What would Adam Smith make of modern competition policy?

Modern competition law makes it illegal to be party to a price-fixing agreement – or even to be in the room when such conspiracies are discussed. Adam Smith would probably approve.

Adam Smith was a strong advocate of competition, and worried about how it could be undermined. But despite his well known observation about the proclivity for firms to conspire against the public, he did not go so far as to propose that cartels should be illegal.

It would be unfair to criticise Smith for this, not least because modern competition laws would have been inconceivable before he had articulated the benefits of a competitive market economy. Nevertheless, a deeper look at the analysis in The Wealth of Nations helps us to understand both why he adopted this position and why he is an enduring influence on competition policy today.

While Smith thought that collusion was endemic, he considered it ‘self-evident’ 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.’ His concern with collusion, then, was that it raises profits at the expense of consumers.

But he also believed strongly in personal liberty, and advocated an economic system in which every man ‘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’.

Personal liberty limits the acceptability of state intervention, even to prohibit meetings where prices might be fixed. Smith noted: ‘It is impossible, indeed, to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.’

Nevertheless, he argued, nothing should be done to help firms to identify rivals, put them in the same room or allow them to require any form of joint action: ‘though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary’.

Under modern competition law, it is illegal to be party to an agreement to fix prices, or to allocate markets or share price-sensitive information. Being in the same room when such matters are discussed is also illegal.

This a step further than Smith considered feasible, though it took until the 21st century before enforcement became widespread and reasonably effective. Landmark legislation includes the Sherman Act of 1890 in the United States, the European Union Treaty of 1957 and the UK Competition Act in 1998. But it was not until the 1990s that there was effective implementation of anti-cartel legislation in much of Europe. It was around this time too that most other countries introduced anti-cartel laws.

Smith’s focus on consumers continues in modern competition policy. It has outlasted 19th century utilitarianism and 20th century welfare economics, which would support a policy that balances the interests of consumers and producers.

What’s more, his concern for personal liberty is still met in that rival firms can meet in the same room. Now though, they are advised to be accompanied by a lawyer to ensure that the conversation does not stray into pricing.