Competitive Markets, Free Markets, and Adam Smith's "Wealth of Nations" invisible hand

In "Wealth of Nations" Adam Smith wrote "Monopoly is the enemy of competition"  which means that his description of how a free market works is premised by the necessity for a competitive market. 

Scholars studying the relevance of that proposition, such as Jagadeesh Sivadasan in "Barriers to Competition and Productivity: Evidence from India" (Steven Ross School of Business Working Paper, University of Michigan, 2008), study Adam Smith's proposition as "Monopoly is the enemy of good management" and confirm it's validity.

I agree with Adam Smith's premise. A competitive market is necessary for the long-term success of a free market. The maxim of an ideal free market depending upon having an ideal competitive market has been stated in most introduction to economics textbooks. 

You cannot have the benefits of a free market without the conditions of a competitive market. Without the one, the other fails to fulfill its promise.

Many consider "The Wealth of Nations" to be, perhaps, the greatest economic text book because it applies common sense, common terminology, and common examples so that anyone can easily learn the essentials of economics. Some consider "Wealth of Nations" to be the how-to or the bible of sound economic policy.

Yet, some modern economists ignore Adam Smith's necessary premise of competitive market in order for proper functioning of a free market. 

In recent decades, so-called conservative economists have latched onto Adam Smith's metaphor 'the invisible hand of the market' to support arguments for a no-rules, jungle economics ... which in polite society is called 'laissez faire' or 'hands off'. However most of those economists fail to include Adam Smith's necessary premise of a competitive market. That is a critical error.

Monopoly is concentration of power into the hands of the few. 

Adam Smith's statement that economic monopoly is the enemy of economic competition necessarily leads to the corollary that the monopoly in politics is the enemy of a free and competitive society -- a meritocracy, equal opportunity, and liberty.

Therefore I believe that Adam Smith, in that statement "Monopoly is the enemy of competition", also told us that concentration of power from the right and left must be equally dangerous, because concentration of economic power leads to concentration of political power and, hence, the political control over policing and military power.  Hey, power is power, concentration of power is concentration of power no matter from where it derives.

Concentration of power from the right starts with economic concentration of power that wrests ("buys") control and concentrates power over politics, and, hence, political control over policing & military power. And, equivalently, it therefore can be said the concentration of power from the left starts with political power (and its control over policing & military power) to wrest control and concentrate power over the economy. 

Therefore, Adam Smith's "Wealth of Nations" statement that "Monopoly is the enemy of competition" and it's implications for monopoly of economic, political, and policing & military power says that the  most important, effectual spectrum should be one of the degree of concentration of power in any of these institutions.

The relevant spectrum, economic and political, is degree of concentration of power .... not from where it derives.

Some scholars use 'the invisible hand of the market' as a metaphor for proving natural self-governance of the markets -- the assumption that by acting solely in his/her own interest a person necessarily delivers also in the general interest of his/her society. However, if you read in Adam Smith's "Wealth of Nations", where he details how this works in practice, you will find the assumptions of nationalism, limited awareness of outside interests, and efficient competition. 

Yes, in economics, individuals acting in their own self interests only benefits the overall market when complete information about the market is available to all individuals, they have the political and economic freedom to act on that information, and the actions of any one (or a few) individuals cannot influence the market more so than the collective actions of other individuals.

Many neo-conservative economists also tack on that 'the invisible hand of the market' only works in free markets, those in which there is no public sector governance of the economy -- law of the jungle markets. (Although more crude than that of Rudyard Kipling's "Law of the Jungle".) 

This law-of-the-jungle market economy is also referred to as 'laissaz faire' ... 'hands-off'. But laissez faire actually defines as having sufficient government involvement to ensure that the economic natural laws of laissez faire can operate ... and those laws assume and include a competitive market. 

Laissez faire economists emphasize an omnipresent criminal law system to enforce the market results. And, if the laissiz faire market produces extreme wealth for a few who then go on to unduly influence the criminal laws to their favor, then what?

Competitive markets require that the actions of no one player can affect the market as a whole; that all of the players have the same, full disclosure, complete knowledge of the market and their options; and that all players are rational decision-makers. That's never been a realistic possibility. So some societal or publicly elected governance is required to help enforce the rules of the game and help those who are at an awareness, education, and deciding disadvantage. Ideal competition rarely occurs. Life is not that pure and simple.

I find a worthy comparison in the game of baseball.

Would you pay to watch a baseball game with no umpires? Would you follow a game where some (or all) do not have to follow the rules? Would you pay to watch a baseball game in which some have the advantages of more money or easier transportation between stadiums and other man-made extras? 

Of course not. In fact, this is so abhorrent to Americans that when we were made aware of even the hint of rigged games -- Chicago Black Sox of 1919 and Pete Rose -- we demand justice on our ballfields and we demand justice our courts! So why wouldn't we want umpires onsite doing their job in our economic lives?

We need to have umpires on our economic ballfields.

Perhaps we should change the names "regulator" to "umpire".

... but that's a separate blog posting in itself!

By Steven J. Reichenstein