The Interplay between Markets and Government in Todays Economy - Essay Example

• The Interplay between Markets and Government in Today’s Economy

In a modern economic system, the aggregate interactions between the business and citizens guide economic decisions and pricing of services and goods. Markets refers to the mechanisms for allocating resources. If the markets are well regulated, they become competitive to maximize the welfare of customer by improving the growth of the economy. Properly functional markets provide the consumer’s needs cost effectively because of a strong competition among the organizations. However, the best market outcomes are unattainable unless the government intervenes by setting institutional and legal frameworks for the organizations and the market to operate in (Mercuro & Samuels, 2014). Therefore, a market cannot exist independently if the state does not play its legitimate role to shape it through intervention.

Mainly, price coordinates economic decisions in a market as demand and supply interact. Therefore, economies based on market conditions are also referred to as free economies because socio-economic institutions alter the pricing to affect to solve the problems that affect the economy (Moomaw et al., 2013). Additionally, an invisible hand affects a market economy because sellers and buyers are responsive to the pricing system, hence the coordination of the two parties.

Private Sector Entrepreneurship

In the modern times, private sector entrepreneurs make decisions to solve economic problems. Most of the time, they aim at profiting from the business and sale and purchase of market commodities. Therefore, they factor commodity prices when making decisions. On the other hand, consumers are responsible for creating market demand by revealing their preferred commodities through a purchase process. Additionally, suppliers consider commodity cost and profitability when creating a supply force. Consequently, they allocate adequate resources to inject more commodities into the market for maximum income and profitability.

The production issue concerns the selection of an appropriate production technique by considering the economic conditions in the market. Given that the private sector aims at maximization of profit, the entrepreneurs select the most cost-effective method of production. Therefore, a low-price factor is more applicable in the production process to lower the production cost. Another problem arises from the distribution of the economy’s total output to the country’s citizens. In countries such as the United States, people are not limited to a number of resources they can own. Factors such as skills, merits, entrepreneurship, and inheritance decide the resource ownership. However, the owner is at liberty to redistribute his property through charitable organizations and donations.

The State

In planned economies, a central authority decides resource issues on resource allocation through councils controlled by the state. Proper planning is imperative in centralized economies to ensure an attainment of the desired outcome (Bochove et al., 2007). For instance, in Cuba, the government solves basic economic issues by using a preset plan to allocate resources. A plan such as this is a descriptive statement that illustrates the income distribution, market conditions, the state resources and the production process. Mostly, a central regulatory organ decides the allocation of resources between the investment goods and the consumer.

The modern financial markets are characterized by turbulence and volatility due to economic instability and financial crisis. In the past, economies employed traditional institutions to solve economic issues in the market. Prehistoric techniques and instruments were used in the past. For example, production responded to the people’s demands. The farmers produced food and grazed domestic animals for subsistence use by individuals within a given region. Therefore, people exchanged commodities to sustain the local economy. An economic model such as this still exists in some of the most remote parts of Asia and Africa. In comparison, the modern free market economy is characterized by limited interference from regulatory institutions such as the Federal Reserve.

Capitalism

Capitalism is an economic institution that characterizes the markets in the western world, especially the UK and the United States. The US maintain a liberal economy with less state intervention. However, economic problems are mitigated through tax imposition. Instead, the state organs provide services such as law enforcement, pollution control, and education to boost the economic prospects. At times, the government in a capitalist economy can pass policies and legislature to regulate the market conditions (Errygers et al., 2012). Therefore, a state intervention in a capitalist economy cannot be ruled out. In Europe, capitalism replaced feudalism which was a dominant institution in the medieval times. It was a political, economic, and social system based on a manor or a lord’s estate. A lord’s manor included churches, peasant villages, mills, farmlands, and the manor house. During the medieval times, the self-sufficiency of the manors allowed for the occurrence of economic activities. Thus, no trade occurred during such a period.

Corporatism

Corporatism involves the export-oriented manufacturing as is the case with the German economy. Corporatism involves the organization of the economy and the society into distinct interest groups and their representatives to solve economic problems through joint agreements and negotiations. Corporatism is a strategy to raise the level of industrial output while employing a solid nationalist approach (Thorhallsson & Kattel, 2013). It is a system that that emphasize the positive role of the government especially with regards to offering a guarantee of the social justice. At the same time, corporatism suppresses the social and moral chaos of the population that pursues self-interests. The system is flexible because it allows the state to implement economic policies without sharp oppositions from the people.

• Unique Problems

The main economic problem that the market attempts to solve is the scarcity of resources needed to satisfy people’s needs, especially when there is an insufficient knowledge, energy, and will to meet the wishes of all individuals in a given society. It is true that there is a cost to be incurred when acquiring or producing economic commodities demanded in the market (Mercuro & Samuels, 2014). Therefore, it is imperative to determine the sense of belonging of the products.

Surpluses and Shortages

In market economies, government intervention creates social security problems that can neither be solved by private enterprises nor the state. In a market economy, private enterprises do not offer a person an opportunity to plan for a retirement. Equally, the intervening state allows the individual a limited chance only after tax remittance. With regards to social security, the state establishes a price ceiling to people above the age of 65. Terms such as these private bar enterprises from performing their duty.

Another way that the government creates problematic surpluses and shortages in a market economy is through price fixations. If the price of commodities is set lower than determined by the market, the result is an immediate surplus of consumers as the willing suppliers become scarce. Notably, people are mostly interested in commodities at the lowest price possible. Contrastingly, if a price is set higher than the market price, the number of suppliers will rise sharply while that of buyers drops drastically. Considering this, the problem of social security refers to the surplus of retired individuals with hopes of livelihood provision in the future.

The Farm Problem

Since the dawn of the industrial revolution, the farm problem affects the market as it strives to balance the economy for prosperity. At the time, the businessmen attracted personal savings for investment in machines, tools, and factories to encourage job creation. As trade and business specialization develop in any given economy, it is mandatory for a section of the population to produce fiber and food. However, the agricultural industry has been depressed by people shifting to industrialized and urbanized markets. Essentially, this is the manner of a competitive market where scarce resources and workers are drawn to attractive opportunities for employment from less attractive economic conditions.

Reactions and Actions

In free market economies like the United States, the voting blocs of non-workers that demand equal rights are expanding steadily. Additionally, the state officials (especially those unaware of the need to defend private property) impose heavy taxes on workers and savers to provide the needs of the non-workers. Meanwhile, the government urges businessmen collaborate in the development of employment training courses despite the lack of profitability prospect. Hence, it is impossible for a free market to solve the issue of a surplus of subsidized non-workers. As an example, private enterprises in a free market cannot implement new housing projects in as much as the government criticizes the existent structures(Moomaw et al., 2013). Thus, the demand for housing is boosted by abatement, zoning restrictions, rent controls and tax exemptions.

• Market Solving All the Problems in the United States

The market cannot completely solve the market problems. Research indicates that effective markets are only useful in coordinating the interactions and transactions in business entities with sufficient information on the value of service or product in the market. Additionally, it is impossible for markets to solve inherent problems in an expansive modern country like the United States. Markets cannot broadcast adequate information to all the concerned parties as well as t all the participation levels within the large scale trade webs. Unlike markets, people have an ability to decide on the exact time to make exchanges or to consider product value. Moreover, a market is a mere mechanism that facilitates exchange. Therefore, it only works if the involved parties are aware of the basics of the production process of goods and services. The American economy is remarkably diverse. In fact, the free market economy is overwhelmed with technical expertise embedded within the process of production ( Ropke, 2014). Moreover, the US economy is so distributed in time and space that the participants cannot have enough knowledge on the underlying value forming the basis of product pricing.

The situation is further complicated as the modern American market has multiple competing parties. According to hierarchical control theory, an absence of a logistical level of competition jeopardizes the equitable resource distribution and wealth in an economy. Most economic experts in the US argue that competition is responsible for the low cost of operation and higher innovation in the production. However, such a mechanism is dependent on fairness and absolute honesty to overcome the temptations that violate protocols. Notoriously, American citizens are susceptible to this temptation as seen in years prior to the economic recession. At the moment, numerous legislations are enacted by government agencies to provide a band-aid approach to logistics. During the leadership of Clinton and Reagan, use of deregulations unearthed weaknesses of markets with regards to cheating. Therefore, without the use of traditional measures, modern US market cannot sustain an equitable distribution behavior especially if the Congress is a sole decision-making body.

The global markets have failed investors blatantly since the 2008 economic recession. Most analysts observe that an over-reliance of the free market as a transaction mediator can lead to enormous market failures especially in financial derivatives, securities, and housing. For instance, the housing bubble is prompted by the sellers’ inability to value the property realistically, properly, and prudently (Balchin, 2013). Resultantly, a herd mentality takes over, convincing all the parties that the cost of houses will always maintain a steady rise over time. In the long run, people consider their houses as financial investments guaranteed to appreciate in value despite economic conditions. The housing appreciation, therefore, is used as collateral for loans to purchase other products or services. In the wake of financial crisis, the purported rise in housing prices overshadowed the economic performance as the analysts included the unrealistic costs in calculating the country’s GDP. In essence, it painted a wrong picture on the health of America’s economy. Because homes constantly gained value, the GDP rose steadily, thus failing as an important determinant of the economic conditions.

In a classic case such as this, the market failure is clearly evident. Particularly, the market failed in mortgage-backed security products and other mortgage derivatives. Despite this, numerous libertarian and conservative voices call for the freedom of the market rather than a reconsideration of traditional economic measures to protect the fragile American market. They argue that the market was never fully freed as demonstrated by the frequent failures that threaten to cripple the growth process (Heilbroner & Milberg, 2012). The libertarian voices claim that if the market was indeed free, it would be possible to solve all the US’s economic problems. A section of economists shrugs off the proposition of more government regulations as fallacious. Most importantly, the necessity of incorporation of traditional measures to curb the market conditions cannot be understated.

To understand the reason for market failure, the evolution of America’s economy from the early exchange modes between the Indian tribes to the modern market. People improved several moral thinking patterns to ensure proper trading. The mental patterns ensured fairness in trading by balancing the resources placed by others with trader’s efforts. The regulators of early markets often arrested malicious attempts to claim extra value than warranted. Consequently, the violator was subjected to tough sanctions as a punishment. Tracking changes in the traditional measures and dynamics results in an understanding of the limitations of the market mechanisms. In this way, the regulators can understand the causes of failure in the housing industry.

The market fails when it cannot guarantee the fairness and equitability of trade for all the parties involved. In the case of the housing bubble, Libertarians often argue that market system worked because the prices stabilized after the bubble burst (Crowe et al., 2013). However, thousands of families in America today are yet to overcome economic challenges as their homes are lost due to foreclosures. They bought the houses when the market was riding high but after the slump, the financial institutions forced them to repay loans at higher prices despite the tumbling investments (McCarthy et al., 2013). When the majority of these individuals lost their jobs, they lacked an alternative other than to admit a total loss and to speculate on future market situations. Desperations such as these are a testament to the failures of the market and the need to maintain the tradition and command economic solutions.

The current US market governance systems (such as Federal Reserve, EPA, and Federal Trade Commission) aim at incorporating tradition and command to restore the economy and to provide logistical control. However, there is uncertainty on how to regulate the market because these agencies resulted from the state’s reaction to frequent economic failures and market weaknesses. An overarching theory for the existence of these agencies is lacking, hence the failures of the existing regulatory approaches to the market system (Heilbroener & Milberg, 2012). The American government does not apply the understanding of natural hierarchical control to formulate and operate functional mechanisms for coordination of the market economy. Mostly, the regulatory organs attempt to implement inappropriate band-aid measures.

Specifically, markets are useful in providing solutions for local issues affecting trade. They hardly fail when applied properly to the local economic conditions. Still, it is worth noting that they cannot eradicate all the economic issues unless other traditional measures are included in sourcing for a lasting remedy. The Americans assumed that market eliminates all the problems, but now, emulation of American strategy by the global economies has proved disastrous. Instead, the economies that mix command, tradition, and markets such as China and India are successful especially in ensuring equitability in wealth distribution. The fact that such economies are not purely capitalistic demonstrates their inability to grasp the environmental issues, though they are neither planned economic systems. Policy makers must have a clear understanding of autopoiesis to ensure achievement of a fair economic model that is beneficial to all the Americans despite their social background.