Monday, December 31, 2007

In Adam Smith's Day Cartels Were Legal

Barrons carries an article by John Steele Gordon (here) “Contrivances to Raise Prices”, with the obligatory quotation from Wealth Of Nations:

Adam Smith understood economics because he understood human nature. In The Wealth of Nations he 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."

In Smith's day there were no laws against such conspiracies. The favorite contrivance to raise prices was the cartel.”

In Smith's day there were no laws against such conspiracies.” Well, that gives it way. John Steele Gordon has selected the quotation, read the bit about ‘same trade seldom meet together’, notes the bit about ‘contrivance to raise prices’, and immediately concludes that because there are now laws against such ‘conspiracies’, there were no laws against them in Adam Smith’s day.

Well, in pure fact that was the case, but Adam Smith’s point was far more serious than the absence of laws against cartels.

Wealth Of Nations contains his critique of mercantile political economy. A singular feature of the time was the legalization, and statutory protection of cartels! Adam Smith’s complaint about ‘trades’ was precisely about their legal status.

In those days – and for long before since Elizabethan times (16th century) – the incorporated Guilds of each town ran their affairs as instruments of monopolies for each trade. Now ‘trades’ were precisely that – butchers, printers, mechanics, weavers, knitters, haberdasheries, shops of all kinds – they were not businesses on the scale thought of today, or common since the 19th century. They were shops.

These were the men who also ran the towns. They decided who could and could not trade in the town precincts, who could sell there, and – note well – who could work there. The Statute of Apprentices allowed them to recruit apprentices and allowed each trade to limit the number of apprentices employed by a trade (usually just two!).

The Trades also required any tradesman to have served his apprenticeship in the same town and prevented tradesmen trained elsewhere from working there. The common route to ensure post-apprenticeship employment was to marry a daughter of the Master.

The Guilds were not just employers (the Masters); they were also the men who served in them. Their nearest modern equivalent is not the capitalist firm; it is the modern professional Guilds of employed and self-employed people, such as the screen writers, presently on strike.

The trades that Adam Smith spoke of did not need to strike – they controlled the laws that protected their privileges and provide the local magistrates who enforced them. It was the Trades in Glasgow who refused permission for James Watt to work at his trade as an instrument maker in 1763. Fortunately for him, and for the ‘industrial revolution’, Glasgow University offered him the post of the University’s instrument maker (Adam Smith was a member of the Senate that appointed him) and it was there that he was given a model of the Newcomen steam engine to repair and later to improve – and the rest, as they say, is history.

Moreover, cartels today tend to be ‘of the same technology’ and stretch across the whole country, sometimes the world. In Smith’s time the 'conspiracy' was open and legitimate, and involved all the different trades of a town in a co-conspiracy to protect each other’s monopoly. They didn’t need to meet in secret and pretend it was a social gathering. They met openly and shared ‘merriment and diversion’ openly.

Adam Smith’s point was that social meetings and their business meetings were directed to one end: keeping the market supply restricted and their prices high – even to each other! – to ensure higher profits than would be the case if there was open competition.


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