Adam Smith's System of Natural Liberty: Competition, Contestability and Market Process

Abstract

In this article, I argue that Adam Smith’s system of perfect liberty contains some of the seeds of perfect competition, but that the modern perfectly competitive model differs from Smith’s perfect liberty in some important respects—in particular, the role of active competition among firms and the role of the entrepreneur. The article examines the analytical linkages between Smith’s system of liberty and three strands of modern economic theory—neoclassical perfect competition, contestable market theory and the Austrian analysis of market process.