The Wealth of Nations

by Adam Smith

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What does the following quote from The Wealth of Nations suggest about the merits of a free-market system?

“People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or contrivance to raise prices” (Adam Smith, 1776, book 10, chapter 8).

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One of the most frequently quoted sentences in Adam Smith's treatise TheWealth of Nations concerns the tendency of businessmen to create price-fixing conspiracies and cartels when left to their own devices. As Smith writes,

People of the same trade seldom meet together even for merriment and diversion, but...

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the conversation ends in a conspiracy against the public or contrivance to raise prices.

What this says about a free-market system is that it will inevitably encounter obstacles, not the least of which is human nature, which tends to favor self-interest and even the interests of neighbors and members of the same profession over any principle of public good.

What Smith says here is straightforward and not particularly controversial. However, the quotation is often taken out of context to mean that government intervention is required in order to correct this tendency to conspire. Smith says no such thing and, indeed, goes on to say that such meetings cannot and should not be prevented by law. The British economist Eamonn Butler (who, not coincidentally, is the Director of the neoliberal think-tank, The Adam Smith Institute) has argued that Smith's point is open to precisely the opposite construction. Conspiracies against the public can only succeed if they are protected by government regulation. Otherwise, such conspiracies will be subject to the pressures of the open market, meaning that they will be defeated by other businesses which are more competitive (and honest).

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Many critics of the free-market economy quote this particular excerpt from The Wealth of the Nations to show that their ideas correspond with those of the great Adam Smith. Unfortunately, it's often the case that such critics then conveniently omit what Smith goes on to say in the very same chapter:

It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

In other words, governments shouldn't frame laws that actively prevent businessmen from conspiring against the public through price cartels, price-fixing, or other such measures. Nor, for that matter, should they be in the business of making it easier for them to do so by devising regulations that protect producers involved in such conspiracies.

In Smith's view, then, the only way that businesses can succeed in any kind of "conspiracy against the public" is if they are given protection by government regulation. If not, then the pressures of market competition will ensure that conspiring businesses involved in price-fixing will be undermined by their competitors.

In short, it's the free market that is best placed to end any such conspiracies, not the intervention of government, however well meaning. When all is said and done, it is the market that decides prices, not government intervention and not the price-fixing activities of businesses involved in a conspiracy against the public.

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In The Wealth of Nations, Adam Smith writes,

“People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or contrivance to raise prices.”

By this, he means that when people who have the same occupation get together, even when they get together to socialize, they discuss their jobs and ability to act in unison to raise prices to the disadvantage of the public consumer.

To simplify, Adam Smith is saying that whenever bakers or tailors, as examples, get together, even if they are spending time socially, they end up talking about what they each charge customers for a loaf of bread or to hem a dress. As a result of their discussion, they mutually agree to maintain prices at roughly the same level.

In modern terms, this is referred to as price collusion or price fixing. The Federal Trade Commission describes price fixing as

an agreement (written, verbal, or inferred from conduct) among competitors that raises, lowers, or stabilizes prices or competitive terms.

Adam Smith is arguing against price collusion. However, collusion is really only possible in a monopoly, duopoly, or oligopoly. In a monopoly, one person or entity controls all the supply of a product or service. A duopoly is characterized by the operation of two primary suppliers of goods or services. An oligopoly refers to a situation in which a few large corporations supply the goods or services.

When there are a sufficient number of competitors in the industry, it becomes extremely difficult to fix prices. In a competitive situation, the free-market system allocates resources and prices properly. As Smith says,

The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion indeed, but for any considerable time together.

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This quote from Adam Smith is often taken to be a criticism of the free market.  In a way, it is because it does say that people engaged in free enterprise will try to collude and manipulate the system for their own benefit and against the benefit of the people.

However, what Smith is really arguing here is against government interventions in the economy.  He is saying that the government should not do anything that encourages those people to meet with one another since those meetings would lead to collusion against the public interest.  After he says that, he goes on to warn against various kinds of regulations that would induce the "people of the same trade" to meet.

Essentially, what he is doing here is warning against government policies that would create interest groups.  He is saying that the government should not enact policies like workman's compensation laws that would give the various people in an industry the motivation to get together in a group and lobby the government.

So, what Smith is arguing is that completely free competition is better for society.  He does not want the government to do anything that would encourage those in an industry to form an interest group and start to "conspire against the public."

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