The Economics of the Dutch East India Company

[Music] trillion-dollar mega corporations are a very big deal these days there are about two or three of these companies that exist in the modern world and they are primarily tech companies that have achieved this status by capitalizing on cutting-edge modern technology and probably a bit of optimistic speculation but there is one corporation that has snaked its way through history that may have very well been the largest company in history this was a company that laid the foundations for modern multinationals and created systems and procedures and expectations that we take for granted today historians economists and business experts have speculated about the value of this company at the peak of its power and have assessed that adjusting for inflation it could have been worth seven point nine trillion US dollars easily making it more valuable than the largest corporations combined today it would make it more valuable than the GDP of every modern nation outside of the United States and China so what is going on here how did this company founded over 400 years ago achieve such astronomical scale in a time before proper economics even existed well to understand this you must first understand the Dutch and the creative ways that they pioneered business the Netherlands around the time of the formation of the Dutch East India Company was actually a Spanish colony it wasn't a particularly powerful nation in its own right it didn't really have much in the way of farmland or even a strong Navy which were the key determinants of national power during this time period what they did have though was a very active market economy you see economics is a discipline wasn't really a thing at this time that was not to say that economic theories didn't hold true or there weren't economies it's just that people weren't really focused on it the world was ruled by an overarching theory that later became known as the cantle ism which was basically the idea that the world was a zero some game and he who controls the gold controls the world mecan't ilysm heavily emphasized the importance of exporting more Goods than you imported in order to build up more and more gold and by doing so limit the ability of other nations to build up their supply of gold this theory was born out of an era of limitations if I don't control at least this much farmland my people will starve and I will be invaded India throned the only way that I can ensure that I stay in power is to hoard wealth and deny it to everybody else the same was ultimately true for things like trade routes the Spanish at this time were making lots and lots of money by shipping spices from Asia into Europe where these commodities were hugely useful for things like preserving meats and well adding a bit of flavor to a bland diet and because this was so profitable the Spanish were in no hurry to give this up because well if they don't profit from these trade routes then someone else will and that goes against the idea of mecan't ilysm now the Netherlands at this time was not doing so great based on this whole theory of mecan't ilysm they were importing far more than they exported because they couldn't really farm that much on account of most of their country being under water and the whole Spanish colony thing kind of put a damper on things as well what they did have was a far more freewheeling business culture merchants traded goods from across Europe and the nation was a useful middleman for a lot of the colonial powers to ship their spices to other European nations the Netherlands was also home to a really ingenious system for funding the epic journeys that were spiced runs you see sending janky wooden ships of the day halfway across the world often through hostile territory and then loading them up with nutmeg and sailing them back home was a surprisingly risky procedure sure the powers that be like Spanish royalty could afford it but they were better off just facilitating this trade and then taxing it much less risky that way rather what actually happened was that individuals could invest into these voyages now these voyages were expensive it required paying for or building a ship and hiring a crew that demanded pretty decent wages because there was a very very real chance of not actually surviving these voyages the financial risk of a single voyage was normally too much for a single individual to take on themselves so what the savvy merchants realized was that they could sell shares in these voyages and then share out the profits if there were any to the group of investors curiously enough at this time the term stock meant the framework in which a boat was constructed which could have given rise to the term stock market with these individuals buying shares in these expedition boats now these investments were volatile like a Bitcoin day trader with ad/hd and 100 to 1 leverage would probably tell you to cool it many of these small wooden ships sank many more lost lots of crew members and returned with no spices and so all of the investors money was gone but if the expedition did pay off investors could easily expect to make four or five times their investment this stock market was going well on everything but it was a little bit Wild West there were lots of moving parts lots of players from the Spanish Royal Fleet to individual captains and even directors of individual ports more so there was lots of uncertainty I mean there was nothing to stop a ship's captain raising lots and lots of money to fund an expedition and then just piecing out to England or whatever what the whole system needed was some good old stability and maybe just a bit of brand value with the blessing of the Dutch government a lot of these larger expedition companies came together and formed the united india company which was granted exclusive rights to trade in the goods of the Far East in an attempt to cut out the riffraff of these individual expeditions the company would of course still capitalize on the profit to be had in shipping spices from east to west but it would control the whole process it would own the ships and the ports and the plantations it would employ its own sailors and give people a single entity to invest in and I had in built diversification see no longer wooden investors money be determined by the fortune of a single voyage but rather by an entire fleet that would be traveling between their own ports and also relying on their own protection that's right the Dutch East India Company circumnavigated the need to be beholden to the Spanish by basically forming their own Navy this type of business strategy is called vertical integration where a single company owns more and more of the product process normally companies do this to reduce costs and have more control over the quality of their products throughout the process what the Dutch East India Company was doing was sort of like what a lot of modern companies are doing today take Tesla for example it is now the most valuable motor company in America and a big part of its business model is vertical integration a normal motor car company will get its components from suppliers and then assemble cars and its factories and then distribute these cars to a network of independently operated dealerships and once those cars are sold it can be serviced at a local mechanic and filled up with fuel at a local gas station Tesla on the other hand is working hard to be its own battery supplier they have a very incorporated factory system and they own their own dealership network even beyond that and for better or for worse Tesla's are almost exclusively serviced at Tesla service centers and are charged at Tesla branded charging ports this kind of integration is great for Tesla because it lowers their costs by cutting out middlemen and also allows him to control the entire product experience what vertical integrations gave the Dutch East India Company though was stability and power lots and lots of power the Dutch East India Company was not a purely for profit nation sure it had investors that wanted to see returns on their investment but the company operated with the blessing of the Dutch Republic which was at the time fighting rather desperately for their independence from Spain the company could turn a profit but during the time of McCann tourism this would mean that it was denying Spain profit the company was also allowed warships and to claim colonies in to have a standing military and to wage war and enforce laws the company did really blur the lines between a government entity and a for-profit corporation that been said they did still make profits at its peak the Dutch East India Company was appreciating by close to 40% annually which to anybody that knows the power of compounding is remarkable and it very very quickly rose to prominence as the world's most valuable company it employed over 50,000 people which even today is very very respectable it had over 150 merchant ships and 40 warships and warships at this time were a huge deal fielding 40 warships was like the equivalent of Walmart fielding 10 aircraft carriers while still also turning a profit but just how valuable was this company many people will point to the Dutch East India Company as the single most valuable company in history but that was not necessarily true the Dutch East India Company was very very valuable and very influential in its time but it was not the most valuable company in history companies are really really hard things to value we have seen this in our video on the rise of trillion-dollar companies last week but companies that have closed up over 200 years ago are even harder to value when we are talking about the value of the Dutch East India Company we will explore it at its peak it operated through good times and bad times but its peak at least in terms of valuations was around 1637 now a figure of around 8 trillion US dollars is thrown around a lot by estimating the value of a company like this at its peak the market capitalization of the Dutch East India Company was around 78 million Dutch guilders and this is pretty reputable but then people just make the leap and say that that was worth about seven point something trillion US dollars because inflation well no not really this is a massive misunderstanding of what inflation is but let's take this as the most basic type of valuation and I do warn you this involves maths a Dutch Guilder in 1637 was exchangeable for around 0.6 grams of gold 78 million Gilder would have been exchangeable for 40 6.8 million grams of gold or forty six thousand eight hundred kilos or let's say roughly 47 tons of gold now today gold is trading for around 50 $1600 per kilo 47 thousand kilos would cost around 2.4 billion dollars so you know it's still a lot of money but it's only about 0.03 percent of that seven point four trillion dollar figure you got by just extrapolating inflation over 300 years now in fairness gold was far more scarce in the 17th century than it is today the World Gold Council the total supply of mine gold in 2019 was around one hundred and ninety thousand metric tons in the 1600s it was estimated around 20 thousand metric tons which means but by adjusting the supply constraints the company would have been worth around twenty two billion dollars which again is very impressive but still puny compared to the trillion dollar figures that we have been led to believe this misunderstanding comes from what most people misunderstand with inflation inflation is the rising price of goods now this can occur because goods are getting more expensive or most often it occurs because the supply of money is higher now inflation actually tends to be a sign of a growing economy whose wealth is increasing the United States for example actually targets a 1% to 2% inflation rate that's happening that's a good thing they also hope for around a 2% to 3% annual growth rate so that growth outpaces the inflation but the thing is the 1600s were poor assists by purchasing power parity GDP the entire world economy's GDP was probably around 81 billion dollars there just wasn't as much technology to produce as many things and there wasn't as many people trading in an active economy we have seen before on this channel that the average citizen of the United States today lives better than the kings of more than 200 years ago and this is because we live in wealthier times 200 years from now I fully expect the people from the 21st century to look like paupers maybe the best way to demonstrate this is to look at the book value of the Dutch East India Company now again this is something that we have explored earlier that basically a book value is looking at the value of the company's assets minus its liabilities at its peak the company had around 40 warships 150 merchant ships plus around a dozen ports and 100,000 acres of plantations as well as a large inventory of spices so that last one is probably the easiest to get rid of today spices are so easy to grow and harvest and share anywhere in the world that they are practically worth nothing nutmeg used to be as valuable as gold today is used to make your eggnog a little bit more peppy the value of the entire inventory supply of this company has been made worthless because the rising efficiency of the modern world has reduced prices of spices which is actually deflation the same is true for their ships sure at the time these ships were modern marvels but they are rinky small wooden tubs that don't even have an engine in the modern world a shipyard could easily produce this entire fleet for around 10 million dollars in probably half a year based on production price of materials and labor and that's been extremely generous the land and gold reserves of the company were noteworthy and unlike manufactured or agricultural goods like ships and spice respectively land and gold has actually appreciated in value over the years but still based on their portfolio at the height of their power these would have been valued at around thirty billion dollars which again is been incredibly generous since most of their holdings were in Southeast Asia in areas that aren't famous for their high property prices now Book value has its problems as well but if you were to transplant the Dutch East India Company into the modern day this effectively would be what it would be worth thirty billion dollars as an extremely generous figure but perhaps this is unfair perhaps the valuation of seven trillion dollars was based on how influential the Dutch East India Company was in comparison to the whole world economy and perhaps they are onto something there as a share of total world trade the Dutch East India Company controlled a much much larger slice of the global pie than any corporation does today it was just a much much smaller pie like around 970 times smaller all of this is not to say that the Dutch East India Company was some relevant curiosity it wasn't it was one of the most influential historical corporations ever it just actually wasn't that wealthy because it came from a time that was during leap or the Dutch East India Company eventually fell to corruption from an increasingly vast collection of underpaid employees and of course competition the Dutch East India Company was a great idea that was replicated with the British East India Company and the French East India Company and and so on and so on oh and remember that whole mecan't ilysm thing well as soon as the British and French and Spanish could get spices from their own colonies there was no way that they were going to import it and risk losing their precious precious piles of gold the Dutch East India Company is really interesting to explore not only because it was a trailblazer for many corporate structures and systems that we see today but also because if you understand its actual scale correctly you will realize how wealthy and prosperous our modern world truly is hi guys I hope you enjoyed this video a huge thank you to our new patrons over on patreon as always your support continues to make this channel possible guys so thank you otherwise we will be hosting the Q&A session live streamed on the second channel linked in the video description if you want to be involved in that come on over there or participate directly by joining us on our discord server if you did enjoy this video please consider liking and subscribing thanks guys bye

Channel: Economics Explained

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Keywords: the economy of dutch east india company, the economics of dutch east india company, the economy of dutch east india company explained, the economics of dutch east india company explained, dutch east india company economics explained, economics explained dutch east india company, dutch east india company economy explained, dutch east india company economy economics explained, dutch east india company economics, how dutch east india companys economy works, economics explained

Id: hjVFwqM7xuo

Length: 18min 35sec (1115 seconds)

Published: Thu Feb 27 2020

Reddit Comments

[u/Compieuter]

Ik zou hier een hele /r/badhistory post van kunnen maken. Maar om het iets korter te doen zal ik mijn comment van onder de video hier ook even plakken:

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I think some of this video is based on a false premise. The 7.9 trillion dolar isn't a figure thrown around by historians, at least not historians who study the VOC. This figure dates back to an article on fool.com from 2012, written by Alex Planes. Well, how did he get this number? He took the value of an auctioneer who valued a stock from the VOC at $764,000. Planes then multiplied this by 10 million as that is his estimation of how many stocks there were at the time and thus he arrives at a value of in the trillions of dolars. This is wrong on many levels: firstly the value of the stock is the value actual paper artifact that was a VOC stock from the 17th century this does not reflect the value at the time. And secondly his estimation of there being ten million stocks is also based on nothing. This is just another internet factoid like people eating x amount of spiders every year.

On a related note, many times in this video you say that the VOC was competing with the Spanish in the spice trade but they were actually mostly competing with the Portuguese but this isn't completely wrong as for a time they would also be ruled by the king of Spain.

You also say that the Netherlands were a colony of Spain around the founding of the VOC. This is also wrong. The Habsburg king of Spain had inherrited a vast number of territories in the Low Countries and the Italian and Iberian peninsula. He was also the king of the Spanish (Castilian+Aragonese) colonies. The relationship between his holdings in the Low Countries and of where he held court (Madrid) is not correctly described with the term colony. It was one of his lands and he sent a representative of himself to rule in his stead (in this case his half sister) these different parts of his domaine would mostly operate independantly but they would contribute financially to wars for example.

Furthermore the Dutch 'republic' had already been fighting it's war of independance vs the Spanish king for 34 years when the VOC was founded. So unless you want to call 34 years earlier around the time then that it is wrong to say that the Netherlands around the time of the forming of the VOC was a Spanish colony.