The Functioning of the Economy - Assignment Example

In what sense can it be said that responsibility was or continues to be a key aspect for the functioning of a market society? What problems may occurin securing adequate conditions for the achievement of that responsibility? The evolution of mankind and its subsequent development paved the way for several inventions and innovations. As time passed governance and pattern of economic system came up. In its early stages mode of life was simple with few people, but as population increased the question of its management became pivotal. A market economy and a command economy are the two forms of economy which are often debated. Proponents of free market mechanism consider least government interference as the ideal form of government. At the other end of the spectrum lies command economy where decisions are taken by the government. Here the relationship is vertical in nature and exercising control is done by a “multilevel hierarchy” (Samuelson, 1980, p.691). Economists are divided in their opinion regarding the viability of the above systems but it can be pointed out unambiguously that every system requires certain conditions for its smooth functioning and effectiveness. The paper here seeks to examine the importance of responsibility as an essential requirement for the functioning of the economy and the problems that might come up while securing the conditions for the achievement of that responsibility. Meaning and emergence An economic system which is controlled, regulated, and directed by the markets alone is known as a market economy. Here it is assumed that the demand for goods and services will equal its supply. The function of purchasing power in the hands of the owners is performed by money in this system. As a result, production will be controlled by prices as profits of the producers will depend on it and distribution will also depend on price. The essence of this system lies in the fact that it is price which ensures order in production and distribution of goods. A market economy is said to be self regulatory in nature. The implication of self- regulation is that all production is meant for sale and income is generated from such sales (Polanyi, 1944, p.68). The failures of command economy especially in case of Soviet Union paved the way for its embracement. As government coordinated system of demand and supply collapsed in Soviet, the concept of free market became more pronounced. Liberalization and globalization demanded integration of the markets and under such situations the concept of free trade emerged. Independent and free trade was supposed to ensure greater opportunities for the producers as well as consumers (Lindau & Cheek, 1998, pp.3-6). The road to market economy: obstacles Market economy essentially means self regulation. Such self regulation was required in every market for the smooth functioning of the economy. To have an effective market economy it was essential to have a market for labor and the creation of such markets was impeded in England during Industrial Revolution by a series of laws like the Poor Laws, Speenhamland Law, and others. The transition to market economy implied uprooting the existing system. Under such a scenario Karl Polayani, viewed the Speenhamland law as an attempt to safeguard the traditional system of production. It was also considered to be a self defensive mechanism against an economic system that might be undesirable (Polanyi, 1944, p.68). The Poor Laws were initiated in Elizebethan England to provide relief for the poor in England. A number of laws were introduced by the English Parliament in 1563, 1572, 1576, 1597 which ultimately culminated into the Poor Laws. This law was initiated because a lot of people in England were suffering from abject poverty due to various reasons (The Poor Law, n.d). However in the views of economists like Adam Smith and David Ricardo, such laws were economically unsound and it hampered the mobility of labor which was essential for the development of free market mechanism (Trattner, 1999, p.50). The Speenhamland Act was introduced to lay the foundation of a system where grants-in-aid of wages were supposed to be given on the basis of the existing price of bread. The main purpose of this act was to generate employment in the Speenhamland countryside and also to prevent extreme poverty which was expected once free market for labor was established (Skocpol, 1984, pp.54-55). This was also considered as an impediment to market economy and on the other hand it has defended by Karl Polayani. Mechanism and benefits The market economy is characterized by self regulation. In fact it is the very essence of a capitalistic system. In a socialistic system we come across a system where there is maximum government interference in every aspect of the society. The capitalist economy’s principles are just the contrary. Here the market is left on its own to function and accordingly an equilibrium situation is reached where prices and quantities reach a steady state. In case there is disequilibrium then the market on its own makes the necessary adjustments to bring back equilibrium. Under this system the government does not interfere. Here there is an interaction between the buyers and the sellers, which results in the determination of prices. Thus it is very clear from the above mechanism that no individual producer or consumer can affect the prices. Prices are very essential in this market and everything under the commodity system commands a price. Apart from that it can be pointed out that these prices serve as signals for the producers as well as for the consumers. A rise in demand for a particular good will increase its price which will serve as a signal for the producers to increase supply. Similarly an increase in price of a commodity signals the consumers to go for substitution in other commodities (Samuelson, 2005, pp.26-27). There has always been a debate in economics regarding the choice between free market mechanism and centralized planning system. Proponents of free market mechanism are in favor of this system as it produces goods according to the need of the people and there is adoption of efficient production techniques due to the existence of competition (Karl, 2007, p.43). The system is often supported as it solves the principal economic problems of a society in an efficient way (Samuelson, 2005, pp27). As there is least government intervention so policies are adjusted to suit the requirements of the economy. As a result one observes economic integration due to which there is foreign investment. If producers are endowed with latest technology then consumers also benefit by having greater access to various commodities. Increased competition and the fear of losing jobs always ensure good performance from the workers. As there is almost no government control, the decisions are quick and easily implemented (Ollman, n.d). Pitfalls of this system Advocates of free market mechanism speak in favor of this system on the basis of efficient allocation. However often it is seen that the free market fails to allocate goods efficiently. This situation is known as market failure. A reason for this failure is often attributed to asymmetric information. If such a situation occurs then it is often argued that government intervention is essential and the government needs to adopt a “paternalistic” view on the whole thing so as to ensure the future of the upcoming generations (Riley, n.d, p.159). It has also been argued by many that the investments accruing to a economy under free market mechanism are distorted. Here investments are directed in those sectors which are often not important for the economy. The conditions of workers under this system had often been under the scanner. Here the workers are exploited very badly and less wages are paid to them as remuneration. As workers are highly underpaid in this system there can be situations of over production as the workers don’t have sufficient money to buy the commodities. As machines is the basis of free market economy, there often unemployment because machines replace workers. As exploitation is quite rampant in this system one can see its impact on the society. The gap between the rich and the poor increases and as a result there is increasing inequality in the society. As a result of this corruption emerges in all sectors of the society and there is degradation of ecology. One can expect reduction of social benefits and welfare. As there is lack of government control, such economies are more vulnerable towards economic crisis (Ollman, n.d). The solution Free markets as well as command economies have their own pitfalls. It is not possible to gauge their relative importance or relevance on the basis of theoretical forms. A quick look at the performance of different economies had revealed the pros and cons of both the systems. The plight of Soviet Union under command economy had clearly exposed its drawbacks. The adoption of China’s open door policy took the nation to a great success. On the flip side the glaring disadvantages of market economy prevents one from adopting it in absolute terms. The solution under this situation would be adopting a system which has certain features common to both the systems. The most prominent name is of a mixed economy. A mixed economy embraces the principle of both market and command economy so as to give a result conducive to the economy. Interventionism is more than just interaction between government and market. If there is some amount of government intervention in key areas of the economy then it would ensure efficient production and distribution. Private entrepreneurs are always more interested in their profits and as a result the welfare of the masses are ignored. An effective government intervention would ensure the existence of a welfare state and it would also help in reducing the growing inequality in the society. The involvement of the government would serve to be the necessary stick to check the malpractices under free market mechanism (Ikeda, 1997, pp.31-38). Responsibilities The poor outcomes of the Soviet model and China’s initial performance had made the system of command economy very obsolete. Socialism today is a historical concept which was more common in the past. At present the only successful economy is China which has certain elements of socialism in it, for the rest it’s either a fully fledged market economy or mixed economy. The benefits of market economy cannot be completely ignored but the only major drawback in this system was its lack of responsibility. Externalities, income inequalities, and imperfections were the major drawback of this system and because of this effects were seen on the society as a whole. The existence of market imperfections in terms of monopoly and monopolistic competitions under market mechanism does not guarantee provision of optimal allocation and welfare. On ethical grounds the superiority of this system becomes very doubtful. It can be pointed out that if the market is allowed to function without any restriction then it does not ensure optimal returns. Operation of the market is due to its entities. Thus failure of the market to provide the best is due to the failure of the business. So often the lack of social responsibility of this system to meet the requirement of the society is attributed to the entities (Bhanumurthy & Krishna, n.d, p.52) Concluding remarks The transition from one particular thing to another is always difficult for people in all ages. The adoption of type of government or economic system is very vital for the economy as it builds of the economy and determines its relation with the other countries. The transition to market economy in England had witnessed a number of laws and policies but ultimately it was implemented. The adoption of Old and New Poor Laws were justified and criticized by different people. Considering the problems associated with command economy, it becomes an essential requirement to design the market economy in such a way so as to ensure smooth working of the economy. The question of social responsibility is very vital over here and one might come across problems in ensuring it. Thus acknowledging the importance of responsibility and the problems in ensuring it, it is essential to make changes to incorporate it. References Samuelson, P.A. (1980). Economics, New York: Tata McGraw-Hill Education. Polanyi, K. (1944). The Great Transformation, Boston: Beacon Press The Poor Law. (n.d), ELIZABETHAN-ERA, available at: http://www.elizabethan-era.org.uk/the-poor-law.htm (accessed on November 1, 2011) Tratter, W.I. (1999), From poor law to welfare state: a history of social welfare in America, New York: Simon and Schuster Skocpol, T. (1984), Vision and method in historical sociology, Cambridge: Cambridge University Press. Samuelson. (2005). Economics, New York: Tata McGraw-Hill Education. Karl, C. (2007), Principles Of Economics, 8/E, India: Pearson Education. Ollman, B. (n.d), Market Economy: Advantages and Disadvantages, NYU, available at: http://www.nyu.edu/projects/ollman/docs/china_speech2.php (accessed on November 1, 2011) Riley, G. (n.d). AQA A2 Economics Module 5 & 6 Digital Textbook, Boston: tutor2u Limited Ikeda, S. (1997). Dynamics of the mixed economy: toward a theory of interventionism, London: Routledge Lindau, J.D & Cheek, T. (1998). Market economics and political change: comparing China and Mexico, Maryland: Rowman & Littlefield Bhanumurthy & Krishna, (n.d). Politics, Ethics and Social Responsibility of Business, India: Pearson Education   Read More