3.3.6 Government Control of Markets
Government control of markets is less economically efficient than allowing the forces of supply and demand to assign resources.
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 to enable 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). 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. 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]
Some governments disagree with Smith and Hayek and become directly involved in markets, despite the administrative costs and the loss of economic efficiency – as described in the following sub-sections:
● They might try to control prices and incomes in internal markets for political reasons, but this is unworkable because market forces are stronger and more efficient (126.96.36.199).
● They might depart from free trade principles to gain leverage over other countries (188.8.131.52). Donald Trump’s pressure on China, Iran and Mexico damaged America’s economy without stemming the economic tide.
The next section, (3.3.7), examines the impact of politically targeted economic interventions on behalf of specific industries.
This page is intended to form part of Edition 4 of the Patterns of Power series of books. An archived copy of it is held at https://www.patternsofpower.org/edition04/336a.htm.