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What is the meaning of the following quote from The Wealth of Nations? (See below)...
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What Smith meant here is that it is very important for the government to refrain from meddling in the economy. He is saying that the government should not do things that will make businessmen want to get together in what we would now call interest groups.
Smith believes that the firms in a particular area of business should compete with one another. This would help the public because the competition would drive prices down and quality up. But the government can put this in danger if its policies encourage businessmen to get together. For example, if the government created regulations that the businessmen would not like, they might get together to figure out ways to persuade the government to abandon those policies.
Smith felt that such meetings would lead to collusion between the businessmen who were supposed to be competing. This would mean less competition, and the decrease in competition would harm the public.
Posted by pohnpei397 on April 16, 2012 at 1:29 AM (Answer #1)
Smith's concern here is not that the government will intervene but that companies that produce similar goods or provide similar services will get together in order to fix prices, control availability, and create a plan to keep their products and services at the optimal price for a long period (a price good for the companies, not the consumer).
Most industrialized countries realized the dangers of what is now called price-fixing and created a series of laws called anti-trust laws, which specifically prohibit and usually criminalize any corporate behavior among similar corporations to fix their prices or jointly decide when and how to make their products available. Many anti-trust suits in the US, for example, have centered on companies colluding to keep the availability of their products slightly below the level of demand so as to keep prices high.
Despite these precautions, however, there are instances of price-fixing today. The oil-producing countries, in an organization called OPEC, essentially meet with each other every year to decide how much oil to produce and ship to various countries in order to keep prices high. If OPEC were a US corporation, the Department of Justice would probably bring an anti-trust suit against OPEC.
Posted by docholl1 on April 16, 2012 at 11:16 AM (Answer #2)
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