Governments Role in a Market Economy - Example

Running Head: Government’s Role in a Market Economy Your name Course name Professors’ name Date Introduction To demonstrate that there can never be a truly “free-market” economy, it is necessary to examine economic systems in the world then proceed to inspect the role played by government in an economy. Economic systems are basic structures formed to address three specific issues: the kinds of goods and services produced by a country’s resources, procedure followed in producing the goods, and persons who will benefit from the goods hence it can be defined as a system of producing and distributing goods (Bonney, 1995). According to Terence (2002), economic systems are widely classified into planned and market economies. Planned economy assumes the form of a centralised government controlling most factors of production and participates in making all decisions about production and allocation (Myant, 2010). On the other hand, Myant states that market economy encompasses individuals controlling and making decisions on production and allocation. Myant goes ahead to assert that frequently changing price is a revelation of decisions made that accompanies supply and demand of various products and services. In planned economies, there is communism system where government owns and operates all production bases. Communism came into being in the 19th century but received insurmountable force when Soviet Union came into being. Communism in the Eastern part of Europe was the consequence of World War II whilst China, North Korea, Vietnam, and Cuba came under communism following political revolution (Myant). However, by 1990, Soviet Union and Europe were already out of communism. Communist economies are characterised by a number of factors such as state owned enterprises, central planning, collective farming, and a shortage economy (Furet, 2000). Driven by the need to industrialise, communist governments allocate large proportion of resources to production of capital goods. Concentrating on manufacture of capital goods means that consumer goods and housing are discouraged. Government control in this scenario is therefore indispensible. In the example of Soviet Union, Communist Party made decisions in relation to appointments, promotions, and dismissals of staff in various enterprises (Theotônio, 2000). Planning in communist state is done centrally with planner’s preference taking precedence over consumer preferences. In the farming sector, former Soviet Union decided to conduct collective farming to provide food for the people. Additionally, prices in this economy were set below the equilibrium price, leading to deficits (Gregory, 2004). This demonstrates government’s control over businesses. The second economic system is socialism, which is based on central ownership of capital. Even as individuals work in various levels, it is the responsibility of government to regulate how the earnings are used hence the aspect of government intervention. At the same time, citizens define their needs. The central focus for socialist society is to conduct its activities for the common good of the people (Jacobus, 2003). Notwithstanding existence of several types of socialism, this economic arrangement comes in between capitalism and communism. This balanced state has seen people contribute proportionally for the common benefit of all people. Contrary to capitalist societies, socialism has minimal government control (Engels, 2006). In an argument by Karl Marx, societies and economies eventually fall under the category of capitalism (Engels). This ardent supporter of socialism believes that government control would be replaced by power vested on the people. Even though Sweden and Canada are examples of socialist economies, they practice varied aspects of socialism. Moreover, democratic nations often practice socialism where people have most freedom. One of the distinctive features of socialism from capitalistic society is healthcare (Engels). In a capitalist society for example, individuals go for their own health insurance whilst under socialist state; central government provides healthcare plans to all citizens. In summary socialism meets the following description: more state control over the people, the control outlines wages and compensations, taxes are high and goes a long way to meet citizen needs, classes exist but not similar to capitalist, and government control is aimed at satisfying needs for all people (Engels). A study by Scott (2006) defines capitalism as a social, political, and economic arrangement where properties are owned and controlled by individuals. The basis of capitalism is therefore on private ownership of means of production thus individuals pursues own interest under an environment of freedom. Scott identifies savings and capital accumulation, financial interests and profit motives, price system, and freedom to compete economically as some of the basic principles behind capitalism. Moreover, Scott clarifies that markets in a capitalist society are open to forces of supply and demand whilst the concept of laissez-faire is the basic building block of this economy. Government’s role in capitalist society is only visible in market operations when protecting private investments and rights of individuals via enactment of laws. Equilibrium production is determined by the consumer demand and willingness of suppliers to supply the good in the market. Concisely, capitalist encourage persons to pursue their own interest and leave the market forces of demand and supply to control economic activity (Scott). The economies of Canada, United States, and Western Europe fall under capitalist society. Mixed economic system results from blending elements in market and planned economies (Ikeda, 1997). In recognition of the fact that United States is a capitalist society, the nation has minimum wage policy and has even gone further to set rules on pollution and environment. United States also offers price support to farm products, restricts importation of goods that will compete with locally manufactured goods, and provides worker health support through Medicaid and Medicare (Ikeda). Nonetheless, most decisions are made by the by the market itself thus USA can be classified as a mixed economy skewed to the capitalist side. Contrasting with USA is former Soviet Union whose central planning agency concentrated on industrial sector. The role of government in a market economy Several scenarios illustrate government’s role in a market economy. While addressing these issues it is important to note that the decision to intervene in the market must draw a balance between costs and benefits. The first context to demonstrate government’s role in a market economy is existence of legal and social framework to protect both consumers and producers from exploitation (Aly, 2008). Keeping deeds to property, enforcing contracts between two parties, and protecting intellectual property i.e. copyrights is an indispensible role played by government in market economies. The government also provides conducive environment for employers and employees to set wages and working conditions (Aly). This is made possible by a well-structured criminal system that provides assurances on easy and fair market dealings. United States FED is another good example to show government participation in a market. Competition in a market motivates producers and suppliers to respond to price signals and consumer power. Enactment of anti-monopoly laws such as Clayton Act of 1913 was a move to regulate businesses and promote competition (Kintner, 1974). However, some services and goods are best provided by a single government agency. Monopoly in such sector therefore serves the purpose of ensuring provision of the best services to the consumer at the best price (Dwivedi, 2001). Prosecution of Microsoft in 2000 simply affirms consequences that befall an institution violating monopoly laws (CNN Money, 2001). Income and social welfare is the third area that a government in a market economy must come in to regulate. Through tax policies, the government is able to redistribute income. This role normalizes concentration of wealth and promotes diffusion of economic power across different households (Blanchard, 2011). The USA government has made substantial effort to provide citizens with social safety net. This is confirmed by support given to unemployed, medical care for the poor, and pension benefits for the retired persons. The basis of these support programs is transfer of income from high to low income earners through progressive tax system. Price support programs in farm inputs and low interest loans offered to needy students contributes to income redistribution. Government’s role is detectable when providing public and quasi-public goods. A situation where markets fail to supply the required goods in the market prompts government to act (Blanchard). These public goods are defence and security, judicial system, police, and protection. Quasi-public goods are those that cannot be provided fully by the market thus government must come in to offer support. Examples of these goods are education and health services. It is the role of government and Federal Reserve to step up macroeconomic growth and stability. Government is able to control GDP and fight inflation and unemployment through the mechanism of fiscal and monetary policies (Blanchard). Treasury department manages fiscal mechanism by varying taxes and spending. When a government has an economic objective of stimulating spending, production, and employment, taxes are reduced whilst government spending increased (Blanchard). On the other hand, Federal Reserve employs tools such as reserve requirements to regulate money supply and availability of credit in its monetary policy. When Federal Reserve increases money supply by relaxing reserve requirements, interest rates would decline consequently availing more funds for banks to loan (Keynes, 1936). This stimulates consumption for households and investment for business wishing to expand. Conclusion This paper began by shading light on economic systems in the world. These systems comprise of communism, capitalism, socialism, and mixed economies. Under communist economy, the government owns and controls all production while socialist society supports central ownership of capital. This part was followed by socialism, which is guided by the principle of meeting needs of all citizens. Capitalism was also discussed as a system that allows individual to own and control property. Government only comes in to facilitate smooth operation of business by protecting personal investment. Finally, mixed economies and the role of government in market economy was given necessary attention. This writing confirms that government intervenes not only in the market but also in the whole economy. Reference List Aaron, H. J. (2004). "Economics." World Book Online Reference Center. 2004. World Book, Inc. February, 2004, . Aly, H.Y. The Role of Government in a Market Economy. Marionstar.com. 27 Sept 2008. Blanchard, O. (2011). Macroeconomics Updated. 5th ed. Englewood Cliffs: Prentice Hall. Bonney, R. (1995). Economic Systems and State Finance. Oxford: Clarendon Press. CNN Money. 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