Market Economics Discuss the Role and Importance Essay

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Market Economics

Discuss the role and importance of Governments and intervention in the allocation of resources in market economies. Provide examples.

The role of government and the intervention in the allocation of different resources has been continually changing. Part of the reason for this, is because there were various schools of thought, about how the government could help to distribute resources in the economy. In the 1700's, Adam Smith believed that the role of the government should be limited. This is based upon his theory that private individuals and businesses, could be able to address the various demands of people (by giving them the resources / materials to be successful). While at the same time, taking a very limited role in how the demands of customers are met (the invisible hand). As a result, this would be the basic policy of many developing countries from the 1700's until the late to mid-1800's. (Aharoni 1997, pp. 3- 24)

At which point, these views would change, with many people believing that businesses were taking advantage of their workers and the community (to make a profit). This is because many of the different ideas of capitalism (through the government's limited role) were following the common beliefs within society. One of the most notable was Social Darwinism. This idea basically combined the views of Darwinism (survival of the fittest) with a restricted government role. Where, it was believed that people were successful in society, based upon their ability to adapt (survival of the fittest). Those who were wealthy were considered, to be individuals that overcame the different challenges they were facing to make their fortune. While those people were poor or middle class could not adapt. As a result, any kind of government intervention in the economy or the distribution of natural resources was considered to be going against this principal. (Klein 1996, pp. 3 -- 6) This is important, because it is highlighting the basic idea of the market economy. As there should be limited government intervention in the allocation of resources. (Aharoni 1997, pp. 3- 24)

However, as time went by these views would change from the obvious disparities that were occurring in society. What happened was, various ideologies such as: Marxism and Socialism would quickly emerge. Both of these different ideologies would radically alter the way the government should control the various resources and the economy. As Marxists believed that the government should: seize all private assets, redistribute wealth more evenly and control how the production of different goods / services would take place. While, Socialists felt that government should restrict how these different resources should be allocated, based upon various regulations and controls. In this aspect, there would be competing government programs that would offer various resources to the general public. At the same time, private businesses were allowed to operate, in a manner that controlled their activities (through these different regulations). Both of these ideologies were developed out of the frustrations that millions of people were experiencing, from the extreme disparities that were occurring in the market economy. As the overall number of regulations were very limited, resulting in a misappropriation of various resources. (Aharoni 1997, pp. 3- 24)

A good example of this can be seen with overall amounts of contention in many Western economies going into the 20th century. What happened was; the underlying disparities became so extreme that it caused the economy to be subject to: extreme boom and bust cycles. After the stock market crash of 1929 and the subsequent Great Depression, the ideas of increasing the government's involvement in the distribution of natural resources would become more active. The below diagram illustrates how the basic relationship between: consumers, businesses and the government until this point in time (1929). (Aharoni 1997, pp. 3- 24)

Diagram 1.1: Limited Government Involvement in the Distribution of Resources until 1929

Government

Negotiation of Goods / Services

Businesses

Consumers

In this case, the government has a very limited role in negotiation of goods and services. This is important, because when this kind of situation is taking place, it means that the government is essentially allowing businesses to determine how to allocate various resources. Where, they are taking a smaller role, resulting in greater amounts of freedom for businesses to negotiate with consumers.

The time frame between the 1930's to the 1980's would see the government's responsibilities change, when it came to the allocation of different resources. This is because the Keynesian model advocated a large role for the government in economic activity (through increased amounts of regulation and spending). At the same time, the different disparities between these groups in society would be continually changing. As there would be an emphasis on addressing this issue through a host of different social programs (i.e. welfare, public housing) and with various regulations (i.e. labor, environmental laws). This is important, because it shows how the government is controlling the allocation of resources (either directly or indirectly) through these different tools that they are using. As a result, their overall authority would increase dramatically in how businesses were operating. (Aharoni 1997, pp. 3- 24)

A good example of this occurred in the UK from the 1930's forward. What took place, was the government became increasingly involved the allocation of different resources. As they would use a host of different laws, to restrict the ownership of certain assets and there was increased amounts of spending. This is significant, because it shows how the greater involvement, would have an impact upon the way businesses would interact with consumers. The below diagram illustrates this changing role that was taking place in the market economy (from the 1930's until the 1980's). (Aharoni 1997, pp. 3- 24)

Diagram 1.2: Limited Government Involvement in the Distribution of Resources from the 1930 to the 1980's

Government

Negotiation of Goods and Services

Businesses

Consumers

This shows how the government has an active role, in telling business what they should be doing through: various regulations and laws (as this is controlling the distribution of natural resources either directly / indirectly). While at the same time, they are carefully watching the different transactions between businesses and consumers. The relationship between the government and consumers is one that works both ways, with them providing assistance to various disadvantaged groups through a host of social programs. These different elements are important because, they are showing how the government is playing a more active role, in determining where resources are allocated in: the economy and their contribution to economic growth (from various social programs as well as increased spending).

From the 1980's onward, there would be an emphasis on changing the role that government would play in the allocation of natural resources. What happened was; the different regulations and laws began to interfere with the activities of business. Part of the reason for this, is the government began to become heavily involved in: the economy and how various resources were allocated. At which point, economic activity would begin to slow. This led to reductions in the amount of influence that government would have in the way they were allocated.

A good example of this occurred in the United States during the 1980's. What happened was, the different regulations surrounding the sale of electricity, was mainly concentrated among protected monopolies. In what was known as vertically integrated companies. These are select electric utilities that were allowed to operate in a particular region under heavy regulation (such as: Consolidated Edison for all of New York City). The idea was that without any kind of strict oversight, various abuses could occur with many private companies engaging in: drastic price increases and reductions in services. At the same time, these companies could cut off the flow of electricity to a poor family during the middle winter (effectively allowing them to freeze).… [END OF PREVIEW]

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