Price Theory & Public Policy

3.0 Public Policy

3.1 Origins

3.2 Competition Policy

3.3 Equity

3.1 Origins

Long before 'perfect competition' was a glimmer in the eye of 19th century Neo-Classical economists, public regulation of exchange, production and trade was an ancient and well established practice.  And after the 'perfect competition' there has emerged the much more complicated methodologies to more adequately analyze the state of industrial competition (see 3.2 Competition Policy, specifically Industrial Organization).

The dawn of written history is in fact not one of poetry and fine tales but rather it begins with accounts of goods and services exchanged, produced and traded.  These records served two critical and parallel goals: (a) to better manage a business; and, (b) to pay the taxman.   The ruler of the day - king, queen, priest, warlord, et al - choose carefully what, who, where, when and why to tax.  A detailed picture of an ancient economy can be sketched out today using the same records 5,000 years later.  In fact, Revenue Canada and its foreign equivalents do the same for the 'rulers' of the contemporary economy and provide the basic data that informs the income-side of the System of National Income Accounts produced by Statistics Canada and other national statistical agencies.

Concerns of the ruler include not only tax revenue but also political stability that may be threatened if competition between consumer/consumer, producer/producer and/or consumer/producer is not perceived as 'fair and equitable' as well as the laws laid down by the ruler (currently the executive, legislative and/or judicial arms of the modern nation state).  History is replete with ancient rebellions and modern revolutions ignited by issues of 'fairness and equity', e.g. 'no taxation without representation' that fueled the American and 'Liberty, Egality and Fraternity' of the French Revolutions.

Underpinning these two modern revolutions (and to a lesser extent the Russian Revolution of 1918) was the 'Great Rebellion' of 17th century England embodied in the beheading of King Charles the First in 1649.  The roots of this rebellion lay far back in British history through which it gathered ever growing momentum.  Since the time of King John and the Magna Carta in 1215, there had been a progressive erosion of the power of the English Crown. In effect, two things happened.

First, the powers of the Crown were progressively limited by ‘rights’ granted first to the barons at Runnymede  and then to other ‘estates’ of the kingdom.

The gild franchises of the merchants and manufacturers gave to them a "collective lordship" similar to the private lordship of the barons, for their gilds were erected into governments with their popular assemblies, their legislatures, their courts, their executives, and even with authority to enforce fines and imprisonment of violators of their rules. Their most important sovereign privilege granted by the King was that of binding all the members by a majority vote so that they could act as a unit. These merchants' and manufacturers' gilds, at the height of their power, were not only legalized "closed shops" but also legalized governments. (Commons 1939: 225).

These ‘gild franchises’ were the first ‘monopolies’ of the English-speaking world, the monopolies against which Adam Smith was to bitterly complain.

Second, as the regulatory powers of the Estates grew the taxing authority of the monarchy declined. As Parliament – both the House of Commons and the Lords – increasingly refused to approve new taxes, monarchs realized they could raise money (and political favors) by granting charters to new groups or ‘companies’. The number of ‘monopolies’ soared, particularly during the early years of the reign of Elizabeth I. Near the end of her reign, however, these Crown grants of monopoly were increasingly:

…. adjudged against the "common right and public good," and "against the common law," because, being a monopoly, it was "against the liberty of the subject," and "against the commonwealth.” (Commons 1939: 226).

The process came to a head with the 1624 passage by Parliament of the Statute of Monopolies to abolish royal letters patent granting monopolies.  This was followed by an evolutionary process whereby the Common Law courts progressively stripped the guilds, with one notable exception, of their monopoly powers and assumed responsibility for their regulation.

The next hundred years, until the Act of Settlement in 1700, was substantially the struggle of farmers and business men to become members of the Commonwealth, whereby they might have courts of law willing and able to convert their customary bargains into a common law of property and liberty. The court which abolished the power of the gilds began to take over the work of the gilds. Their private jurisdiction became a public jurisdiction. And the very customs which the gilds endeavored to enforce within their ranks became the customs which the courts enforced for the nation. The monopoly, the closed shop, and the private jurisdiction were gone, but the economics and ethics remained. Much later, in the modern commonwealth, other functions of the gilds, such as protection of the quality of the product and the qualifications of practitioners, have also been taken over by courts or legislatures (Commons 1939: 230).

It was not, however, until 1801 that the British House of Commons abolished the 'craft' guilds with passage of the Statute of Artificers.  This was the beginning of what Karl Polanyi called The Great Transformation giving birth to the 'self-regulating marketplace'.

This trend continued the laissez faire, laissez passez economics of Adam Smith becming the siren call for minimization of government involvement in the economy.   Thus at the beginning of the Industrial Revolution, just as small innovative businesses began to transform human life in what Alvin Toffler calls the 'Second Wave', government involvement in the economy was increasingly limited.  Public works were adjudged valid but that was virtually the only economic role for government other than taxation. Competition between consumer/consumer, producer/producer and consumer/producer was to be left to market forces until the late 19th century when something strange happened - competition policy was born.  In some ways its birth was prophesized by Adam Smith when he wrote:


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...1

The interest of dealers . . . in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public ....  The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.  It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it .2


1. Adam Smith, The Wealth of Nations, Edwin Cannon, ed. (Methuen, London, 1961), vol 1, p. 144.

2. ibid., vol. 1, p. 278.

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