1.
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. In the developed world, for instance, there is a
little intervention from the government (central planning). Contrastingly,
there are centrally planned economies such as North Korea, China, and Russia,
where the state institutions are heavily involved in monitoring the decisions
made to improve the economic performance.
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
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. 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. 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. Basically, 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. It is a system that that emphasize the positive role of
the government especially with regards to offering a guarantee on 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.
2.
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. 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
bar private 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 of employment from less attractive economic
conditions.
Reactions and
Actions
In
free market economies such as 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. Thus, the demand for housing is boosted by
abatement, zoning restrictions, rent controls and tax exemptions.
3.
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. 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. 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 will 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. 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. 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.
References
Heilbroner, R. L., & Milberg, W. S. (2012). The Making of Economic Society.
Upper Saddle River, N.J: Pearson Prentice-Hall.
Moomaw,
R., Olson, K., McLean, W., & Applegate, M. (2013). Economics and contemporary issues.
Cengage Learning.
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