Analysis of Market Stability - Coursework Example

MARKETS ARE UNSTABLE STRUCTURES Name Institution Date Question 1 MARKETS ARE UNSTABLE STRUCTURES Markets form the very fundamental factor in ensuring economic balance. The issue around economic markets is best understood when studied under market structures. Economists have asserted that markets are the most unstable structures and are in constant need of organization, control and regulation. The study presented herein attempts to establish the truth in the assertion. Additionally, it endeavors to find out whether markets are always in imbalanced state or not and establish the reason as to why. Further, the study attempts to find out the extent of effect of market state on competition. Finally, the study sheds significant light on the importance of stable prices and stable markets to the economy and the government. The concerns addressed in this paper are indeed vital in ensuring that the economy is always in the pink and safe. Economics is mostly concerned with socio-economic issues including fair prices and fair competition, managerial problems and microeconomic problems. Moreover economics is concerned with production, consumption and transfer of wealth within and without parties and states thus a need for regulation of the market in order to have a balanced equilibrium (Lyashok, n.d). Economics and markets are correlated in that scholars cannot talk of the two without mentioning of commodity prices and how they affect market decisions. Price being the monetary value attached to a given commodity at that particular time of disposal whereas the market price is the price at which suppliers or sellers are willing and able to dispose off their goods or services and the buyers or consumers are willing and able to buy or pay for the goods or services respectively at that particular time of transaction (Mikhalevich & Chizhevskaya, 2006). The point at which the market price is met is dubbed as market equilibrium price. Any point above or below the market equilibrium price will result into market disorientation termed as price instability (Peters, 1994). Whenever market prices are equilibrium the market shall be dispensable of any market of adjustments as buyers shall be contented with the going prices and suppliers shall be highly willing to supply hence resulting into market equilibrium condition. Economic equilibrium is a state where supply and demand among other economic factors are balanced per se without the influence of external factors (Lyashok, n.d). For instance, in the case of perfect competition equilibrium is achieved when demand and supply are in equal. In such a market structure, the quantity of goods and services availed by sellers to the market equals the quantity of goods and services buyers are willing and able to purchase hence eliminating cases of market saturation or shortages. Economic equilibrium Market price equillibrium Minsky, (1992) in his definition purports that market is not necessarily a place but a means by which goods and services get exchanged and how buyers and sellers co-relate with each other. The modern market goes beyond a formal physical market as it gets incorporated into the progressive technology and internet making markets to be virtual rather than physical. However, irrespective of the transaction place, an ideal marketplace remains unstable. The exploration to market stability devised an argument with two polar views. The first view contend that markets are inherently stable and require zero adjustments as the economy is self directed towards smooth and perfect growth path. The assertions on markets as stable institutions develop a conviction that fluctuations within a macro-economy are brought about by either individualistic optimal adjustments or unworthy government interventions (Janssen & Jager, 2001). The notion asserts further that governments should keep off from economic intercessory to allow the market forces heed to everything within the market and to cultivate desirable results. Conversely, Restuccia, et al., (2010) asserts that markets are always in unstable condition and consequently cannot operate efficiently without government intervention. This assertation maintains that when markets are left to operate by themselves, they shall undergo a series of escalations and recessions which are indeed unhealthy for economic and social safety and progress resulting in persistent periods of high unemployment levels amongst other economic issues. According to them, government’s macroeconomic policies should be devised to ensure stabilization of economic market disorderliness. Additionally, Holzinger/Knill, (2004) argue that the unstable markets lead to “race to the bottom” which they blame on the integration of the global and European markets which resulted to abolition of the national trade barriers and mobility of labor and goods (Brunt, et al., 2011). Keohane/Nye, 2000 also contributes to this argument by claiming that different countries and states have been forced to redesign their domestic market regulations in order to avoid facing regulatory burdens which would restrict market competitiveness especially on their domestic industries (Manning & Roesad, 2007). Wheeler, (2000) vehemently argues that through the raising capital outflows the governments in countries know to have high incomes to consider lowering the level of regulation leading to the “race to the bottom” as well as leading to policy convergence. Tiebout (1956) emphasizes that this competition that is induced by regulation is likely to be based on economic theories on regulatory completion or system completion used in explaining the America’s experience with the corporate chartering policy (Stango & Zinman, 2011). In support of this claim, Siebert 1991 states that this particular model flourished in American economic environment because it showcased how regulators stabilised demand as well as showing the significant evolution of the legal norms and policies in the global environment scale (Minsky, 1992). However, Hoberg, 2001 insists that this concept should be evaluated in the context of controversy over economic globalization since there are concerns that the economic integration and trade agreement issues might undermine the government’s abilities in protection of the environmental values as well as causing a downward harmonization of regulatory principles (Eichengreen & Hausmann, 2010). On the other hand, Drezner 2001 supports this claim by stating that the Seattle conflict which thwarted the World Trade Organization expansion which took place in the year 1999 was instigated by similar arguments. Kern, 2000 argues that the market instability theory might also hinder the achievement of success as it is hindered by regulation and limitation. In this case, that these are two issues which lead to the other. He emphasizes that, limitation and regulation by the government might lead to instability due to lack of openness and willingness of more parties getting into these markers due to the high regulatory tariffs imposed on them by these governments (Baldwin, R., Cave & Lodge, 2012). However, Holzinger, 2003 claims that these limitations and regulation by various government lead to instabilities of these markets since most of the individuals in this markets tend to be in prisoner’s dilemma since the establishment of the new equilibrium in this market tend to take longer that it is expected. In context to this theory, Jacob, (2004 ) claims that situations of over capacity tend to arise and the efficiency of the joint parties can only be achieved by rationalization of the existing over-capacity (Mikhalevich & Chizhevskaya, 2006). In addition to this e also claims that the situation of over capacity is likely to occur if the production capacity adjusts to the demand when it is at peak. Jänicke, 2004 claims that in such markets ‘sunk cost’ implies to an individual producer that they should wait for the suppliers to withdraw from the markets since it is indication that over-capacity might go on for a considerable amount of time. With reference to most of the modern macroeconomic models especially the ones applied by banking institutions and governments, institutions and modern markets tends to operate by themselves and endeavor to avoid and lock themselves from external interferences. The models used by the larger institutions hang in between these two economic notions but are more inclined to the stable market condition notion than the other extreme (Brunt et al., 2011). Some economists argue that without external inferences, the economic markets shall definitely remain stable and operate within economic stability path. In the stable market system therefore, decentralization of the economy is undisputedly necessary in ensuring that the government does not develop direct control or regulation on the affairs of institutions. Further, for market stability to be met, the organizations in themselves require devising models that shall result to neither boom nor recess making the economy to forever remain at stable and equilibrium state (Ismihan & Metin-Ozcan, 2009). According to stable market ideologies, economic cycles such as boom and recess as well as economic issues such as inflation that are customary in the mainstream macroeconomic models are as a result of external forces that agitate the stable economy system (Chhabra, 2012). There exist numerous reasons as to why the modern economics is adopting the stable-with-shock ideology in analyzing macroeconomic fluctuations due to political economy issues. In consideration to the economic growth patterns of major countries such as United Kingdom, United States and France amongst others for a number of previous consecutive years, it is deducible that the growth rate exhibited stable economic growth path. The growth rate took a linear path of economic growth until the periods of world wars when the world experienced greatest inflation ever interfering with the whole stable growth path pattern. Additionally, most of the economic models and theories are highly favorable to stable market system influenced by regulations and limitations (Baldwin, Cave & Lodge, 2012). Most of the theories make declarations with major assumption based on lack of external interferences or interventions in ensuring that the theory is feasible. Finally, the practicality in stable growth path system which takes the form of linearity is highly tractable and analyzable enhancing market analysis and simplicity. Taking deep consideration of a real time market system it is however noticeable that market system exhibits recurrent cycles of booms and bursts. The level of unemployment rates remain undoubtedly high as employment rates get highly affected with fluctuations. Some economists believe that a stable market can as well experience fluctuations in market prices and employment rates devoid of external interferences like regulations and limitations more of a liberal system (Chhabra, 2012). They claim that the market can as well under a series or recurrent booms and busts within its own capability with no peripheral disturbances. This ideology is based on the assumption that a bust automatically sows the seed for the next boom. The other section of economists have come up strongly to oppose this notion as they purport that such notions are obsolete and archaic as the current contemporary market get highly influenced by external forces as documented in mercantilism (La Porta et al., 2000). In consideration of the discussion presented in the above section, it is necessary to undertake pragmatic examination on the stable-with-shock ideology. Empirically, it is noticeable that the stable-with-shock ideology exhibits characteristics of unstable market such as recurrent booms and busts as well as high rates of unemployment and employment fluctuations (Stango & Zinman, 2011). Further, it can be alleged that notion of a market without external interferences such as government interventions is far out of real time practicality even in an international political economy. Further, in considering the stable-with-shock ideology, it is expressed that market analysis can be done on rectilinear basis which on practicality indicates that markets operate without any form of interference (Brunt et al., 2011). This ideology articulates lack of sense in economic understanding and interpretation as markets must consistently adjust to meet the ever fluctuating economic conditions. In authentic life situation, governments shall always endeavor to formulate rules and regulations to regulate market conditions for the better operation of the market (Peters, 1994). Market systems are expected to exhibit linearity or stability when viewed on long-term basis in which the numerous infinitesimal market adjustments and fluctuations cease to be visible and noticeable. However, economic markets are best understood when considered under short term basis. Under short term basis, the market reveals substantial volatility. The short term basis allows the economists to study the economy on a lens assisting on the realization of the dynamic factors thereby doing away with the linear or stable market notions (Lyashok, n.d.). On an economic lens, the economy keeps on fluctuating violently resulting into endogenous cyclical behavior which results in great friction between the market and external factors leading to unstable markets. Instead of favoring the stable-with-shock ideology it would be prudent to consider market as an unstable structure and that market booms and busts are in existence because of market incentives. In unstable market structure the economy is normally centrally planned. It is believed that the market does not operate for the interest of individuals but for the benefit of the social and economic set up. Its main objective is to assist the government achieve its core mission of a better economy and controlled economic growth and development (Mikhalevich & Chizhevskaya, 2006). In that regard therefore, the government must devise regulations and policies to assist in controlling and regulating the market. Indeed markets are the most unstable structures. In conclusion, the issue around market stability is worth consideration in understanding market phenomena and the international political economy. Considering markets as stable institutions is not only inaccurate but outdated as governments shall always endeavor to control their markets as international organizations shall as well do their best in overseeing international trade systems and patterns. Markets are unworthy to be considered as stable-with-shock institutions as the notions borrow almost all concepts from unstable market system. In this regard therefore it is better to conclude that markets are indeed unstable structures characterized with persistent disturbances and fluctuations as well as booms and fluctuations amongst other factors. Governments shall always devise laws that look forward addressing the social and economic problems rather that addressing individual problems. References Baldwin, R., Cave, M., & Lodge, M. (2012). Understanding regulation: theory, strategy, and practice. Oxford University Press on Demand. Brunt, T. M., Poortman, A., Niesink, R. J., & van den Brink, W. (2011). 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