke introduced the idea of preventing the King from granting these
charters. Of course the King would not
stand for that and finally removed Coke and went on granting these monopolies. When the revolution came it declared that the
King had no such power. If Coke’s
rulings had been allowed to stand there would not have been a revolution in
1640. It put into effect by violence
what Coke had tried to establish by natural law.
The doctrine of liberty was immediately found to be
too liberal. The guilds were destroyed
and they had regulated competition. Now
there came in what we might call cut-throat competition. So the court had to introduce a new idea which
begins in the year 1618, the idea of reasonable competition.
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There was a carpenter who had a little business in London. He wanted to sell that business to another
carpenter. He sold his workshop and with
it gave a bond that he would not enter into competition with the man who bought
the business. Previous to this time all
contracts of that kind were considered to be contracts in restraint of trade
and were declared to be unlawful. No
freeman could agree not to compete which was to agree to sell his liberty. The carpenter’s case went through several
courts, it was a new proposition. The
man that sold the business afterwards violated his contract and set up a
competing carpenter business in the same locality. The other man brought suit against him for
damages. What were the damages? He had not destroyed the physical property. He had competed with him and got his customers
away from him. He had damaged his
intangible property. The courts had
always declared that was all right, that you could damage a person’s business. They had always declared that a point of that
kind was unlawful. But now the court
decided against the man who set up the competing shop. The court of the Kings Bench called in all the
lawyers of the Kingdom - nine judges gave their opinion on the case. They said it did not look reasonable that a
man who had sold not only his tools and shop but the exclusive right to deal
with his customers, in violation of that sale comes back and tries to solicit
those customers. So the court reversed
all the decisions of 300 years and said the man had a right to his damages which
he had suffered by reason of having his business interfered with, not his
business but his intangible property. It
was not called goodwill until 150 years later.
So the doctrine came to be that liberty is valuable, that you can sell
your liberty and get money for it and if you can sell your liberty it means
that you are not allowed to compete in that field thereafter. That is the thing on which modern business has
been built, the protection of goodwill. Previously,
guilds had protected goodwill. When they
were abolished the courts took it up.
There were two or three other ways in which it started. About the same time there was a manufacturer
of clothing, a weaver, named Hall. He
put his name on one corner of the cloth. He got quite a reputation and had quite a
business made up. Another man thought he
would steal that business, so on his cloth he put the
name of Hall. This man Hall brought a
suit in court for damages. What damages
had that man done to him? He had not
damaged his physical property, he had not trespassed, he
had not committed violence or interfered with his liberty or property under the
old definition. What had he done? He had interfered with his going business.
The court did an interesting thing. It never seems to do anything new at all, it
is always following precedent. But here
it changed the definition of trespass. The word formerly meant trespassing on your
physical property.
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The court now
called this also trespassing. They added
a little phrase to it, “trespass on the case.” The court enlarged the definition of trespass
to mean trespass on a going business as well as trespass on physical property. That is the way the trade mark law started. It was originally simply a trespass on the
person’s business.
The trade mark and goodwill are two great assets of a modern business. Take a newspaper for example. It has privileges of the associated press
which are worth ten times as much as the physical machinery which it has. If you have a trade mark and goodwill you can
borrow money with which you can get physical property. Physical property follows intangible property.
Patents. Under the old feudal system the King
was sovereign and supreme. A patent was
a charter to a guild. Queen Elizabeth
introduced another idea about patents and that is the great significant thing
about this period. During this time
England became a commercial nation, depending upon traffic and business. Queen Elizabeth wanted to encourage industry
and she gave to people certain patents if they would start up a certain
business - they could have the monopoly of that business. Monopolies started as a good thing to build up
the industries of England. She filled
the country with patents and monopolies, coal mines were developed, saltpeter,
imports grew - all to develop industry.
But that was abused. The people
who got hold of them were the courtiers - what we call politicians now. She gave a patent to one of these courtiers
named Darcy to have the exclusive manufacture of playing cards in England. Nobody else could import them or sell them, everybody had to do business with Darcy. In 1603 a printer started making playing cards
and Darcy brought suit against him. That
also went up to the Kings Bench. Coke
said anybody had a natural right to make playing cards if they wanted to.
This was the great case which defied the Queen. The chief justice of England’s court,
dependent upon the Queen, removable by the Queen, said the Queen could not have
that power. King James would not stand
for these things, so he removed Coke and carried things along with a heavy hand
until finally Parliament enacted the statute of monopolies in 1624. That statute said that the King shall not
grant any patents or exclusive privileges for any purposes except two: new
inventions or processes and arms and ammunition. He could have freedom in the manufacture of
implements of warfare.
So we got our modern patent law which is the survival of the original
patents which were devised to build up industry. Patent laws are probably as important for
capitalism as goodwill and trade marks.
Copyrights. There was another
guild established called the stationers guild, a guild of book and job
printers. Nobody was allowed to print a book
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unless he had a license from the stationers guild. They had a meeting place called Stationers
Hall. If a person published a book
without a license he was sent to prison and the book confiscated. The stationers guild
had this same power to make rules and regulations, power to exclude
publications. It was a closed shop of
publishers.
The stationers guild survived the revolution
for this reason: people did not want everything in the world published so they
kept the stationers guild alive. But
after the revolution of 1700 the courts no longer supported the guild. John Locke and the people of that time had
developed the idea of freedom of the press. The courts then took away from the stationers guild the power to restrict publication. The stationers guild
established a copyright. Nobody could come in and print without a copyright. A man named Thompson wrote a book of poems
called the “Seasons” which was published about 1720. About 40 years afterward somebody else copied
the “Seasons” and printed another book. The
man that was publishing the original copy brought suit for damages. It was not physical damage but it was damage
to the business.
In 1769 the courts changed the definition of property. Formerly it means manuscript, that is the
physical property, but the court said not only has he a right to his manuscript
but he has a right to the market for the publication of his manuscript. So the High Court of England decided that this
original publisher should have damages against the man who had infringed this
copyright.
There the court carried it too far. It said the right to a market for a copyright
was the same as the right to a manuscript. If the court’s decision had been allowed to
stand it would have meant a perpetual copyright because there was no way of
repealing it. It was corrected five
years afterwards by the House of Lords which said that a person does have a
natural right to publication but he can have a right for only 28 years.
Copyright is the foundation of the modern book business. You could not have manufacture and
publication of books as we know it without copyright.
Four kinds of intangible property which are the
foundation of capitalism. I do
not think that capitalism is based on the ownership of physical property - that
was feudalism. Capitalism is based on
the ownership of intangible property. That is what I call the commercial revolution.
Capitalism is based on market
opportunities, not on physical things. The
commercial revolution established four kinds of intangible property: goodwill,
the right to sell a part of your business; trade mark, prevention of
competition by copying the name; patent right, protection in case you have
invented a new process; copyright, in case you have invented a new book. Those are the things that make it possible for
capitalism [sic] to do business, borrow money and get hold of physical
property. That is the
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commercial revolution. It started in law during the 17th century, the
time when Coke defied Queen Elizabeth, and continued until 1700 when Parliament
prohibited the King from removing the judges. It is based on court’s decisions - judge-made
law - and the court has done it by changing the definitions.
It would be interesting to compare the commercial revolution with the
industrial revolution. The modern
definition of property is coming to be not simply the right to do business,
property is not only a going concern, but is coming to be the right of a
laborer to a job just as the capitalist established the right to a going business.
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