, Research Paper
Should the Government Regulate the Economy?
The free market approach in economic decision-making is based on private ownership of properties and resources, there is no government involvement, whereas the command approach describes a situation in which resources are jointly or publically owned, everything is government owned. Be that as it may, the key to a successful economy lies somewhere in between these two types of economic systems.
In a command economy income and wealth is more evenly distributed, there is little unemployment and the economy experiences few boom/bust cycles. The profits are used for expanding production and the production of goods and services are planned to meet society s needs which means that consumers receive the basic necessities of life. But, since everything is publicly owned, often there are little or no incentives for the working class. Technological change and innovation are discouraged by the needs to meet production quotas and because of lack of incentives, low-quality goods are often produced. Inefficiency and widespread waste of scarce resources occur in production and because of planning, the economy is inflexible and slow to respond to economic changes. Also, income and wealth are controlled by the state and consumers are not offered a wide selection of goods and services. Given that everyone works for the good of the state, and the incentives given when you exceed your quota s is not that appealing, unrest among the working class is created. That is a harmful thing because if the working class is unhappy they may strike and cease production, causing an enormous economic crisis. If no goods are being produced, then the basic necessities are no longer available and the country can go into major economic hardships.
In a free market approach too economic decision-making, there are several advantages. First, there is a great deal of individual freedom in the decision making process. Secondly, the free market approach is efficient at allocating resources into various uses. This efficiency is achieved through the price system. Changes in prices act as signals to buyers and sellers and direct their behavior. Third, the competition among sellers ingrained in a free market system provides for lower prices and better quality goods. However, this is only true in a model free market. Markets are not always perfect in their operation. Buyers and sellers often don t have proper information to make informed decisions and competition may be controlled by a few large companies. Also, the free market system may not provide certain services that society considers important and there may be such huge gaps in income distribution that many of the underprivileged cannot compete and earn very little in terms of income. Free markets are not immune to fluctuations in the level of economic activity and as a result of these market imperfections, the government intervenes and tries to maintain an order of balance in the economy.
A free market system is one in which private ownership and individual decision-making is stressed and the government has little or no involvement. The advantages of this market system were first introduced by Adam Smith. He said that a free market system would channel selfish, egoistic motives toward the betterment of society. He also stated that an invisible hand or competition would make or break a business. And that government intervention would only have negative consequences on society. He said that there was no need to plan an economy and that if people were free to pursue their own interests the sum of their individual actions would automatically work for the betterment of society. In this economic system, the government s role was reduced to only protecting the country against foreign enemies, ensuring competition, maintaining law and order, and protecting individual property rights.
In a purely competitive economy, with no blockages preventing entry or exit from the industry, an efficient allocation of resources would be attained. Corporations would tend to have competitive prices which in turn would mean that the consumer gets top product for their dollar. This is why economists hold up the purely competitive model as a standard by which to judge any particular industry. However, there are cases where a free market would not result in economic efficiency.
In a free market system, some people may not be able to compete. For example, the elderly and disabled are often passed up for jobs that healthy young people can do. If an individual cannot compete in a free market, he or she won t be able to earn an income. Since our society has a conscience about such matters, this is where the government should and has stepped in, to ensure a more equitable distribution of income because everyone should have the right to basic necessities. The government has introduced many social welfare programs to counteract the possible shortcomings that certain individuals face. They introduced programs that help the elderly and the disabled such as employment insurance and financial assistance for single parents.
There is no economic system that is free of fluctuations. There are periods of economic expansion and periods of economic decline. Examples of this are the Roaring Twenties and the Dirty Thirties. The Roaring Twenties are an example of economic prosperity. The economy was booming and everyone was very prosperous. Yet within ten years, everything went downhill. People lost vast sums of money in the stock market and there was widespread hunger, poverty and unemployment. At the beginning of the depression period, governments didn t see their role as one for the influencing business conditions. However, as economic conditions deteriorated even more, governments were influenced by the writings of John Keynes and became more involved in the state of the economy. Keynes proposed that government involvement in the economy could help bring an end to depressed economic conditions. The government then issued a statement accepting responsibility for maintaining high levels of employment, reasonably stable prices and sufficient economic growth.
The government has taken steps to see that the economic depression that took place in the 1930’s never happens again. One way they have done this is by introducing price ceilings. This is when the government doesn t approve of the price established in the product market. Government officials may feel that the price is too high and legislate a price lower than the one that has already been established in the marketplace. This legal maximum price for a product is referred to as price ceiling and when it has been launched, it makes it illegal to sell products at a higher price. Price ceiling insures that everyone has access to basic necessities.
Another thing that the government has introduced is price floors. This is when the government thinks that the price being charged for a product is too low so, they raise the price and make it the new minimum price. Now the minimum price that the product can be sold for is the new price that the government has introduced. The problem that this poses in a free market system is normally a surplus of products would be disposed of by lowering the price. With a price floor this can t happen. Another way has to be found to rid the market of this surplus good. One way to do this is to restrict the amount of product that can be produced. Another solution would be to create a need for the product through advertising and such means. Regardless of which solution is chosen, the government becomes further involved in regulating market conditions. The intrusion of a price floor results in a loss of equilibrium and the government must intervene to further restore balance. An example of price flooring was the introduction of minimum wage and was introduced to help reduce the level of poverty.
The extent of government involvement should be regulated but it should still be there. Full government control creates problems as does no government control. The best thing is to meet halfway and have both government regulation and also privatization. When government is in complete control of industry, the working class is left feeling unhappy and this may lead them into taking more drastic measures which can cause turmoil in the entire economy. The same is true when there is no government involvement. Competition is supposed to regulate and command the economy so that the consumer gets the best case scenario every time yet this does not always happen. Consumers often don t possess all the knowledge required to make well-informed decisions and many businesses capitalize on this. The best thing to do is establish an economy where everyone is contented, which includes government ownership and intervention as well as privatization.