Laissez-Faire Economy - Coursework Example

? Laissez-Faire Economy Task Introduction Laissez-faire economy refers to a free market economic system where there is minimal government intervention. Laissez-faire encompasses both the doctrine and policies that actually enforce such an economic system. The main principle is that the welfare of both the community and individuals is best served when markets for goods, capital, land, labor and other resources are left to the “free play of supply and demand”, and when the state interferes as little as possible, in both the economic and the social sphere (Baumol & Blinder, 2011). The resources are allocated by voluntary market transactions with very limited state intervention; the main role of government is to safeguard property rights of individuals. The belief is that both economy and the public would do without governmental involvement that may hamper the economy’s complete potential. However, a purely and effective laissez-faire economy is virtually non-existent; all successful national economies are buttressed by great and effective governments. Laissez-faire economies and liberal market systems lack adequate self-regulation mechanisms and this necessitates the government to intervene to prevent enduring economic crises and numerous social problems associated with pure Laissez-faire economy such as escalating income inequalities. Government’s intervention is also necessary to prevent market failure. Most economic systems are mixed with substantial state intervention, regulation and direction (Baumol & Blinder, 2011). State intervention in an economy is critical to alleviate market failure. Frequently, market failure is an outcome of lack of information concerning the products available in the market among the consumers. In market failure, participants’ self-promoting actions fail to achieve an efficient outcome, so that it is possible to increase the welfare of one or more group of individuals without harming someone else welfare. Market failures can first result from an externality, which is an interdependency among two or more individuals that is not taken into account by a market transaction (Baumol & Blinder, 2011). An example includes pollution. Market failure may also be associated with public goods. A public good’s benefit can be received by payers and nonpayers alike once the good is provided. The provider cannot, therefore, keep a non-payer from consuming the good’s benefit, and this inability limits incentives on the part of users to finance the good’s provision. An example of such a public good is defense. A third source of market failures may stem from property rights that are either undefined or owned in common unrestricted or open access. Markets, which allow for the voluntary exchange of property rights, can only operate if these rights are recognized and protected. Common ownership when coupled with open access, would also lead to wasteful exploitation in which a user ignores the effects of his or her action on others (Baumol & Blinder, 2011). The presence of market failures means that some form of state intervention on a collective basis may be needed. Sometimes the state could be intervening as an outside authority to negotiate an agreement among the concerned parties. Fig. 1 (below): Examples of Market Failure and Ways the Government Intervenes To Remedy Them Types of market failure: • Externalities • Merit and demerit goods • Public goods • Natural monopolies • Equity Types of government intervention: • Taxes • Subsidies • Regulations • Public provision • Transfer payments State intervention results into mixed economy system. This is where there is a merge of public and private organization and ownership of property. All rely on markets for some purposes, but also assigns some role to government. A mixed economy is one with some public (state) influence over the working of free markets. There may also be some public tenure amalgamated with personal property. It is more or less a blend of socialism and capitalism. In mixed economies, the means of production are still largely privately owned and market forces play the central role in coordinating and driving the economy. The market is liberal guided mostly by capitalistic individuals and enterprises. However, the state significantly controls, influences and regulates the economy and market through various legislations and policies aimed at alleviating the economic recessions and other problems associated with capitalism such as huge income inequalities, high unemployment levels and fiscal crises (Baumol & Blinder, 2011). Most countries have mixed economies though the proportions of the mixture of free-market determination and government control vary from economy to economy. The mix also varies from sector to sector. Examples of mixed economies include the US, Japan and the UK (Baumol & Blinder, 2011). The government plays numerous functions and roles in mixed economies. Private individuals have the right to procure and sell what they wish, to accept or refuse work that is offered to them, and to move where they want when they want. But governments create the legal framework that governs transactions. Governments are also responsible for the provision of a stable-valued currency which is the measuring rod for all prices. In modern mixed economies government go well beyond these important basic functions. Governments in mixed economies generally redistribute income and wealth through social programs; stabilize the economy through monetary and fiscal policies; and regulate business activity through environmental laws and protections for workers, consumers, savers and other stakeholders (Baumol & Blinder, 2011). Governments intervene in market transactions to correct market failures. These are the identifiable situations in which free markets do not work well. For example, natural resources such as fishing grounds and common pastureland tend to be overexploited to the point of destruction under free market conditions. Some products such as public goods have to be provided by the government. Public goods are those services or goods that the government needs to provide to its citizens (Baumol & Blinder, 2011). Public goods are different from private goods because the good’s benefits cannot be traded in markets. Examples are defense and law and order. Public goods are consumed by all; both the payers and non-payers and the provider cannot therefore prevent those not paying from consuming the good’s benefit. Thus, this inability limits inducements for of users to finance the good’s provision. For instance, if defense were not supported by taxes but by citizens, generosity, defense budgets would be very small indeed. Individuals are anticipated to take a free ride on the effort of providers. The state therefore has to intervene so as to provide the public goods. A second property of a public good is that its benefits are non-rival; that is, “one individual’s consumption of the good does not detract, in the slightest, from the consumption opportunities still available to others from the same unit of the good” (Baumol & Blinder, 2011). Governments also play the role of dealing with externalities. These are costs and expenditures that private agents impose on others by engaging in their economic activities (Baumol & Blinder, 2011). An example is when factories pollute the air and water – the public is harmed but has no part in the producers’ decision. These are some of the reasons why free markets sometimes fail to function in desirable ways. Thus, governments have to intervene and alter the outcome that would result if everything were left to the market. Nevertheless, not all effects are necessarily detrimental to third parties. In case of scientific breakthroughs or technological innovations, the discovery can benefit the finders and others alike. Without the support or subsidies from governments, too little research and developments may be undertaken. The government may also intervene to ensure success of such noble ventures. There are also some products like health and education, that could be provided through the market, but which the governments have decided should be provided by the state and (in some cases) free of charge. These are not pure public good, but many countries governments’ have decided that some level of minimum provision must be available to all, so this cannot be left to the market. These are called merit goods (Baumol & Blinder, 2011). There are important equity (or fairness) issues that arise from letting free markets determine people’s incomes. Some people lose their jobs because firms are restructuring in the face of new technologies. Others may keep their jobs because, but the market values their services so poor that they face economic hardship. The old and chronically ill may suffer if their past circumstances did not enable them to save enough to support themselves. For many reasons of this sort, the government has to intervene to redistribute income by taking something from the ‘haves’ and giving it to the ‘have-nots’. In mixed economies, a significant percentage of private income comes from the public budget and public tax and transfer payments considerably determine the state of private wealth distribution (Baumol & Blinder, 2011). Governments also play apart in influencing the overall level of prices and in attempting to stabilize the economy against fluctuations in income and employment. A stable price level and full employment are the two major goals of governments’ macroeconomic policy. The government also intervenes in order to reign over monopolies where a company is the only one supplying a given commodity and hence could result in exploitation of the consumers (Wessels, 2006). The diagram below explains how the government intervenes to correct monopoly. Fig. 2: Example of How Government Could Intervene To Correct Monopoly. The governments’ intervention in economies has its own limitations and problems. The fundamental problem with government involvement in the economy can be illustrated rather simply. In almost every case, a government plays the twin roles of rule maker and referee in a country’s economy. The government makes the laws and enforces them. So it is only natural that havoc results when the referee starts playing the game. The referee’s team no matter how lacking in ability would all but guaranteed to win. Such problems that result from state intervention include growth of bureaucratic and inefficient systems, corruption, valuation and lack of price information (Wessels, 2006). Research findings are a testimony to the fact that more government intervention results in lesser economic growth. For instance, one research conducted in over 100 states, regarding the size, degree of government economic intervention and tax rates indicates that smaller government intervention was relatively associated with better economic growth (Wessels, 2006). Fig 3: Graph Showing Effect of Degree of Government Intervention among Various OECD Countries. The Lesser the Degree of Intervention the More the Growth. In conclusion, the government plays exceptionally important roles in almost every national economy of the world. State intervention is compelled by the principle, besides the socio-political reasons, that free market mechanism singly cannot meet all economic functions. Government intervention through various policies and strategies are indispensable to guide, regulate and control it in certain aspects. Governments normally play four important roles in an economy; regulation, promotion, entrepreneurship and planning. While the state control of the economy is a universal phenomenon, the extent and nature of the control contrast based on the nature and phase of progress of the economy, the behavior of the private sector, the political philosophy and social attitudes administrative system among others. In practice, every financial system is a mixed economy because it amalgamates noteworthy elements in determining economic behavior. References Baumol, W. J. and Blinder, A.S. (2011).Economics: Principles and Policies, Twelfth Edition. Mason, OH: South-Western Cengage Learning. Wessels, W. J. (2006). Economics Fourth edition. Hauppauge, NY: Barron’s Educational Series, Inc. Read More