Government Control of Internal Markets

Some governments attempt to control economic performance by constraining the operation of internal markets.  This has mostly proved to be impractical; it requires bureaucracy; and the market manipulation results in a misallocation of resources.

For example, the 1966 Labour Party Election Manifesto promised government control over prices and incomes:

“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.”

The party won Britain’s general election with a convincing majority but, when the controls on pay 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 1968 cabinet paper, Strained consensus and Labour, “the TUC membership overwhelmingly voted to reject legislation that restricted collective bargaining.”

Price controls are also unrealistic in an era when competition is largely global.  Many companies can simply move if one country makes itself economically unattractive.

For most countries, it is equally impractical to attempt to control currency exchange rates.  In one notorious example, as in the BBC report 1992: UK crashes out of ERM, the government had to announce that it had “suspended Britain’s membership of the European Exchange Rate Mechanism”; the currency markets were more powerful than the Exchequer:

“Chancellor Norman Lamont raised interest rates from 10% to 12%, then to 15%, and authorised the spending of billions of pounds to buy up the sterling being frantically sold on the currency markets.

But the measures failed to prevent the pound falling lower than its minimum level in the ERM.”

China, though, has been big enough to manipulate its currency to increase its exports – as noted in the next sub-section (



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