Adam Smith, The Missed Lessons


The common take away from Adam Smiths work "The Wealth of Nations" is that there is an invisible hand that helps to self regulate markets.  And, that invisible hand is the competing self interests of those in the market.  There are sellers competing with other sellers, thus keeping prices down; and there are buyers competing with other buyers, thus keeping prices up. And, all in all, the invisible hand, or, in otherwords, competition, keeps markets and prices reasonable.

But, from Adam Smith's work, there is a often missed concept. In contrast to the invisible hand, Smith presents that the main issue with markets is the formation of cartels and monopolies.  That, this formation of cartels and monopolies is an emergent pattern natural to markets.  And that preventing malignant monopolies is one of the key roles of government.

Just as competition creates an emergent pattern that keeps prices reasonable, conspiracy and collaboration creates an emergent pattern of domination and exploitation by cartels and monopolies.

It is the ongoing effort of humanity to create balanced systems that allow for the continuation of progress.  And, it is the failure of this balance that leads to the cycle of civilizations, from growth to decay, and, eventually, replacement.  

Preventing malignant monopolies is not only a matter concerning markets, it is a matter concerning  governments.  After all, the government is a monopoly; it is a monopoly on law in a region.  And, in the US, by having states competing for residence and commerce by citizens, the states, as monopolies over their regions, are compelled to act decently or else citizens would move to competing states.

Government as a monopoly is acceptable because, since monopolies are an emergent pattern of nature, a monopoly of government will form regardless of whether there was one there to begin with.  And, since a government as a monopoly will form regardless, it is wise to intelligently construct the government monopoly so as to prevent it from becoming malignant.

Knowing this, when the US founders created the US government they took efforts to ensure the US government was minimal and restrained, but adequate to prevent outside governments from taking over.

Another often missed concept from Adam Smith, is that seemingly simple situations with seemingly simple regulatory solutions end up not being simple, and the regulatory solutions result in unexpected outcomes due to unseen complexity.  And, consequently, the efforts of government to regulate markets should be limited to essentials, including preventing malignant monopolies.

So, to recap

1. Monopolies are an emergent pattern of markets
2. Monopolies are dangerous.   Just as any self interested entity with unlimited power, you can never expect a monopoly not to exploit others for its own gain.
3. There are areas where monopolies either must or should exist.  In the case of a government, if there were not an intelligently constructed monopoly, constructed to restrain the power of the monopoly, like with the US, then an exploitative monopoly would end up ruling, either from external usurpation or an internal formation by the most powerful groups in the region.

In the case of utilities, there exists what is called natural monopolies.  A natural monopoly is a monopoly where it is not economical for there to be multiple sellers of a service or product.  For instance, with sewage systems, it does not make sense to dig up roads multiple times to place multiple adjacent sewage systems.  Instead, societies allow natural monopolies to exist but regulate them so they do not do not exploit their customers.  And, in this sense, government is a composite of natural monopolies.  Government is a monopoly on law enforcement.  It is a monopoly on law creation.  And it tends to be a monopoly in many other areas.  The main issue in constructing government is how to prevent any of the composite monopolies of which the government consists from becoming malignant.

So, whenever someone presents you with the idea that we should make government bigger, always think, if we give this monopoly more power, what prevents it from using exploitatively?

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