One of the most controversial disputes still present among economists is the importance and extent of governmental intervention in the economy. Pro-capitalism scientists state that such interventions should be eliminated and believe that the forces of the free market can provide natural and timely economic regulations. They criticize top-down interventions mainly for disorganized allocation of resources, for the lack of “harmony” and thus negative long-term consequences. Nevertheless, some admirers of centrally planned economies argue that government intervention is critical, at least in such fields as public goods, monopoly power, and externalities. Despite some short-term benefits, governmental interventions usually provide negative impacts on the economy.
John Keynes believed that the economic policy could be implemented only in a situation of disequilibrium, and when the aggregate demand is low (Sowell 2008). It means that the best “natural” condition of the economy is when it self-regulates, but the government should apply new policies to intervene at the moments when market forces are not able to stabilize the economy. Von Mises (2006), states that the public and politics usually see government economic interventions as a “solution” to the issue, but in reality, it brings about chaotic and insufficient conditions. The main requirement for successful intervention is economically devised actions that should be finished in time. According to Gwartney, Stroup R. L., and Stroup R. (1993), the central planning approach should be avoided because it always spoiled by political considerations of legislators. It leads to insufficient direct investments and subsidies, which hamper economic progress.
Government intervention is currently welcomed only in cases of recessions when the government uses expansionary policy to reduce taxes and increase the money supply in order to enhance economic growth. Another issues authorities can target with particular policies are negative externalities, monopoly regulation, and public goods. For instance, governmental coordination of the production of public goods is spotted to be often better than market one (Gwartney, Stroup R. L., and Stroup R. 1993).
Public goods are non-rivalrous and non-excludable, so they usually are underproduced, as the producer does not have enough motivation to bear all the costs (Sowell 2008). Hence, some economists believe that the government has to tax inhabitants in order to utilize revenues in public goods production. Nevertheless, private actors are found to supply society with public goods often, but if they perceive the project to be a failure, they will be reluctant to commit money. That is why the optimal approach should require a public provision (Sowell 2008). It is difficult for governments to define how many public goods should be produced because of the absence of a mechanism to prevent overprovision. Nevertheless, the number should be determined by demand. For instance, when statistics tell that fires occur more often than before, the city should get more fire tracks.
According to Lee (1999), politicians tend to ignore diffused costs, so the interventions driven by politics lead to wealth-destroying decisions. The rent-seeking is legal theft, which is very wasteful to society because people spend their resources to protect themselves instead of sufficiently allocate them (Foundation for Economic Education 2011). In order to control government projects, the monitoring and transparency are needed in an implementation and bidding stages, the rent-seekers should be legally punished and loopholes closed. Moreover, special oversight institutions should operate to hinder corruption and avoid rent-seeking.
To conclude, government interventions usually end up bringing an adverse impact on the economy. Such negative effects are related to pressure group interests, government failure, and corruption. The government should intervene in the market in case of its failure. The government should control public goods production if the market forces underproduce it in numbers that are defined by demand. Transparency and oversight institutions are needed to control governmental interventions.
References
Foundation for Economic Education. 2011. “Public Choice Economics with Ivan Pongracic.” YouTube video. Web.
Gwartney, James D., Richard Lee Stroup, and Richard Stroup. 1993. What everyone should know about economics and prosperity. Vancouver: The Fraser Institute.
Lee, Dwight R. 1999. “Costs Should Be Revealed, Not Concealed.”FEE. Web.
Sowell, Thomas. 2008. Applied economics: Thinking beyond stage one. New York: Basic Books.
Von Mises, Ludwig. 2006. Economic policy: Thoughts for today and tomorrow. Auburn: Ludwig von Mises Institute.