The year 1602 is very relevant today
In 1602, one of the world’s most powerful inventions came into being.
It wasn’t just a single innovation. It combined multiple leaps forward into a package that has dominated the world since – and may well be the dominant entity long after flesh and blood humans are obsoleted.
In Amsterdam that year, the Dutch East India Company (VOC) pushed forward a number of innovations:
- The VOC’s shares were tradeable. Joint stock companies had existed before, but the VOC was the first to issue tradeable shares to the public in the world’s first IPO.
- The VOC created a new stock exchange with formalised rules for trading shares, creating safety for participants.
- Whilst people had invested in distant ventures before, the VOC bundled many ventures together in one, reducing risk for investors.
- The stock exchange created a secondary market for the VOC shares, creating liquidity and enabling investors to take their gains at any time.
- The VOC was the first limited liability company, meaning investors were only liable for their investment, not any other losses of the VOC.
This is a lot of innovation at once. The entrepreneurs who pulled it off created the most powerful engine of change in the world to date. It gifted the Dutch world domination for a century. When they left Amsterdam for London, they handed that gift over to the British, which helped created another Empire that lasted 150 years.
What was so powerful about what the Dutch created that fateful year?
Rape and pillage and…
It’s easy to miss the wood for the trees here. The VOC was an awful company. Its main business was essentially to steal property, murder people, and trade slaves. Although it “created” much wealth for the Dutch, it was largely a net negative for the world, destroying global wealth in the process, as violence usually does.
But what the VOC and the Amsterdam stock market pioneered was a fundamentally new way to circulate value. That was the powerful invention, and it was not an obvious leap to make at the time, requiring several bold innovations at once.
What I call a value circulation model is, essentially, a way that value (often, but not exclusively, in the form of money) can go around a cycle. The fractional reserve system is another example, a set of rules to enable banks to loan depositors’ funds to businesses and incentivise economic growth, which then returns to depositors both via an interest rate payment and via a general increase of the wealth of the nation.
The public limited company was something else, though. Previously, only a few (accredited?) investors had been allowed to participate in private ventures. Monarchs often had to be involved. The wealth was locked up and illiquid. The risk on each venture was extremely high. The VOC model created a way that a company could raise money from the entire population (at least any who had money), use that productively (well…) and then return that value to investors via dividends or capital appreciation.
Even though we don’t typically think of public corporations as democratic institutions, it was and is a great engine of opening up wealth creation to private individuals. 1602 marked the beginning of the democratisation of wealth creation.
2023 vs 1602
In 2023, we find ourselves poised on the edge of a similarly powerful invention.
Much like in 1602, there are multiple innovations needed. Merely moving stock into blockchains isn’t going to do it. Creating crypto coins with no real-world use is neat but still incomplete, for now at least. NFTs with no real economic value are extremely interesting but still not quite right. Yet all those innovations have a whiff of magic about them.
Meanwhile, regulation over the last 400 years have ossified the previous value circulation models. Only a very narrow set of businesses can get funded via public markets. In a global world, the currently sanctioned value circulation models are fragmented into a patchwork of local regulations. The stock market is generally the province of aggressive hedge funds and high frequency trading algorithms. The game of value circulation has turned from win-win to win-lose, a ruthlessly competitive and extractive dynamic that mostly lines bankers’ and traders’ pockets.
We are on the cusp of creating something better. Let’s look at a possible solution next week.
The Weekly Update
On the Investibles side, we’ve conducted a number of very interesting customer development interviews, leading us in an interesting direction, potentially. Find out more in the update (video link below). Nothing other of note to report this week.