The Grand Regulator: Monopolies as Hindrances to Prosperity

trade international trade monopoly colonialism monopoly price free markets

Nathalie Smallidge for AdamSmithWorks

In Adam Smith's Wealth of Nations he shows how monopolies hinder prosperity and contain the seeds of their own destructions. The merchants and other laborers who work within market systems will always be chipping away at their power.  

July 13, 2022
Although it is likely not the topic most readers recall when thinking of Adam Smith’s Wealth of Nations, monopolies loom behind every well-ordered division of labor. Beyond restricting the natural competition of the marketplace, monopolies can also be wielded by governmental powers as an economic strategy for ensuring prosperity in certain sectors for the betterment of the nation. Smith uses England as the prime example of a governmental power that is acutely conscious of and controlling in its marketplaces, equally attentive to commerce both in the mother country and in her colonies abroad. During the interval when a monopoly is functioning within the marketplace, there is little interference with the otherwise free commerce. However, Smith explains that by nature, monopolies enable corruption to take seed in the merchants and other laborers who work within it, leading to its inevitable disintegration. Does this bias to corruption in monopolies suggest that the interests of the nation and those of the merchant are incompatible and therefore any restriction on the marketplace would prove detrimental to the naturally occurring prosperity inherent to free trade? 

One form of monopoly is the establishment of trade agreements between foreign countries who seek partnership with one another for the purposes of peace and profit. Trade agreements provide assurance to countries that goods which they hope to sell will be purchased by a trade partner, and goods which the trade partner wishes to sell will be available. Not always do the countries which establish the agreement benefit equally. There is an imbalance between the favoring country and the favored. The former imparts a greater share of its goods for a lesser return, while the latter parts with less of its own goods for a greater return. However, the favored is not always in the most advantageous position. A particular trade agreement, the Methuen treaty, drawn up between England and Portugal depicts this exactly. Although the direct trade which occurred as a result of this treaty appeared to favor Portugal, England inevitably had the advantage. The agreement articulates that Portugal would always allow wool and woolen goods from England into Portugal with no increase in taxes paid by the English merchants to export their goods thence. Likewise, England would always allow Portuguese wine to be imported, even in time of war, taxed at a rate two thirds that which England requires for imported French wine. 

With the spread of the market came a more established system of regulations from England. This was natural, due to the increasing number of English colonies, first in America and then in the East. In the American colonies, the commodity of tobacco became strictly regulated. The colonies produced a staggering surplus of tobacco, beyond that which could be consumed domestically and in the mother country, and England called for approximately ninety-six thousand barrels of tobacco to be shipped thence, despite the paltry fourteen thousand or so which she would consume (Bk 4, Ch 7, Pt 3). This was because she recognized the profit that she could make from selling the surplus of tobacco directly to European countries rather than relegating the duty of trade to the colonies. Although it might have been more efficient for the colonies to have the authority of direct trade, England determined that if the subsequent employment of capital was left to the colonies, it would not be used for more prosperous outlets, such as expanding the market. The colonies would have brought the capital back to their communities and used it to increase their production of tobacco for the following year, and simply repeated the cycle. Because England already had the infrastructure, systems, and political ties in place, she realized that she could be more prosperous by expanding the market through more colonies. With more colonies naturally come more goods which can be judiciously traded for even greater profit. 

Such judiciousness requires reinforcement through regulations. These regulations—as seen with enumerated goods and non-enumerated goods (because even that which was not traded directly from the mother country must be calculated)—helped England measure supply to meet demand, whether through controlling the goods in the market or by increasing the division of labor to become more productive. The regulations were tools which England wielded to ensure that her business ventures succeeded. Otherwise, all those involved in the productive capacity of the manufacturing and trading process would be left without an income. Likewise, customers expecting a certain availability of goods would be disappointed at the loss of their anticipated share, even though they might not have lost anything other than time waiting for it to be produced. Such is the balance of supply and demand. And regulation is the means of protecting that balance. However, regulation can reach an extreme. 

When legislators, acting on behalf of their governments, become too concerned with controlling the production and trade of certain commodities, they increase regulations beyond a sustainable limit. This limit is breached by creating monopolies in particular sections of the division of labor. To review, the division of labor spans the entire line of production from rude produce to retail, and it spiderwebs throughout myriad other occupations. For example, the farmers who cleared the timber and worked the land for tobacco were inevitably accountable to the merchants in England who sold that tobacco to customers in mainland Europe. Furthermore, those merchants had access to that tobacco due to regulations imposed on the farmers by the English government, controlling the trade of tobacco in the colonies. Additionally, the farmers likely worked with cartwrights who built barrels which met specific measurements best suited to transporting tobacco. The measurements of those barrels would affect the laborers involved in the carrying trade, depending on the weight or size of the barrels, both loaded with tobacco and unloaded. Although such efficient cooperation does not require centralized supervision, the multilateral network comprising foreign trade must be mutually supportive, which is best regulated by a central power that is informed in all aspects of the trade network. And thus, a monopoly is born. England acts as this central power. As the central power, though, England’s success comes from a cooperation between the merchants who are behooved to the regulations and the legislators who impose them. This cooperation supports the monopoly for a time, but the individuals within the system of the monopoly begin to weaken it. 

The weakness comes not from a place of undermining the prosperity of the colony but from a desire to partake in a greater part of the prosperity that comes to the company controlling the monopoly. England’s foreign trade in the East Indies created the perfect environment for such interests to arise. England found ways of selling goods in the East in regulated markets, thereby earning a steep profit. She likewise imported goods from the East at low cost because of their monopoly on the source within their own colonies. This exacerbated the prosperity in the mother country and the loss in the colonies. The merchants in the colonies began to notice this and naturally their own motivations for profit crept in. Although they are citizens of England, their commerce existed in the colonies and they knew that increased prosperity in the colonies increased their own prosperity. They began seeking to moderate the production and trade that occurred within the colonies in an effort to protect their own capital. This engendered a type of sovereign status for the merchants, who sought control over the resources within the colonies: “As sovereigns, their interest is exactly the same with that of the country which they govern. As merchants, their interest is directly opposite to that interest.”( Bk 4, Ch 7, Pt 3) So, the merchants are at odds with the interest of the colony. But as sovereigns in the colonies, their interests were perfectly in line with the marketplace. The sovereign seeks to abolish monopolies while the merchant seeks to reduce the amount of healthy competition in his marketplace in the colonies. Because the colonies began to prosper in the environment fashioned by the sovereigns, should not England begin to profit indirectly? Although the colonies—extensions of the mother country—experience prosperity, the control of the capital is not in the hands of the mother country herself. Therefore, she perceives a dearth of prosperity and opportunity for further employing increased capital to expand the market. 

As with the colonies in America, England sought to regulate trade because she believed she was best able to employ it: “The country belongs to their masters, who cannot avoid having some regard for the interest of what belongs to them. But it does not belong to the servants.”(Bk 4, Ch 7, Pt 3) For a country (or market) to belong to someone such as a merchant, a great deal of the capital invested in that market must come from that merchant. And because the “servants” employed as productive labor within the market do not have any capital but their capacity to work invested in the market, they have no ownership therein. However, they contribute to the circulation of capital by trading money earned from labor for goods needed at home. Despite their meager investments in the marketplace, they have no stock in the market which propels prosperity. Their greatest asset is their labor, which supports the marketplace but doesn’t increase production in and of itself because only the division of labor (meaning, an increase in the number of laborers) achieves that. 

Forms of capital such as the means of manufacturing and the commodities prepared for trade can be regulated and monopolized. The commodities that circulate in the marketplace are recognized as wealth by those who control the monopolies. The nature of monopolies requires this recognition, because otherwise the consequent objective of employing the profit in expanding the market would not be sensible. In this case, the objective truly is to expand the market (with an inevitable division of labor) and not to merely accumulate money. It seems that those who regulate trade possess the purest sense of what wealth is, seeing that it lies not in money itself but rather in what it can purchase or has purchased. However, regulating who has the authority to handle money encroaches on violating rights of citizens in the regulated society. This is because the prosperity of a country is not achieved by the work of only those who design the regulations. Prosperity is achieved by the cooperation of all those involved in the marketplace, whether as legislators, manufacturers, laborers, or simply buyers. Whose prosperity is of the utmost importance: That of the individual employed within the strata of the division of labor, or that of the government which is arguably the best informed as to how to generate increased prosperity? And why does isolating the “deserved” prosperity to one party or another undermine the wellbeing of the whole? 

Although the productive labor of “servants” is essentially the only resource they have to offer to the market to increase prosperity, they still seek their own profits when oversight through monopolies becomes too oppressive. They begin to conduct their own private trade within their colonies. When the trade that they begin is open and permissible, as with any upstart merchant enterprise, it strengthens the culture of commerce and encourages healthy competition in the marketplace. Such trade is conducive to self-regulation. But when the mother country governing the colony prohibits such trade and the “servant” persists in his trade regardless, the environment becomes toxic to self-regulated commerce:  

“They will employ the whole authority of government, and pervert the administration of justice, in order to harass and ruin those who interfere with them in any branch of commerce which, by means of agents, either concealed, or at least not publicly avowed, they may chuse to carry on.”
Bk 4, Ch 7, Pt 3

This is not a mark against the quality of the goods the “servants” bring to the marketplace but rather a fervent warning against the corruption and malfunction that stems from illicit, unregulated trade. 
The “servants” see their interests as diverging from those of the colony, which is deeply detrimental to the overall health and prosperity of the mother country and therefore the nation to which they belong. This does not excuse other merchants who take advantage of monopolies for their own profit, even if that trade is permitted by the mother country. It simply emphasizes the disparate interests of those merchants, the legislators protecting the hum of the marketplace, and those employed in production: 

 “The real interest of their masters, if they were capable of understanding it, is the same with that of the country, and it is from ignorance chiefly, and the meanness of mercantile prejudice, that they ever oppress it. But the real interest of the servants is by no means the same with that of the country, and the most perfect information would not necessarily put an end to their oppressions.”
Bk 4, Ch 7, Pt 3                            

The conditions which the perspectives of the masters and the “servants” create cause an insuperable impasse.

Such disparity amongst the interests of the agents within the administration signals a fundamental flaw in the system of monopolies. Because monopolies are essentially protected by the mother country due to their exceptional encouragement of prosperity by means of productive capacity, the interests of the monopolies are favored instead of the interests of those employed by the monopolies. The political aims of a society rarely overlap with the prosperity of the society. Because beyond prosperity and an increase in capital for the mother country, monopolies with license to trade with the colonies and other countries facilitate the circulation of trade in the international marketplace. Not all companies have the permission to trade directly with foreign countries on account of political conditions and sundry trade agreements, as with the Methuen treaty. However, licenses permitted by the government are to no one’s advantage, even the merchants’, because the monopolies the licenses protect eventually deteriorate. The impasse between the interests of the masters and the “servants” in the administration wholly undermine the monopoly’s system, and the means of prosperity for both the mother country and the colonies begins to hemorrhage.

It seems reasonable to expect that because the “servants” are protecting their own interests in the colonies, the well-being of the marketplace and the circulation of capital will persist. That is not the case, however, because as Smith states above, the “servants” have no means of understanding the interests of the marketplace, regardless of their business taking place within it. The merchants, as masters and sovereigns in the colony’s commerce administration, intuitively support the marketplace, despite their interests not being in line with the country. But the merchants require laborers to fulfill the role of the “servants” as demanded by the division of labor. Because without the division of labor, the prosperity of the merchant’s company ceases to grow. Therefore, prosperity cannot be sustained in the mother country by means of colonies. No matter how many companies are formed to replace those that inevitably do not succeed due to the malmanagement of monopolies, the interests of the nation and the merchants will always be at odds.

This essay is a revised and excerpted extract from Prosperity in the Colonies, my senior essay (St. John's College, Annapolis, 2022).