The Role of Government in a Free Market Economy - Coursework Example

The Role of Government in a Free Market Economy Insert Name Course, Class, Semester Institution Instructor Date Roles of government in a free market economy Introduction Apparently there cannot be a true free market economy. Such respected economists as Adam Smith argue that a free market economy is a hypothetical system that cannot exist in the real world. While economists explain the concept of free market as a hypothetical framework, it can be described as the fairest of them all. The free market system is the foundation of capitalism. Apparently, the essence of free market is that the forces of demand and supply control the market conditions including the price at which goods and services trade for (Wessels, 2006). Unlike other forms of market, the government has a limited role to play in a free market. Worth noting is the actuality that in the real world, the government cannot be totally sidelined from business. This, in simple terms explains why there cannot be a complete free market economy. The role of the government in a free market economy is minimal yet quite significant. The government, according economists is the setter of the trading environment. This paper endeavors to explicate the role of government in a free market economy and why there cannot be an absolute free market. Characteristics of a free market Perhaps one of the most pronounced features of a free market economy is the fact that the government is a minor player. Additionally, the government is somewhat a moderator in the economy, but not a determinant of the direction of the economy. Since the market is a minor player, the market conditions including the price are determined by the interplay of demand and supply. The essence f a free market is self interest and capitalism (Ubel, 2009). The other feature of a free market is the actuality that the private sector controls almost all the land and other resources as well as the means of production. Similarly, the self interests create some form of competition since each individual stakeholder wants to be the best player. A free market is characterized by many buyers and many sellers unlike a monopoly where the seller is one and the buyers are many. Similarly, in a free market, there is no single large buyer that determines the terms of transacting. All buyers and sellers have equal chance. Homogeneity is another primary feature of a free market. By homogeneity, it means that the buyers and sellers are almost identical in the sense that none of them is too significant as to determine the prices. All buyers and sellers compete for the identical units offered by the market. Worth noting is the actuality that in the case of a free market, there is ease of entry and exit. New firms can easily enter the market as there are not so many barriers to the process. On the same note, existing firms can easily exit as there aren’t barriers to the same. Demand and supply interact to determine the prices. Depending on which one supersedes the other, demand and supply interplay causes price changes (Taylor, 2008). Another significant feature of the free market s the point that the buyers and sellers enjoy what is referred to as stakeholder sovereignty. Sovereignty means that the stakeholders’ actions and decisions are not influenced by so many forces. The role of government in a free market economy One of the most prominent roles played by the government in a free market is the provision of public goods. Public goods basically refer to infrastructure. Infrastructure here refers to such things as transport and communication networks that as well as the physical market areas. Worth noting is the actuality that the provision of such public utilities cannot be left to the private sector. The main reason why such essential cannot be left in the hands of the private sector is because undertaking such products and utilities is considerably costly (Martinez, 2009). Similarly, self interest may interfere with the distribution of the public utilities. As such, the government regulates and oversees the production and administration of such utilities. The second function of the government in a free economy is that of overseeing the preparation of a legal framework that regulates the manner in which the economy functions. Apparently, all business transactions, especially contracts require a legal framework that will ensure sanity and order among the citizens. Such legal frameworks can only be provided by the government of the day. Ensuring economic stability is another primary role of the government in a free market economy. The government, through the central bank, ensures the stability of the currency in use through various monetary and fiscal measures. Of importance to note is the actuality that such things as interest rates are determined by the government through the central bank. Interest rates and other measures as well determine the amount of money in the economy (Wade, 2003). Additionally, the government plays the roles of reducing or rather taming the rates of inflation. This way, the government helps the private sector operate with a considerable degree of certainty. A similar role of the government is political stability. It is inevitably important that the businesses operate within ma political climate that is considerably stable. Apparently, where the political climate is volatile, insecurity rates are high. As such, business investors will be scared away. The government, again, becomes a key player here. Through maintaining a stable economic climate, the government determines the rate at which foreign investors come into the local market. The role of the government is to ensure fluidity and continuity in the economy. This is dome through regulating the amount of money in circulation. By regulating the amount of money, and controlling the rates of borrowing, the government measures that business and other economic activities do not come to a standstill because of uncertainties and unforeseen disturbances related to the local currency and any other relevant currency (Krugman, 2009). In addition to these functions, the government concerns itself with the protection of individual rights. In an economy, one of the fundamental roles of the government is to safeguard the constitutional rights and freedoms of the citizenry. Through such safeguarding efforts, the government ensures that the individuals are not exploited in the market which is characterized by self interest. In so doing, the government again emerges as the body that guards the sanctity of contracts. Ideally, business is based on agreements between people, either as individuals or as firms. Such agreements ought to be legally recognized and enforceable. The primary reason why the government concerns itself so much with sanctity of contracts is because people are likely to conflict over the consideration, also referred to as the monetary value of the agreement (Doti & Lee, 2012). Apparently, money is a serious cause of disagreements. It is a matter of common knowledge that the law of contract is the largest part of business law. This is closely followed by the law of property. The government of the day will oversee the administration of contracts through civil branch of law. Another noteworthy role that the government plays in a market economy is the correction of various failures. A market where the influence of the government is minimal is likely to be affected by various factors that cause failure. Correcting such failures and price instabilities can only be achieved by the bureaucratic systems of the government, through the central bank (Anderson & Leal, 2001). As explicated earlier, the government controls the market through various fiscal and monetary measures. Monetary measures are concerned with interest rates, which fiscal measures are concerned with policy such as taxation policies. Why there cannot exist an absolute free market Talking of a complete free market means that government has to take a back seat and watch the private sector control the economy. A free market essentially means zero interference from the government; apparently, this is a simple impossibility because a market where there is zero government interference is one without a legal framework. It is a matter of common knowledge that operating in a situation where there is no order is not practical. The business community needs some regulatory frameworks that will bring sanity to trade and industry (Friedman, 2007). Secondly, talking of an absolute free market means that the private sector will provide public utilities. Apparently, the private sector cannot afford to lay down such things as roads and communication networks as they are costly. At the same time it is not practical to operate in an economy that has no infrastructure. Infrastructure, according to reputable economists, is the backbone of the economy. A free market cannot exist because if it must exist, personal rights will not be catered for. They will be thrashed by self interest. Self interest, the essence of capitalism, does not focus on the greater good. Instead, it emphasizes personal wealth and well being (Denny, 2006). The government has to step in as a moderator and protector of fair play. Apparently, the prices of goods cannot solely be determined by demand and supply. This is essentially because there are other factors such as inflation, competition and taxation. As such, we cannot have the interplay of demand and supply as the sole determinant of prices and market conditions. Protection of the citizenry through law of property and contract is essential. Free market does not consider such important aspects. There must be government authorities to ensure political stability and social sanity. Conclusion In conclusion, it is clear to note that from the above discussion, a free market is one characterized by many buyers, many sellers, homogeneity, competition among stakeholders, limited government interference, ease of entry and exit, self interest and stakeholder sovereignty. It is critical also to note that in a free market, the factors of demand and supply are paramount as they are the determinants of prices and economic conditions. Practically, it is not easy and possible to have a free market because with a free market, government roles will be left to the private sector. This will be considerably impractical as the private sector cannot afford to provide public utilities. Another reason why having a free market is impossible is because self interest, which is a central concept, brings about subjectivity. References Anderson, T. L., & Leal, D. (2001). Free market environmentalism revised edition. New York: Palgrave. Denny, J. A. (2006). The role of government in economy and business. Yogyakarta: LKiS. Doti, J., & Lee, D. (2012). The Market Economy: A Reader. OUP Catalogue. Friedman, K. (2007). Myths of the Free Market. New York: Algora Pub. Krugman, P. (2009). How did economists get it so wrong?. New York Times, 2(9), 2009. Martinez, M. A. (2009). The myth of the free market: The role of the state in a capitalist economy. Sterling, VA: Kumarian Press. Taylor, J. B. (2008). Economics. Boston, Mass: Houghton Mifflin. Ubel, P. A. (2009). Free market madness: Why human nature is at odds with economics--and why it matters. Boston, Mass: Harvard Business Press. Wade, R. (2003). Governing the market: Economic theory and the role of government in East Asian industrialization. Princeton University Press. Wessels, W. J. (2006). Economics. Hauppauge, N.Y: Barron's. Read More