The way to distinguish between such markets is not as difficult as it might appear at first sight. In fact it aligns very much with common sense. Once we rid ourselves of any belief in economic universal truths then we find that common sense turns out to be a very good guide, at least as far as market control is concerned. We just look at how the fair market conditions derived in the last chapter can be established.
In all cases where there is a requirement for state control the degree of control should relate to the extent to which individual participants or society might be harmed or exploited by any unfairness. A market that isn't fair but can do little harm or has limited scope for exploitation requires correspondingly little or no control. For example, a supplier of luxury products whose production incurs no negative externalities, whether or not there is effective competition from other suppliers, will find it difficult to exploit customers because they always have the choice of walking away.
Let's see what is needed to bring about fair market conditions:
Whenever there is a private monopoly or cartel (whether formal, informal or tacit - which there will always be with limited numbers of sellers or buyers[127]) regulation is needed to limit their ability to keep other sellers or buyers out.
In monopoly or cartel cases where products are essential - for example energy supply, water supply, waste services, public transport, national security and essential pharmaceutical products, then the state (either centrally or locally) should provide them. The main criterion that determines the need for state supply of goods and services in these circumstances is when provision must be guaranteed, because no supplier other than the state can provide that guarantee. Contractual guarantees for private suppliers are very limited. Suppliers can go bankrupt, cease trading, be bought out by other companies that don't wish to continue the service, be closed down by the regulator for gross failure, or walk away because the business is not profitable enough. This is what happened when National Express walked away from the East Coast rail franchise in 2009.[128] The government re-nationalised the route, which, incidentally, went on to make a profit of over £1 billion for society while under state control.[129]
The real danger comes when the state loses the ability to provide a formerly private service, as it is bound to do eventually, so that when the guarantee is invoked the government is at the mercy of remaining suppliers and must pay whatever they demand. Also, when essential private supplies have to be underwritten by the state then the state must set up regulatory bodies to try to stop them from exploiting their position, the costs for which are levied on the private suppliers making them even more desperate to cut the costs that remain under their control. Private suppliers find it well worthwhile devoting considerable effort to finding ways to exploit whoever pays for their services, and this sets up cat-and-mouse games between regulators and regulated, where the regulated suppliers always remain one or two steps ahead of regulators because it is very profitable to do so.
Indeed the objective of private suppliers is to make money for themselves, the level of quality or even the supply itself of the contracted product is not their objective, it is merely a vehicle for making money and as such all controllable costs must be minimised and all revenues maximised. In contrast the objective under state control is not to make money, it is to provide an appropriate quality product at an appropriate price. This has great significance for privatisation of essential public services, Private Finance Initiatives (PFI), Public Private Partnerships (PPP), and outsourcing. These matters are discussed in detail in chapter 92.
Monopolies that are deemed to be against the public interest tend to be broken up into a group of smaller companies. But all this achieves in most cases is to change a monopoly into a cartel. The essential factor that makes market competition work is ease of entry for new suppliers. Without this the existing suppliers will do their best to find ways to collude to increase profits at the expense of customers. They often compete fiercely in all other respects but collude on price to disadvantage buyers. Another quotation by Adam Smith from 'The Wealth of Nations' sums up the situation well:
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. (Smith 1776 Chapter X Part II)
Another criterion for state supply is when the state is the main or a major customer for research-intensive products of monopoly or cartel suppliers, such as pharmaceutical drugs and medicines. There is so much wrong with the pharmaceutical industry and the way it is allowed to operate that it gets the next chapter all to itself.
Whenever there is a danger of harm or exploitation by means of inaccurate, missing or biased product information the state should apply regulation that enforces accuracy and availability, charged to the suppliers.
The state should prohibit or restrict the sale of dangerous products, or establish and enforce minimum health and safety standards. In the absence of minimum standards competition acts against the interests of health and safety, giving bad products competitive advantages over good products, driving them out of the market. Other products can be harmful, especially in excess, but full and accurate information is insufficient to dissuade or limit buyers' appetites for them. These are products that are habit forming or very pleasurable. At the same time in some cases people are used to having them so outright prohibition is impractical or ineffective. For example alcohol was prohibited in the US in the 1920s and early 1930s but the law was widely disregarded and eventually scrapped. Street drugs are prohibited in many countries but again laws are widely flouted. Outlawing these products drives them underground where product information and quality are outside the state's and buyers' control. As a result far more harm is often done than if they were permitted and adequately controlled, but restricted or strongly discouraged as are tobacco products in the UK.
Further complication arises when the issue becomes a moral one, as it has become for drugs, when any suggestion of legalisation in any form is regarded as the state encouraging their use. Where morality is not involved the state should apply appropriate levels of discouragement or control, which can be by taxation, restrictions on advertising[130], licensing - appropriate for potentially dangerous activities, registration and availability through prescription - as was done for drugs in the UK prior to 1964, rationing and so on, or a combination of these measures. At the same time advice and practical help for people who wish to stop using the products should be freely available. Where morality and public acceptability are involved the issue is much more difficult but the same approach could still be taken, especially given the dreadful impact of street drugs on users and even entire communities, and also the vast amount of crime and associated damage, distress and fear that comes as a direct result. Victims shouldn't be seen as criminals, they need help. On any measure prohibition just doesn't work, except for drug dealers, who benefit enormously from it.[131]
Potentially harmful products aimed at children should be particularly closely controlled. Soft drinks are recognised as having many dangerous effects, including obesity and hyperactivity. These and many kinds of fast food generally cause harm that threatens to overwhelm the NHS, yet little is done to restrict or discourage them. These cases in particular show the 'unfettered market knows best' philosophy to be deeply flawed.[132]
Whenever there can be harm to third parties or society as a whole (negative externalities), the state should ensure that companies prevent any such harm at their own expense, prohibit the activities, or require that proper compensation be paid either directly or in kind and distributed to those suffering the harm, again at the companies' expense.
This happens when benefits are purely social or when a socially beneficial investment project is too long-term, too risky or too expensive for private financing. In such cases the state must accept its responsibility to make provision on behalf of society. Examples include public amenities such as parks, gardens, libraries, galleries, museums, sports facilities and playing fields; and large scale or long-term investments such as power stations, transport infrastructure, flood defences, national security and countering environmental threats. Private investors only operate on short timescales because of uncertainties. For long timescales they either won't invest or demand extortionate returns to hedge profit success as in private finance initiatives - see chapter 92.
Given the above conditions and remedies all else (most things in a prosperous country) should be produced and supplied privately, because markets will then be sufficiently fair, and a fair market is the most efficient and responsive way to match supply to demand.
In stark contrast to the claims of neoliberals there is very extensive evidence that markets and governments are strongly positively correlated - i.e. markets function best when there is strong government. Research by David R Cameron (not the former UK PM), extended by Dani Rodrik, shows that the more developed a country the greater the share of national income that is taken by the public sector - the richer the country the better its markets function and the bigger the government. Rodrik was so surprised by Cameron's findings that he repeated and extended the study and found exactly the same thing (Rodrik 2012 Chapter 1). A major contributor seems to be openness to international trade. The more a country's markets expand the more that government must expand also. The reason seems to be social insurance. Governments are needed to preserve the legitimacy of markets by protecting people from the risks and insecurities that markets, especially international markets, bring with them. Markets and governments are not in opposition, they are complements. This of course flies in the face of neoliberalism.
The role of the state and of the government as society's agent are explored in detail in Part 4.