1.3 Managing the national economy
The earliest regulation in Europe was not motivated by stewardship concerns, but was aimed at small businesses whose owners did not take the trouble to measure the success of their business. Consequently they went into liquidation, often, as is the case with small business networks, taking other businesses down with them. The 1673 Savary Ordonnance in France, which is regarded as the first national accounting rule created in the world and was subsequently taken up into the French Commercial Code (more below), was introduced to prevent bankruptcies. The French government required all businesses (but at the time, pre-Industrial Revolution, large businesses were in single digits) to make an annual inventory, in effect, a balance sheet using current market values, to assess the health of their business. The difference in net worth from one year-end to the next showed whether the business was profitable or not.
This first example illustrates one of the principal forces for regulation: governments are concerned with the healthy functioning of the economy for which they are responsible. Increasingly, politicians have thought it necessary to step into the markets and introduce controls on corporate behaviour. If you look at any pronouncement by the US Securities and Exchange Commission (SEC), which regulates the US financial markets, you will see that they frequently refer to protecting the smooth operation of the markets and preserving investor confidence, as a reason for almost any measure.
The 1673 regulation in France occurred because the government observed that there had been a spate of bankruptcies, leading to a loss of confidence in business and a downturn in economic activity. It wanted to re-build confidence by weeding out the weaker businesses before they took others down. We will look at this pattern again in Section 2.3: the cycle of negative economic events leading to change in regulations.