SOUNDING OFF:

Last week, Jim Righeimer invoked the beauty of free markets in solving the current economic crisis (“Bailouts won’t help us learn from mistakes,” Saturday).

Several writers pointed out that this was premature at best and perhaps government intervention was hard at work. This Sunday, Judge Jim Gray (“The Libertarian philosophy”) praised market incentives in his pitch for Libertarianism. Perhaps it’s time to examine the free market concept.

The model for most free market adherents is Adam Smith in his seminal work “The Wealth of Nations” published in 1776 (note the date). Smith himself referred to England as a nation of shopkeepers, a line famously echoed decades later by Napoleon in deriding the British.

But indeed, that was what Smith saw in 1776. The only large businesses were government monopolies. Kings granted monopolies to folks like the East India Tea Co. who paid big fees out of their monopoly profits to the king, who then used the money to pay the troops and stay in power.

Smith hated monopolies, and when he preached the virtues of free markets, it was those little shopkeepers he had in mind. Lots of them and too small to manipulate markets.

What Smith never envisioned were economies of scale, the ability of a few large companies to lower costs and then drive their competition out of business. There are, of course, great benefits to be had in economies of scale — it makes many luxuries affordable to the masses. But it also puts great economic power in the hands of those large firms, and, with that, comes the potential for abuse.

It is no accident that the heads of many 19th century conglomerates were dubbed “Robber Barons.” It was their abuse of “free markets” that gave rise to regulation. And the evidence is mounting that a failure by regulators to keep up with derivatives and hedge funds is a big part of the current debacle.

Are market incentives powerful? You bet. But don’t underestimate the value of some rules and guidelines.

BOB SCHMIDT lives in Newport Beach.