Solutions of Economic Coordination Problems - Report Example

Introduction

Free market economy presumes that the forces of demand and supply, as well as demographic factors, are sufficient in solving problems that arise from time to time. Moreover, in neoliberal capitalism, the government is supposed to strictly offer infrastructural support for the markets and leave free markets to solve their economic coordination problems. However, this paper argues that government tinkering is superior to the free-market competition in solving economic coordination problems. To achieve this, the first part will briefly explore the strengths of free-market competition in market regulation. The next part will point out its shortfalls when it comes to solving market coordination issues before concluding.

How Free Market Competition Solves Economic Coordination Problems

Free markets are a product of the U.S and Western economic thinking since the days of Adam Smith. Its success is pegged on limited state involvement in the supply and demand process as well the clear demarcation between the state and economics (Beckert, 2009). Therefore, free markets operate free from state intrusion in their designs for production and distribution of goods and services (Beckert, 2009). Thus, neoliberalism thrives where the state plays a limited role in the economic regulation. Moreover, after World War I, the U.S economy flourished on the model in which labour and capital were thought to be the solutions to economic coordination problems (Boettke, Chamlee-Wright, Gordon, Ikeda, Leeson, and Sobel, 2007).

After the 1960 economic crisis, the solution to coordination problems was state involvement through infrastructural support through policy, legal frameworks, and financial bailouts. The act could be done through the creation of an environment that supports free competition through relaxed labour laws, privatisation of public sector initiatives, lower taxes, and the free flow of capital (Jessop, 2002). In essence, government policy in the western capitalist economies has been hands-off by leaving markets to regulate themselves. For example, since 1970’s, the U.S government stopped fixing prices for agricultural produce to the market forces (Moore, Kleinman, Hess, and Frickel). In France, the government supported policies that allowed employers to regulate wages to encourage investments (Culpepper, 2004).

Government Intervention is Superior

The economic crisis of 2008 blew out the illusion of the perfection surrounding neoliberalism economic thought. The sub-prime mortgage crisis revealed the dark side of unregulated markets and the limitation of free-market competition solutions to economic coordination problems (Kotz, 2009). Notably, unregulated competition in the issuance of credit brought the economy to a halt as accumulated bad debts lead to liquidity problems. In addition, they contributed to toxic assets that investors could not recover. Also, the market grew short of credit, new investments stopped, production halted, and job losses became prevalent, which led to government intervention (Peters, Pierre, and Randma-Liiv, 2010).

Foremost, the Chinese government has demonstrated that government regulated economy can be ideal for fostering economic stability. The Chinese government has been instrumental in experimenting with and coming up with policy designs that are unique to the country’s circumstances (Heilmann, 2009). For instance, the government directly intervenes by devaluing the currency to improve returns on exports. Also, the state has been instrumental in investing in the real estate as well as financial services provision at home and abroad. Such situations are the reasons they were able to avoid the upheavals of the global economic crisis as their economy recorded growth while others were in recession (Heilmann, 2009).

Under the neoliberal economic thinking, central banks are supposed to limit themselves to regulating the rate of inflation to facilitate free-flow of credit. However, after 2008, they have been instrumental in reorganising the economy from total collapse witnessed in that period and after (Grauwe, 2008). In fact, government involvement in central banking is essential for stabilising the economy from fluctuations or recession. For instance, the bank as a lender of the last resort for private capitalists’ ventures indicates the superiority of government solutions over the free market competition ones (Grauwe, 2008). Furthermore, the free market options have limits and cannot do without government-directed solutions.

History is replete with capitalist failures and reciprocal policy intervention by the government rather than free market competition options. Specifically, after 2008 crisis, the government responded with measures such as economic bailouts and economic stimulus programs (Peters et al., 2010). The quantitative easing programs in the United Kingdom and Unites States were instrumental in enabling the government to buy the toxic assets and restore credit availability (Joyce, Miles, Scott, and Vayanos, 2012). Significantly, the ‘New deal’ government program after the U.S economic upheavals of the 1930’s helped to resuscitate the economy from recession created by capitalist greed. Also, after the Second World War, government solutions through economic stimulus packages such as the Marshall plan were used as platforms for the recovery of capital gains and investments (Eichengreen, 2006).

An unregulated free market has detrimental effects on the wellbeing of the society. In this regard, it has been blamed on the rising inequality between the poor and the rich who are owners of capital (Kotz, 2009). Apparently, the free market cannot bring about equality in the society. The fundamentals of the American dream do not work in favour of all but only a few at the expense of the majority. Therefore, it takes deliberate government policy measures to redistribute wealth through social security measures and affirmative action programs (Iversen and Soskice, 2008).

Speculation is another platform upon which neoliberal economics rely upon to make present and future investment decisions (Kotz, 2009). Traditionally, the risky approach to business has always predicted growth based on calculations, permutations, and combinations. Moreover, they have always predicted economic growth as witnessed before all the economic crises. Nonetheless, when financial failure ensues, the government is the last resort, and its intervention redeems the situation. From the preceding, government solutions appear superior since they are the last resort, but they are not exclusive of the free market competition solutions.

Post-war economies rely on positive government investments on infrastructure among other capital investments to develop. Majority of European economies like Germany and England had to be funded by the International Monetary fund after the Second World War (Eichengreen, 2006). In the prevailing circumstances, the private sector had to rely on funding from an international financial institution to start over again because it was the only resort. In addition, the attendant risks associated with significant infrastructural projects were not viable for private business. Moreover, these loans are spread over an extended period to attract minimal interest rates that are not worth investing in.

Whenever markets competition solutions fail, the state is regarded to have failed in its policing role over the same. Furthermore, competition is self-serving that it has no regard for the rule of fairness and equity (Bonefeld, 2015).Therefore, it is the responsibility of the state to regulate rogue investors from setting up and operating within their own rules to the detriment of the majority (Bonefeld, 2015). For example, if the state had reigned in on the financial institutions before 2008, the banks would not have engaged in uncontrolled lending. As such, the governments of the United States and the United Kingdom had failed in their superior regulatory role.

Conclusion

Overall, free-market policies are not superior to government interventions in the economic sphere. Besides, neoliberalism satisfies private capitalists and investor interests at the expense of realistic commercial potential. Evidently, it has been the pillar of economic growth because of investments, service provision, job creation, and innovative solutions to human challenges. However, the government intervention is usually the last resort and the foundation that supports the free market solutions. Moreover, it has been instrumental in correcting the mistakes of the free market solutions for coordinating sustainable growth and investment.

Reference List

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Boettke, P., Chamlee-Wright, E., Gordon, P., Ikeda, S., Leeson, P.T. and Sobel, R., 2007. The political, economic, and social aspects of Katrina. Southern Economic Journal, pp.363-376.

Bonefeld, W., 2015. Crisis, Free Economy and Strong State: On Ordoliberalism. European Review of International Studies, pp.5-14.

Culpepper, P.D., 2008. Capitalism, coordination, and economic change: the French political economy since 1985. In Changing France (pp. 29-49). London: Palgrave Macmillan UK.

De Grauwe, P., 2011. The European Central Bank as a lender of last resort. VoxEU. org, 18, pp.08-11.

Eichengreen, B., 2008. The European economy since 1945: coordinated capitalism and beyond. Princeton : Princeton University Press.

Heilmann, S., 2009. Maximum tinkering under uncertainty: unorthodox lessons from China. Modern China, 35(4), pp.450-462.

Iversen, T. and Soskice, D., 2009. Distribution and redistribution: The shadow of the nineteenth century. World Politics, 61(3), pp.438-486.

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Joyce, M., Lasaosa, A., Stevens, I. and Tong, M., 2011. The financial market impact of quantitative easing in the United Kingdom. International Journal of Central Banking, 7(3), pp.113-161.

Kotz, D.M., 2009. The financial and economic crisis of 2008: A systemic crisis of neoliberal capitalism. Review of Radical Political Economics, 41(3), pp.305-317.

Moore, K., Kleinman, D.L., Hess, D. and Frickel, S., 2011. Science and neoliberal globalization: a political sociological approach. Theory and Society, 40(5), pp.505-532.

Peters, B.G., Pierre, J. and Randma-Liiv, T., 2011. Global financial crisis, public administration and governance: Do new problems require new solutions? Public Organization Review, 11(1), pp.13-27.