Adam Smith on Monopoly Theory. Making good a lacuna
| Author | Neri Salvadori,Rodolfo Signorino |
| Date | 01 May 2014 |
| Published date | 01 May 2014 |
| DOI | http://doi.org/10.1111/sjpe.12040 |
ADAM SMITH ON MONOPOLY
THEORY. MAKING GOOD
ALACUNA
1
Neri Salvadori* and Rodolfo Signorino**
ABSTRACT
This article analyses Adam Smith’s views on monopoly by focusing on Book IV
and V of The Wealth of Nations. It argues that the majority of scholars have
assessed Smith’s analysis of monopoly starting from premises different from
those, actually though implicitly, used by Smith. We show that Smith makes use
of the word ‘monopoly’ to refer to a heterogeneous collection of market out-
comes, besides that of a single seller market, and that Smith’s account of
monopolists’ behaviour is richer than that provided by later theorists. We also
show that Smith was aware of the growth-retarding effect of monopoly and
urged State regulation.
II
NTRODUCTION
Historians of economic analysis usually acknowledge the French ‘ing
eni-
eurs-
economistes’ of the first half of the 19th century as being the forerun-
ners of the formal theory of monopoly (Blaug, 1997a, pp. 331ff, Mosca,
1998 and Ekelund and Hebert, 1999). By the same token, Adam Smith’s
contribution to the subject of monopoly has been by and large underrated
or even passed over without comment. Yet, the author of The Wealth of
Nations (WN hereafter) discusses, often at length, a number of issues per-
taining to monopoly. Such a situation involves an exegetical dilemma. Is
Smith’s analysis of monopoly not worthy of a particular mention since it
is intrinsically defective or largely inferior to that later elaborated by the
French school? Or did Smith leave his analysis of monopoly in an embry-
onic form, and the majority of scholars assess it on the basis of wrong
*University of Pisa
**University of Palermo
1
A previous version of this manuscript was presented at the 17th Annual Conference of the
European Society for the History of Economic Thought, Saint-Petersburg, Russia, 17–19
May 2012 and at IX Annual Conference of the Italian Association for the History of Politi-
cal Economy (STOREP), Padua, Italy, 1–3 June 2012.
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12040, Vol. 61, No. 2, May 2014
©2014 Scottish Economic Society.
178
premises? By ‘wrong premises’ we mean different premises from those
which Smith (implicitly) used in his approach.
2
In this article, we follow the latter route and propose a rational reconstruc-
tion of Smith’s theory of monopoly. Our contribution clashes with the con-
ventional view that Smith had little or nothing analytically interesting to say
on this subject, and may be summarized as follows. The first question we
tackle concerns the terminology: the word ‘monopoly’ is generally used by
Smith to refer to a heterogeneous collection of market outcomes, besides that
of a market in which there is just one seller. (Yet, Smith also analysed this
kind of market). Moreover, while it is commonly thought that Smith’s theory
of monopoly, if there is such a thing, is to be found first and foremost in
Book I, Chapter 7, ‘Of the Natural and Market Price of the Commodities’, of
WN, we show that this is not actually so. Smith devotes this chapter to illus-
trating his theory of natural prices and their role as attractors of market
prices in all those markets where there is free competition: monopoly is merely
a side issue. By contrast, an extensive discussion regarding monopoly can be
found in several chapters in Book IV, ‘Of Systems of Political Economy’, and
Book V, ‘Of the Revenue of the Sovereign or Commonwealth’. In these two
books, Smith takes issue with a panoply of government measures concerning
international trade, colonial trade and the exclusive privileges of trading com-
panies, measures enacted over time under the influence both of mercantilist
authors and various pressure groups. We thus focus on these two books as
the proper place to look for Smith’s theory of monopoly. We show that
Smith’s account of monopolists’ behaviour is a good deal richer than that
provided by later theorists. In our view, Smith’s monopolists follow a three-
step strategy: (i) enforcement of their barriers to entry, (ii) choice of the quan-
tity of the commodity to be brought to the market, and (iii) market price fix-
ing, taking due account of the results actually achieved in the previous two
steps. (Note that step (iii) is not redundant, since Smith assumes no Walr-
asian-like price mechanism.) We also show that Smith was aware of the
growth-retarding effect of monopoly and, accordingly, urged state regulation.
The structure of the article is as follows. In Section II, we assess some con-
tributions that underestimate the Classical theory of monopoly or even deny
its existence: we focus on the premises on which these contributions are gener-
ally based. In Section III, we present our rational reconstruction of Smith’s
theory of monopoly, based on a different set of assumptions. Section IV con-
cludes.
2
Exegetical dilemmas of this kind are not uncommon within the historiography of eco-
nomic analysis. To give just one example, Kurz and Salvadori (2009) show that Ricardo’s
Principles of Political Economy and Taxation implicitly encompasses an economic theory of
exhaustible resources and even the Hotelling Rule, notwithstanding the fact that Ricardo did
not treat royalties as anything different from profits. Ricardian interpreters have generally
been misled by their search for a Ricardian theory of exhaustible resources in the wrong
place, that is, in Chapter III, ‘On the Rents of Mines’, of Ricardo’s Principles. By contrast,
Kurz and Salvadori’s focus is on Chapter XXIV, ‘Doctrine of Adam Smith concerning the
Rent of Land’.
ADAM SMITH ON MONOPOLY THEORY 179
Scottish Journal of Political Economy
©2014 Scottish Economic Society
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