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Competitive markets Essay

The economic problems that are plaguing the United States economy have had global repercussions, threatening to undermine the economic fundamentals of other countries.  Since the collapse of the Housing market in the United States, Australia has begun to experience what some have come to call an economic recession.  While it remains to be seen if the United States economy is really undergoing a recession at this point in time, this situation can be used as a great opportunity to point out the current struggles of the local economy.  In light of this, it is argued that the best solution to these problems lies in the statement that competitive markets, free from government intervention, are the best means of allocating a society’s scarce resources amongst its members.

In order to arrive at a better understanding of this problem, the main reasons for the collapse of the American Economy must first be examined because any solution that is provided must deal with the foundations of the problem.  The fundamental flaws and structural weaknesses of the American economy are not only more visible now but also more potentially damaging.  The much touted and highly publicized US $700 billion bailout plan is argued to be

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good for the economy as a “quick fix” to the problem yet there are a number of economists who feel that the real solution to the problem lies in establishing more solid fiscal and monetary market fundamentals.

            In order to effectively argue which type of economic policy would be more effective, it is important to first understand the current market situation.  As the headlines in today’s newspapers all around the world show, there is a global economic slowdown.  Economies all over the world are being plunged into what is tentatively being called “Recession.”  While there are those who believe that this is simply an expected trend given the rapid growth of the global economy, it still does not detract from the fact that it is an urgent and pressing problem.

            There are two ways by which the problem can be addressed.  The first method is through the application of the Laissez Faire method, which basically dictates that the market should be left alone to resolve the problem, and the Government Regulation, which is the policy that the governments around the world have taken.  The first part of this discussion will outline the reason why a free market system should not be adopted while the second part and the conclusion will show the necessity of reducing government intervention.

            As the current economic meltdown shows, it is argued by many that there is indeed a dire need for government intervention.  At the peak of the Great Depression, John Maynard Keynes advocated for government intervention so solve the problem.  Similarly, the US $700 Billion bailout plan mirrors the type of government intervention that stopped the Great Depression.  The reason this policy was effective was because it negated the effect that other negative forces had upon the economy.  Without the ease by which goods could travel, such as in the present, the economy had to be resuscitated by the government.  As history shows, the solution lies not in letting the market forces dictate the flow of the economy alone but by allowing the government to regulate such flow.

            The great danger in allowing a free market economy is that it does not allow for regulations.  We exist in a global market.  An action in one end of the world invariably affects the other side.  As such, care must be exercises, especially with regard to economics because of the repercussions that it might have.  The more complex markets of today have shown that the pursuit of self-interests, while natural of human behavior, must be regulated by external systems in order to ensure a more equitable and efficient allocation of resources.

            Government intervention has been heralded as the solution to the inefficiency of markets because of the fact that it allows for a more efficient and effective distribution of resources among the players in the market.  As the government is but a tool, a conduit, for the movement of resources, it is, therefore, but logical to argue that in order to achieve optimal efficiency in the economy, there must be government intervention.  Without this, markets will collapse, as the recent economic meltdown has revealed.

            This view is similar to that of classic economists who have always held that the ideal and optimal economic performance is determined by the degree of involvement of market forces.  Recent economic models however have shown that when the interests involved are public goods, there is a need for a certain level of government intervention.  This study therefore seeks to examine the situation in a welfare state and allowable state intervention to produce a successful and progressive economy.

            Mainstream neo-classical economic theories, however, discourage too much state intervention.  It is the belief of these economists that too much state intervention unduly restricts the possibility of conducting free trade.  It is the theory that the perfect economic model can only be achieved in a laissez faire model (Brebner, 1948).   Later economic theories however take a different stand from the neo-classicists in that they postulate that there is a need for government intervention up to a certain extent.

Russell Roberts, however, in his article entitled, A Marvel of Cooperation: How Order Emerges without a Conscious Planner, argues that there is no such need for massive government intervention because economics has a way or bringing about order in life.  Citing the teachings of Hayek and Frederic Bastiat, he effectively argues that the workings of the markets do not need government intervention or guidance for it to flow.  He essentially argues that the time for Keynesian Economics has passed.  The application of government regulation and intervention techniques are no longer as effective as they used to be.

The previous arguments on the matter have taken the side of government intervention in order to mitigate the perceived “harmful” effects of a regulated market.  Classic economists have always held that the ideal and optimal economic performance is determined by the degree of involvement of market forces.  Recent economic models however have shown that when the interests involved are public goods, there is a need for a certain level of government intervention.  Mainstream neo-classical economic theories, however, discourage too much state intervention.  It is the belief of these economists that too much state intervention unduly restricts the possibility of conducting free trade.  It is the theory that the perfect economic model can only be achieved in a laissez faire model.   Later economic theories however take a different stand from the neo-classicists in that they postulate that there is a need for government intervention up to a certain extent.

Perhaps the wisdom of the words of Russell Roberts is more evident in the manner by which governments all over the world have reacted to the recent economic crisis.  The current economic crisis that has rocked the global economy has prompted many countries to take drastic measures in order to deal with the situation.  The Federal Reserve and the National Treasury have also teamed up to deal with this global economic crisis by instituting several reforms and policy changes.  With the goal of providing an immediate and permanent solution to the problem, the Treasury, with the help of the Federal Reserve, has instituted these fiscal policies to alleviate the situation.

The answer, however, clearly lies in the road less travelled.  Laissez Faire should be adopted by the world markets in order to address the current economic woes that global economies are facing.  Laissez Faire has a distinct advantage because it will allow the emerging markets to reach their full potential without government regulations that stifle their growth.  China will be able to emerge as a legitimate economic global power once the trade restrictions are eased.

The time for Keynesian Economics has passed.  The application of government regulation and intervention techniques are no longer as effective as they used to be.  Since the problem was caused by government intervention in the first place, it stands to reason that the solution may not possibly lie in that area.  Laissez Faire can, and will, create an avenue of growth that will solve the global slowdown.  The free market system will be more reactive to the real world scenario and will bring solutions to the current economic problems.

References:

Baumol, W. and Blinder, A. (2006) Macroeconomics: Principles and Policy, Tenth edition. Thomson South-Western, United States

Davidson, Scott. (2003). Economics: Perfect Competition and Monopolistic Competition. 2nd

            Series. Bantham Books: 103-105.

Epstein, L. and Martin, P. (2003). The Complete Idiot’s Guide to the Federal Reserve. Alpha Books. United States

Mishkin, F. (1995) The Economics of Money, Banking, and Financial Markets, New York, Harper Collins. United States.

Stone, Diane. (2007) “Market Principles, Philanthropic Ideals and Public Service Values: The Public Policy Program at the Central European University”, PS: Political Science and Politics, July: 545—551

 

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