Economics For Today

Economics 101 Part 1

One of the dangers to which laissez faire (that is, unregulated) free market capitalism is susceptible is a monopoly. In Adam Smith’s time (1723-1790), “monopoly” did not carry the conspiratorial baggage with which it is now encumbered. Originally, a monopoly was a way for government to gain control of or regulate the availability of a strategic commodity, resource, or technology. Nor was it unknown, even in this comparatively late period after Europe’s “discovery” and conquest of the “uninhabited” Americas, for kings to devolve land and all uses thereof to those performing valuable services to the crown.

Left to itself, a monopoly can easily become a power center in its own right. For example, should an individual possess land that contains a very high percentage of a locally rare but very necessary commodity for life (e.g., salt), he theoretically achieves a dominating trade and quite possibly a disproportionately significant economic advantage over his neighbors until technology (transit systems) opens new competitive sources.

Elevate the scenario to the international level where one country enjoys a monopoly over a vital resource. How its relationships with other countries evolve – whether open (or more open) trade among all on an equitable basis or the resort to armed conflict by one or more of the countries bereft of the resource – depends on the interplay of a host of exterior factors. Among these is a collective moral pragmatism that can serve in ordinary times as an invisible self-referencing foundation for society and in crises as a self-regulating mechanism that, when energized by the political leadership, acts to constrain the use of violence regardless of the alleged provocation.

Should the above even slightly resemble the Founders’ interpretation of Adam Smith’s market dynamics, how can the system determine a new “natural level” should political governance come under stress?

The first step is to determine the source of the stress. In the current international economic meltdown, the precipitating stress, according to economic gurus, has been the inflated U.S. housing market and the “bundling” of high risk (and therefore high profit as long as prices inflated) mortgages. The psychology at work is easy to understand: greed, made possible by removing transparency and accountability not only in the market place but in the art of governance.