Adam Smith Is Somewhere, Smiling

On Monday last, I attended by first class of a geezer course in what is called Senior University. The class — 6 Great Economists — is taught by a Senior University superstar who last taught this course in 2001. The Big Six (different from 2001) selected by the prof were Adam Smith, David Ricardo, Joseph Schumpeter, John Maynard Keynes, John Kenneth Galbraith, and Milton Friedman; the prof's main selection criteria was lasting influence on economic theory. Class 1 began with Adam Smith. Among other things, I heard that Adam Smith proclaimed that the market was governed by competition (or the lack of competition). The prof also said that there were examples of market theory in the economic world today. Lo, and behold, Robert Samuelson — in today's Washington Post — asks: "What do AT&T, the CAB, steelworkers, and Kmart have in common?" Answer: they all were done in (or forced to change significantly) by competition. If this is (fair & balanced) realization of Adam Smith's belief in competition, so be it.

[x Washington Post]
Competition's Anxious Victory
By Robert J. Samuelson

What do AT&T, the Civil Aeronautics Board, steelworkers and Kmart have in common? Answer: All are victims of competition. Over the past four decades, the U.S. economy has become vastly more competitive. Paradoxically, that has elevated both our prosperity and our anxiety. The result is a broad transformation of everyday life. In this season of grand pronouncements -- the inaugural address, the State of the Union message -- we need to remind ourselves that many profound economic and social upheavals arrive unannounced.

On competition, we Americans have mixed feelings. We cherish its promises (lower prices, more choices, greater freedom) and detest its disruptions (lost jobs, vanished companies, shattered communities). Witness airlines. Everyone likes lower fares; they've dropped 20 percent since 1998 (adjusted for inflation). But only the hard-hearted are unmoved by the parallel distress: layoffs, salary cuts, bankruptcies. In 2004 United Airlines lost $1.6 billion, Delta $5.2 billion. These once mighty carriers may have poor business plans. Their unions' labor costs may have become excessive. Still, competition is a harsh disciplinarian.

Our mistake is to view this toughening of competition as affecting only isolated industries. But all those industries together make up the economy. In a new book ("The Competition Solution," published by the American Enterprise Institute), economist Paul London argues that heightened competition overshadows Reagan's tax cuts, Clinton's budget policies or new technologies in explaining the resurgent prosperity of the 1990s. He's more than half right. Competitive pressures helped suppress inflation. They also helped raise living standards, through improved productivity.

Granted, the story is tangled, stretching over decades. As told by London, a deputy undersecretary of commerce in the Clinton administration, here's what happened:

• Competition from imports forced the steel and auto industries -- and many other manufacturers -- to streamline. Since 1990 U.S. manufacturing productivity has grown a hefty 4 percent a year.

• Government deregulation ended protected monopolies and markets in air travel, freight transportation and communications. Before 1980 the Civil Aeronautics Board and the Interstate Commerce Commission restricted the number of airlines and truckers that could compete on individual routes and also set their fares and rates. And AT&T Corp. (now merging with SBC Communications Inc.) had a legal phone monopoly before its court-supervised breakup in 1984.

• Wal-Mart and other low-cost chains triggered a revolution in retailing. Wal-Mart's sales now exceed $250 billion annually, and its buying power forces "manufacturers, transporters, and its other [suppliers] to become more efficient and lower their prices."

• The creation of the Nasdaq market in 1971 and Michael Milken's popularization of junk bonds made it easier for new companies to raise money -- and new companies intensify competition. Junk bonds go to riskier borrowers; Nasdaq permits smaller and younger companies to sell new stock.

Note that all these industries (manufacturing, retailing, financial services, wholesaling and transportation) employ about 45 million Americans, roughly a third of all workers. Many of the rest work in government (16 percent), health care (11 percent), and hotels and restaurants (8 percent).

Now, tougher competition has had some horrific social consequences. Since 1970 steel industry employment has dropped 75 percent, a loss of almost 400,000 jobs. Significantly, however, production of finished steel hasn't declined at all. In other industries, employment has mostly shifted from losers to winners. Southwest has won; United and Delta have lost. AT&T has lost; Cingular Wireless has won. There's a constant churning of power and status. Unions have particularly suffered, because they dominated once-sheltered sectors (steel, autos, telecommunications, airlines). In 2003 unions represented only 8 percent of private workers, half the level of 1983.

Despite the upsets, competition helps more than it hurts. It forces companies to deliver more for less. American auto buyers "learned to expect quality from the Japanese," writes London. The favorable climate for business start-ups encourages new technologies (indeed, overencouraged them in the late 1990s). And competition helps spread technology. When Wal-Mart makes better use of computers, rivals must follow -- or fail. Competitive checks on wages and prices mean that the Federal Reserve, in pursuing anti-inflation policies, doesn't collide with the concentrated power of business and labor to raise wages and prices. In Europe, with weaker competitive pressures, the collision has slowed economic growth and raised unemployment (the 1990-2003 average: 9.2 percent).

So, there's a final paradox: Though competition heightens individual insecurity, it deepens collective security. By muffling the wage-price spiral, it minimizes recessions. By enriching most Americans, it combats poverty. The calls to restrict competition, through government regulations and import barriers, are understandable -- and usually wrong. Living with competition is hard. Living without it would be harder.

Robert J. Samuelson, a contributing editor of Newsweek, has written a column for The Washington Post since 1977. His column generally appears on Wednesdays.

© 2005 The Washington Post Company