Laissez-Faire Economy and Functions of Government - Coursework Example

? Laissez-Faire Economy and Functions of Government Laissez-Faire Economy andFunctions of Government Physiocrats were a group of French writers who popularized the term “Laissez-Faire”, which translates as ‘let do’. Laissez-faire is a type of economy which promotes a free market and believes that government should not intervene in the decision making matters of the state. Laissez-faire economy liberates an economic system where self interest is the key role performed by the people of the country and also which is the best and the most efficient of ways while carrying out economic practices. Laissez-faire economy holds the characteristics of a free market economy which supports the idea of working for private interests. This creates a ground for innovation and creativity to blend into an economy and work in the most efficient manner. In a laissez-faire economy, since there is no government intervention, price determination is done by the market forces of demand and supply and there are no regulations to be followed which are set by the government in a command economy. In such an economy, the producers are profit motivated which boosts up entrepreneurial mindset (Sloman, 2007). The following diagram shows the market forces of demand and supply: Adam Smith, who is regarded as “the father of modern day economics”, supported the idea of a laissez-faire economy and boosted its importance and significance into the course of history. He referred to ‘the invisible hand’ that regulates the well being of an economy, and consequently, since everybody works for self interest, it benefits the economy as a whole. However, Adam Smith himself supported the idea of government intervention up to a certain extent. The United States of America is a good example where a “laissez-faire” economy was under practice for a certain period of time. “Laissez-faire” gained popularity in America because of Adam Smith’s opinions that the government should not indulge too much in the running of economic activities. There existed a greater quantity of conservatives who thought that when government intervened, it was imposing too many regulations. Except the help of government in establishing the railroad system in the 19th century, the state did not intervene much into the decision making of the country. There was existence of private ownership of businesses until the economic system of USA started altering after the Great Depression. There was a great incentive of innovation and people constantly worked in their self interest. The state started intervening to reduce the concentration of businesses and to eradicate monopolies. Before that the state did not interfere in resource allocation of the country and the matters did start deteriorating. Private businesses which were on a large scale started victimizing the small firms and created monopolies. There was a need for government regulation and thus government started stepping in the matters of decision making. Today’s economies have evolved from historical economies and differ in nature and characteristics. In earlier times, government intervened a little too less into how an economic system was supposed to be established. Today’s economies support government intervention and mixed economies have come into existence. A government has vital roles to play and has proved to be beneficial at certain times. A government aims to provide the basic necessities that people or a country require. Its primary aim is to provide security and defense to guard the country against external threat. This enables the people to live in peace and carry out economic activities in the most efficient manner. Also, the government is there to serve justice to people and prevent any illegal activities to take place. But sometimes it pays too much attention on providing security and defense which results in suppression of creativity or innovation that could have resulted in entrepreneurial activities. A government plays a strong role in altering the economic functioning of a country. A government supports entrepreneurial activities and grants rights to every individual to add to the economy. However, when certain groups or individuals tend to carry out activities against the interests of the country, the government intervenes and modulates economic matters. The government tries to give head start to infant industries and support existing industries which need financial support. There are various ways how a government intervenes in the economic functioning. However, some infant industries become too complacent and just harbor to the support of government. One of the most important functions of the government is to eradicate any existence of monopolies and to create an opportunity for everyone to compete in the domestic market. It tries to demolish any barriers to entry for infant firms and take hold of provision of commodities from which the public benefits as a whole, like electricity and gas supply, being service motivated. The government finds is imperative to support people who are economically unstable. There are certain firms who tend to exploit their workers who have feeble negotiation power, financially. This is where the government steps in and provides rights to such workers and liberates freedom for trade unions to form. Also, if oligopolies come into existence, which tend to form cartels, they ultimately victimize consumers by elevating prices; the government has to deal with such establishments. But sometimes, trade unions start protesting on every small issue they can find which deteriorates the atmosphere (Lipsey & Chrystal, 2004). The following diagram is a monopoly diagram: The government plays a significant part while dealing with the provision of merit and demerit goods. It tries to regulate the provision of demerit goods. There are certain goods which can be harmful for any individual, like tobacco and alcohol, so the government levies taxes on such goods so that the demand for that particular commodity falls. It also makes sure to increase the provision of merit goods by creating awareness and subsidizing the producers so that consumption increases (Bamford & Grant, 2010). The following graph is of provision of merit goods: The government also plays an important function by intervening in policies of international trade. It imposes protectionist policies like tariffs, quotas etc to reduce the amount of goods being imported in the country which gives an incentive to domestic producers to work efficiently and meet the local demands. Such policies avoid dumping which in turn protects the infant industries in the local market. Also, if the international market is very competitive and domestic producers tend to fall behind international standards, the government subsidizes local firms so that they increase their quality of products which results in becoming competitive in the international market (Bamford & Grant, 2010). The following diagram is of the protectionist policy of tariffs: Most importantly, the government provides social escalation in the economy to help unemployed people, senior citizens, people who suffer intense injuries or are fighting for their life and are unable to pay for medical. Also, it provides public goods like healthcare facilities, education, public parks and libraries. Sometimes, people who are unemployed exploit these benefits and deliberately stop searching for jobs because they are getting money just by sitting at home. Whenever an economy is in a recession, the government increases its spending and create public works opportunities like building roads, bridges etc, which creates employment. As employment is generated, people tend to earn and consequently their purchasing power increases and they spend on commodities. This cycle continues and this way an economy turns out of an economic slump. It also helps in price stabilization and price regulation. For price stabilization it employs techniques of buffer stock system and for price regulation price ceiling is employed (Lipsey & Chrystal, 2004). Price ceiling is practiced as follows: The Union of Soviet Socialists Republic (USSR) is the best example of a command economy. There was total government dominance in the Russian Federation and there was no presence of private enterprise. Everything was state owned and people were given salaries for their services. The state owned the agriculture sector and many other areas were solely under state control. There was no space for creativity or innovation and all the decision making was in the hands of the state. Till 1989, Russia practiced command economy effectively and there was equal distribution of income among the people. The standards of living were poor because there was no priority given to entrepreneurial activities thus the economy was out of competition. There was very less variety of goods and services and resources were allocated by the state. The state itself determined the general price level of commodities. However, as matters were in the hands of the state, public goods were efficiently provided and there was no absence of basic necessities like food, shelter and clothing, but queues had to be made and people were to wait for hours to receive goods and services. Being a good example, state dominance helped Soviet Union to recover from the Great Fatherland war, and thus its effectiveness has remained unquestionable in some aspects. References: BAMFORD, C., & GRANT, S. (2010). Cambridge international AS level and A level economics course book. Cambridge, Cambridge University Press. LIPSEY, R. G., CHRYSTAL, K. A., & LIPSEY, R. G. (2004). Economics. Oxford, Oxford University Press    SLOMAN, J. (2007). Essentials of economics. Harlow, FT Prentice Hall.   Read More