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.
Whatever the merits or demerits of various political proposal, what must be kept in mind when evaluating them is that the good fortunes and misfortunes of different sectors of the economy may be closely related as cause and effect - and that preventing bad effects may prevent good effects. It was not accidental that Smith Corona was losing millions of dollars on its typewriters while Dell was making millions on its computers. It was not accidental that Safeway surged to the top of the grocery business while A&P fell from its peak to virtual oblivion. The efficient allocation of scarce resources, which have alternative uses, means that some must lose their ability to use those resources in order that others can gain the ability to use them Typewriters were no longer what the public wanted after they had the option to achieve the same end result and more with computers. Scarcity implies that resources must be taken from some places, in order to go to other places.
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