Issues of State Intervention in the Market Economy

Free Market Economy

The free market economy is designed to operate with a minimum of state intervention. However, as this paper will show, there are certain issues that can only be addressed by state intervention. These include avoidance of unfair trading, employee and supplier exploitation. In many cases, such as the expansion of the power of supermarkets, economists are of the opinion that the state does not go far enough in protecting the public (Marguand, 1977, p.5). This report shows that, whilst a free market is good for economic growth, there is a need for intervention from the state, however limited, to protect public services and the rights of the individual.

Introduction

Although many economists and politicians have concluded that the “free market economy” is the most appropriate form of trade, it seldom is allowed to operate without some measure of state intervention. The purpose of this paper is to study the concept of a “free market economy” and, at the same time provide an understanding of the reasons for and operation of state intervention. To provide an example of how such intervention manifests itself in practice, its recent impact on the Tesco supermarket chain is explored.

The basic premise of a free market economy is one where the distribution of resources is determined solely by market forces, without any state interference (Philip Allan Updates, 2006). The main condition of is that exchange of resources should be undertaken freely, without duress or deceit. In a free market, the price of goods or services is agreed between buyers and sellers, and there is no government restriction imposed upon this process. If the state interferes by influencing price for any purpose, be that to aid the consumer or seller, a free market cannot be said to exist. Proponents of the free market system believe that it can provide its own solution to problems and that state interference is a hindrance to that process (Ian Adams, 1998, p.23).

Essentially, the free market operation is based on the laws of supply and demand. A buyer, by offering to pay a given amount for a product creates the demand. Conversely, a producer, by offering to sell a product or service at a price creates the supply. In a free market, an exchange between a buyer and seller takes place when the amount offered by a buyer matches the price requested by the seller.

The optimum price will normally be determined by the level of demand and supply. If the supply is higher than demand, there being not enough buyers, prices will tend to fall as suppliers compete to sell their products and buyers look to reduce the price offered. In such circumstances, suppliers may also choose to reduce their production or even cease business altogether. The suppliers who remain will be those whose product unit cost is at the lowest level, allowing them to retain profitability levels despite price reductions. When the reverse occurs, in that demand exceeds the number of products available (the supply), prices will rise. In this situation, the seller is in command of the market. An excess demand situation may also lead to existing suppliers increasing production levels, and may tempt new producers into the marketplace. However, businesses that achieve rapid growth, even when an excess demand arises, are typified by sellers who maintain lower than market demand prices, such as supermarkets. Often this is achieved by constraining supplier prices. It can be seen therefore, that a free market is very much based on an enterprise system, where entrepreneurs are the most important factors (Marquand, 1977, p.159).

Many economists agree that the free market cannot exist without some state intervention. For example, “Keynes’s argument [is]^[1] that the only way to stop the market wreaking havoc is for the state to intervene in the economy.” (Quoted in Peter Morgan, 1999). However, economists often disagree about the extent of such intervention.

In an ideal version of a free market economy, the state role would be limited to ensuring freedom of competition remains and to protect the marketplace from incidences of intimidation, conspiracy or deceit. Therefore, if a situation develops where a group of sellers agree to maintain prices at an artificial level, forming a cartel for the purpose of price fixing irrespective of the market demand, the state may intervene. Similarly, the state may intervene if a large corporation endeavours to force suppliers to meet restrictive conditions including price, in order to an unfair competitive edge over other sellers, or attempts to achieve dominant market share by maintaining artificially low prices. Included within this area is the concept of free and unencumbered competition. This presupposes that no one corporation, or group of corporations, should be allowed to dominant their sector in a way that precludes other suppliers from entry (Erik Ringmar, 2005).

In order to address these situations, state intervention usually occurs by the introduction of anti-competition laws and regulations, unless a self-regulatory code of ethics and conduct is agreed. To reduce the incidence of fraud by corporations most states, nationally and internationally, have introduced a combined system of codes and laws designed to combat this problem. In the UK, such laws include the consumer protection act, anti-competition laws and corporate governance regulations, supported by the company’s acts. A significant part of the role of these acts also serves to protect consumers from abuse by corporate action. In this respect, the state considers that the consumer needs to have access to accurate information, such as pricing and content of products, which they might otherwise be denied.

In recent decades, state intervention has also focused on protecting the rights of the workforce, to stop workers being exploited, unfairly treated or discriminated against by the businesses they work for. To achieve this many acts have been instigated, the latest of which is the Employment Equality (Age) Regulations 2006

Another area where governments intervene in the free market scenario is to protect and provide public services. These include the National Health Service. Despite the move to greater privatisation on public services, generally the ordinary member of the public favour these being run by the state (Erik Ringmar, 2005, p.136).

To fund their role in the economy, the state imposes taxes upon the enterprises that occupy the market. Although in theory, such taxes should be limited to this purpose, in reality governments also use taxation as another form of intervention. For example, in an effort to address health and environmental issues, such as tobacco and alcohol addition and global warming, additional taxes have been levied on products that cause these addition and the use of which exacerbates environmental problems. Thus, in the UK we have seen the introduction of additional levies on such items as cigarettes, beers, wines and spirits, and fossil fuels and energy usage.

Margaret Thatcher, during her terms as Prime Minister, was a strong supporter of the free-market, believing it to be a moral and sound way to develop the economy (Ian Adams, 1998, p.79). In the UK, one of the commercial sectors that have benefited most from the freedom of trade under the “Thatcher” years was Supermarkets. This ethos has been carried through the Blair years, although some ministers now admit that such freedom is not necessarily the right path (Stephen Byers, 2003). As a result, supermarkets have experienced almost unprecedented growth, creating an imbalance in many market sectors, to the extent that the high street is dominated by four major chains, Tesco, Asda, Sainsbury and Safeway (now Morrisons) (Joanna Blythman, 2003). Of these, Tesco’s is the largest and accounts for one eight of all consumers shopping and over a third of groceries.

Because of increased concerns over supermarket power and competition issues, the government has taken a direct approach in terms of intervention. For example, the monopolies commission was instrumental in stopping further consolidation of supermarket numbers by subjecting the Tesco, Asda and Sainsbury bids for Safeway, the fourth largest, to full inquiries, allowing Morrisons to succeed (Richard Northedge, 2003). For Tesco’s, a number of similar planned expansion projects, to extend its stores numbers through construction or acquisition, have been thwarted by various government methods. However, the supermarket chain responded to these measures by achieving expansion through a different route. Using the Office of Fair Trading (OFT) own two-market view of grocery retailing, namely that one-stop and convenience shopping were separate markets, Tesco has expanded into the latter field, despite concerns expressed by some ministers (Julia Finch, 2005). The corporation has aggressively built a six hundred-store presence in this marketplace, with plans to double this in the near future.

In 2002, in response to continuing concerns and complaints regarding the supermarket’s treatment of their suppliers, which included Tesco, the Office of Fair Trading, a government-funded body, introduced a supermarket code of practice (Joanne Blythman, 2003). Since then, there have been no further complaints. However, it is widely believed the reason for this is not so much satisfaction with the working of the code, but more the enormous influence supermarkets such as Tesco’s exercise over their supply chain. It is considered that this influence is used to deflect intervention (Joanna Blythman, 2003).

In respect of the protection of employees, over the past few decades the UK government, partially driven by European Commission regulations, has intervened by introducing laws including the Protection of Employee (Fixed Term Work) Act 2003, together with numerous other Acts that deal with a wide range of discrimination issues, such as race, disability and age. In addition, to further reduce the possibility of exploitation of workers and to provide them with a reasonable standard of living, a system of setting a minimum wage was introduced. In an effort to enable employees to bring complaints against employers, a tribunal system, together with an independent body, ACAS^[2] has been set up to intercede in these issues.

In most cases, supermarket chains, such as Tesco, have pre-empted these regulations, by introducing their own human resource strategy to deal with the issues. For example, before the age discrimination act that came into force in 2006, Tesco had previously taken steps to address the problem. Such was their success in this area that they won the “Personal Today 2004 Age Positive Award” (Tesco Website 2006), which acknowledged the steps they had undertaken to eliminate age discrimination.

Although historically it can be seen that the free market system has led to significant economic growth, a side effect was that it also created problems and, in some cases, misery for many people (Erik Ringmar, 2005). To redress the balance required state intervention. It can be seen from the research carried out for this paper that, certainly in an effort to counteract the power of supermarket giant’s such as Tesco, a free market economy needs to have a certain element of state intervention in order to protect suppliers and employees.

References

Adams, Ian (1998). Ideology and Politics in Britain Today. Manchester University Press. UK.

Anon (2006) Price and resource allocation. Philip Allan Updates. Retrieved 14 December 2006 from http://www.philipallan.co.uk/images/532-T2.pdf

Blythman, Joanna (2003). Lord of the aisles. The Guardian, UK. 17 May 2003

Byers, Stephen (2003). I was wrong. Free market trade policies hurt the poor. The Guardian, 19 May 2003 UK.

Finch, Julia (2005). Calls for an end to Tesco’s bully-boy tactics have grown too loud to ignore. The Guardian, 12 November 2005.

Marquand, David (1997). The New Reckoning: Capitalism, States and Citizens. Polity Press, Cambridge. UK.

Morgan, Peter (1999). The new Keynesians: staking a hold on the system? International Socialism Journal. Issue 82, March 1999

Northedge, Richard (2003). Morrisons profits will boost Safeway bid. The Scotsman on Sunday. UK.

Ringmar, Erik (2005). Surviving Capitalism: How We Learned to Live With the Market and Remained Almost Human. Anthem Press, UK.

Statement (2006) Older Staff. Tesco website. Retrieved 13 December 2006 from http://www.tescocorporate.com/page.aspx?pointerid=DE09B90CFDD44BE995DFE562405EAF38

The Employment Equality (Age) Regulations 2006. Her Majesty’s Stationery Office. London. UK.

Footnotes

^[1] Words in brackets added

^[2] Advisory, Conciliation and Arbitration Service (UK)