The International Monetary Fund made an important appointment last week, naming Raghuram G. Rajan of the University of Chicago as its new chief economist. In this position, he will oversee all of the IMF's economic research and have a great deal to say about its policies and programs.
What interests me about Rajan is that he is co-author (with Luigi Zingales) of a very interesting new book, Saving Capitalism from the Capitalists (Crown Business, 2003). It is one of the most powerful defenses of the free market ever written. Not only does he defend the market from anti-globalists and socialists, but against capitalists who manipulate markets and government policies for their own benefit.
In this respect, Rajan writes very much in the tradition of Adam Smith, who was very sophisticated about the ways of businessmen. Smith well understood that businessmen could often be the free market's worst enemies, because they will sacrifice it in a minute for the sake of profits. Often, they enlist government as a co-conspirator, getting it to enact laws that restrain competition and raise prices, which benefits them, but hurts everyone else.
In The Wealth of Nations, Smith wrote that the interests of businessmen and the public were almost always in conflict. The former wants to limit competition, while the latter benefits from an increase in it. "To narrow competition," Smith said, "can only serve to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow citizens."
Sometimes businessmen will try to limit competition by conspiring among themselves. "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices," Smith observed.
However, such conspiracies were far less dangerous to the free market than government-sanctioned restraints on competition. Without government enforcement, private cartels naturally fall apart after a time. But when government imposes trade protection and other limitations on competition, it can go on indefinitely. For this reason, governments should be extremely wary of enacting such policies, especially when urged by businesses to do so.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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