The Economics of the Dutch East India Company

Trillion-dollar megacorporations are a big deal today; There are about two or three of these companies that exist in the modern world and they are primarily technology companies that have achieved this status by capitalizing on cutting-edge modern technology and probably quite a bit. of optimistic speculation, but there is one corporation that has made its way through history and may well have been the largest

company

in history. This was a

company

that laid the foundation for modern multinationals and created systems, procedures and expectations that we take for granted today. Historians, economists and business experts have speculated on the value of this company at the height of its power and have assessed that, adjusting for inflation, it could have been worth seven point nine trillion US dollars, making it easily more valuable than the today's largest corporations together. make it more valuable than the GDP of all modern nations outside the United States and China, so what is going on here?

How did this company founded more than 400 years ago manage to reach such an astronomical scale in a time before proper

economics

existed? We must first understand the Dutch and the creative ways they pioneered business. The Netherlands at the time of the formation of the Dutch East India Company was actually a Spanish colony. It was not a particularly powerful nation in its own right. Actually I didn't have one. In terms of farmland or even a strong Navy, which were the key determinants of national power during this period, what they did have was a very active market economy.

You see,

economics

is a discipline, it wasn't really something at this time that I didn't mean that economic theories weren't true or that there weren't economies, it's just that people weren't really focused on them, the world was governed by a general theory that later became known as Cantleism, which was basically the idea. that the world was a game from scratch and that whoever controls the gold cannot control the world. The ilysm strongly emphasized the importance of exporting more goods than imported in order to accumulate more and more gold and, in doing so, limit the capacity of others. nations to increase their supply of gold this theory was born from an era of limitations if I do not control at l

east

this amount of farmland my people will starve and I will be invaded India enthroned the only way I can ensure my stay in power is accumulate wealth and deny it to everyone else.

The same was ultimately true of things like trade routes. The Spanish at that time were making a lot of money shipping spices from Asia to Europe, where these products were enormously useful for things like preserving meats and adding a bit of flavor to a bland diet, and since this was so profitable the Spanish were in no rush to give up. This because well, if they don't benefit from these trade routes, then someone else will and that goes against the Now the Netherlands at that time wasn't doing so well based on this whole I can't theory. They were importing a lot more than they were exporting because they couldn't really grow as much because of the bulk of their production.

The fact that the country was underwater and the whole Spanish colony thing also put a damper on things, what they did have was a much freer business culture, merchants exchanged products from all over Europe and the nation was a useful intermediary for many of the colonial powers. To ship their spices to other European nations, the Netherlands also had a really ingenious system for financing epic voyages that were spiced tours, as seen in the wooden ships of the time, which crossed half the world, often across from hostile territories, and then loaded them with nutmeg and bringing them back home was a surprisingly risky procedure, sure the powers that be like the Spanish royalty could afford it, but they were better off just facilitating this trade and then taxing it heavily. less risky that way, instead what actually happened was that individuals could invest in these trips now these trips were expensive it required paying or building a boat and hiring a crew which demanded pretty decent wages because there was a very, very real possibility If you didn't survive these trips the financial risk of a single trip was usually too much for a single individual to take care of himself, so what smart traders realized was that they could sell shares on these trips and then share the profits. , if any, with the group of investors.

Interestingly, at that time the term stocks meant the framework in which a ship was built which could have given rise to the term stock market with these people buying shares in these expedition ships. Now these investments were volatile as a Bitcoin day trader with ad/hd and 100 to 1 leverage would probably tell you to cool off many times over. Many more of these small wooden ships sank, lost many crew members, and returned without spices, so all the investors' money was lost, but if the expedition bore fruit, the investors could easily expect to make four or five times its investment, this stock market was.

Everything was going well, but it was a bit of the Wild West, there were a lot of moving parts, a lot of players, from the Spanish Royal Fleet to individual captains and even individual port directors, so there was a lot of uncertainty. I mean, there was nothing stopping a ship's captain from raising a ton of money to finance an expedition and then just setting off for England or whatever the whole system needed, it was good stability and maybe just a little value of money. brand with the blessing of the Dutch government. The larger expedition companies joined together and formed the United India Company, which was granted exclusive rights to trade in products from the Far East in an attempt to eliminate the rabble from these individual expeditions.

The company would, of course, still capitalize on the profits that would be made. in shipping spices from

east

to west, but he would control the entire process, he would own the ships, the ports and the plantations, he would employ his own sailors and give the people a single entity to invest in and I had built a diversification, see no more wood. Investors' money would not be determined by the fortune of a single voyage, but rather by an entire fleet that would travel between its own ports and also rely on its own protection. That's right, the Dutch East India Company avoided the need to be indebted to the Spanish basically.

By forming its own Navy, this type of business strategy is called vertical integration, where a single company owns more and more of the product process. . Typically companies do this to reduce costs and have more control over the quality of their products throughout the process, which is what the Dutch East Indies do. What the company was doing was something like what many modern companies do today. Take Tesla as an example. It is now the most valuable automobile company in the United States, and a large part of its business model is vertical integration. A normal car company will source your components. from suppliers and then assemble cars and their factories and then distribute these cars to a network of independently operated dealerships and once those cars are sold they can be repaired at a local mechanic and filled with fuel at a local service station, on the other hand, Tesla. is working hard to be their own battery supplier, they have a very built-in factory system and own their own dealer network even beyond that and, for better or worse, Teslas are serviced almost exclusively at Tesla service centers.

Tesla and charge at Tesla brand charging ports. This type of integration is great for Tesla because it reduces its costs by eliminating middlemen and also allows it to control the entire product experience. What vertical integrations gave the Dutch East India Company was stability and power, a lot of power for the Dutch East India Company. It was not a purely for-profit nation, sure it had investors who wanted to see returns on their investment, but the company operated with the blessing of the Dutch Republic, which at the time was desperately fighting for its independence from Spain. The company could make a profit, but during the McCann tourism era, this would mean it was denying Spain profits.

The company could also have warships and claim colonies to have a standing army and wage war and enforce laws. The company really blurred the lines between a government entity and a for-profit corporation that was said to still be making profits. At its peak, the Dutch East India Company was appreciating about 40% annually, which for anyone who knows the power of capitalization is remarkable and very, very quickly rose to prominence as the most valuable company in the world employed over 50,000 people, which even today is very, very respectable, it had over 150 merchant ships and 40 warships, and warships at that time were big business, deploying 40 warships was like the equivalent of Walmart deploying 10 aircraft carriers and at the same time also making a profit, but how valuable was this company .

Many people will point to the Dutch East India Company as the 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 very difficult things to value, we have seen it in our video on the increase of trillion-dollar companies last week, but companies that closed more than 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, but its peak, at least in terms of valuations, was around 1637. A figure is now thrown around at around US$8 trillion. There is a lot of spin 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 quite respectable, but then people just give the jump and says that was worth about seven. Point to something trillion US dollars because inflation, well, no, actually, this is a big misunderstanding of what inflation is, but let's take this as the most basic type of valuation and I warn you that this involves mathematics.

A Dutch guilder in 1637 was exchangeable for about 0.6 grams. of gold 78 million Gilder would have been exchanged for 40 6.8 million grams of gold or forty-six thousand eight hundred kilos or let's say approximately 47 tons of gold today gold is trading at around 50 $1600 per kilo 47 thousand kilos would cost about $2.4 billion, 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 that you get by just extrapolating inflation over 300 years. . To be fair, gold was much scarcer in the 17th century than it is today. World Gold Council, the total mining gold supply in 2019 was around one hundred and ninety thousand metric tons, in the 17th century it was estimated around 20 thousand metric tons, which means that if supply constraints were adjusted, the company would have been worth around twenty-two billion dollars. which again is very impressive but still insignificant compared to the trillion dollar figures we have been led to believe.

This misunderstanding comes from what most people misunderstand as inflation. Inflation is the increase in the price of goods. Now this can happen because goods are becoming more expensive or more expensive. It often occurs because the money supply is greater now. Inflation actually tends to be a sign of a growing economy whose wealth is increasing. The United States, for example, is actually targeting an inflation rate of 1% to 2%. That's happening, that's a good thing, they expect it too. for an annual growth rate of around 2% to 3% for growth to exceed inflation, but the point is that in the 17th century aid was poor according to purchasing power parity.

The GDP of the entire world economy was probably around $81 billion, there just wasn't that much technology. to produce so many things and there were not so 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 will live in times richest in 200 years. I hope the people of the 21st century look destitute. Perhaps the best way to demonstrate this is to look at the book value of theDutch East India Company.

This is something we have explored. Previously, basically a book value looks at the value of the company's assets minus its liabilities. At its peak, the company had about 40 warships, 150 merchant ships, plus about a dozen ports and 100,000 acres of plantations, as well as a large inventory of spices so that the latter is probably the easiest to dispose of today. in day. Spices are so easy to grow, harvest, and share anywhere in the world that they are practically worthless. Nutmeg used to be as valuable as gold. Nowadays it is used to make a little more eggnog. full of life, the value of this company's entire inventory supply has become worthless because the increasing efficiency of the modern world has reduced spice prices, which is actually deflation.

The same goes for their ships. Sure at the time these boats were modern wonders, but they are little wooden tubs that don't even have engines in the modern world. A shipyard could easily produce this entire fleet for around $10 million in probably half a year, depending on the production price of materials and labor, and that has been extremely generous. and the company's gold reserves were notable and, unlike manufactured or agricultural products, such as ships and spices, respectively, land and gold have appreciated in value over the years, but still, according to his portfolio at the height of his power, these would have been valued at around thirty. billion dollars, which again has been incredibly generous since most of their holdings were in Southeast Asia in areas not now famous for their high real estate prices.

The book value also has its problems, but if you were to transplant the Dutch East India Company to today this would effectively 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 compared to the entire world economy and maybe they are about something there as a share of total world trade, the Dutch East India Company controlled a much larger portion of the global pie than any corporation today, was just a much smaller pie, around 970 times smaller, all of this is not to say that the Dutch East India Company was a relevant curiosity, it wasn't, it was one of the most influential historical corporations of all time, it just wasn't that rich because it came from an era that was during the leap or the Dutch East India Company finally fell. to the corruption of a growing collection of low-paid employees and, of course, competition, the Dutch East India Company was a great idea that was replicated by the British East India Company and the French East India Company. the East Indies, and so on, and so on, and remember all that.

I can't say anything right, as soon as the British, French and Spanish were able to get spices from their own colonies, there was no way they were going to import them and risk losing their precious piles of gold. The Dutch East India Company is really interesting. explore not only because it was a pioneer for many corporate structures and systems we see today, but also because if you correctly understand its true scale you will realize how rich and prosperous our modern world really is. Hello guys, I hope you enjoyed this video. Many thanks to our new patrons on Patreon, as always your support continues to make this channel possible guys, so thank you otherwise we will host the Q&A session streamed live on the second channel linked in the video description if they want to participate.

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