Paul Krugman reviews David Warsh's Knowledge and the Wealth of Nations. In the course of the review Krugman asserts that
for the invisible hand to work properly, there must be many competitors in each industry, so that nobody is in a position to exert monopoly power. Therefore, the idea that free markets always get it right depends on the assumption that returns to scale are diminishing, not increasing.
Krugman's agenda, of course, is to make the case for government regulation of industry, generally, and antitrust prosecutions, specifically. His unstated premise is that the phenomenon of increasing returns to scale is widespread -- even though it is not, as evidenced by the wealth of industries in which there are many competitors. More fundamentally than that, Krugman clings to the notion that monopoly is bad, either out of ignorance or anti-business malice (certainly the latter but possibly both). Monopoly is not only not bad, it is good -- as I have explained here.
What's most interesting about Krugman's review is his failure to discuss the federal government, which holds a legal monopoly on the governance of the United States, which it has perpetuated through the use and threat of force. Does the federal government exhibit increasing returns to scale? I say yes, given that the addition of a few buildings, some bureaucrats, and a handful of regulations adds disproportionately to the federal government's stranglehold on the economy. Krugman, were he consistent, would call for the breakup of the federal government, just as he is longing to call for the breakup of successful businesses that actually produce things of value.
(Thanks to AnalPhilosopher for the pointer to Krugman's trash.)
