Adam Smith on commercial Conspiracies

Adam Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations in 1776 during what has since been called the Scottish Enlightenment.

He’s one heavy duty guy in political economic theory. Everyone claims they have read Smith, but few have bothered.

Conspiracy Theories: I am naturally skeptical about any idea that requires co-ordinated effort over time by several independent organizations. It is not that I don’t think it could happen, it is just that I lack the evidence to justify this belief.

It is, however, my considered opinion that Big Franchising exists and is very active in every substantial franchise market. The reason is very simple: The total gross margins accruing to the individual members are increased by co-operating rather than opposing each other.

  • The nominally independent organizations act as if they were one company. In doing, so they achieve their separate business goals.

And the world’s first economist seems to agree.

It appears that a consumer should assume groups of self-interested, profit-maximizing businessmen are actively working against the consumers’ best interests (high quality and service at a low price):

People of the same trace 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. It is impossible indeed to prevent such meetings by any law which either could be executed, or would be consistent with liberty and justice.

To pretend that businesspeople will not arrange themselves to defeat unknowing investors is a childlike view of the world.

  • My Oz friends: please note how useless the law is in stopping this abuse. Information sharing, yes. Easily captured legal process, no.

The media can be used to keep the sheep asleep.

Avarice, the spur of industry. David Hume (1711 – 1776)

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One Response to Adam Smith on commercial Conspiracies

  1. Carol Cross says:

    I dislike the use of the word “investment” to describe a single unit Mom and Pop retail franchise. Those who have the resources to invest in themselves are looking for employment and are investing in themselves. This is generally not discretionary money that prospective franchisees are using to earn money, as in the ordinary investment vehicles like the stock market.

    The VETS and their families who are now being targeted by franchisors in the USA because of the Patriot Express Loan Initiative passed in June of 2007 will be forced into the ranks of the self-employed because the government knows there will be as shortage of jobs available to them. This is a “pilot” program and will work to stimulate the economy for a few years even if it doesn’t work very well long run for the VETS and their families who won’t be successful and will lose their collateral posted to secure the SBA loans.

    This Patriot Express Loan Initiative was announced as being to “honor the service” of the veterans but will veterans be honored if the true and known risk of the purchase of the franchise is obscured from view because of ineffective federal regulatory policy and the veteran invests in a high risk and unprofitable franchise?

    The franchise vehicle is described as an “investment” by the FTC as part of the scheme to capture cheap labor and cheap venture capital, and especially in times of recession where good jobs are scarce and hard to find.

    It is ironic that the big franchisors do survive the recessions because they don’t have the great investment in the physical structure of the systems that provide and grow the gross sales of the system and thus have greatly reduced their overall risk, even in hard times. The SBA is actually subsidizing “big franchising” when it approves and guarantees loans for prospective franchisees. Was this the original intent of the SBA in the 1950″s —–Who knows? Or, did “Big” just learn how to use this agency of government together with FTC regulatory policy in the 1970’s to subsidize big business on the backs of the savings and debt of little people who would buy single unit franchises?

    Did Adam Smith consider that government revenues and government job figures would render the government part of these special interests who conspire and work together for their “greater good?” When government joins the conspiracy, it is no longer a conspiracy! It is then public policy that serves the greater good? huh?

    Could franchising survive if the unit performance statistics were required to be disclosed by the franchisor to the new buyer of the franchise under the law?

    Like

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