Governments Role in a Market Economy - Coursework Example

Market Economy Name of the Student: Name of the Instructor: Name of the course: Code of the course: Submission date: Explain government’s role in a market economy. In your answer, demonstrate why there can never be a truly ‘free market’ economy. Introduction One of the major and most contentious debates in the 20th century was in regard to the role of the government in the market economy. This is an epoch in history which experienced a massive struggle between the governments which advocated for capitalism and on the opposite hand other governments championing for centralism and absolute control of the economy. In 1992, this struggle came to a sudden halt with the disintegration of the Soviet Union which was a government system which advocated and upheld policies for central control as well as promotion of equality (Merchant, 1997). Nonetheless, despite the seemingly triumph of capitalism, this phenomenon resulted in many scholars from diverse realms of academia as well as different policy makers questioning the role of the government in the market economy. This discourse has generated a wide alley of issues. These are related to the extent and nature of government regulation in the economy as well as the ways in which a government can play an effective role in the process of redistributing economic power and concurrently keep the free market economy unperturbed. In addition, other issues have been related to how the government itself can be regulated as well as how can the government be prevented from becoming an instrument of tyranny and injustice (Khan, 1994). Against this backdrop, this paper will focus on the role of the government in the market economy. Moreover, it will also demonstrate the reason why there can never be a truly ‘free market’ economy. Role of the government in market economy According to Aly (2008), there has been an extensive consensus among proponents in the economic literature in regard to the government’s role in the market economy. Thus the government has been called forth to perform five basic functions. Provision of a legal structure to the economy; this is perhaps the most fundamental role of the government in the market economy, failure of which the economy is bound to collapse. This role necessitates the government to be in the forefront of ensuring property rights, act as an arbitrator in case of foul play in the market as well as provision of enforcement of contracts. In this scenario, the government is mandated with the role of furnishing the economy with legislations and regulations, defining the ownership rights and enforcement of contracts as well as provision of means of ensuring quality in the production process (Aly, 2008). This role of the government contravenes the basic assumptions among the proponents of free market economy where there is the non-existence of government intervention in the economic processes in terms of regulations and legislations to govern these economic processes. Nonetheless, despite some countries priding themselves of being free market economies, the government is to some extent involved in passing legislations and regulations to govern the economic processes which cements the fact that there can never be a truly ‘free market’ economy. In actual sense, research has revealed that governmental policies which exhibit reliance on processes of the market economy within a stable legal structure culminate in positive outcomes. These outcomes are often compatible with the goals of securing elevated national income, human well-being, acceptable resources distribution as well as certain environmental goals (Berggren, 2003). Maintaining competition; this is another fundamental role of the government in market economy. This is founded on the fact that competition is the finest and effective market mechanism which is aimed at encouraging resource suppliers and producers to exhibit response to the price signals and consumer sovereignty. Thus, the government ought to fight non-competitive behavior and monopoly powers in the country. The cognition of the importance of this role by the government to maintain competition has culminated in the establishment of anti-monopoly laws in countries like the US which are aimed at regulating business behavior as well as promote competition (Aly, 2008). It is imperative to note that some governments, for instance, the United States have been credited for being ‘free market’ economies driven by the laws of demand and supply (Mandelbaum et. al, 2008). Nonetheless, this country has instituted legislations to curb monopoly practices as well as govern the behaviour of businesses, a development which saw Microsoft being found to violate these laws and subjected to fines in 2000 (Aly, 2008). The existence of such laws passed by the government to maintain healthy competition in the market despite the assertion of US being a free market economy fortifies the fact that there cannot be a truly free market economy. Promotion of stability and growth; the government in collaboration with other agencies is also mandated with the role of promoting macroeconomic growth as well as ensuring stability of the economic system. This is through fighting inflation, elevating the Gross Domestic Product (GDP) as well as managing employment. This is usually through instituting changes in the monetary and fiscal policies. The monetary policies relate to the reserve requirements, use of interest rates as well as money supply. On the other hand, fiscal policies relate to the use of taxes as well as spending these taxes in the management by the executive branch, mostly represented by the treasury department (Aly, 2008). In the doctrine of the free market economy, there is supposed to be no intervention of the government towards ensuring increased economic growth and stability. In actual sense, there is the assertion that the balance of demand and supply is bound to ensure stability of the economic system and thus the intervention of the government in influencing this stability is uncalled for. Nonetheless, despite some countries being termed as ‘free markets’ purely governed by the laws of demand and supply, there is often the tendency of the government to intervene in case of a financial crisis which threatens the stability of the economic system. The above fact was apparent in the US during the global financial crisis in 2008 where the government intervened by seizing control of the American International Group (AIG) which is one of the biggest insurer in the world in an $85 billion deal. This signaled the necessity of the government intervention aimed at averting the threats posed by the possibility of collapse of the financial system (Karnitschnig et. al., 2008). The cognition of the imperative role of this bailout cements the fact that there can never be a truly ‘free market’ economy without government intervention to ensure the stability and growth of the economy. Provision of the public and quasi-public goods; Aly (2008) determined that in case of the market failure to provide the necessary goods and services in the correct quantity and quality, the government is mandated with the role of filling in the vacuum. This also related to the public goods and services which cannot be provided by the market, for instance, public defense and security, judicial system as well as police protection. This is evident in Australia whereby at the forefront of the government commitment is the provision of security and defense as well as protecting the national identity, an undertaking which the market cannot do (Australian Government, 2012). In the above case, the government plays a central role in the market through the provision of these vital goods and services through processes like procurement of security infrastructure among other things. The capacity of the government to provide these services influences the forces of demand and supply of goods in the market. Nonetheless, Colombatto, (1997) asserted that in case the government manage and acquire some power and authority in the provision of certain goods and services, then the principles of free market are violated. However, there is no country where the government is not involved in the provision of these vital goods and services which cements the fact that there is can never be a truly ‘free market’ economy where the government is not involved in the provision of these public and quasi-public goods. Redistribution of income; this is the final role of the government in the market economy which will be analyzed in this paper. Aly (2008) determined that the government ought to make extensive efforts to provide relief to the poor, unemployed and the handicapped. This is best exemplified by welfare, Medicare programs and social security which are examples of programs to support the sick, poor and the elderly. In actual sense, Alesina and Glaeser (2006) revealed that the Americans spend around 11% of their national income on social programs, France spend almost double of that amount and Nordic countries spend even more. Thus, the government ought to institute programs which transfer the income from the members of the high income groups to the members of limited income group, mostly through progressive taxes. Other methods which can be used by the government in the redistribution of income include price support programs, for instance, farm subsidiary as well as offering low interest rates to the students based on their family income (Aly, 2008). The importance of this role of the government, for instance, in formulating and implementing Medicare programs to help the sick, elderly and the handicapped among other groups in the US has resulted to the proposition of an idea to extend the US Medicare benefits to Mexico, one of the countries credited for being a ‘free market’ economy (Haims & Dick, 2010). The importance of this role by the government in the market economy supports the fact that there is can never be a truly ‘free market’ economy where the government does not to some extent engage in the redistribution of income for the benefits of the citizens. Conclusion From the preceding discourse, it is evident that the government plays some integral roles in the market economy. These roles include provision of a legal structure to the economy, redistribution of income, provision of the public and quasi-public goods, promotion of stability and growth as well as maintaining competition. The centrality of the governments in different regions of the worlds fortifies the fact that there can never be a truly ‘free market’ economy. References Alesina, A. & Glaeser, E. (2006). Why are welfare states in the US and Europe so different? What do we learn?. Horizons Strategiques, 2: 1-11. Aly, H.Y. (2008). The role of government in a market economy. Retrieved March 14, 2013 from http://www.econ.ohio-state.edu/Aly/docs/The%20role%20of%20government%20MS%20Article%209-27-08.pdf Australian Government (2012). Equipping Australia against emerging and evolving threats. A Discussion Paper to accompany consideration by the Parliamentary Joint Committee on Intelligence and Security, Sydney, Australian Government. Berggren, N. (2003). The Benefits of Economic Freedom: A Survey. The Independent Review, 8(2), 183-211. Colombatto, E., (1997). Free-market economies, rule of law and policy-making. Retrieved March 14, 2013 from http://web.econ.unito.it/colombatto/kluw1.pdf Haims M.C. & Dick, A.W. (2010). Extending U.S. Medicare to Mexico: Why It’s Important to Consider and What Can Be Done. Occasional Paper, Santa Monica: Rand Health. Karnitschnig, M., et. al., (2008).U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up. The Wall Street Journal, Retrieved March 14, 2013 from http://online.wsj.com/article/SB122156561931242905.html Khan, M.A. (1994). The role of government in the market economy. The American Journal of Islamic Social Sciences, 14(2): 155-171. Mandelbaum, M., et. al, (2008). Markets and Democracy. eJournal USA, 13(6): 1-37. Merchant, J.E. (1997). The role of governments in a market economy: Future strategies for the high-tech industry in America. International Journal of Production Economics, 52(1-2): 117-131. Read More