¶ … Global Economy Crisis (2008) for U.S. Economy
The economic crisis that was recently witnessed around the world including the United States and the various efforts that were made by the various governments in order to bring some stability to their economies, have raised questions on the strengths of free-market system and what informs interventions by the state. This paper's objective is to put into perspective the debate on interventions by the government and free-market efficiency. The paper also seeks to make a case for the need for regulating financial institutions so that economies are more stable (Aikins, 2009).
The economic crisis raised several questions on the place of the interventions states make in stabilizing economies as well as the strengths and weaknesses of the free market system. A lot of debate has been going on in this area. At the height of the crisis in 2008, various governments of industrialized countries, in fear that the situation may escalate further, took serious measures to ensure that the financial institutions that were facing financial turmoil in their nations did not collapse. The U.S. was at the forefront and made interventions to a scale that could be equated to the ones seen during the great depression (Aikins 2009).
Market Society and Laissez-faire Economies
The theory of laissez-faire economics is based on the model that production, be they of goods or services, is governed and controlled by the consumers who are deemed to be rational in the choices they make. An idealized competitive economy is characterized by self-regulation, free flow and availability of information as well as the revelation of preferences and exclusion. These factors of revelation of preferences, and assuming that individuals are rational in meeting their preferences, constitute what consumer sovereignty is based on. Only exclusivity when it comes to ownership and use of property can ensure the transfer of property and hinder people using goods and services they have not paid for (Aikins 2009).
The liberal self-regulating state of the 19th century lead to the emergence of 'market society' (Polanyi 1957, 250). The liberal state stood for influencers who were behind market focused institutions. When World War I ended, embedded liberalism replaced classical liberalism and market society. Embedded liberalism was focused on employment, growth and redistribution and was grounded on socialism (Ruggie 1983; Polanyi 1957). The need for the state to intervene in macroeconomics was reinforced during the great depression. The economy stagnating made it urgent that states make various interventions to guard against loss of employment (Gallarotti 2000). As Marx had predicted, in their efforts to protect their capitalist states from collapsing, the states adopted policies that they were against that encouraged the use of resources of other producers to better the position of other people so as to promote equity in the society (Aikins 2009).
Keynesian Model of Macroeconomics
Interventionist policies that started following World War I was intellectually legitimized by Keynesian Revolution which became popular during the period the great depression was ending. The war had taught the capitalist societies that a capitalist economy's crisis could be avoided through extensive public expenditure. John Maynard Keynes theorized later on what lessons had been drawn by the capitalist state (Aikins 2009).
Keynes had the belief that the goal of state intervention was complimenting market forces so as to achieve high economic activity levels as well as full employment therefore enhancing the productivity of the liberal market (Kethineni 1991). As a way of counteracting the reducing demand, Keynes made the proposal that governments increase their public works expenditure, especially on power projects, hospitals, roads, schools, etc. (Brown 1984). Most Western nations adopting the views of Keynan sought to achieve both goals of social freedom and justice (Mishra 2001). The measures taken ensured the stability of the economy and helped the economy grow (Aikins 2009).
A key argument in Keynesian theory of macroeconomics is nations using fiscal policy in countering recession by increasing government spending or lowering taxes so as to increase consumer spending. This means that governments can take various measures to alter demand in the market. The problem with these interventions is their vulnerability to political motives, and so, it is difficult to regulate (Aikins 2009).
Policy Responses
The financial crisis had serious administrative and policy implications as far as sound governance and economic and financial system is concerned. Every nation aims at making decisions that advances its needs and makes it achieve its goals. As Lehne (2006) argues, a society puts up political institutions that construct...
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