Business and Labor

In his 900-page classic, The Wealth of Nations. Smith warned against “the clamour and sophistry of merchants and manufacturers,” whom he characterized as people “who 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.” David Ricardo, spoke of businessmen as “notoriously ignorant of the most obvious principles.” Knowing how to run a business is not the same as understanding the larger and very different issues involved in understanding how the economy as a whole affects the population as a whole. Free market competition has often been opposed by the business community, from Adam Smith’s time to our own. It was business interests which promoted the pervasive policies of government intervention known as “mercantilism” in the centuries before Smith and others made the case for ending such intervention and establishing free markets. Business leaders are not wedded to a free market philosophy or any other philosophy. They promote their own self-interest any way they can, like other special interest groups. The efficient uses of scarce resources by the economy as a whole depends on a system that features both profits and losses. Businesses are interested only in the profit half. If they can avoid losses by getting government subsidies, tariffs and restrictions against imports, or domestic laws that stifle competition in various agricultural products, they will do so. Losses, however, are essential to the process that shifts resources to those who are providing what consumers want at the lowest prices—and away from those who are not. Take the airline industry. Between the last year of federal regulation in 1977 and twenty years later in 1997, the average air fare dropped by 40 percent and the average percentage of seats filled on planes rose from 56 percent to 69 percent, while more passengers than ever were carried more safely than ever. Meanwhile, whole airlines went bankrupt. That was the cost of greater efficiency. Even people who understand the need for competition, and for both profits and losses, nevertheless often insist that it should be “fair” competition. It means artificially keeping prices higher than they would be in the absence of government intervention, so that companies with higher costs of doing business can survive. The greatest contribution that a business makes to the economy and the society is in producing the most goods with the least resources, including labor. But nothing will get a corporation denounced more widely than laying off workers. On the other hand, nothing gets more public praise than business’ giving away the stockholders’ money to fashionable causes, many of which undermine the free market and the free society on which business itself depends.