Front Page Titles (by Subject) Smith\'s Critique of Monopoly - Literature of Liberty, July/September 1979, vol. 2, No. 3
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Smith's Critique of Monopoly - Leonard P. Liggio, Literature of Liberty, July/September 1979, vol. 2, No. 3 
Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.
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Smith's Critique of Monopoly
“The Burdens of Monopoly: Classical Versus Neoclassical.” Southern Economic Journal 44 (April 1978): 829–849.
Whereas in classical analysis a dominant theme is the importance of promoting free trade and eradicating all forms of monopolies, modern neoclassical analysis shows that the actual cost of monopoly is very small. West argues that the modern approach is “too confined” and has become too “institutionally sterile” because it has ignored important elements in the classical critique that are equally pertinent today. Adam Smith's vigorous attack on monopolies provides the starting point of this comparison between classical and neoclassical views of monopoly.
Neoclassical analysis finds that net welfare loss to monopoly is small because most of the effect of higher monopoly price is a redistribution of income to monopolists. Those who challenge this conclusion have centered on rent-seeking activities of those who wish to capture the gain. Classical analysis is much more encompassing in its assessment of the welfare loss to monopoly. Smith specifically pointed both to rent-seeking and attempts to thwart rent-seeking as monopoly losses and also regarded the income redistribution itself as a major loss to monopoly.
Smith's attack on monopolies condemned the state protectionist system of overseas trading companies. These companies, enjoying exclusive trading rights, were subject to diseconomies of scale which included the inefficiencies of large bureaucratic management. Smith identified both the “excessive shirking” and “inadequate monitoring” that has been noted in the modern literature on bureaucracy, and concluded that bad institutions were responsibile for inappropriate employee behavior. One major diseconomy he noted was the tendency for these trading companies to export bureaucracy to the countries they traded with thereby reducing the potential gains from trade. Smith focused particularly on the losses associated with exclusive trading laws with the colonies. He argued that the cost of the monopoly to the public included not only higher prices both in the colonies and the mother country, but also the costs of policing and maintaining the colonies—defending trade routes and maintaining order—and he believed that the loss exceeded the gain.
Although the modern reader may view Smith's tendency to include all restrictions on supply as monopoly as too general for cogent analysis, West points out that Smith should be congratulated for providing a dynamic analysis which included political, constitutional, and legal factors. He was interested in the costs of “monopolizing” as well as the costs of monopoly, and monopolizing behavior will involve the law and constitution as dependent variables. This greatly increases costs of monopoly.
While many of the historical institutions about which Smith was writing have passed, we can still learn from his analysis. Smith reminds us that people use resources to change the rules of the game in their favor, but the rules are “part of the social fabric:” the system of “collective protection of private property” is vulnerable to attempt to close the market. West concludes by pointing to public education as a perfect example of monopolizing behavior which has eliminated the market to such an extent that it is no longer possible to measure the welfare loss.