Regulating the market economy

Teaching Business & Economics, Autumn 2003 by Maunder, Peter

In 1979 Croom Helm published a text Government Intervention in the Developed Economy which reviewed the nature of state intervention in some developed economies. There were seven contributors in the text edited by the present author who also wrote the chapter on the United Kingdom. One was immediately aware in surveying this topic of the problem word 'intervention'. What did it mean? Someone on the far Right of the political spectrum in the 1970s would expect only very limited 'intrusion' by the State into the workings of the capitalist system. However, someone on the far Left would have anticipated the very opposite - just occasional touches of private enterprise amidst a basic collectivised economic system. Thus the word 'intervention' had (and still has) an elusive meaning depending on the political standpoint of the person using it. This is not the only difficulty with the word 'intervention'. One also needs to recognise different dimensions to this problem word. We could probe what can call the macro dimension or, alternatively, the micro dimension.

THE MACRO DIMENSION

Taking the macro dimension first we could be involved in examining how a government regulates the economic system via fiscal and monetary policies in pursuit of specified economic objectives. This 'territory' is, of course, covered in all the AS/A2 specifications of the examining boards. Any debate about the 'macro' extent of intervention raises the issue of the demise of the centrally planned economies of Eastern Europe. The process of transition by these economies was recognised in Curriculum 2000 with its clear requirement that

'Specifications should require students to study economic choices and markets as one of two themes..... The emphasis should be on the market model of resource allocation.'

Taking a wider view one can pose the following question: How is the role of the State now viewed in an international context? One answer is to turn to the World Bank's 1997 edition of World Development Report. Its chosen topic for discussion was the relationship between successful economies and the role of the State. The World Bank identified various functions of me State as shown in Table 1. These will seem familiar to any teacher of economics.

The World Bank probed what is called the 'capability' and 'effectiveness' of state intervention. The World Bank showed that the credibility of governments was a crucial factor in determining the level of investment and rate of economic growth.

THE MICRO DIMENSION

If we turn now to the micro dimension to intervention this 'territory' can be defined as that incorporating more specific state intervention in both labour and product markets that aim to be supportive of the thrust of macro measures to achieve policy objectives. Thus this territory could be defined to include all the following: agricultural support mechanisms; education, training and manpower policies; competition policies, energy policies and transport policies. If our focus on these matters is to be a UK perspective it would nonetheless require recognition of how, as a member of the EU, this territory has multi-national ramifications. It is hardly a profound comment to state that the UK perspective and that of other EU members have often not been easily harmonised. But if we just try to focus as narrowly as possible on the UK scene in isolation what is the view of the business community towards interventionism? It is very evident that the business sector has been exhibiting a growing enthusiasm to complain about the burden of regulations.

In recognition of our opening remark about the political spectrum one would not be surprised to find Thatcher and Major administrations alert to the cause of deregulation. Thus in January 1994 the Deregulation and Contracting Out Bill proposed 23 measures following extensive discussion in seven Task Forces. These Task Forces had proposed the ending of 605 regulations. Of these the then Conservative government accepted the case for repeal of 250 of these regulations. Mr Michael Heseltine, President of the Board of Trade, was reported as stating it was 'the largest bonfire of controls that has taken place in modern times in our country'. These reforms included the introduction of legally-binding undertakings in merger cases by companies to avoid the need to face an investigation by the Monopolies and Mergers Commission. Small firms with a turnover of less than £90K were released from the need to have their accounts audited.

The Conservative administration required an estimate to be made of the compliance costs of new regulations. With Labour's return to power in 1997 there was an attempt to bring about 'better' regulation through the quantification of the costs and benefits of new regulations. As from August 1998 Regulatory Impact Assessments (RIAs) apply to proposed UK or EU legislation that 'has an impact on businesses, charities or voluntary bodies'. It is thus evident that something of a bipartisan approach emerged in the 1990s - an opposition to unnecessary 'red tape'. But, as we shall now see, the meaning of the term 'red tape' is not quite as obvious as it might seem at first sight. Moreover some who are critical of red tape clearly seek a much diminished role of the State and a reduction in the number of civil servants. In particular the relevance of the Department of Trade and Industry (DTI) to the needs of manufacturing industry has been questioned.