Bruce Caldwell forwards a query concerning a vaguely-recalled passage
from Adam Smith suggesting that "free enterprise requires monitoring to
prevent failure caused by unethical behavior"

    There are, of course, countless passages that could have prompted
such a recollection, but perhaps your correspondent has in mind Smith's
observation of the agency problems inherent in corporate management:

    "The trade of a joint stock company is always managed by a court of
directors. This court, indeed, is frequently subject, in many respects,
to the control of a general court of proprietors. But the greater part
of those proprietors seldom pretend to understand anything of the
business of the company, and when the spirit of faction happens not to
prevail among them, give themselves no trouble about it, but receive
contentedly such half-yearly or yearly dividend as the directors think
proper to make to them. . . .  The directors of such companies, however,
being the managers rather of other people's money than of their own, it
cannot well be expected that they should watch over it with the same
anxious vigilance with which the partners in a private copartnery
frequently watch over their own. Like the stewards of a rich man, they
are apt to consider attention to small matters as not for their master's
honour, and very easily give themselves a dispensation from having it.
Negligence and profusion, therefore, must always prevail, more or less,
in the management of the affairs of such a company."

       This is not, however, so much a criticism of "free enterprise" as
of the corporate structure.  In the next sentence he tells us that "It
is upon this account that joint stock companies for foreign trade have
seldom been able to maintain the competition against private
adventurers."
    (WN V.i.e.18)

    Indeed, to be fair to Smith, any reply should note that Smith saw
market forces as a powerful spur to "ethical behavior."  Perhaps the
most convenient summary of that argument is found in Nathan Rosenberg's
excellent article on the point:  "Adam Smith and the Stock of Moral
Capital," History of Political Economy, vol. 22 (Spring 1990), 1-18.

Glenn Hueckel