19 April 2012 A Treatise on Economics How “fair” is a market-based economy? A market-based economy is largely self-regulating. This type of economy leverages human behavior. In his book, Naked Economics: Undressing the Dismal Science, Charles Wheelan states that “when the cost of something falls, it becomes more attractive to us” (10)…
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While not perfect, a market-based ecomony operates on familiar rules because those rules mimic the choices people are likely to make. In Wheelan’s words, “a market economy is to economics what democracy is to government: a decent, if flawed, choice among many bad alternatives” (21). Do market incentives always lead us in the right direction? Market incentives are subject to interpretation and application by individuals, groups, and other entities. Incentives exist to encourage desired behavior, and can be successful to the extent that incented people embrace the incentives. Wheelen asserts that “when we are paid on commission, we work harder; if the price of gasoline goes up, we drive less” (26). People’s responses to incentives allow the market to adjust. If an economy is not reliant on the market, government does not reward good or poor work practices and behaviors; the result is often inefficiency, poor quality, and high cost (27). Alternatively, incentives can present problems. One of these is the “principal-agent problem” that presents itself when a business, the principal, hires an employee, the agent, who may be incented not to act in the best interest of the company (31). In these cases, the agent may see personal gain as a greater incentive than the incentives provided by the company and steal or take advantage of the work situation in other ways. The success of incentives in a market-based economy is subject to the decisions of the people who respond to them. Incentives may not always lead us in the right direction. Can government help to guide our incentives? Government can help guide our incentives, but too much of this guidance could spell disaster. Wheelan states that “the communist governments of the twentieth century controlled their economies by controlling their citizen’s lives” and “often wrecked both in the process” (21). Other ways the government could guide incentives include taxes and regulations. Incentives tied to taxation add complexity to “public policy” in an effort to transfer wealth to the poor (38). Businesses and individuals respond by “avoiding or reducing the activity that is taxed” (38). The result is often that the economy does not realize the anticipated boost to the expected extent, if at all. Regulations, on the other hand, may be unavoidable. Wheelan suggests that “good government makes a market economy possible” (51). One role the government plays is to “define and protect property rights” so that individuals and businesses can develop and produce unique products without fear of those products being stolen or misused (52-4). The government can also support business and individuals by “providing uniform rules and regulations, such as contract law; by rooting out fraud; by circulating a sound currency” (54-5). While government involvement in economics may not be popular, if present at an acceptable level, the government can provide a framework in which a market economy can thrive. In Wheelan’s words, “government is like a surgeon’s scalpel: It is an intrusive tool that can be used for good or for ill” (80). What is “human capital” and how does it relate to a country’s economic well-being? Wheelan defines “human capital” as “the sum total of skills embodied within an individual: education, intelligence,
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