Government intervention in the economy

GOVERNMENT = state administration represented by:
parliament,
ministries,
institutions that represent army, police, public health service etc.,
state-owned enterprises.
What do we mean by „government”?
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What, how and for whom is produced in the economy may be determined by:
market,
government,
both.
Basically government intervenes because of so called market failure.
Market vs. government
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MARKET = arrangement through which buyers and sellers meet or communicate in order to trade goods or services.
What do we mean by „market”?
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„Invisible hand of market”…
Own interest leads to individual and national wealth.
Market is a self-regulating mechanism. The mechanism leads scarce resources to their best uses.
„By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it”.
Adam Smith, „The Wealth of Nations”
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Government can intervene in markets.
…and „visible hand of government”
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What should the government do and for what reason?
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Government as a guard
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Government as a monopolist punisher
Monopoly = there is only one supplier of a commodity
Monopolist may take unjustified advantage of its dominant market position.
To protect competition government monitors the operation of firms suspected of monopolistic practices (e.g. Office of Competition and Consumer Protection in Poland).
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Government on the war with economic cycles
Fiscal policy:
taxes
expenditures
Monetary policy (?):
amount of money in circulation
interest rates
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Goods that should be promoted (eg. vaccine).
Goods that should be discrimined (eg. alcohol).
Government affects the allocation of resources
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Liberals:
they believe in markets
everyone is responsible for one’s fate
State control believers:
they believe in government as an economic player
the division of income must be controlled by government
Liberals vs. state control believers
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Free market:
solely private property rights
market controlls the allocation of resources
example: West-European economies in w XIX century
Mixed:
not only private, but also public property rights
allocation of resources is controlled not only by market, but also by government
example: Polish economy at the moment
State-controlled:
public property rights
allocation of resources is controlled by government
example: Polish economy under comunism
Types of economies
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History of government intervention
in a nutshell
Government spending as % of NI
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There are significantly liberalised mixed eonomies with small share of government (eg. USA).
There are also significantly „tutelary” mixed economies (eg. Sweden).
Both may succeed.
World map of economic freedom
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Important role of government, however not in the social sphere (economic stewardship – yes, tutelage – no).
Third model – far-east model
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Index published in „Economic Freedom of the World” report (Fraser Institute).
Index of Economic Freedom (Heritage Foundation and Wall Street Journal).
In both cases Poland took places that oscillate around 65 in the last few years.
The measurement of economic freedom
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Hongkong
Singapur
Australia
Switzerland
New Zealand
Index of Economic Freedom – top 5
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A bit about the way state-control is executed: democracy and election
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State-control is executed by those who were elected.
Those who were elected (agents) may behave in the way that is not in the best interest of their principals (agency conflict).
Principal and agent
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