YD Ahn
June 2008
Revised 2012
Market Economy and the Government
Modus Operandi of the Market
Self-interest ⇒
Desire
for wealth ⇒
Competition
for resources ⇒
Innovation
to win in the competition ⇒
National
economic growth and development ⇒
Betterment
of the human life all through the world
It is not from the
benevolence of the butcher, the brewer, or the baker, that we expect our
dinner, but from their regard to their own interest. We address ourselves, not
to their humanity but to their self-love, and never talk to them of our own
necessities but of their advantages. (A. Smith. The Wealth of Nations, 1776; Bk I, Ch. II)
Elements in a Free-market Economy
1)
Freedom to choose (aka voluntary exchange)
2)
Purposeive rules of the game
- Fair trade and competition
- Property right
3)
Rule of law
John
Locke "No liberty without law."
Immanuel Kant "Man is free if he needs to obey no one but the laws."
Participants in the Market Economy
1) Context builder
- Institutions (rules of the game)
- Infrastructure (the playing ground)
- Stability of the environment
2)
Players
- Firms
- Households (Individuals)
- (The government)
3) Manager: The resource allocator
- ?
4)
Umpire
⇒ Role division
- The private sector:
- The government:
Market Failures
1)
Public goods
2)
Externalities
3)
Imperfect competition
4)
Information asymmetry
Roles of the Government in a Nutshell
1)
Context builder
2) Umpire (⇒ rule of law)
3) Prevention of market failures
On
true meaning of "free"
Although many
remember Smith today mainly for his brilliant insight into how market forces
could support a self-organizing division of labor—the invisible hand—he
was anything but a laissez-faire ideologue. Smith spends much of
Book V of The Wealth of
Nations explaining in detail
why the state has powerful responsibilities regarding defense, justice,
infrastructure, and education, areas in which collective action is required to
complement, or substitute for, private-market forces. (J. Sachs. The End of Poverty, 2005, p.
348)
Mainly what is
required for rapid economic growth is (as Smith himself put it as a young man)
"peace, low taxes and a tolerable administration of justice." (D.
Warsh. Knowledge and Wealth of
Nations, 2006, p. 45)
⇒ Friedrich
A. Hayek [Laissez-faire a misnomer.] (Road to Serfdom, 1994)
Economic Policies
1)
Macroscopic: As the context builder
- Three objectives: stability in employment, price and balance of payments
- Three means: monetary, fiscal and FX intervention
2)
Microscopic: as the manager (or player sometimes)
- Industrial policy
- Trade policy
- Financial
policy
- Regional development policy
- Equal employment opportunity policy
- And You name it .
