16. Adam Smith on Corporations as monopolistic

March 24, 2009 § Leave a comment

Here are all the references in Wealth of Nations to Adam Smith’s views on corporations. Note, each one is critical because of their tendency to control and hence prevent free market activity. They were found by searching the online etext for “corporaion”

Adam Smith

The exclusive privileges of corporations, statutes of apprenticeship, and all those laws which restrain, in particular employments, the competition to a smaller number than might otherwise go into them, have the same tendency, though in a less degree. They are a sort of enlarged monopolies, and may frequently, for ages together, and in whole classes of employments, keep up the market price of particular commodities above the natural price, and maintain both the wages of the labour and the profits of the stock employed about them somewhat above their natural rate.

Such enhancements of the market price may last as long as the regulations of police which give occasion to them.

All such incorporations were anciently called universities, which indeed is the proper Latin name for any incorporation whatever. The university of smiths, the university of tailors, etc., are expressions which we commonly meet with in the old charters of ancient towns.

It is to prevent this reduction of price, and consequently of wages and profit, by restraining that free competition which would most certainly occasion it, that all corporations, and the greater part of corporation laws, have been established. In order to erect a corporation, no other authority in ancient times was requisite in many parts of Europe, but that of the town corporate in which it was established. In England, indeed, a charter from the king was likewise necessary. But this prerogative of the crown seems to have been reserved rather for extorting money from the subject than for the defence of the common liberty against such oppressive monopolies. Upon paying a fine to the king, the charter seems generally to have been readily granted; and when any particular class of artificers or traders thought proper to act as a corporation without a charter, such adulterine guilds, as they were called, were not always disfranchised upon that account, but obliged to fine annually to the king for permission to exercise their usurped privileges. The immediate inspection of all corporations, and of the bye-laws which they might think proper to enact for their own government, belonged to the town corporate in which they were established; and whatever discipline was exercised over them proceeded commonly, not from the king, but from the greater incorporation of which those subordinate ones were only parts or members.

yet the corporation spirit, the jealousy of strangers, the aversion to take apprentices, or to communicate the secret of their trade, generally prevail in them, and often teach them, by voluntary associations and agreements, to prevent that free competition which they cannot prohibit by bye-laws.

In China and Indostan accordingly both the rank and the wages of country labourers are said to be superior to those of the greater part of artificers and manufacturers. They would probably be so everywhere, if corporation laws and the corporation spirit did not prevent it.

Corporation laws enable the inhabitants of towns to raise their prices, without fearing to be undersold by the free competition of their own countrymen.

An incorporation not only renders them necessary, but makes the act of the majority binding upon the whole. In a free trade an effectual combination cannot be established but by the unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind. The majority of a corporation can enact a bye-law with proper penalties, which will limit the competition more effectually and more durably than any voluntary combination whatever.

The pretence that corporations are necessary for the better government of the trade is without any foundation. The real and effectual discipline which is exercised over a workman is not that of his corporation, but that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence. An exclusive corporation necessarily weakens the force of this discipline.

Corporation laws, however, give less obstruction to the free circulation of stock from one place to another than to that of labour. It is everywhere much easier for a wealthy merchant to obtain the privilege of trading in a town corporate, than for a poor artificer to obtain that of working in it.

The obstruction which corporation laws give to the free circulation of labour is common, I believe, to every part of Europe. That which is given to it by the Poor Laws is, so far as I know, peculiar to England. It consists in the difficulty which a poor man finds in obtaining a settlement, or even in being allowed to exercise his industry in any parish but that to which he belongs. It is the labour of artificers and manufacturers only of which the free circulation is obstructed by corporation laws. The difficulty of obtaining settlements obstructs even that of common labour.

In ancient times, too, it was usual to attempt to regulate the profits of merchants and other dealers, by rating the price both of provisions and other goods. The assize of bread is, so far as I know, the only remnant of this ancient usage. Where there is an exclusive corporation, it may perhaps be proper to regulate the price of the first necessary of life. But where there is none, the competition will regulate it much better than any assize. The method of fixing the assize of bread established by the 31st of George II could not be put in practice in Scotland, on account of a defect in the law; its execution depending upon the office of a clerk of the market, which does not exist there. This defect was not remedied till the 3rd of George III. The want of an assize occasioned no sensible inconveniency, and the establishment of one, in the few places where it has yet taken place, has produced no sensible advantage. In the greater part of the towns of Scotland, however, there is an incorporation of bakers who claim exclusive privileges, though they are not very strictly guarded.

that exclusive corporation spirit which prevails in them, naturally endeavour to obtain against all their countrymen the same exclusive privilege which they generally possess against the inhabitants of their respective towns

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As it is the interest of the freemen of a corporation to hinder the rest of the inhabitants from employing any workmen but themselves, so it is the interest of the merchants and manufacturers of every country to secure to themselves the monopoly of the home market.

but were at best but a sort of corporation, which, though it had the power of enacting bye-laws for its own government, was at all times subject to the correction, jurisdiction, and legislative authority of the mother city.

and, Newsweek has an asessment that ends

A more probable outcome is the one drawn from the narrow history of bear markets that grew out of financial crises. In it, the bear scenario continues to play out until the bull takes over, with more debt busts and government trial and error until things get set right again. That could mean two more years of bouncing around and then another six or so before the Dow is back above 14,000. Not long ago, such an outcome would have seemed unimaginably bleak. Given the other possibilities, it doesn’t seem so bad now

But the article did not discuss “other possibilities”. Wild cards: war, civil strife, plague, San Fracisco earthquake? And what are we doing about climate change? The obvious is that there is a real opportunity to put together energy, education, health into a new structure for society. But how can we get there?

Back to Sen who says

Ideas about changing the organization of society in the long run are clearly needed, quite apart from strategies for dealing with an immediate crisis.

But then look where he goes.

First, do we really need some kind of “new capitalism” rather than an economic system that is not monolithic, draws on a variety of institutions chosen pragmatically, and is based on social values that we can defend ethically? Should we search for a new capitalism or for a “new world”—to use the other term mentioned at the Paris meeting—that would take a different form?

So, not new capitalism, but pragmatic. This is a sort of rorschach.

All affluent countries in the world—those in Europe, as well as the US, Canada, Japan, Singapore, South Korea, Australia, and others—have, for quite some time now, depended partly on transactions and other payments that occur largely outside markets. These include unemployment benefits, public pensions, other features of social security, and the provision of education, health care, and a variety of other services distributed through nonmarket arrangements. The economic entitlements connected with such services are not based on private ownership and property rights.

So the hint here is that the current systems is already post capital, or rather mixed, and meeting challenges. He then says

Underlying this issue is a more basic question: whether capitalism is a term that is of particular use today. The idea of capitalism did in fact have an important role historically, but by now that usefulness may well be fairly exhausted.

For example, the pioneering works of Adam Smith in the eighteenth century showed the usefulness and dynamism of the market economy, and why—and particularly how—that dynamism worked

And Smith never used the word “capitalism”

It is also worth mentioning in this context, especially since the “welfare state” emerged long after Smith’s own time, that in his various writings, his overwhelming concern—and worry—about the fate of the poor and the disadvantaged are strikingly prominent. The most immediate failure of the market mechanism lies in the things that the market leaves undone. Smith’s economic analysis went well beyond leaving everything to the invisible hand of the market mechanism. He was not only a defender of the role of the state in providing public services, such as education, and in poverty relief (along with demanding greater freedom for the indigents who received support than the Poor Laws of his day provided), he was also deeply concerned about the inequality and poverty that might survive in an otherwise successful market economy.

Smith is much more helpful now then the simple free market reading suggest

Smith called the promoters of excessive risk in search of profits “prodigals and projectors”—which is quite a good description of issuers of subprime mortgages over the past few years. Discussing laws against usury, for example, Smith wanted state regulation to protect citizens from the “prodigals and projectors” who promoted unsound loans:

A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.[4]

But the then goes to the psychology of the situation rather than to the underlying real debt and real unemplomnet, and the real lack of any vision of were new jobs on such a needed scale can be created.

One of the problems that the Obama administration has to deal with is that the real crisis, arising from financial mismanagement and other transgressions, has become many times magnified by a psychological collapse. The measures that are being discussed right now in Washington and elsewhere to regenerate the credit market include bailouts—with firm requirements that subsidized financial institutions actually lend—government purchase of toxic assets, insurance against failure to repay loans, and bank nationalization. (The last proposal scares many conservatives just as private control of the public money given to the banks worries people concerned about accountability.) As the weak response of the market to the administration’s measures so far suggests, each of these policies would have to be assessed partly for their impact on the psychology of businesses and consumers, particularly in America.

The psychology is many times as much an amplifier as the underlying realities?  doubt it.

He seems to shift from things are basically o, to the need for solid redirection.

Since the suffering of the most deprived people in each economy—and in the world—demands the most urgent attention, the role of supportive cooperation between business and government cannot stop only with mutually coordinated expansion of an economy.

which is very strong and remarkable, but achievable? There is no discussion of resistance. But he does something quite interesting, he picks up a Keynesian weakness, getting on the side of the critics, and then delivers

The limitations of Keynesian economics to address their problems demand much greater recognition.

and he ends with

The present economic crises do not, I would argue, call for a “new capitalism,” but they do demand a new understanding of older ideas, such as those of Smith and, nearer our time, of Pigou, many of which have been sadly neglected. What is also needed is a clearheaded perception of how different institutions actually work, and of how a variety of organizations—from the market to the institutions of the state—can go beyond short-term solutions and contribute to producing a more decent economic world.

So, we need major changes, but things are going along, and there is no criticism of corporations  and little of banks.

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