Free Market Economy - Essay Example

Free Market Economy Student’s Name: Instructor’s Name: Course Code: Date of Submission: Introduction The question many of the investors could be asking themselves, is if the market economy is free without any form of influence? While in the market economy, the supply and demand for goods and services is expected to operate and determine its price, in many occasions this may not be the case. This is because it emerges that some of the products and services are very critical and cannot purely be left in the hands of private persons to take charge. Take the example of the security, healthcare, education, external forces and even distribution of national resources (McMillan 2002). These and many more factors tend to erode that confidence that people may be having about the existence of the market economy. In the world over, there is an element of confusion between capitalism and market economy. Capitalism is characterized by the ways in which strong economies tend to dominate over others and therefore taking due advantages in the market and therefore need not be confused with free market economy. Further, capitalism doesn't only take into account the economic process but political and social processes as well. Because of the selfish interests that exist among the key economic players, it is therefore concluded that capitalism cannot be used to mean a free market economy (Watts 2012). It is in this regard that this essay looking forward to explain the role of the government in a free market and at the same the reasons as to why free market can never be. Definition of key terms: Market economy Market economy refers to an economy where major decisions on investment and production as well as distribution are determined by the supply and demand of goods and services and prices of goods and services are reached in a free price process. In other words, in a free market economy, investment decisions and allocation of resource is purely a factor of the market (Jail 2010). Role of government economy For substantial economic growth to take place according to Adam Smith, three important factors which include self interests and property rights as well as the division of labor have to be enjoined. While self interests are characterized by the need by the producers to avail their products and services in the market for exchange with buyers, the sellers’ interests are founded on the need to buy goods and services at more affordable prices (Easterly 2002). In the case of property rights as ought to be in the free market economy, individuals are expected to have exclusive rights on certain properties in order to allow them to trade freely. On the other hand, the division of labor is expected to facilitate different economies of scale in order to maximize production. However, in a situation where the market does not function efficiently as ought to, it is assumed to have failed and so called market failure (McMillan 2002). Such circumstance prompts the government to intervene and bring sanity and efficiency into the system by carrying out various functions as discussed below. Providing the legal structure of the economy: It is important to note that this is the primary role of the government in the market economy. It is the responsibility of the government to ensure the necessary measures are taken to prevent economic collapse and this highly depends on the enacted legislations (Easterly 2002). Further, this role is also important in ensuring that individuals have exclusive property rights and that they transact freely, provide a legal framework to be followed when enforcing different contracts and finally to act as a referee of all the activities that take place at the market so as to impose of necessary penalties that could punish foul plays (Jail 2010). However, to perform this function, the government must be in a position to furnish different regulations as well as legislations and other means that could be used to ensure product quality and proper ownership rights as well as contract enforcement. Examples of the legal systems that have been introduced to make necessary interventions in the market economy include FDA, The FED and SEC (Barrio 2002). Income redistribution: In the economy it is the government that is expected to protect and provide some relief for the poor, the handicapped and the unemployed who cannot compete favorably with the rest. Some of the example areas where the government is obliged to intervene include security, education, Medicare and Welfare (Amadae 2003). These are programs that are aimed at protecting the poor, the sick and the elderly. The process involves transferring income from highly dominant individuals to groups of people with limited incomes through a progressive tax system. Other ways of accomplishing redistribution include use of price support programs like farm subsidies and low interests on loans given to students from poor family backgrounds (McMillan 2002). Maintaining completion: Competition is one important factor in the market as its being used as a mechanism for optimally and efficiently encouraging individuals respond to price patterns and also give individuals power to exercise sovereignty in making important business transactions. It is in this regard that the government intervention is required in order to take charge of monopoly powers and other anti-competitive behaviors. The anti-monopoly laws are designed purposely to help regulate business behaviors and also promote fair competition (Mathur 2010). Provision of critical goods to the public. In the market place, it is important to recognize that are those products and services that are very critical to the public and whose supply cannot be compromised at all cost. When there is a shortage in the supply of such goods and services in the market, it’s the role of the government to intervene and fill the existing vacuum (Bernanke 2004). Some of the important products and services that critical for public consumption and that cannot be left fully in the hands of private persons include country defense and security as well police service and the entire judicial system (MarionStar.com 2008). On the other hand, such services as education health care services are a good example of quasi-public services that the government must always be accessible to each and every person in the community. This is particularly important when the market does not provide enough of them and the government support is required in their provision (Amadae 2003). Promoting economic growth and stability: One of the major responsibilities of any government is to ensure that its economy is always growing and remaining stable irrespective of the forces that might come into play. This can be done through the enactment of macroeconomic policies that will accelerate growth and stability by increasing the country’s GDP and also fighting inflation as well as unemployment (Krugman 2003). This is achievable given stable fiscal and monetary policies. The fiscal policies entails the use of taxes and spending in order to regulate business activities and this is the responsibility of the treasury. On the other hand, the monetary policies refer such tools as interest rates, reserve requirements and money supply in order to cushion the market from unproductive activities (Barrio 2002). Referring to these roles and trying to examine what has happened to the American as a whole and in particular its financial markets for almost the last two decades, one may start to imagine which roles the government did not do as expected or completely neglected. On the other hand, in other areas where the government functions have been exercised, they were expanded beyond expectation in duties and thus conflicting with the free market system (Krugman 2003). As a matter while the free market economy as presented is expected to be controlled by the supply and demand for goods and services, it has been established that this scenario might not apply in all markets. For first, the market needs the legal structures to guide its operations (MarionStar.com 2008). On the other hand, some goods and services are very critical to be completely left in the hands of private private market players. Take the case of security, education, defense, health and many more. These are all essential services that any government cannot afford to see a vacuum in its provision (Mathur 2010). Conclusion This essay has tackled the concept of market economy by looking at overview of it, what it means and the role of government in the market economy. While this discussion has established that in a free market economy, it’s the supply and demand for goods that is to set the pace for business without any interference, it's becoming absolutely clear that that might not be through. And this is because the market operates under a particular system which must have a framework and controls in place. It is in this regard that it emerges that while the market may be required to operate freely, government intervention is required in making sure that efficiency in productivity is enhanced. References Amadae, S. M. (2003). Rationalizing Capitalist Democracy. Chicago: University of Chicago Press. Barrio, R. J. (2002). Nothing Is Sacred: Economic Ideas for the New Millennium. Cambridge, Mass.: MIT Press. Bernanke, B. (2004). Essays on the Great Depression. Princeton University Press. Jail, E. (2010). The role of government in a free market economy, retrieved on 15th March 2013, available online: http://ekspoze.wordpress.com/2010/10/05/role-of-government-in-a-free- market-economy/ Krugman, P. (2003). The Great Unravelling: From Boom to Bust in Three Scandalous Years. London: Allen Lane. Easterly, W. (2002). The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. Cambridge, Mass.: MIT Press. MarionStar.com (2008). The role of government in a market economy, retrieved on 15th March 2013, available online: http://www.econ.ohio- state.edu/Aly/docs/The%20role%20of%20government%20MS%20Article %209-27-08.pdf Mathur, V.K. (2010). The Government’s role in a free-market economy, retrieved on 15th March 2013, available online: http://www.standard.net/topics/opinion/2010/11/20/governments- role-free-market-economy McMillan, J. (2002). Reinventing the Bazaar: A Natural History of Markets. New York: Norton. Watts, M. (2012). What is a market economy? Retrieved on 15th March 2013, available online: http://infousa.state.gov/economy/overview/mktec8.html Read More