Government involvement in economy?
Its an essay topic I have.....Ideas?
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why do ppl ask such complicated questions that require lengthy answers on YA?
Government involvement in the economy is like an entrepreneur managing an organisation. It must help plan and organise the economy to grow and achieve a positive and desired GDP(Gross Domestic Products) or what is profit to an organisation. However the Prime Minister, as head of government is like a CEO. He must be competent with good professional and leadership abilities to lead the country and its economy to achieve prosperity. He should ask government agencies or business organisations why they are doing those things and not how they are doing them. His prime duty is to govern and not to learn how to govern. Or to leave the management logistics to the experts. However he will need a penal of experts to advise him or a risk management programme to help in him to formulate his government policies.
Put simply, an economy could not last without government. Government can not last without an economy. Separating the two is only possible from a theoretical sense.
If you disagree with me, you're wrong.
Some degree but not all.
If there is little government intervention, such as in a neoliberal, free market economy, there is little regulation and everything is dictated by market forces. This isn't good because the markets will be prone to speculative investor activity and result in formation of stock market bubbles (enormous increase in asset prices due to overconfidence). This has caused the DotCom and Housing Bubble which led to the 2001 recession and today's Credit Crisis.
If there is a lot of government intervention, such as in a Keynesian fiscal regime, there is a lot of red tape, higher taxes and lots of regulation. There is too much interference with the private sector, and this puts off a lot of investors, who want some flexibility. And it makes people lazy too. A good example would be the Welfare States of many European countries (especially the UK under Thatcher) in the 1970s-1980s when those governments spent too much money subsidising healthcare and other services.
So a best mix would be somewhere between the two. A mixture of government intervention and market dynamics.
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Government involvement in economy?
To what extent should governments be involved in planning the economy?
Its an essay topic I have.....Ideas?
Government Involvement In The Economy
Governments should not be involved in the economy. Central planning never works. The economy can never be "planned" by only a few group of people in government who are so called "experts". The free market works well as it is. The problem we see in the economy right now and in our history are not caused by the Free Market. They are all caused by government intervention/planning. Central planning of the economy has been proven a failure - just look at the Soviet Union and Germany.
Prior to 1929, depressions lasted only a year or 2 as the government allowed the market to correct itself, it was painful but short. The Great Depression lasted more than a decade because of all the government intervention that the Hoover and Roosevelt administrations did. They thought that a "few central planners" are more knowledgeable than the market itself so they created their "new deal". History showed that they were dead wrong. Because of all the government intervention that they did during the 30s, the market was not able to correct itself and it made the matters worse.
To explain it further, let us talk about the Business Cycle theory of the Austrian School of Economics:
Entrepreneurs are the expert in predicting the market, thus they can venture into capital investment and business decisions. Some of them fail because they are not as good as those who are successful. But if the market is tampered with by the government (through artificially low interest rates, price fixing, wage fixing, inflation, etc), it sends bad signals to these entrepreneurs which causes them to make bad investments (malinvestments) - and a temporary/fake prosperity ensues (this is the boom cycle). Once the market tries to get back to real rates or equilibrium, it will start liquidating the malinvestments created by the boom cycle (this is the bust cycle).
A perfect analogy would be the following:
Imagine a small landowner who rents out a space for lodging in a small town. One day, the circus came to town bringing with it its numerous staff and the tourists they attract. Because of this, more demand came up for his business. He then started buying the lots beside his land and created more lodging for the people that the circus attracts. Once the circus leaves town though, not only did it bring its staff with it, its departure also stopped the big number of tourists coming into town. Now the business owner is paying extra expenses for very few customers.
So, the business cycle exists because of government intervention and NOT by the free market.
Now that we do have a business cycle because of the federal reserve, the best thing to do during depressions is just to let the market correct itself because that is what is needed to remove the malinvestments. Depressions are the corrections needed by the market. And by stopping these corrections from happening, it makes the matters worse. That is exactly what the Hoover and Roosevelt administrations did during the Great Depression. That is the reason why the depression lasted for more than a decade.
***When it comes to the need for "regulation", the government is not needed for regulation. Remember that anything the government touches, it worsens it. The free market already has regulations in place that is more effective than government regulation. If a company is fraudulent, consumers will not buy its products. What the government can do is to enforce contracts. People who got ripped off can turn to the government to enforce the contract or sue the fraudulent company. Also, this notion that governments and economies go hand in hand, that is not true. Example, money was not created by government, money exists even before governments were created. An economy comes out of people's need of things and services, regardless of whether a government is present or not.
In short, government intervention in the economy is bad.
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