Monday, July 19, 2010

Adam Smith on imperfect competition

From Wealth of Nations, Book IV, Chapter IX:
Some speculative physicians seem to have imagined that the health of the human body could be preserved only by a certain precise regimen of diet and exercise, of which every, the smallest, violation necessarily occasioned some degree of disease or disorder proportioned to the degree of the violation. Experience, however, would seem to show, that the human body frequently preserves, to all appearance at least, the most perfect state of health under a vast variety of different regimens; even under some which are generally believed to be very far from being perfectly wholesome. But the healthful state of the human body, it would seem, contains in itself some unknown principle of preservation, capable either of preventing or of correcting, in many respects, the bad effects even of a very faulty regimen. Mr. Quesnai [a French economist], who was himself a physician, and a very speculative physician, seems to have entertained a notion of the same kind concerning the political body, and to have imagined that it would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that in the political body, the natural effort which every man is continually making to better his own condition, is a principle of preservation capable of preventing and correcting, in many respects, the bad effects of a political economy, in some degree both partial and oppressive. Such a political economy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of teh bad effects of the folly and injustice of man; in the same manner as it has done in the natural body, for remedying those of his sloth and intemperance.
This argument is significant to me for a number of reasons. For one, it deflates the vaunted economic achievements that many wish to ascribe to government. That is, economies have flourished not because of, but rather in spite of the meddling of government. For another, it is a nice statement of Enlightenment optimism: things naturally progress forward, in spite of many serious obstacles. It would be foolish, however, to describe Smith as a simple optimist. There are many other statements in this treatise which sound rather pessimistic. Nevertheless, this is perhaps a hopeful statement for libertarians, who will, with near absolute certainty, never be satisfied with how government handles the economy.

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