Think carefully before intervening

⭐ Robert Jameson
Jan 25, 2019 · 5 min read

(Introduction to Economics, Lesson 14)

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Are you sure this is good idea?

One of the reasons governments feel justified in interfering in markets is because people often feel that markets sometimes ‘fail’ in some way and that something ought to be done to correct this failure.

Sometimes, businesses behave in what we might consider to be deeply unethical ways. Sometimes they treat their workers badly. Sometimes, they show no regard for the environment.

One of the most common problems is when businesses try to get rid of competition. Imagine you have a village or small town with two grocery shops. Neither shop can charge unreasonably high prices, because, if they did, everyone would simply go and shop in the other store. Competition keeps prices low. You can see, then, why the owner of one shop might be tempted to buy the other one. He can then charge much higher prices in both shops without having to worry so much about the competition. Alternatively, the owners of the two shops might get together (traditionally, this is done in a smoke-filled room!) and agree on a secret deal that they will both charge high prices. Either idea might be regarded as ‘anti-competitive’ and unfair.

Sometimes, it is not individual businesses, but the market as a whole that seems to be acting unfairly. Imagine, for example, that the state did not supply any schools and left education services entirely up to individuals and businesses in the free market. The result would probably be that the children of rich, well-educated parents received a good education, but children with poor or under-educated parents did not. This, again, seems very unfair.

It often seems reasonable, therefore, for the state/government to interfere in the market in some way. Sometimes they provide services themselves — such as when they provide schools. Sometimes, they regulate and control what private businesses can do and how they can behave.

The trouble is that there is never any end to the demands that the government should ‘do something’ about something — that they should stop individuals, companies or markets doing things we might consider to be unreasonable or unfair.

The government is bombarded by continual demands that it should interfere and regulate in order to ‘enforce standards,’ to ‘control excesses,’ to ‘prevent abuses’ and to ‘protect consumers.’ Further demands are made that the government should intervene to keep interest rates low, boost jobs, protect jobs, reduce unemployment, modernise our infrastructure, control inflation, boost growth, boost demand for various goods and services, encourage exports, encourage the take-up of new technology and all manner of other things!

Individually, such demands might sound reasonable, but if we don’t draw the line somewhere and put a limit on what the state is allowed to interfere with, then we may end up with a command economy where every economic decision is dictated by the state — and then we’ll have precious few freedoms left!

Another problem is that every time the government interferes in the market, whilst this interference might appear to help in some ways, it almost always has unintended and unwanted effects in other ways — often far beyond the specific market the intervention is aimed at. For a start, state interventions in the market need to be paid for. That often means higher taxes and increased costs to businesses — and these things have huge repercussions across the whole economy. Almost any state intervention in the markets is going to have knock-on effects — many of them unintended and many of them largely unforeseen!

Sometimes, state intervention completely fails to have the effect it was intended to have, anyway. Sometimes it even produces the opposite result to what was intended and wanted.

For example, suppose the government wants to encourage people to buy electric cars. They offer a grant to anyone who buys one. You might imagine this would encourage people to buy electric cars — but it might not! For a start, once you announce this new scheme, most people will refuse to buy an electric car until the scheme actually begins. Until the grants become available, they’ll be fewer electric cars bought than normally. Then, once the scheme is running, the manufacturers may take advantage of the scheme by increasing their prices — so that the extra money effectively goes to them, rather than to the customer.

In due course, the money for the scheme will run out — but, now that people are used to having a subsidy to buy electric cars, they may refuse to buy an electric car without one. They may now anticipate that there might be a new scheme in the future — and may refuse to buy an electric car until there is one. All in all, you might end up with far fewer electric cars sold than if the government had not intervened at all.

And when the state intervenes in the education system, can we really expect that a bureaucrat somewhere deep in a government office complex really knows or even cares what is best for your child? Is a bureaucratic, command-driven, state-controlled system able to recognise and employ the best teachers? The state intervenes to ‘ensure’ every child gets a good education — but do they achieve this aim? Clearly not!

Ultimately, it is, in any case, very difficult to assess the impact of state intervention in the markets. When we look at the results of government intervention, we don’t really know what to compare them with, because we don’t know what the result of allowing a free market would be. State intervention affects practically every corner of the economy — so we don’t really have any markets left that are even remotely free of the knock-on effects of government intervention.

It is, therefore, very difficult to know whether the problems we witness in any market are genuine market failures or whether they are actually the unintended knock-on consequences of government intervention. For example, when businesses seem to be charging unfairly high prices, is this really a market failure as such, or is it the result of lack of competition caused by government taxes and regulations discouraging potential competitors from setting up in business? The government may propose state intervention to bring down high prices, but, without government intervention, prices might never have got so high in the first place.

All of these many problems and difficulties — along with many others — contribute to making it very difficult to decide how much the state should interfere in the workings of the economy. When there’s a problem, is it the market that is at fault? When is state intervention the answer to market failure — and when is it the cause of the problem in the first place?

It’s no wonder that arguments over the extent of state intervention are at the centre of a large proportion of debates and arguments over how an economy should be run. How much of the economy should be in the public sector, controlled directly by the government? How tightly should private individuals and firms be regulated and controlled?

>>Lesson 15>>


Bob's Economics

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