Critique of Free Market Economy (Research Paper Sample)

Running Head: CRITIQUE OF FREE MARKETS CRITIQUE OF FREE MARKETS by Student's name Code+ course name Professor's name University name City, State Date Introduction The recent financial and economic crisis in US (of 2007-08) has perhaps strongly evoked a rather serious debate on the virtues and fallacies of free market economy which has been ongoing, although mildly, for more than a century in academic literature and socio-political circles. Debates, ideas and assumptions on whether free market economy supersedes other forms of market structure such as socialism (which is still in place in countries like China and Russia) continues to divide economists, politicians, civil servants, public policy experts, and others on two fronts. Further, the determination of optimum boundaries between a free market and a capitalist system and the potential role of the government has pretty much embroiled every nation in the past and continues to do so even to this day. In fact, to check the financial crisis on 2007-08 from becoming a prolonged depression that would have potentially engulfed the US, if not the rest of the world, for at least a decade, heavy pervasive intervention by the US Government was needed, which was, in turn, followed by similar steps from other governments around the world in pretty much the same manner and form. Adherents of free market lay emphasis on the equilibrium achieved by the market mechanism process of demand and supply as necessary and sufficient condition to correct any inefficiencies in the system. On the other hand, proponents of market interventionist, have persistently demurred the market framework of demand and supply and seem to draw parallels of the current financial crisis US with this specific market imbalance leading to inadequacies. Supporters of active government involvement argue that only the government intervention, through its regulations, can wade effectively into the system of the market and correct the imbalances and bring about a sense of parity, justice, equity and fairness. However, government involvement does not mean that the competitive elements and forces will be subdued but it means that those forces will be better monitored to prevent any drastic fallout that may inevitably harms the society (Aikins, 2009) (Heilbroner and Thurow, 1998). Critical Analysis of Free Market and Government Involvement Modern welfare economists and policy makers have tended to use micro - economic fundamental reasoning of welfare and well-being as justification for the government to step in and be a major player in the decision making process of the market. However, an important assumption is that such preoccupation by the government should purely be based on the consideration of external benefits that it will generate and which, in turn, will, in a sense, lead to social equity, which is the ultimate and overriding goal of any government, in a democracy. Fundamentally, such external benefits have been driven by Pareto optimality principle which can be surmised as "a given economic arrangement is efficient if there can be no arrangement which will leave someone better off without worsening the position of others." This conceptual framework is heavily built upon the principles of social welfare objectives because any exchange or reallocation of resources is Pareto optimal if the exchange or reallocation will not harm somebody. Hence, from a theoretical standpoint the participatory role of government is fructified and forms a very important basis on which individuals and political parties contest elections in a country (Parker, and Nobay, 1973). Precisely, it is these rational and meaningful assertions that have been the background for the welfare activities of the government in western free market economies, albeit in varying magnitude depending on the legislative system of each country. Further this notion also mandates and informs us on the reasons government in developing countries undertake large social expenditure. All the conditions of pareto optimality can be fulfilled perfectly and easily if the market structure is characterized by elements of perfect competition, where there are large number of sellers and buyers, and without any prevalence of negative externality, whereby actions of one individual adversely affects the consumption and production of large section of individuals. However, the modern mixed economy, which is the predominant form of market in most countries, is not ideal and has a number of imbalances that warrants the government to play a passive role (of a regulator that monitors the activities) in terms of competitiveness of markets and industries and active role in so far as the welfare objectives are concerned (Stiglitz, 1991). It is noteworthy that democratic institutions and privately owned factors of production have coexisted without any degree of acrimony in most of the countries. It can rightly be inferred from the experiences of advanced industrialist countries that capitalist market system can be guided perfectly by professional governance model that leads to favourable competitive outcomes which benefits both the consumers and the producers. For instance, major capitalist countries including US, Japan and Germany have been democratic where the all the essential aspects of business, most importantly, including price, continue to be determined via the market. It is important to realise that the private means of production that have led the accumulation of wealth in each of these countries. Although, the government has indeed aided in research and expenditure and other favourable trading policies but, by and large, it has been the competency of the business operations that have been the main cause of the progress of western society. Hence, it will not be wrong to claim that principles of democracy have proven to be the main centrifugal force that aids in expansion of business and production that leads to generation of employment and income (Dahl, 1992). The talents, skills and hard work of people are most prized in an economic system which guarantees them a certain reward for that. Here too, evidence seem to point that a free market democracy assures this pre-condition along with social system that can also work for the benefit for the poor. Importantly, in many advanced and emerging countries, most private sector have also realized that shared progress of all is the key to nation's supremacy and, hence, corporate social responsibility has emerged as one the main objectives of private sector (Erhard, 1958). Government regulation has to be efficient that lays out unambiguous rules for business to abide by. Lack of proper regulation of business activity, whose sole existence is to create profits, will not lead to sustained economic growth and this can have lethal consequences for the welfare of the economy. Hence, policy mechanism has to be rightfully framed that can instil a sense of balance, discipline to the operations of the private producers and manufacturers. For instance, regulation that does not lead to overutilization of natural resources is absolutely essential for sustainable growth. The needs and rights of the future generation to use a natural resources is also string as ours and hence, enterprises have to exercise a degree of caution when dealing with natural resources. A well regulated free market is precisely the need because "even if competitive markets were to produce efficient outcomes, these efficient outcomes would not necessarily be justifiable; and some justifiable outcomes may be inefficient" (Dahl, 1992). Arthur Pigou, an English economist, had argued that government has a crucial role to play for the upliftment of society's most deprived individuals. Essentially, expenditures by the government in activities that have a positive impact on socially backward individuals has to be undertaken at any cost. He emphasized that subsidies by the government in education and healthcare is a valid reason for government to participate in the market aggressively and with a sense of intent because it positively impacts those individuals in the society that are placed at the lower ends of the social ladder. Greater social spending for these groups increases their capability to be absorbed in the labour force and gives them an opportunity to enhance their social status by being a part of a growing economy and not being left out of it. However, a free market system gives the firms the necessary incentives to be able to advance business interests which if the economy would not free will go through a lengthy, time consuming bureaucratic procedures. Hence, a free market guarantees that both the objectives can be met (Stiglitz, 1991). Further, importantly, another Nobel Prize winning economist, Paul Samuelson, categorically developed a number of theories around a unique and distinct class of goods - called as public goods – which was initially conceptualised as only physical infrastructure such as roads, street lights, dams, bridges and other, but however, with later theoretical development in the subject, other social overhead cost such as education and health facilities for individuals who cannot afford to buy any was also included as a part of it. Samuelson claimed that lack of sizeable profit opportunities for the private player's in the provisioning of public goods means that only the government is in a position and has the resources to be able to provide such goods effectively and to large masses. However, it is extremely important to point out that the historical argument behind this was given by John Keynes, labelled rightly as the champion of interventionist approach of the government, at the end of the great depression, whereby he had theoretically demonstrated that inadequate demand creation was the cause of persistence of massi...