The term ‘trading company’ signifies companies as diverse as the Dutch and English chartered trading companies of the seventeenth century and after (Carlos and Nicholas 1988), the numerous private trading companies that were active in Asia and Africa during the nineteenth century, and the Japanese trading companies that rose to prominence in the first half of the twentieth century (Jones 1996). Trading companies have played a prominent role in the development of colonies and other dependent areas. Despite their historical importance, however, relatively little research has been done on the theory of the trading firm (Casson 1997, Chapter 9). This chapter attempts to remedy this deficiency. It is structured in three parts. The first six sections develop a static theory of the trading firm. The next three sections discuss the dynamics of the firm, focusing on the pattern of growth and diversification. The chapter concludes with an application to colonial trading companies in the final three sections.
Trading is a central issue in economics. In neoclassical economic theory, trade is a major source of efficiency gains (Kemp 1964). Trade in finished products allows consumers who possess goods to which they attach little value to exchange them for goods they value more. Trade in labour services allows workers to specialise according to their personal comparative advantage, selling the goods they produce in return for the goods they wish to consume. This promotes a division of labour between industries. Trade also promotes a division of labour within industries—for example, trade in intermediate products promotes specialisation between different stages of production.
The centrality of trade in neoclassical theory makes it surprising that there is no neoclassical theory of the trading company. The reason is that simple neoclassical theory ignores transaction costs. In the absence of transaction costs, there is no real need for institutions such as firms. Workers can trade directly with consumers, and consumers can trade directly with each other. Workers who wish to collaborate in production negotiate directly with each other. In each case, there is no need for a firm to act as ‘go-between’.