Did Adam Smith consider the impact of anti-competitive regulatory actions on free markets?

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Question: 

Was corporation efforts to limit competition (healthcare drug maker practices, etc.) considered within the original, or current, evaluation of free-market equilibrium? It seems like the free-market theory diminishes when such practices are in place and competition is limited through things other than efficiency, ingenuity, capital, etc., such as lobbying government or organizations to limit entry to a market through regulations rather than competition. I'm not well read on Adam Smith. Did he consider such limits to the "free" in free markets?

Answer: 

You are correct in observing that efforts to limit competition have the potential to produce market outcomes that diverge from the "free market ideal" that economists commonly use as their baseline of comparison. Indeed the desirable properties of the free market emerge only in ideal conditions in which all market participants must accept the market determined price, are fully informed about the price in the market and are individually too small to influence the market price through any of their actions. 

It is indeed often in the interest of individual market participants to attempt to influence market outcomes. As Adam Smith observed in the Wealth of Nations, for example, "People of the same trade seldom meet together even for merriment or diversion, but the conversation ends in a conspiracy against the publick [sic], or in some contrivance to raise prices."

Much of modern economics is concerned with analyzing how deviations from perfectly competitive circumstances affect market outcomes, and to designing solutions that will minimize these effects. But this analysis also recognizes that government agencies are themselves often interested parties in these outcomes and that they are made up of individuals who are seeking to advance their own interests. Put somewhat differently, the free market is a convenient special case but it is unlikely to be observed in nature.

Answered by:
Dr. Joshua Rosenbloom
Professor
Department Chair
Category: 
Last updated on November 23, 2021