There is little doubt that Adam Smith did as much for economic theory as anyone, but that does not mean that he and David Ricardo had found the best way to run an economy. For the Smith doctrine, markets are free and competitive, therefore what you get is proportional to your value, or at least your social contribution. It assumes that entry to the market place is effectively free and unconstrained, as is exiting, and further no single entry or exit will significantly perturb the market. The problem with this point of view is that it just does not apply in many areas. Smith based his analysis on an agricultural society, and in this the farmers have to sell whatever they grow, and his assumptions are valid. An additional farmer, or one who does not produce, makes little difference to the market. There are ups and downs. I can recall when I was young there was a potato glut, and farmers were taking potatoes and throwing them over a cliff. My father was at the bottom and picked up what he needed and set off to grow them for next season, his reason being if everyone else was getting out of potatoes, next season there would be a shortage. That happened, and prices went up by a factor of ten. Smith’s theory was working well, including the fact that some could see what would happen and make money from their foresight.
However, there is another side to the market: some find the best way to make money is not to be efficient, but to exercise power. With sufficient power, you can close out competitors, and with a monopoly, or failing that, a limited oligopoly, you can price how you like. The problem with Smith’s analysis is that the players respond differently to their rewards. Some spend and others save. The concept of saving, in the Smith analysis, is that the saver simply delays reward, while investment is made with the goal of forgoing present rewards with the view to get bigger rewards in the future. But suppose the purpose of saving is not to get rewards, but rather to gain economic power? With power, you also get inequality, because the purpose of power is to get your rewards by tithing those without sufficient power.
In a previous post (http://wp.me/p2IwTC-5n ) I constructed a simple game where 128 people started equally, and they could either spend or save. After as few as five rounds, where in each round there was a fifty-fifty choice of whether to spend or invest, one was clearly ahead of all the rest. Now, you might say, if someone is prepared to forego current pleasure, is it not fair that he ends up with more wealth in the end? That depends, in my opinion, on how he uses it. If the saving is merely spent on getting a bigger brighter object, then that is of no concern, but if he uses wealth to close down others’ opportunities, then that is not helpful.
The problem with the wealth is that when opportunities are rare, whoever gets in first and succeeds has a great start. There is no doubt that in the very early stages of a new technology, there are a number of failures as a very few become ascendant. The question then is, why do they become ascendant? In some cases it is because others fall by the wayside, in part because they were one-hit wonders, and as time passes, the hit that was is no longer a hit. But in other cases, it was because they were lucky, or had a slight edge at the right time and place. How much is due to power and influence? It may very well be that it has nothing to do with the best product. Thus I recall when desktop computers came into being, businesses all went with Microsoft. Why was that? First, Microsoft somehow came to a deal with IBM, which in principle had been leading in the handling of mainframe computers for some time. Why IBM gave Microsoft that position is one of the mysteries of life; presumably they did not foresee what would happen, because the opportunity was theirs for the taking. IBM gave businesses a feeling of “security”. Second, these businesses often had in-house computer “experts”, and these would recommend Microsoft, even if it were not the best. Why? Well, if they recommended Apple, say, the bosses could work out how to use it themselves, and the jobs of the “IT experts” were not necessary. Better to go with IBM, and keep their jobs because the procedures then were too opaque for the bosses, and the workers were not going to show them how to do what would make them unnecessary. There are a number of other businesses, such as telecoms, insurance, pharmaceuticals, banks, etc, that are essentially oligopolistic.
Pharmaceuticals are an interesting example, in that the relevant companies have supported extremely expensive testing regimes that ensure the barriers to anyone else entering are so high. With little competition, they price their drugs extremely highly, thus ensuring many ordinary people cannot afford them, and also, they tend to focus their research on chronic problems, or problems such as cancer, where any treatment has to be on-going for a long time. There is also the question of personal rewards. The large payments to the banksters who effectively brought the economy to its knees, and their firms to near collapse is hardly a sign of reward for value and efficiency.
So, the question is, are our economies run by means that are fundamentally efficient and fair, or are they based on exploitation? If the former, governments cannot do anything but mess them up; if the latter, then defeating entrenched power is necessary for fairness and shared prosperity. Assuming we want to be fair. Do we, or do we prefer to let greed win out, and ignore the [plight of those who did not win?