MARKET COMPETITION

Laurent Bouvier, managing director and global head of industrials at UBS Investment Bank, posts (14 December) on FINANCE LONDON HERE

“Industrials sector must learn that more competition brings more risks

Basic economic theory about competition is flawed, which poses problems as technology changes the way goods are produced”

As a natural born capitalist, I embraced from the youngest age the economic theory from Adam Smith. Self-interest acts as an economic motivator whilst that motivator is held in check by competition through free-market policies. Self-interest and competition complement each other to produce wealth through the “invisible hand”. How could anyone possibly disagree?

According to such traditional economic theories, the optimal level of competition from an economic efficiency point of view is maximum competition. Industry participants must compete for all the resources alongside the entire value chain. They must capture the hearts and minds of suppliers, talented employees, customers, governmental institutions and capital providers - relentlessly. Only the fittest survive. It is a matter of natural selection.

COMMENT

Laurent Bouvier, with his albeit impressive employment record at the heart of capital, is also, when more closely examined, in a muddle. There is no ‘free market’, there are well established regulatory interventions, and participants do not necessarily ‘behave” themselves. Moreover, he seems a bit starry-eyed when it comes to Adam Smith’s ideas, possibly over selective about what he described his ideas, not least of which is his version of Smith’s use of the ‘invisible hand’ metaphor.

Bouvier is mistaken as to where the problem lies in over-simplified theories of competition. Certainly not with Adam Smith’s account, though it certainly does lie with modern, post-Samuelson’s invented presentations of Adam Smith’s ‘invisible hands’ and all that guff.

Smith was quite clear. People can compete in markets, or they can manipulate them. Both phenomenon co-exist and always have. Any study of the evolution of markets reveals open competition and hidden collusion, plus manipulation. Courts of law have been dealing with cheating, dishonesty and

outright criminality in markets since way back when they appeared many millennia ago in various parts of Europe and the Middle and far East; and expanded rapidly from the 16th century.

There are consequences of human actions, best understood without rose-tinted vision. Smith’s single reference in Wealth of Nations to ‘an invisible hand’ was not a magic bullet setting competitive prices. It simply meant than from the actions of producing a product in a market environment (honest or corrupt) there is an immediate consequence: the expenditure of the actors necessarily, and consequentially, adds to domestic aggregate demand for the resources used in productive activity through their  purchases of inputs and hiring labour.

The recipients of incomes become spenders in the economy. Labour spends it wages, owners of inputs that sell, spend their sales receipts, and the economy continues in successive rounds of expenditures. The process was dubbed by Smith as a metaphoric invisible hand. He could have descred it as the circular flow of income, albeit less impressive as a metaphor, and perhaps also not as impressive in terms of ‘Belles Lettres’ - remember his ‘Lectures on Rhetoric’ included ‘Belles Lettres’ (fine writing) in his title and text..