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What Would Adam Smith Have Thought About Modern Cartel Policy, 300 Years After His Birth?

 |  July 11, 2023

By: Bruce Lyons (Center for Competition Policy, UEA)

The commemoration of the Tercentenary of Adam Smith’s birth prompted a revisit to one of the most renowned quotes in competition policy, seeking a deeper understanding of its context and the true intentions behind it. The question arose as to whether Smith would have sanctioned modern cartel policies or perceived them as undue interference in the natural workings of the market.

Smith emerged as a fervent proponent of competition, with a deep-seated concern about its potential erosion. He held the view that collusion was ingrained within industries, asserting, “People of the same trade 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.” [1] This profound skepticism regarding business motives has since become a cornerstone of effective enforcement of competition laws. Smith further espoused the belief that “Consumption is the sole end and purpose of all production, and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.” [2] This aligns closely with the contemporary concept of consumer welfare, as Smith’s concern about collusion lay in its adverse impact on consumers, often resulting in increased profits at their expense. However, Smith did not go so far as to propose the outright illegality of cartels.

Another pivotal aspect of Smith’s normative analysis rests on his unwavering belief in personal liberty. He advocated for an economic system wherein every individual “is left perfectly free to pursue his own interest in his own way, and to bring both his industry and his capital into competition with those of any other man.” [3] While this sentiment may bear resemblance to present-day concerns over “exclusionary effects,” the latter predominantly revolve around future price hikes. Smith, on the other hand, perceived inherent value in the individual’s freedom to enter the market, irrespective of the implications for consumer prices and product quality…