State, Market and Social Policy - Essay Example

Market and Social Policy Introduction This paper discusses the relationship between the government and the market along with the social policy implemented by the state. Additionally, there is also a discussion the tools of economics analysis used by Baileys (2002) in examining the role of government in the economy. This article reflects on the rationalization for government participation in the economy and how preferences are made about the responsibility of the public sector and the policy implication of such in creating an argument. At the start, this paper takes an overview of the position and responsibility of the State in the economy and then utilizes economic theory and confirmation for the purpose of analyzing key areas of government policy. At most of part of this paper is the provision of the answer to the question on whether we should be concerned on market failure or government failure. Role of Government There are inefficiencies brought about by monopolies. One in which is that they can get away with imposing higher non-pecuniary (non-financial) costs on buyers (Lewis and Widerquist 2001). For instance, assuming a small local market for counseling had just one provider of psychotherapy. Clients who went to this provider's office might have to spend long periods in waiting areas. This would have been the time that the clients could have spent engaging in other valuable activities; as a result their waiting time would be a cost. The therapist might be able to do some things to lessen clients' waits, other than as a monopolist, the therapist faces no viable demands to do any of them. In response to this, Lewis and Widerquist (2001) assert that a government has three things it can do to lessen and improve the inefficiency caused by monopolies. First, it can attempt to promote competition in monopolistic markets through breaking up monopolies or by avoiding them from forming. This is the reason why the United States has antitrust laws. Antitrust laws limit mergers (the joining together of firms in order to create bigger firms) between firms that sell goods in the same market. Moreover, antitrust laws also limit price-fixing between firms in the same market through preventing competing firms from performing as if they were monopolists. Evidently, the U.S. government utilized antitrust laws to break up American Telephone and Telegraph's monopoly on long-distance phone service, and the Justice Department has taken Microsoft to court. Second, governments have the power to decide whether to permit the monopoly to survive but regulate its price. As an application and realization, the U.S. government has employed this solution for phone companies and electricity companies, and local governments on occasion use it for cable television. This preference is frequently used for industries that are supposed to be natural monopolies. For the reason that a group of smaller firms would have a higher cost than one large firm would, breaching up a natural monopoly would not work very well. On the other hand, leaving the natural monopolist alone generally is not a good suggestion since natural monopolies have the same aspiration to get the most out of profit as any other firm, subsequently they will increase prices higher than costs and have the tendency to raise prices well above costs. For instance, one may think that his/her water bill is high now, but how high would your bill have to go before you seriously considered drilling a well You would probably let it go quite high (as cited in Lewis and Widerquist 2001). Therefore, if the water company were an unregulated monopolist, it could get away with a very high price. It is not easy for government to determine the right price to tolerate a natural monopolist to charge, and firms that face a regulated price have efficiency problems, but regulation may be the best solution, basing on the options. Lastly, the government may perhaps plainly take the monopoly over and run it itself. The U.S. government has used this solution in a number of industries, including passenger rail service, the highway system, and the postal service. This strategy is more common in Europe. However, the drawback of this approach is that it is complicated for the government to find out the most proficient price and the most efficient structure of management. On the bright side of this government move is that any profit that the monopoly makes may possibly be used for other government projects that are advantageous to society as a whole. Market Failure due to Government Intervention Traditionalists and conservatives alike definitely disagree, but hypothetical rationalization exists for government involvement in markets. Ever still, readers of all political stripes may well wonder whether a government decision is reasonable so long as it is made democratically. There are at least two arguments commonly offered for the reason why the government should not intervene in the economy unless it has a compelling reason to do so. One is based on the principle of liberty and freedom of choice and the other on the principle of efficiency. The argument on liberty against government intervention is that people have a right to switch over their legally owned property for whatever they perceive fit. The restriction of government on the ability of people to make free use of their property-even a restriction approved by majority vote-represents an annoyance on individual freedom and as such ought to be avoided except for the reason to do otherwise is persuasive. The second argument on the efficiency against government intervention is based on the understanding of economists of the benefits connected with entirely competitive markets. With the exception of distortions, entirely competitive markets result in efficient distribution of goods. According to Adam Smith (1776), the idea that the whole society benefits from exchanges between self-centered individuals in completely competitive markets is now called the first fundamental theorem of welfare economics (FFTWE). The FFTWE does not appear to leave a lot of room for government to make a optimistic and constructive involvement, but one important avenue for government intervention is available. One of the functions of government in mixed economies is affecting the distribution of property rights. Provided that society looks upon a certain distribution of property as too uneven and disproportionate, it can use taxes and transfers to alter this distribution (Atkinson and Stiglitz 1980). After doing so, the resulting distribution of goods will be Pareto efficient (Named for the late economist-sociologist Vilfredo Pareto, who defined the conditions for efficiency) should the government let people to engage in trades with one another and markets are completely competitive. According to Lewis and Widerquist (2001) such conclusion is the second fundamental theorem of welfare economics, and it proves that government intervention aimed at creating a more equal distribution of property need not necessarily interfere with economic efficiency. More often than not, one will hear people use the FFTWE as part of an oversimplified dispute in opposition to government intervention in the economy. It actually works just like this: For the reason that one circumstance for an efficient outcome is the existence of markets with free entry and exit, and since government intervention can restrict and control entry, markets without government intervention are more efficient than ones with government intervention. However, this argument is perceived to be wrong because it pays no attention to the fact that many other conditions for an efficient outcome also are not met. It amounts to saying that even though all the conditions required for efficiency are not convened; we should meet as many of them as possible. Nevertheless, according to a standpoint in economics called the theory of the second best (TSB), meeting many but not all conditions for efficiency does not lead to efficient markets. The TSB asserts that if some conditions for efficiency are not met, violating another condition for efficiency may be compulsory in order to offset the first. The theory of the second best entails that government has many opportunities to get involved in promoting the efficiency of the economy since all the conditions for an efficient economy are not often met. For instance, the government may perhaps encourage efficiency by providing information to consumers if the hypothesis of perfect information is not met. Market failure takes place when one condition needed for Pareto efficiency is not present. To properly illustrate, "if the market fails, the market outcome is inefficient"; the government could ratify policies that lead to a Pareto improvement, a change in the distribution of goods that makes at least one person better off without making anyone worse off. Government Failure Government involvement in the market economy could possibly fail like market would. Despite a lot of studies have assumed that government is a benevolent body that would do something to remedy market failures, many economists have pointed out that there is no assurance that a government, even a democratic one, will prefer the efficient policy responses to market failures, even if economists could identify efficient policies (Barr 2004). From the start of the 1950s and 1960s, a group of economists began to address government failures through the utilization of mainstream economic tools. In particular, their technique was to apply to political decision making the same rational choice tools that economists apply to marketplace decision-making. Public choice theory assumes that people vote, pass legislation, run for office, give campaign contributions, or lobby Congress to maximize their own private benefit (whether it be utility or profit). Basing from the point of view of rational choice theory, the difference between public sector institutions and profit-seeking firms is very important. A company's purpose and intention is fairly clear - to gain profits. It is sensible and practical to believe that they are all united in their aspiration for the firm to make as much money as possible even though a corporation has thousands of stockholders. On the other hand, governments do not have owners and do not directly make profits; nonetheless every action that a government takes has always an effect on the income of firms and individuals all over the country. As a matter of fact, government policy makes some people better off and others worse off most of the time. For instance, the federal government taxes middle-class people not to make a profit but to finance programs that benefit the poor or perhaps another segment of the middle class. One innermost characteristic of democratic decision-making is the existence of groups with contrasting interests that may try to find social policies to serve themselves, conceivably at the expense of others. Public choice theorists for that reason do not speak of the goal of the government as they would speak of the goal of the firm, but to arrive with a theory of government they regard as the competing goals of diverse actors in the political decision-making process. Many of public choice theory practitioners are rather negative and distrustful about government and they have a tendency to be advocate of small government for the simple reason that public choice theory is apprehensive with government failure. On the other hand, it would be erroneous to scrutinize public choice as merely a reason and validation for small government. The theory is well thought out. Building a good government necessitates a good consideration of what can possibly go wrong with government. Public choice theory proposes significant insight about the mechanism of contemporary governments. Transformation of Welfare States Along with the twist of the century, state-sponsored care and social protection in all of the highly developed industrialized countries have entered a new period, marked not only by a chronological rotation but also by material improvements that have profound and lasting implications. In the United Kingdom for instance, Tony Blair's New Labour policies demonstrate no hesitation in privatizing the delivery of public services; in Sweden, the Social Democrats have initiated the partial privatization of old-age pensions; in Germany, reforms have brought in significant incentives for citizens to open private pension accounts for their old age; and all throughout Europe and the United States changes in unemployment, disability, and social assistance programs have apparently qualified significant rights to public aid by a determined emphasis on the responsibility to work and to be independent.As the charitable scope of and access to public benefits contract, change is in the air, as well as in the substance of social provisions-to which some will no doubt respond, however, in regard to state-sponsored social protection, things have apparently not stayed the same. As the subheading of this paper signifies, the main line provides proofs and confirmations that the welfare states of highly developed industrial nations are going through a major transformation.It should also be clarified that transformation is not to dismantle or eliminate but to essentially alter the existing structure in such a way to materialize a new design.In this case, what is being altered involves the necessary framework for social policies that shaped the basis on which the most progressive welfare states were ascertained.Momentarily placed in the language of social architects, this change is from policies enclosed by a universal approach to publicly delivered benefits intended to protect labor against the vicissitudes of the market and firmly held as social rights to policies framed by a selective approach to private delivery of provisions designed to promote labor force participation and individual responsibility-summed up by the axiom "public support for private responsibility." Or to put it more bluntly, a change from the ideal type Scandinavian model of social welfare to a market-oriented version, which is identified with the Anglo-American approach that is termed by Gilbert (2002) as the enabling state. Case in Asia Furman and Stiglitz (1998) have significantly reviewed the pertinent literature to disagree against raising interest rates with the purpose of protecting the exchange rate. Particularly where leveraging is high, the same as in East Asia, high interest rates will take an enormous toll by weakening the comprehensive demand and increasing the possibility and occurrence of insolvencies. Unanticipated interest rate hikes have a tendency to weaken financial institutions, lower investments and therefore, output. They present three main reasons why keeping interest rates low while letting the exchange rate decrease in value may be a preferable option in the face of the trade-offs involved: 1. To avoid crisis, there should be greater concern about interest rate increases than exchange rate declines (Demirguc-Kunt and Detragiache 1998). 2. Invoking a moral hazard argument, they suggest that any government intervention to stabilize the exchange rate is likely to encourage economic agents to take positions they would otherwise not take, later compelling the government to support the exchange rate to avoid the now larger adverse effects. 3. Invoking an equity argument, they ask why borrowers, workers, firms and others adversely affected by higher interest rates, should be compelled to pay for speculators profits. 'When a government defends its currency, it is often making a one-way bet, where the expected loss is speculators' expected gain. In contrast, if the government does not wager any reserves, the gains of some speculators are simply the losses of others' (Furman and Stiglitz 1998). The early IMF policy recommendation to raise domestic interest rates not only failed to stem the capital flight, but also intensified the impact of the crisis, with financial pain brought about by currency depreciation, stock market fall down and higher interest rates. Furman and Stiglitz (1998) have argued that the East Asian collapses were all the more severe for the reason that such efforts to try to protect the exchange rate by raising interest rates. Higher interest rates imposed greater, and perhaps more everlasting damage on the existent economy. In the financial crises and global governance, Stiglitz (2000) asks the following questions: "Are international policies in this area [financial liberalization] being designed on the basis of the best available economic theory and evidence, or is there another agenda, perhaps a special interest agenda, seemingly impervious to the effects of such policies, not only on growth, but on stability and poverty" (as cited in Desai and Said 2003). If that is the case, is there a more fundamental problem in the international economic architecture going to issues of accountability and representativeness Do those making decisions that affect the lives and livelihood of millions of people throughout the world reflect the interest and concerns, not just of financial markets, but of business, small and large, and of workers, and the economy more broadly These are the deeper questions posed by the crisis through which the world is just emerging. (Stiglitz, 2000, p. 1085) A further and probably deeper question that needs to be added to Stiglitz's, is the reason why, at best, did it take considerable crashes before policy-makers in some Least Developed Countries realized some of these problems and began implementing these types of policies (even if still not based in the best available economic theory and evidence) in a less dogmatic way And only then were previously untouchable issues, such as capital account regulations, taken seriously (Desai and Said 2003). However, at least some policymakers in a few countries have found out at last - which cannot be assumed for the greater part of international fund managers who do not appear to have learned much from their faults and continue to act as if these crises have never happened, and there is nothing in this world but the end-of-year additional benefit. In this world of by now high, rapidly emerging, tremendously unstable, and roughly completely unfettered international liquidity, capital controls can, of course, be of some help; but one cannot look forward to them to be able to hold the fortress on their own. This is for the most part the case in small countries - small in respect of not only to international financial markets in general, but even to the position-taking capability of a small number of hedge funds; according to them, theory and evidence recommend that they necessitate to follow essentially different policies than larger ones, not just as momentary measure but in the stable state (Eichengreen, 2000). Conclusion The concept that government has the capability to encourage efficiency has recurrently been criticized. This paper has laid out examples of market failures and presented ways that the government could address those failures, showing that the government was a perfectly working institution and an indispensable body in the economic development. It would be wrong to take for granted that the market works efficiently at all times, yet it would also be incorrect to assume that the government always works efficiently. Cautious government action to remedy a market failure may be achievable, however it is uncertain whether the government will take those actions. Occasions when the government fails to make efficiency-improving choices or makes decisions that decrease efficiency are called government failures that have been found to have direct effect on market and the economy. References Adam Smith (1976), An Inquiry into the Nature and Causes of the Wealth of Nations (1776; reprint, Oxford: Clarendon). Anthony B. Atkinson and Joseph E. Stiglitz (1980), Lectures on Public Economics (New York: McGraw-Hill). Bailey,S.(2002), Public Sector Economics,2nd,Basingstoke, Palgrave. Barr,N (2004), The Economics of the Welfare state,4th ed Oxford: OUP. Demirguc-Kunt, A & Detragiache, E (1998), 'The determinants of banking crises in developing and developed countries', IMF Staff Papers, 45(1), pp. 81-109. Desai, M & Said, Y (Eds.) 2003, Global and Financial Crises, Routledge, New York. Eichengreen, B (2000), 'Taming capital flows', World Development, 28(6), pp. 1105-1116. Furman, J & Stiglitz, JE (1998), 'Economic crises: evidence and insights from East Asia', in Brookings Papers on Economic Activity, 2, Brookings Institute, Washington, DC, pp. 1-135. Gilbert, N. (2002), Transformation of the Welfare State: The Silent Surrender of Public Responsibility, Oxford University Press, New York. Hellmann, T, Murdock, K & Stiglitz, J (1997), 'Financial restraint: toward a new paradigm', in M. Aoki, H. Kim and M. Okuno-Fujiwara (eds), The Role of Government in East Asian Economic Development: Comparative Institutional Analysis, Clarendon Press, Oxford, pp. 163-207. Lewis, MA & Widerquist, K (2001), Economics for Social Workers: The Application of Economic Theory to Social Policy and the Human Services. Columbia University Press, New York. Stiglitz, J (2000), 'Capital market liberalization, economic growth, and instability', World Development, 28(6), pp. 1075-1086. Read More