Monday, March 03, 2008

The Simple System of Natural Liberty

Mark Blaug, an important British author on the history of economics, argues in an essay titled Is Competition a Good Thing? that Adam Smith meant something quite different by "competition" than what economists mean by it today. The clue, Blaug says, is in the articles. "a competition between capitals"; "the competition with private traders", and so forth. Economists today see generally competition as an end-state, as evidenced by the use of comparative statics and general equilibrium theory. For Smith and most of the other classicals, however, competition is a process or a behavioral activity.

Blaug says what we call "competition" today was for a Smith "the obvious and simple system of natural liberty", meaning no more than a 'self-evident' relationship between buyers and sellers given that a marketplace exists. Smith says in The Wealth of Nations that it would be absurd to attempt to prove this "common sense" relationship. Here, Blaug is saying our "competition" is Smith's "simple system of natural liberty".

In The Wealth of Nations what Smith calls the "system of natural liberty" is set in opposition to the mercantile system of trade, whereby the terms of trade are already highly fixed. The terms of trade are not simple. The natural system, on the other hand, is more like what happens between Friday and Crusoe on a deserted island; the mercantile system is what happens when kings and states hoard gold and pillage the wealth of other nations. Mercantilism is highly developed, complex, and the status quo for Smith; the natural system is somewhat like a state-of-nature situation.

Blaug, on the other hand, sets Smith's natural system of liberty in opposition to monopoly market structure. This is misleading because Blaug wants to publish on the differences between static and dynamic efficiency, and he's drawing on Smith to prove his point. But perhaps the only conceived monopolies in The Wealth of Nations was that of the state-owned monopoly in the mercantile system, or just where the demand for goods is inelastic. Blaug also includes in his definition of competition free entry into industries and occupations, which I also think is problematic. The number of sellers in a market does affect both the end-state conception of competition and the more behavioral aspect of competition that Smith talks about.

Analytically, if the number of sellers can be a factor in determining dynamic efficiency, which Blaug wants to eventually say, then the behavioral competition that exists has to be affected by the number of sellers in the market. Sellers behave differently when there are fewer of them. They raise prices, for example. Blaug, I think, is confusing the difference between the system of natural liberty and competition. The natural system is a simple conception of the possibilities of trade in a free market. Competition is an ongoing series of behavioral events and strategies which can be affected and influenced by a number of things that Adam Smith alludes to. The competition between capitals is different than the competition between private traders, for example.

There is a big difference here, so when Blaug says that for Smith "neither competition nor monopoly was a matter of the number of sellers in a market", he is confusing these two different ideas found in Smith.


Mike Beggs said...

Hey Acumensch,

I think much of the genius of Adam Smith's economic analysis, though, is that he didn't limit himself to conjecturing about the 'state of nature' but also tried to analyse the 'unnatural and retrograde order' that actually existed. If he'd only looked at the former, or spent the whole Wealth of Nations harping on about how reality didn't fit some metaphysical 'system of natural liberty', he'd be much less interesting.

I think you're right that there's a difference between the competitive situation prevailing in Adam Smith's day and that today. But I don't think the mercantile system was all about state monopolies, and obviously today concentration in most industries is not primarily a result of state intervention.

The number of sellers in a market says little by itself about competition. Often a reduction in the number of producers can intensify competition and lower prices. For example, when a large number of 'independent producers' are merged into a smaller number of large corporations, it is quite likely that prices will fall as rationalisation takes place, duplication of capital equipment eliminated, and economies of scale taken advantage of. This is, after all, how corporations have become the dominant economic force - by being able to undercut less efficient scattered producers.

Acumensch said...

Hey Mike, glad to see you back!

Well, yes, I am not saying Smith spent all his time thinking about a state of nature. Yet what is the "simple system of natural liberty"? It is precisely such a place where he has limited all other activity in an attempt to imagine a natural trade system.

I also don't think the mercantile system was about monopolies. My point is that Mark Blaug initially sets competition against monopoly, like most economists today do, when the alternative to the simple system of natural liberty was for Smith set against non-simple and non-natural systems, ex.g. mercantilism.

So when Mark Blaug confuses 'competition' with the 'simple system of natural liberty', he also confuses 'monopoly' with 'non-natural' systems.

And to the point about the number of sellers in the market: it sounds like you're using "competition" in the common way, that is, the market performance way. Industry doesn't necessarily compete more or less when market structures change. But their conduct and performance does change. Smith uses competition quite differently, and that was my point. Smith actually seems to talk about competition as a mode of conduct. There is something different about the way states compete than the way traders compete, and so on. So industries will compete differently and use different strategies when the number of sellers in the market changes. And I think in your example you also seemed to agree with my point that market performance is altered by market structure.

Muser said...

Thanks for the fine posting. I've always been highly suspicious of the term, "free market," even to the extent that I interpret it as an oxymoron. It seems as if someone owns or otherwise controls the market-space, prior to any competitors entering it, and/or as if someone has a finger on the scale(s). Have global corporations outgrown the state? (Blackwater in Iraq. Microsoft everywhere.) Some "scattered producers" seem more effective if not more efficient. Anyway, thanks again.

Mike Beggs said...

Cheers, Acumensch. Keen to restart our broader debate from before I went to NZ, it was fun. But still really busy.

I think we're on the same page in preferring the classical conception of competition to the neoclassical. I include the other classicals with Smith (including Marx who developed this conception of competition the furthest), and even Schumpeter, who tried to import it into a generally neoclassical worldview.

But these guys were trying to show how 'competition as a mode of conduct' nevertheless tends to generate predictable results - reproduces value relations whereby everything is paid for basically at cost + average profit because competition tends to eradicate inefficiencies and excess profits.

My point was that in the classical conception of competition, as you say, 'as a mode of conduct', implies much less than the neoclassical static conception that concetrated industries are less competitive. In fact often it is the opposite.

I also disagree with the implication, made more clearly in your new post, that the state and distortions of competition are primarily responsible for the dominance of large corporations. This is not to deny that state restrictions on competition make a difference - the enforcement of intellectual property rights, for example, is very important in shoring up certain companies in the software and pharmaceutical industries. But, I think, probably in shoring them up against other large companies rather than 'scattered producers'.

Muser, what 'scattered producers' are you thinking of that seem more efficient/effective?

Mike Beggs

gune said...

Adam Smith's system of natural liberty is firstly obvious and secondly simple.It establishes of its own accord. Then it is a continuing process.Only it can preserve the competition.Competition is between sellers and buyers,and also within the each party.Then competition unintentionally promote the system of natural liberty.