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.