The clubs and pokies industry exists entirely at the government's pleasure, reliant on government-issued gaming licenses to operate. Is it any wonder they are today some of the largest undeclared donors to political parties? Credit:Andrew Meares In first-year text books, economics students are taught that market forces of supply and demand determine prices. But rarely, in the real world, do the forces of the market work so freely. In reality, the invisible hand is guided, at every turn, by the strong arm of government. Governments intrude on almost every sector of our economy in a number of ways. Sometimes, government simply steps in to set prices by decree. It happens with a frequency that may surprise many. Each year the health minister, with an iron fist that would make Stalin proud, announces the price rises allowable for "private" health insurers.

Electricity bills, too, are largely set when the national energy regulator makes a determination about what reasonable rate of return network owners are allowed to extract. Phone and internet bills were, for many years, heavily influenced by the competition watchdog's decisions about what price Telstra could charge competitors for access to its copper wire network. Today, the National Broadband Network sets standard wholesale charges. Other times, governments create markets out of thin air, by granting licenses to private businesses to conduct a certain activity. The clubs and pokies industry exists entirely at the government's pleasure, reliant on government-issued gaming licenses to operate. Is it any wonder they are today some of the largest undeclared donors to political parties? For decades, state governments have limited the supply of taxi licence plates, heavily influencing the price. Until of course, the rise of ride-share services like Uber dramatically undercut their value.

Last year, the Victorian government announced a $500 million compensation package for the taxi industry. In NSW, plate owners recently lobbied, successfully, for compensation and the government will impose a $1-per-trip fee on users of ride-share services, to the tune of $250 million. When business people invest in industries heavily influenced by government, they should more commonly be forced to wear any resulting regulatory risk. Any compensation can only come from one place: the rest of us, as taxpayers or consumers. Governments can also make or break private fortunes through the public policies they pursue to advance society's greater welfare, including subsidies for solar power or domestic manufacturers. The ability of government to tax, of course, affects every business. Decisions to target one industry over another are open to influence, as we saw with the backlash against the Rudd government's mining tax.

In recent decades, Corporate Australia has come to realise the power of Canberra. Rent-seeking, the practice of attempting to manipulate government decisions to earn profits above what would otherwise be required to stay in business, is now rife. Business has engineered various ways to influence outcomes, hiring third party lobbyists, employing growing armies of internal "government relations" employees (often bright and talented young people whose skills would more valuably be applied elsewhere), funding public campaigns to support their causes and industry bodies to represent their interests and, more blatantly, making donations to political parties. There have been policy responses, including bans on donations from developers in NSW, the creation of public registers for lobbyists and tighter disclosure rules for donations. But anti-corruption reforms have been manifestly inadequate. Political parties declared $207 million in donations last financial year, including $107 million for the Coalition and $70 million for Labor, including union donations.

Taxpayers could buy themselves complete faith that their political parties were not beholden to any third party interests for roughly twice the cost, each year, of the recent same sex marriage postal survey, or just over two and a half times the cost of this year's Royal Commission into banking misconduct. A small price to pay, perhaps, for peace of mind. Political donations are closer to the brown-paper-bag end of the spectrum, but the problem of business rent-seeking and influence peddling goes deeper. Given governments' tendency to cave in to special industry pleading, it's important to also have a focus on the flipside, when government decisions deliver windfall gains to private individuals or businesses. Compensation when governments break fortunes; taxation when they make them.

Viewed in this light, the recent bank levy is just an insurance policy for the day government is forced to bail out a major bank. State governments and local councils, too, regularly make or break fortunes with rezoning decisions. Experts often talk of the need for "value capture" taxation to recoup from local landholders the windfall gain from better transport to their area. Why not a tax to capture the value to landowners from rezoning decisions which deliver windfall gains in value? Corrupt landowners may soon find they had no incentive to try to influence rezoning decisions at all. As we enter 2018, corruption of government decision making is rightly a growing focus. Calls for a federal corruption body are well overdue. We can never hope to eliminate the potential for corruption of government decision making, no matter how much we de-regulate and privatise.

We can only hope to make the processes of government as transparent as possible, and, where possible, remove incentives to pervert the rules of the game. Far better to start with a clear-sighted view of the inherent problems and trade-offs in a heavily government-influenced economy than a fantasist's faith in the free market to sort it all out.