Intervention the Pros and Cons

¶ … Intervention

The Pros and Cons of Central Economic Planning

The recent economic downturn and several preceding and attendant scandals in the financial world have re-sharpened public and political focus on issues of regulation in industry and of the economy as a whole as a means of ensuring growth and providing for stability. There are many different schools of though on the issue, which is not unexpected or even detrimental given the complexities and uncertainties of the economic system, but it can make it difficult to engage in a fair yet comprehensive discussion of the topic. It has been claimed that central economic planning and extensive government intervention can best promote rapid economic growth, efficiency, and market stability, but this is at best and oversimplification and at worst is simply wrong, at least in part. Rapid growth is almost certainly not served by heavy government regulation, but the other two issues -- efficiency and stability -- are more complex. Depending on how one defines these terms, this statement can be seen as far more or far less an accurate assessment of the national and global economies.

A simple application of certain microeconomic principles will help illuminate the validity of this assessment, and will demonstrate one of the reasons for the level of disparity in the conclusions drawn by different economic theorists and politicians when addressing the issue of government regulation. The very nature of many microeconomic theories and terms depends on the freedom of competitive markets, which is by definition limited by government intervention. This does not mean that the effects of regulation will be all bad according to the principles of a free market, but it does mean they will not be unequivocally good.

First, when it comes to economic growth, regulation can quite clearly be seen as a depressive force. The functions of supply and demand operate in such a way as to find the highest potential value for both the consumer and the manufacturer/producer/distributor. An item or service is sold at a price that provides the largest benefit to the largest number of consumers while maximizing profits for the company providing the good or service. Government intervention in this arrangement, such as through a regulation of prices, can have the effect of reducing profit potential for the producing entity, ultimately slowing any growth un the company's offerings and thus reducing long-term value provided to consumers. In some industries such as power generation and other public infrastructure systems such regulation is needed, but these are sectors in which the government is purposefully and consciously controlling economic growth, not ensuring its optimum rapid expansion.

This leads directly to the issue of efficiency, which can be seen quite clearly from the above description to be harmed by government intervention in the short-term; by not allowing the market to find appropriate price point in the rapid manner of supply and demand curves, efficiency is eroded. This is where things get complicated, however, and where a true definition of terms must occur. The concept of efficiency itself is fairly straightforward, but in this context long-term and short-term efficiency must be distinguished. Though short-term efficiency is diminished by government intervention, this is not necessarily the case when major detrimental fluctuations over the long-term are controlled.

It is in the area of market stability that the theoretical quandary of the efficiency issue can be solved. Government regulation quite directly and purposefully, in almost all circumstances, increases market stabilization by controlling prices, providing subsidies, and in some instances controlling the levels of production or allowances of consumption (though rationing days have not been seen in this country for generations). This ensures that a regular and dependable but artificially (usually) limited supply of a particular item or class of items will be available, but does not allow for rapid growth or market fluctuations as reactions to shifting needs, demands, or supply chain issues. If properly conducted, some measure of government regulation in industry can create much greater efficiency in the long-term, because planning can occur on a more certain level, fewer risks will be incurred or even possible, and each expenditure can be made with greater security and a fuller understanding of the true value being created and traded within the market system as it would proceed.