Wednesday, November 09, 2005

The Law and Competition

Peter Gordon writing in The Standard, Hong Kong (“China’s Business Newspaper”), discusses the government’s proposal for a ‘fair competition law. Much of what he writes is a frank assessment of actual competition in markets and I would agree with him on many points.

For example, he opens with a statement from Hong Kong’s Chief Executive Donald Tsang who said: "we do not want to see a situation where a few big companies, whether local or international, can corner the market, fix prices or engage in bid rigging." Now if that same rule applied to the burgeoning growth of large ex-state enterprises in China it would be exceptionally good news. Britain did not quite manage it with its privatizations that created private monopolies in place of state monopolies in the 1990s.

However, Peter Gordon makes some of the usual errors when referring to Adam Smith, though he has a right to his opinion and how he expresses it.

He writes:

“The economic issue is primarily one of efficiency. It's through competition that companies become efficient; competition forces them to pass on these efficiencies in lower costs; and lower costs benefit the economy as a whole.
There's no rule that businessmen have to like this. Indeed, businessmen usually do their best to avoid competition. This is, arguably, their job: businessmen can try to avoid competition by developing new goods and services, by knocking their competitors out of the market through better or less expensive goods and services by - in other words - competing.”

You could not get it clearer than that. I can also testify that I have never met a business leader yet who likes competition, and I have met many who loathe it and do their best to eliminate it. The rule of law is needed to prevent firms and the people in them from doing all they can eliminate competition, fairly or unfairly. In this context, the antics of British Airways some years back to undermine rival airlines on the Atlantic routes spring to mind.

Peter Gordon continues:

“It's this market mechanism that makes economies work to the benefit of us all. As Adam Smith, the patron saint of laissez-faire economies, wrote: "It's not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."

“Adam Smith, the patron saint of laissez-faire economies”? Oh, dear. He was neither a ‘patron saint’ of anything, nor ‘laissez faire economies’, words he never used. That ‘honour’, if it can be called such, or more correctly, idealistic illusion, belongs to a number of French économistes in the mid-18th century, sometimes known as the Physiocrats, and it was never accepted as a policy by Adam Smith.

“Furthermore, sometimes businessmen don't compete as they should, but instead collude. Smith also wrote that "people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

As Peter Gordon is aware of this comment by Smith on the non-competitive proclivities of business people, it should cause him to reflect on the contaminated inclinations of his nominated so called ‘patron saint of laissez faire’. Smith's “Wealth of Nations” is replete with warnings about allowing business people (‘merchants and manufacturers’) alone to do whatever they pleased.

Peter Gordon’s conclusion is most apposite:

“A competition law, therefore, should serve to restore competition where it's lacking.”

Yes, indeed! That is why laissez faire is a false doctrine and why Smith had nothing to do with it. Competition has to be enforced by the law otherwise it degenerates into monopolies or, if the State monopolises economic activity, only the law can free people from the effects of State monopoly and its (always) associated totalitarian or authoritarian government.


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