Macroeconomics: Theory and Policy - Assignment Example

Planning is a useless endeavour, because developments in e-business/e-commerce and in the political, economic and societal environment are moving tooquickly nowadays. Do you agree with this statement? Discuss why? The debate over planned economy and free market mechanism started long ago when the classical economists refuted the mercantilists’ theory. The mercantilists believed that the more bullions a nation possessed the richer it is and thereby, beneficial for its people. They were in favour of trade with government intervention in the form of colonialism. They vouched for a strong government or stat power which can conquer more foreign lands and set up colonies in order to provide in order to provide the traders vast market as well as protection against robberies and foreign attacks. This mercantile theory was strongly opposed by Adam Smith, who emphasised on the ‘invisible hand’ and ‘laissez faire’. Smith was strongly against any kind of government intervention and believed it is the other name of evil. According to smith the free market mechanism of demand and supply should be encouraged and he government should only look after he law and peace of the country. Marshall followed by Ricardo, Mill and others and such a proposition of Smith later. (Ackley 1961) All of them are reckoned as classical economists. The classical economic theory faced its first failure when global community faced the Great Depression of 1930. At this point the importance of government intervention was first felt and actually got established through the words of Keynes. From this point of time the modern debate over planned and market economy began between the Classicalists and the Keynesians which was later continued between the neo Keynesians and neo Classicalists. (Osadchaya, 1982; Froyen 2002) The classical economists emphasized on the long run and believed that the market power will take every problem into consideration and resolve them as time passes by. However Keynes said ‘in the long run we all dead’. Since Keynesian emphasis was primarily on the short run, it was obvious that without any sort of government intervention, any adjustment or restoring the equilibrium through market mechanism would be impossible. (Osadchaya,1982).Before we start our in depth analysis of the issue, whether ‘Planning is a useless endeavour, because developments in e-business/e-commerce and in the political, economic and societal environment are moving too quickly nowadays’, we should take into consideration what are the considerations which Keynesian model of planned economy took into account. First of all, Keynes considered a closed economy since the most important adjustment variable, market rate of interest is only fully active in a closed economy as government can change it in order to restore the economy to equilibrium whenever there is any distortion from the equilibrium. In an open economy, the market rate of interest becomes an effect of inflow and outflow of foreign currencies and thereby, the government cannot consider this as one of the policy variables in its hands. In this context, a definite question to arise is whether a planned economy can still sustain. Planned Vs. Market economy: In a planned economy the government controls the market through rules and regulations as well as fiscal and monetary policies. First of all, a planned economy from the first glimpse looks more stable since erratic market fluctuations are absorbed or neutralised by the government through policy initiatives. In sharp contrast, a market economy depends solely on the free will of the market and it is expected that any disequilibria would be resolved through the pricing mechanism initiated by demand supply interaction. Such a restoration of the equilibrium is a time taking process and passes through several tears and frictions before entering the rain of tranquillity. Problem arises in a planned economy when the state of disequilibria is neutralised by the government for a long time without making any permanent effort to solve this equilibrium and depending upon several unsustainable policy measures such as subsidy. Soon, a situation arises when the government runs out of its resources and the economy collapses. (Arestis, McCombie, William Vickerman, and Thirlwall, 2006) A planned economy is often criticised on the grounds of encouraging political and bureaucrat nexus leading to abnormal bribes and delay or work. It is believed that development cannot foster its optimum potential under a planned economy and can only be achieved through a free market mechanism. A free market mechanism on the other hand is often subject to erratic fluctuation of price level and supply shortage that put the common people into severe pressure and before restoring to equilibrium again, delivers a series of nightmares. So far whatever we have discussed, simply illustrates the pros and cons of both planned and market economy and leave us far behind the final conclusion whether planning is a useless endeavour nowadays. Changing global scenario: With the onset of liberalization trade has spread across the globe today. This changing and expanding scenario of global trade and business can be attributable mainly to the technological factors. Improvements and developments have come across in scopes for transportation and communication. At present trade has become more practical. This has opened the door to the consumers and the enterprises to access the optimum product quality as they can choose from a wider range of items. Due to the fast changing life cycles, the countries compete among themselves in terms of production using these advanced techniques. Promotion of international marketing has gained its origin mainly from this concept of trade. (Grimwade, 2000) The fundamentals of international marketing involve a business agency relationship. This is also the idea of outsourcing. In this fast changing scenario, agencies are gaining more importance. The concept of agency system has become so significant due to the necessity of global business settling locally. The background to this system can be theoretically explained by the principal agent problem (Keil, 2005). In this era of information symmetry it should not be a problem for a business unit to assess global markets. Research and development have become an integral part of business activities. The purpose is mainly to gain a good grasp of market information. The execution of the goal of capturing untapped markets is finally facilitated through agents or agencies. Electronic commerce goes a long way in supporting international business, especially by means of sales, promotion and support obtained through the Internet. This is a topic, which is heating up at the moment and has been supported by an evidence of high market capitalization of firms involved in such electronic business. (Hawkins, Best and Coney, 1998) Such growth rates are expected to continue over the future years. However, sales via Internet account till now contribute a small portion of the total sales figure especially in nations outside America. (Turban, Lee, King and e Chung 2000) Mainly 1990 onwards the global economic and political scenario experienced a change. Before the 1990s, the former Soviet Union and the People’s Republic of China were the main proponents of planned economy. On the other hand, countries like India, who are favouring a mixed economy were more inclined to wards planning rather than welcoming free trade. After the abolition of Soviet Union and disturbance picking up in the communist countries of Eastern Europe, planned economy received a setback. Simultaneously, China and India also began to open up to the rest of the world. These changes provided a ground for the heydays of free trade and marked the slow but sure abolition of planning. First of all, it was realised that in order to foster growth and developments, countries should open up and the comparative advantage doctrine is a mutually beneficial process if followed with honesty. With almost free mobilization of resources across the border, the employment generation problem received an expected solution. (McCombie, 1988). On the other hand the global economy is now becoming far more privatised and the burden of the government regarding job creation has been reduced. With lessening responsibilities on the government and privatisation, importance of planning got reduced. The concept of outsourcing provided several jobs to the developing and less developed nations and if we verify this from demand supply interaction we may find that these countries had a high demand for job met through supplies from abroad. The new millennium witnessed another significant change in the marketplace. By that time e-commerce started to boom and local or indigenous demand for almost all commodities was met globally or from global supplies. The invisible boundary that boosted planning once, has almost passed into oblivion and the true spirit of demand supply interaction was felt. The MNCs (multinational corporations) are now more prominent in their global presence and foreign direct investment is constituting and important part of indigenous development for a country. With foreign capital inflow and outflow, even if it is a managed one, the market rate of interest is no longer solely in the hands of government and planning or rather, its success is subject to several doubts (since the government has lost its sole proprietorship of the market rate of interest, totally or partially). (Turban, Lee , King and e Chung ,2000) A close observation of the changing global political scenario will reflect several other factors, rather political factors contributing to the boost of free trade. First of all, several political or eco-political blocks among different nations have been formed such as the European Union, ASIAN, NAFTA and often two countries are coming forward different Memorandum of Understands (MoU) between them. In recent times, Brazil and India entered a treaty to explore each other’s potential as a mutually beneficial partnership in economic terms. Several Asian countries like India, China and other are discussing the possibilities of forming a cohesive cluster like European Union. (Todaro, and Smith, 2008) The mass is becoming more and more politically aware and rational. With increased responsiveness in domestic and global issues, they are having a clearer view of the whole scenario. The days of the Cold War are long gone and people of one country are ready to accept their counterparts in other countries. They are now venturing to cross borders and reach other countries in search of jobs. Furthermore, with the introduction of cable television, the visual media is becoming the main messenger of globalisation. People are more informed and the asymmetric information, which once provided the nutrition to planning is gone. In this context of increased mass awareness, changing political scenario and introduction of new business tools such as e-commerce and e-business, the only difference between two countries is the geographical outline rather than anything else. Success of one country following the free market mechanism path is creating a bandwagon effect and alluring others to follow. Furthermore, the Keynesian concept of closed economy and socialist doctrine that once influenced several countries to entrust planning over free market mechanism is fading away. Nevertheless, since the integrity of the countries is much more now than the past, a butterfly effect starting from a minor incident in a country often initiates major impact on a country half the globe away. Planning falls helpless in this situation and we are left with no option but to depend on free market mechanisms to restore everything to equilibrium once again. (Todaro, and Smith, 2008) Is it a dilemma? Considering all the above points it seems to us that perhaps planning truly me its end in this changed scenario but is it a dilemma or an illusion? The wide fluctuation that free market mechanism is subject to, got established when the roaring tigers of the south turned into paper tigers all of a sudden. The newly industrialised countries such as Malaysia, Taiwan and others and South Korea were experiencing the zenith of success through the path of globalisation and free market mechanism. Following the capital account convertibility, this countries experience high inflow of foreign direct investment which were suddenly withdrawn from these countries. Though they have restored from that sudden loss that has almost collapsed their economies, this incident denuded the evils of free market mechanism. The above incidence is renowned as the East Asian countries. On a similar note, the crisis in Argentina and that in Brazil, before the communist’s domination, shook the world in regard of the expected outcome of erratic embracement of globalisation. The rising inequalities in countries like India and China are believed to be an outcome of the liberalisation process. It is now widely accepted that public health system in China was sounder before the advent of globalisation in the country. The free market mechanism is entirely run through demand supply interaction and does not take into account the economic or social account of an individual. It is truly ‘the survival of the fittest’ in terms of economic prosperity. Since in developing countries and less developed ones, the larger part of the population lives below poverty line, a free market mechanism might bring those countries growth in terms of industrial index but that only in terms of the sacrifice of millions of population. Questions has already been raised against the clarity, neutrality and benevolence of international organizations like international monetary fund, world bank, WTO and different economic political clusters like European Union, NAFTA and ASIAN. All these are proponents of free trade and rather than being devoted to the benefits of the common mass, they are interested in reaping their own profits and plays a inter-power and intra power game. No doubt, the global trade is free but the question is, is it fair? Following the Prebisch-Singer hypothesis, it seems that such free trade will only make one county rich at the cost of the other and the catch up hypothesis seems to exist in mere theory (Froyen 2002). Considering the current employment crisis that United States of America is facing and the global economic recession that got initiated from USA, doubts are looming large over the horizon regarding the consistency of free market mechanism in delivering a sustainable development experience. When society embraces a change, then it is difficult to alter it. No doubt, in the present context, no country can survive closing its door to the outer world. Globalisation free trade and free market mechanism are the engines of growth that will drive the human civilization to the zenith or prosperity. However, it does not mean that planning has lost its importance. Sectors like health and education cannot be left to be dealt with free market mechanism. Policy formation, implementation and monitoring in these sectors are the necessary responsibilities of the government and thereby, planning. In order to check any sudden fluctuation arising from free market mechanism a buffer needs to be formed and here planning again comes into action. Furthermore, for developed countries, planning might be secondary armour but for the developing and less developed nations, proper planning still holds the key to their future drive into global competition. At the end, planning will remain important in sectors like health, education, defence and infrastructure and however powerful be the market forces, we would need to get rid of cyclical and erratic fluctuations that has always been accompanied with globalisation. References 1. Ackley, G. 1961. Macroeconomics: Theory and Policy; Macmillan Publishing Co Inc Ch- Classical Macroeconomics 2. Arestis, P., McCombie, J. S. L. , William Vickerman, R. and A. P. Thirlwall (2006) Growth And Economic Development, Edward Elgar Publishing 3. Froyen, R. T. (2002). Macroeconomics: Theories and Policies; Pearson Education 4. Grimwade, N. (2000). International Trade: New Patterns of Trade, London: Routledge 5. Hawkins, D. Best, R. and Coney, K.A. (1998), Consumer Behavior: Building Marketing Strategy, McGraw Hill, Boston 6. Keil, P. (2005). “Principal Agent Theory and its Application to Analyze Outsourcing of Software Development”, ACM SIGSOFT Software Engineering Notes 30(4): 1-5 7. McCombie, J.S.L. (1988). A Synoptic View of Regional Growth and Unemployment: II —The Post-Keynesian Theory, Urban Studies, Vol. 25, No. 4, August, pp. 267-281 8. Osadchaya, I. (1982). Keynesianism Today, Progress Publishers 9. Todaro, M. and S.C. Smith, (2008). Economic development, London: Longman group 10. Turban E., Lee J., King D. e Chung M.H. (2000), Electronic commerce. Upper Saddle River, NJ: Prentice Hall   Read More