John R. Commons
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.
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
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.
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.
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
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
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.