Friday, October 13, 2006

Good Working paper on Modern Cartels

A most interesting paper crosses my desk: ‘Cartels and Competition: Neither Markets nor Hierarchies’ by Jeffrey Fear, published as a Harvard Business School Working Paper, Number: 07-011.

The contents should interest all economists and business policy specialists. As it is a Working paper the author requests no discussion on it as if it was a finished document. However, he welcomes discussion and I shall confine my remarks to his presentation of Adam Smith on ‘cartels’.

Here we strike a problem because Adam Smith is referred to on two levels. One is the viewpoint of unnamed members of the profession after World War II and the other is what Smith wrote in Wealth of Nations. The two levels are not congruent, much like the situation that caused my comments on Professor Mutu’s (Princeton) paper at the Columbia University conference I attended in New York last month. Professor Mutu referred many times to ‘international trading companies’, supposedly as if they written about my Adam Smith in the 18th century, though he was writing about the Chartered Trading Companies, such as the East India Company and not about what today we call ‘international trading companies’. This non-congruence by ascription seems to be popular in academic discourse, based I think on selective reading of Wealth of Nations without any concern for context.

Here is how Jeffrey Fear brings Adam Smith into a discussion about cartels under capitalism in general and corporate America in particular:

Before 1945 most of the world thought that cartels brought widespread benefits. Backed by U.S. economic might, after 1945 antitrust ideas spread across the world so that now Adam Smith’s devastating verdict of them as “conspiracies against the public” has become the prevailing interpretation. Business historians have shown, however, that this consensus about cartels as conspiracy is historically the exception to the rule, a product of a post-1945 constellation of ideas and events. Cartels are not necessarily the opposite of liberalism and competition, but a variation on them. For better or for worse, they shaped economic and business history since the late 19th century. From the company perspective, joining, managing, or combating cartels was a major entrepreneurial act. Finally, business historians have shown the varied effects and services provided by cartels (quality standards, technology transfers, or risk management) that extend beyond the conspiratorial motivation to raise prices.”

“To be clear, these cooperative arrangements were by no means benign, mostly second-best forms of competition, and were largely but not exclusively in producers’ interests. They were, however, sometimes more congruent with the public interest than Smith’s claim that they were only an “absurd tax” created by an “order of men…who have generally an interest to deceive and even to oppress the public” (Smith [1776] 1976: 278) [Chicago edition]. We need to broaden the discussion of cartels beyond conspiracy.”

The ‘conspiracy against the public interest’ that Smith spoke of was not a product cartel (like oil), but a town full of master tradesmen, artisans and merchants who formed an alliance of ‘Guilds’ and who effectively ran the towns.

Through the Apprenticeship Statute they limited strictly how many ‘apprenticeships’ a Master could have (often two only), for how long (seven years) and what ‘secrets’ they could be taught (how to make whatever was their trade). Masters did not pay them much, if at all – often the parents ‘paid’ the Master for the privilege – and both gained from free labour and from the limitation on future competition, also circumscribed by chosen apprentices marrying into the family.

In alliance, the Town Guilds used their monopoly powers to only buy from each other and to raise their prices against the consumers. It was to this aspect that Smith drew attention (WN I.x.c.27: p 146: ‘People of the same trade…etc.,’). It was part of his critique of free market distortions brought about by monopolising merchants and manufacturers, who prohibited newcomers operating within their town boundaries (hence, James Watt’s exclusion by the Glasgow Guilds from practicing his trade as a mechanic with the town).

Extrapolating this measured critique to modern cartels is a wide stretch by any standard. We can imagine what he might have said about them, but he didn’t know about them. He knew about the general traders and their chartered monopolies of wide geographical areas, but as he didn’t know about modern corporations it is not clear that his opinion of what they might have been is of much relevance. His presence in the article adds nothing to its modern analysis, except to give it a ‘cover’ of rectitude.

I suggest you read and enjoy, and learn from what ‘Cartels and Competition: Neither Markets nor Hierarchies’ by Jeffrey Fear has to say about modern cartels, and leave Wealth of Nations on your bookshelf.


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