5.3 Governments Managing The Economy And The System Of Economic Freedom
From Economic Freedom by LJM Cooray (1996)

One of the big modern issues in Australia is about "government" managing the economy. John Naisbitt has said that only a stable economy can be managed and then we do not need management. An economy cannot be managed when it is changing and not stable. The complexities of modern interaction make management of the economy impossible.

The cynicism expressed about government management of the economy does not deny the role of law in the economic arena. The idea of a managed economy, where government acts on the basis that it is capable of reaching and under a duty to reach, into every area of human activity in relation to money and money's worth, through a wide ranging and comprehensive economic plan and regulatory laws, is inconsistent with the values and institutions of the western democratic order. The need for a system of limited government and law is recognised and the basis on which limits may be imposed are analysed (see sections 16 and 26). Law also has a role in the control of banking and money and in promoting competition by placing restrictions on restrictive trade practices.

The main problem arises from those who would argue that there are problems and injustices which demand economic regulation. It is likewise argued that it is simplistic in relation to a modern economy to support a system of limited government.

The proponents of wide ranging economic regulation (like regulation in other fields) identify problems in human interaction. They do not, however, consider whether, given the unpredictable nature of human interaction and the multitude of economic transactions involved, regulation can be evolved as an effective alternative. This is a dimension which is ignored in a mountain of literature in the field of economics and, indeed, in all areas of academic endeavour.

Spencer in The Man versus the State, London (1940) pp 29, 30, 31, 34, provides some of the answers to those who see the need for economic regulation:

"... The extension of this policy, causing extension of corresponding ideas, fosters everywhere the tacit assumption that Government should step in whenever anything is not going right. "Surely you would not have this misery continue!" exclaims someone, if you hint a demurrer to much that is now being said and done. Observe what is implied by this exclamation. It takes for granted, first, that all suffering ought to be prevented, which is not true: much of the suffering is curative, and prevention of it is prevention of a remedy. In the second place, it takes for granted that every evil can be removed: the truth being that, with the existing defects of human nature, many evils can only be thrust out of one place or form into another place or form - often being increased by the change. The exclamation also implies the unhesitating belief, here especially concerning us, that evils of all kinds should be dealt with by the State. There does not occur the inquiry whether there are at work other agencies capable of dealing with evils, and whether the evils in question may not be among those which are best dealt with by these other agencies. And obviously, the more numerous governmental interventions become, the more confirmed does this habit of thought grow, and the more loud and perpetual the demands for intervention.
Every extension of the regulative policy involves an addition to the regulative agents - a further growth of officialism and an increasing power of the organisation formed of officials. ...
He contemplates intently the things his act will achieve, but thinks little of the remoter issues of the movement his act sets up, and still less its collateral issues. ... Even less, as I say, does the politician who plumes himself on the practicalness of his aims, conceive the indirect results which will follow the direct results of his measures. ... Dwelling only on the effects of his particular stream of legislation, and not observing how much other streams already existing, and still other streams which will follow his initiative, pursue the same average course, it never occurs to him that they may presently unite into a voluminous flood utterly changing the face of things".

The system of economic freedom has, when it has had scope to operate, clearly proved superior to any system of centralised planning or management. The market order (far more efficiently than bureaucrats) can allocate resources and effort according to the needs of the people, expressed by the people themselves. It therefore produces goods and services in such quantities and of such quality as the people themselves demand. The market produces the goods in response to demand and rewards effort. The market is the only type of order consistent with the freedom of the individual. Whenever the market has been allowed to flourish, it has produced great wealth and emancipated people from poverty. On the other hand, planned economies have consistently failed to meet the expectations of people. In democratic societies the market has been progressively interfered with to the point that it is becoming incapable of producing goods and services as efficiently as it has done in the past. Ironically, these "failures" have been blamed on the market itself and not on the forces that interfered with and dislocated it. These notions arise from a fundamental misconception that the market is something which can be manipulated or controlled to produce particular results.

The choice available is between a system where decisions flow from the activities of and the interaction between hundreds and thousands of consumers, subject to media and public comments and criticisms and a reasonable degree of governmental input on the one hand, and a system where decisions are taken by a massive government bureaucracy far removed from the individuals, the providers and the consumers, on the other. The choice is between the imperfect market involving the interaction of individuals subject to public comment and limited government and an imperfect giant bureaucracy. If the reality that regulation will be in the hands of fallible human beings, purporting (as an implicit consequence of their assumption of power) to be omniscient and infallible, is realised and the record of bureaucracies is considered, the rational and common sense choice applicable to the vast majority of situations is clear.