The reasons for government control of industry can be derived from either (a) a set of value judgements consistent with a particular philosophical standpoint; or (b) the study of the actual policy objectives which governments wish to implement. The first approach is called the normative approach, and the second the positive approach. If we adopt approach (a) we have to justify or evaluate the policy objectives, whereas under approach (b) we can take the policy objectives as given.
The normative approach frequently employed by economists is associated with welfare economics. An initial value judgement is made about optimal economic conditions, usually that the economy must be designed to maximize the satisfaction of consumers. To achieve the optimum requires that marginal social costs must equal marginal social costs in all markets. The free enterprise economy does not automatically fulfil these conditions because (i) companies may be able to exploit monopoly positions; (ii) externalities of consumption and production exist; and (iii) there are difficulties in supplying goods and services with the characteristics of ‘publicness’; and (iv) consumers may not choose the amount and composition of goods and services which ‘are in their best interests’. The government ‘should’ therefore intervene in the free enterprise economy in order to rectify these ‘ market failures’ using such instruments as anti-monopoly legislation, taxes to eliminate negative externalities and subsidies to promote positive externalities, public production of goods which the market cannot provide, and regulations to prohibit sale of ‘harmful’ products. There is considerable controversy about whether these optimal conditions properly reflect consumer interests, particularly in a world of uncertainty about trends in costs and prices and changing consumer tastes and preferences. Nor can it be assumed that government policies can be precisely designed to remove the perceived failures of the market.
However, instead of having to prescribe what governments ought do do, it is more in keeping with the acquisition of knowledge necessary for a business career to identify with the actual policies of government, whatever one may think of them, and to discover how they are likely to affect company strategies. That is why a positive rather than a normative approach governs subsequent analysis.
The positive approach requires the identification of the policy objectives of government which are actually operative. This is more difficult than it sounds. Governments in different countries may promote different objectives or at least assign them different orders of priority, and likewise successive governments in the same country may support different policy objectives. Governments may not wish to reveal their policy objectives and their implications for the choice of policy instruments, at least in detail, for this may adversely affect voter support – no policy is ‘costless’ in the sense that it will satisfy all voters all of the time. What can safely be said is that Western governments are concerned with a wider range of objectives affecting industry than indicated by welfare economics with its emphasis on the allocation of resources at a point in time. At a minimum they are concerned with the growth in industrial output over time and therefore with productive efficiency of factor inputs. They are concerned, rightly or wrongly, with the distribution of industry among regions. Unequal opportunities for employment in different regions could be an important dimension in policies designed to achieve a given distribution of income, and could militate against policies designed to influence individual incomes, such as social security schemes. It is equally clear that regional industrial policy is influenced by the need to retain voter support, particularly in marginal constituencies.
