3.3.6 Government Control of Markets

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; a key element of economic governance in a capitalist country is therefore enabling markets to operate effectively.  The operation of supply and demand will then generate growth (3.3.2).  Some governments, though, try to control markets for political advantage – as described in this section.

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 previously (3.3.5.2).  To quote Adam Smith’s book, An Inquiry into the Nature and Causes of the Wealth of Nations:

“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.” [Book II, Chap. III, para. 36]

Governments should not, therefore, attempt to directly control the creation of wealth.  This is not an argument for having no regulation, though, which is not the same as planning.  As Friedrich Hayek pointed out, in chapter 3 of The Road to Serfdom, some regulation is essential:

“The functioning of competition not only requires adequate organisation of certain institutions like money, markets, and channels of information – some of which can never be adequately provided by private enterprise – but it depends above all on the existence of an appropriate legal system, a legal system designed both to preserve competition and to make it operate as beneficially as possible.” [p. 39]

The topic of economic regulation was discussed earlier (3.3.1).  The focus in this section is on the problems raised by government attempts to plan an economy and to manipulate markets, despite the administrative costs and the loss of economic efficiency.

The following sub-sections examine the impact of government control of, and broad interference with, internal markets (3.3.6.1) and economic relations with other countries (3.3.6.2).  The next section, (3.3.7), examines the impact of targeting economic measures on particular industries or countries.

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