In the economic system of any country, the government is the authority governing the day to day transactions and dealings between individuals whether private or public. Other functions are enforcement of rules and regulations, overseeing the making and execution of contracts and setting of standards to be followed. To do this, resources are required hence collection of taxes. The functions aside, the government itself owns firms within the economy hence a player. The role played by the state/government has been under close support and criticism simultaneously.
In some countries, the government’s role is welcome whilst in others it detested. The main object of government in both scenarios though is the allocation of scarce resources and creating an environment suitable for such resources to be exploited. This is achieved through ensuring that law and order is maintained. External costs incurred by businesses that are not factored in the business transactions are also taken into account by the government. This is in order to protect them from exploitation which may otherwise lead to bankruptcy and collapse.
The government’s role shouldn’t be solely that of creation of a good environment for business via maintenance of law and order. Rather, it should go beyond this by being a key player in the economy. Law and order though facilitates stability as well as reduces corruption hence encouraging investment. Using the opportunity cost principle, the uses to which scarce resources can be put are many and the real costs are those which are forgone. These are incurred in cases where corruption is existent.
Examples of such costs according to Sowell include delay in performance of certain economic activities given an unviable corrupt economic environment this results to non-development of basic infrastructure that would have been used to carry out the economic activity. In turn, planned investments do not occur hence existing output levels are not increased due to lack of expansion. The final results are normally unemployment accompanied by brain drain as the environment is similarly not viable to work in. Simply put, higher corruption levels are accompanied by low economic growths and low per capita incomes.
Other effects of corruption are discrimination in the employment sector and profiling of workers. Contributing to slow economic growth are also long bureaucratic processes. All these contribute to driving away investors. Corruption doesn’t necessarily come in the form of direct bribes. It may also be in the form of nepotism and tribalism which is currently prevalent in most countries. The law being a set of rules and principles that are used in the day to day running of a country ought to have the following characteristics;- reliability; uniformity in application i.
e. they must portray a sense of fairness and equality; rigidity i. e. they should not change from time to time. Rigidity brings about stability. Countries with laws that have these characteristics are prone to boost investor confidence as well as encouraging skilled labor to immigrate into the country in search of job opportunities. Such skilled labor may not have been available locally. This set of rules and principles should be impartial but discriminatory at the same time. The discriminatory aspect of some laws has at times proven to boost economic growth.
However the statement holds only when the discriminating facet is known by the parties involved well in advance. If the discriminating nature of the law is known, the economic environment will be more stable as compared to where the justice system is discriminatory in interpretation and application of the law. The law may be discriminatory on the basis of aspects such as religion and race. However, if the economy grows, the growth will be felt across the board and not just by those for whom the law discriminates.
Even though some laws have discriminatory aspects, they should not in any way allow for the exploitation of one by another nor allow for the interference of one’s activities by another with malicious intentions. A country’s economy is majorly dependent on the existence of a government. Nonetheless, this dependability also takes into consideration the government’s effectiveness in law enforcement. Geographically, some regions within the same country will have laws being more enforced than others. However, extra costs incurred by businesses in ensuring that goods and services reach the consumers are always transferred to the same consumers.
This reduces demand due to high prices. Property Rights On property rights, focus should be placed not just on the owners of such but more so on the general effect the existence and exercise of such rights has on the economy. The exercise of property rights may result to economic effects which impact negatively on the populace as there maybe no single individual to blame. As a result, property rights should be closely monitored but even more emphasis ought to be placed on automatic self-monitoring by individuals as a solution.
The mere fact that the property rights do exist creates a sense of self-monitoring on the individual which is more effective and less costly as compared to government monitoring. This self-productivity results to increased productivity and lower commodity prices as there is less wastage. However, negligence may also result on the part of the property owners and class stratification. However, given that property rights do have a greater economic efficiency, the general population will have higher living standards when the economic growth that results trickles down.
However, restrictions such as setting of minimum standards and creation of Boards to oversee the use of certain property should be put in place. These will help prevent exploitation. Stringent laws need also be put into place by governments and respective authorities. In creation and application of restrictions to property rights, one has to have in mind that property rights do have intentions and effects. Economic incentives by the government do play a big role and such rights need to be looked at from the economic angle i. e. the incentives that are brought about by them.
One should also ask what the effects of changing them or completely doing without them are. Social order is a function of existence of laws, government institutions to ensure the maintenance of law and order and acknowledgement of such by the citizens. The degree of social order differs from one country to another as well as from one individual to another. It is the existence or inexistence of a social order and its level that determines how business dealings are conducted between individuals. Social order should be upheld in all aspects of government.
This may in turn extend to the rest of the community hence doing away with corruption thus bringing down transaction costs. If the social order is inexistent or at a low level, enterprises tend to be small scale. This translates to lower production and by the economies of scale, the end user experiences higher prices. A good social order thus attracts investment. The government can boost this by encouraging honesty within its administration, indirectly supporting or detesting cultures that are pro-honesty. The same can also be achieved via school curricula.
Another factor that can either undermine or develop the social order are the nature of a country’s law. However, the market has a way of creating its own social order. External costs and benefits do exist in business and they occur outside the parties that are part to an actual transaction. These are however not accounted for in the market place and it is for this reason that the government has to come in to make decisions regarding external costs and benefits via legislation and regulations. Some benefits are indivisible. They are either a whole or nothing at all.
To decide any aspect about them is thus better left to government. External costs on their part are felt either directly or indirectly by individuals. The individuals thus decide basing on how the external costs impact them and their activities. In countries with popularly elected governments, most of the decisions made by are not put into much economic consideration. Focus is actually mainly placed on making the people happy and not necessarily on economic improvement. Most of such decisions are political and not economically beneficial to the country.
CHAPTER 18: GOVERNMENT FINANCE Like any other enterprise whether profit making or non-profit making, resources are needed to enable a business e a continuing venture. On the part of the government, its spending aspect if a factor of revenue collection. Revenue is raised via tax collection. How this tax is collected greatly affects how much will in effect be collected as it impacts on the citizen’s view on taxation policies. Any change in taxation policy by the government will automatically result in behavioral change by the tax payer in terms of expenditure and savings.
This change is however in no scale predictable and may go at length to affect the performance of the economy at large. No rule can be said to be applied by government to predict this change. The net tax paid by an individual is a factor of the number of taxes that are applicable on a said person and their position economically. Value Added Tax (VAT) takes a bigger share from the poor than it does from the rich as spending on consumer goods makes up a greater percentage of the poor person’s budget whilst saving or re-investment makes up a greater percentage of the rich’s budget.
However, tax paid by individuals is a mixture of both regressive and progressive taxes. However, the official legal indicator of incidence of tax does not necessarily show who bears the incidence of tax. Before a government makes decisions on whether or not to increase a particular tax, factors to be considered are how the tax is collected. This determines whether the tax is being felt by the individual or not. Increasing or decreasing the tax may thus not necessarily result to behavioral change by the consumer. One way through which government raises income is through sale of bonds.
It is this level of sale of government bonds that determines the national debt. The impact the national debt will have on the economy is a dependent on what percentage it is of the country’s GDP. However, both GDP and national debt increase over time as a result of increased population size. The vice versa is also true. Sale of bonds is considered a future investment by the government and who bears the cost of the national debt is worth considering i. e. whether it is the government or the tax payer. To the government, accrued interest over time is one cost.
This interest may affect investor confidence both in the short and long term. As bonds are sold and re-sold over time, their interest rate has to be increased lest they lose their value. This however lowers investor confidence in the long run. The rise in government interest rates may bring about a ripple effect increase on other interest rates as investors look for money with which to purchase the bonds. Influence of government may however make product prices independent of their costs despite the above ripple effect they may have at the same time.
In an economy, there always are unmet needs which the government must satisfy. However resource distribution by government takes into account not the maximization of their use but rather merely re-distribution. It is this that explains why government may undertake projects that are not economically profitable or necessary as well as why some public utilities are offered at prices which are way below their actual market value or at no value at all. Spending by the government is mainly a factor of whether or not there is the need to spend whilst the principles behind such spending are outlined by the law.
Through its expenditure, the government is able to influence the economy’s net purchasing power. Increased government spending implies more money will be in the economy thus leaving more at the hands of households for spending on other commodities other than those for which the government has already paid for. Costs as a result of government spending can either be to the government or the economy. It should be clear who is bearing the cost and the nature of the cost. As utility varies from individual to individual, the desire to purchase due to price disparity can thus be controlled via price controls or subsidies.
The latter have however proven more fruitful than the former since subsidies transfer the total cost of an item to the entire population rather than letting a single individual to incur it. Here the cost is thus on the economy, not the government. From this, one can deduce that government finance comes in to bring a solution to the price-utility problem by creating an even bigger problem or rather shifting the cost from the government to the economy. The pattern of government expenditure is majorly a political function.
Projects that prove politically building are more likely to be undertaken. Any government has got its obligations and current and future expenditure make up the government’s obligations regarding expenditure. Future obligations may seem not that costly until it reaches a point where they must be incurred. Their costs are accounted for but not incurred until the need arises. Incentives can be either political or economical. Incentives such as government pensions are majorly dependent on the size of the working and the retired population. A good balance enables pension payment.
On the private side however, payment of insurance benefits is dependent on the currently existing subscribers to the insurance. CHAPTER 20: INTERNATIONAL TRADE Some have argued that in international trade, while one country gains, another loses. But both parties should be gaining in a way otherwise there wouldn’t be a reason to trade. A country may gain via for example economic growth. This has been the general effect of international trade. However, terms used in international trade such as trade deficit and surplus do not necessarily reflect a country’s economic wellness.
To determine this, one has to look past the figures involved in international trade. A country may have quite a number of reasons why it should or should not engage itself in international trade. Reasons for however outweigh those against. Those for include absolute advantage, comparative advantage and economies of scale. In terms of absolute advantage, one country can produce particular commodities at prices cheaper than those of another or products of a higher quality. This may encourage it to pursue international trade.
As for comparative advantage, the opportunity cost of one country A to produce a certain commodity at the expense of another is much lower than that of country B. Comparative advantage is thus all about efficiency of one country as compared to another. The costs forgone in producing a product should be lower and income generated from the production line opted for ought to be higher hence making them economically viable. The returns should also be in surplus enough for the country to purchase the commodity it forgo to produce.
In terms of economies of scale, some ventures are viable only if there is enough market to consume the output. Such markets can be created through exports of commodities hence maximizing advantages brought about due to economies of scale or large scale production. Apart from enabling countries to achieve economies of scale, international trade also facilitates countries to fully utilize their comparative and absolute advantages. However, economies of scale have also resulted in the downfall of some infant industries where protectionist policies are inexistent.
In as much as many countries may engage in international trade, some succeed whilst others do not. Reasons for the downfall of others may be the restrictions that exist in International Trade. These include emphasis that has been placed on efficiency of the production process. Another effect of such restrictions are collapse of domestic industries where protectionism does not exist. However international trade itself brings about government interference with trade due to policies such as protectionism while it may result to creation of monopolistic markets and unfair competition finally.
Arguments for International Trade restrictions Different arguments have been put forward for international trade to have restrictions. The high wage fallacy argues that commodities produced by highly paid workers cannot compete with those produced by low paid ones. This does not hold since the argument does not distinguish between wage rates and labor costs and between labor costs and total costs. Wage rates may therefore be higher yet the total costs are lower due to economies of scale hence higher profits. Restrictions may also exist so as to save jobs domestically.
However, just as free trade results to growth in the economies of all countries engaged simultaneously so do trade restrictions result to reduced economic growth or even reversed economic growth. Restricting trade thus does not result in increased employment. Rather, there will be less spending in the economy. The infant industry argument posits that local developing industries ought to be given time to grow to a level at which they can compete with other industries. However, survival of an industry is not a factor of its growth in terms of production and sales.
Political muscle plays a key role in determining the fate of an industry. The National defense argument tries to explain why countries opt to have suppliers of things that are essential for their own national survival lest the external supplier turn enemy. Examples of such commodities are ammunition. Last on the list of reasons for protectionism is the dumping argument which is however restricted given the uncertainties of determining production costs. Here economies of scale may come into play and a supplier selling his/her commodities at lower prices abroad may actually be mistaken for dumping.
These restrictions to trade may come in the form of tariffs which are taxes on imports and aim to raise their prices. The restrictions may also be in the form of import quotas which bring about uneven competition beside achieving the same objective of raising import prices. CHAPTER 21: INTERNATIONAL TRANSFERS OF WEALTH International wealth transfers may take the forms of either direct or indirect foreign investments or remittances from citizens whose domicile is abroad. Rich countries always tend to invest in fellow rich counties due to fear of not getting a return on their investment if done in a poor country.
Political and economic stability, corruption levels, level of honesty amongst the country’s populace as well as movement of capital within a said country’s economy are factors affecting the decision of whether to or not to invest. International trade takes into account only goods exchanged between countries leaving behind service output. It is for this that International trade has to be at a balance despite the fact that measures used in international trade may not be true reflectors of the trade.
An economy that has concentrated in service production rather than goods will tend to export more services and import more commodities. The decision of whether a trade deficit is harmful or not is best done by comparing the deficit with the performance of the whole economy. As a result, the Balance of Payment measure is a better reflector of international trade than the Balance of Payments. Economic transactions are not zero-sum activities where only the buyer and the seller gain, rather it is a wealth creator to both the parties directly involved and to the “spectators.
” Immigration and emigration which are key factors in international trade result to knowledge transfer, new ideas and businesses being created, job creation amongst others. However, on the dark side of the same are diseases, brain drain, increase in crime, collapsing economies and terrorism. Imperialism which implies the domination and exploitation of one country by another is also a means of wealth transfer. However, international investments have been argued to be equal to imperial looting as the subject country loses more than it gains.
This explains the class strata of first, second and third world countries. Ceteris paribus, imperialism is more of a moral than an economic argument. Foreign aid, which entails wealth transfer from richer to poorer countries or from one government to another, may or may not be used for intended purposes. The use of foreign aid in government investments has more often than not resulted to mismanagement due to corruption. Some foreign aid comes with strings attached in the form of Structural Adjustment Programs (SAPs). Such aid has proven to deter rather than encourage development.
World over, the inexistence of a body to oversee the giving of aid to poorer countries has resulted to exploitation of the recipient. Aid may be in the form of cash grants or goods and services to the recipient country. However, the under-utilization of most of the resources in the recipient country is what leads it to have a need for foreign aid. CHAPTER 23: MYTHS ABOUT MARKETS The name “market” in itself is a myth as a market is viewed as a thing rather than the people in the market themselves who are engaging in business activity. This has led to rigidity of the market.
In a market, variation of prices from one seller to another is always notable. This, economists would say defy the laws of supply and demand but in actual sense they do not. Rather, supply and demand should be looked at from the point of view of different consumers. Each consumer will have a different of demand and supply curve intersections due to utility. Prices in the market ought to be ‘affordable’ and ‘reasonable’ is a notion that is not realistic. It implies that prices should be independent of the market forces of demand and supply as well as production cost but should instead favor the purchasing power of the consumer.
The third myth about markets is that some firms may tend to sell their products at below normal prices so as to drive away competition. This myth has not been proven though hence is not that realistic. Fourth is the issue of branding. Despite its advantages of making suppliers and manufacturers to emphasize on quality, the products being sold are more or less the same. What will actually be different is the pricing products or services with brand names that are widely known will definitely cost or charge more. A business, no matter how small is linked to the economy as a whole.
Te role different enterprises play in the economy is a factor of whether they are classified as profit and loss or as non-profit making enterprises. However, there exist differences between the two in that profit and loss organizations will always tend to emphasize on quality in order to maximize profits whilst in non-profit making organizations, the customers themselves will not be in a position to emphasize on quality since they are already paying far less than the true value of the commodity or service they are getting.
It is the nature of the organization that finally determines what name will be given to the extra amounts remaining after costs as well as how it will be used. In some its called profit whilst in others it is revenue. The ‘Trickle down theory|; is more of a political than an economic theory. The theory posits that those opposed to equality in resource distribution tend to believe that resources should be bestowed on the rich so that it may in effect trickle down to the rest of the populace. The theory is a myth since economically one has to spend first so as to make an income.
This spending comes in the form of say purchase of goods and services for sale as well as payments made for their delivery. The economic reality is thus exactly the opposite of the ‘Trickle Down effect. ” CHAPTER 24: NON-ECONOMIC VALUES Economics is not a value in itself. Rather it compares values. The market on its part is a reflector of the people’s attitudes and actions as well as beliefs. The issue of the market with respect to moral and social values arises when the market is looked at from the angle of the impact it has on such issues.
The society’s moral standards will determine how transactions are conducted in the market. Non-economic values in the market tend to introduce morality into business by defining words such as greed alongside maximization of profit for example and others. These non-economic values however put aside economic concepts like the laws of demand and supply that are used in price determination. These non-economic values are also one-sided since they tend to lean on the consumer’s side mostly whilst forgoing the seller’s side. However, greed cannot be termed to be a product of any particular economic system.
Rather it is an intricate trait in all humans and which all have to cope with. The difference however comes with regard to how this greed manifests itself in the different economic systems and how it is controlled. The term greed is however neither adequate or fair in explaining the desire of the seller to make as much profit as possible out of the buyer nor the wish of the buyer to purchase the product with the highest quality at the lowest price. Greed is thus a two way concept which only looks at who is on the gaining end.
Exploitation is another term that crops up whenever non-market values are mentioned. It can simply be said to be that which is beyond the acceptable as per the society’s moral standards. Exploitation is thus based on emotion and not the facts existing on the real world. The disparity between greed and exploitation comes in that whilst the former occurs in almost all types of economic systems, exploitation mostly occurs in monopolistic markets where no free competition exists and the buyer has no wide choice of commodities given the factor of the sole supplier.
To regulate the above, the government may put in place regulations such as trade barriers, tariffs and quotas as well as value added tax or corporate taxes. Taxation by the government may however be considered as both greed and exploitation. Greed since even the poorest of persons in the economy pays taxes whether in the form of VAT or income tax and exploitation as the government enjoys a monopoly of taxing the people yet one may argue that the quality of services is not guaranteed. The market however takes into consideration many factors before pricing decisions are made.
At times the employer for instance may be at the receiving end when the employee has a greater bargaining power or where the demand for services he/she can render is higher than what the market can supply. Here, both greed and exploitation come into play. In as much as governments try to control or maintain at a low the levels of exploitation and greed, the measures put in place might actually serve to make even worse the life of the consumers in cases where exploitation and greed did not exist before.
The principle of fairness when looked at from the non-market values point of view carries with it two assumptions. First is that all individuals are playing by the same rules and secondly that all players have the same potential. However, these two may not hold as different individuals have different desires, priorities and thus derive different levels of utility from the same activity, commodity or service. Fairness doe not have a specific definition hence it is majorly those in power who are left to define what is and what is not fair.
However, vested interests may underlie the making of such decision. Some groups may also be completely ignored in deciding what fairness is. Economics being majorly concerned with the distribution of resources and values tends to critic “unmet needs” of the society. Here, the decision of whether a government should carry out a project or not is a function of what has to be sacrificed in order to satisfy the unmet need. However, the existence or identification of an unmet need is not a justification of it to be met. CHAPTER 25: PARTING THOUGHTS
The economic concepts and principles cannot all be listed given the imaginative nature of the human mind. However, in as much as new concepts and principles are being developed whilst older ones continue to be refined and refuted, the bottom line should be that they all ought to divorce from emotions which vary from human being to human being. Rather there ought to be basic concepts and principles that are followed by both new and old economic ideas. The above fallacies ought to carry precision in the use of words as well as clarity in order to ensure their true or intended ideology is achieved.
A common feature of most economic fallacies is that they focus on the initial consequences of particular policies and not the long term effects of the same. Confusion thus results as focus is placed not on the benefits or effects of policies but rather on the objectives of such policies. The importance of economic principles supersedes their use in only economic factors. If keenly looked at, most things do have economic aspects in which economic principles ca be applied.
Instead of focusing on the objectives of goals, of main concern should be the activities that will be pursued t achieve such goals, what the particular legislation or goal encourages and discourages, the regulations that will follow the attainment of the goal, the long term effects of activities aimed towards attaining the goal. Last but not least, we ought to look at similar goals that were attained in the past and the impact they had. In as much as economics carries many fallacies, a distinction should be made between what is practical and what is indeed a fallacy.