(This is an archived extract from the book Patterns of Power: Edition 2)
Capitalism has been very effective in generating wealth. Although the markets are not primarily motivated to help society, the wealth they create is of benefit – so a key element of economic governance in a capitalist country is allowing the markets to operate effectively; the operation of supply and demand generates growth (3.3.2). But some governments have tried to control prices and incomes.[1] This has now largely been abandoned as a realistic policy option in an era when competition is largely global – people and companies can simply move if one country makes itself economically unattractive.
The way that wealth creation can spontaneously match supply and demand is so complex that no government planner could plan the supply of goods and services as well as a free market. It is not possible for governments to plan as comprehensively or react as responsively as the commercial sector in providing the products that are most needed at a price that people are prepared to pay – not least because they cannot predict some of the non-standard behaviour of markets as described in the previous section (3.3.5). To quote Adam Smith:
“The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.” [2]
Given that markets are more efficient, governments should not attempt to directly control the creation of wealth – but these are not arguments for having no regulation. As Friedrich Hayek pointed out, a regulatory framework is essential for the market to work properly.[3] A lightly (but firmly) regulated market serves everybody’s interests.
© PatternsofPower.org, 2014
[1] For example, Britain's Labour Party manifesto of 1966 stated its aims in these terms: “In order to safeguard the real value of wages, the Labour Government launched the first serious attack on the rising cost of living. The weapon specially fashioned for this attack is the policy for productivity, prices and incomes, which forms an essential part of the National Plan. Without such a policy it is impossible either to keep exports competitive or to check rising prices at home. The alternative, in fact, is a return to the dreary cycle of inflation followed by deflation and unemployment.” This document was available in April 2014 at http://www.labour-party.org.uk/manifestos/1966/1966-labour-manifesto.shtml.
When the controls were implemented they created resentment; some strong unions were able to force exemptions for their members, and it was difficult to block loopholes. As reported in a cabinet paper entitled Strained consensus and Labour, in 1968 “the TUC membership overwhelmingly voted to reject legislation that restricted collective bargaining.” This paper was available in April 2014 at http://www.nationalarchives.gov.uk/cabinetpapers/themes/strained-consensus-labour.htm.
[2] Adam Smith, The Wealth of Nations, IV.2.10. This was available in April 2014 at http://www.econlib.org/library/Smith/smWN.html
[3] Friedrich Hayek made the distinction between the need for a regulatory framework and the need to avoid trying to take direct control over the market, in The Road to Serfdom, chap. 3, pp. 86-87.