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A greater role of the government in the economy such as increased taxation on the rich can reduce inequality. Inflation and unemployment are usually inversely proportional in most economies, i.e., increase of money supply through deficit financing reduces unemployment but increases inflation while tight monetary policies reduce inflation but increase unemployment. According to a number of analysts, a major cause of terrorism in the world is an acute sense of deprivation among a large section of the population. Economic measures can, arguably prove more effective in rooting out terrorism than military action.
Part C-Theory
What, How and for Whom to Produce:
In 'free market economies' decentralized decision making by individuals and firms based on consumers' desires (which determine the price of goods) and the profit motive determine what goods are produced and in what quantities. For example, consumers in the present age value automobiles and the skills of auto mechanics more than horse-drawn carriages or blacksmiths, so they are likely to spend their money to buy cars and pay auto mechanics for their services rather than spend their money on horse-drawn carriages and the services of blacksmiths. Hence firms are likely to produce automobiles instead of horse-drawn carriages and people are likely to become mechanics rather than black smiths. (O'Connor and Faille, 2000) How goods are produced is decided by the firms basing their decision on increased efficiency to cut costs; the 'for whom' decision is largely governed by household...
The government dictates how resources are to be utilized to satisfy society's needs and also controls the wages and prices.
Most economists argue that free market economies are superior to controlled economies because free markets are more efficient; they encourage individual responsibility for decisions; the profit motive provides the strongest incentive to individuals and firms to allocate resources for their most productive use and to produce goods and services that the public wants, using the most efficient means of production. Controlled economies, contrastingly, suffer from inefficiency as centralized decisions about production and prices create artificial distortions in the economy and the lack of profit motive creates lethargy.
References
Free Market Economy" (2003). Article in Microsoft Encarta Encyclopedia. CD Rom Version, 2003.
O'Connor, D.E. & Faille, C. (2000). Basic Economic Principles: A Guide for Students. Westport, CT: Greenwood Press.
The Rural Poverty Trap." (2004). Oxfam Briefing Paper # 59. [Available online] Accessed on January 26, 2005 at http://www.maketradefair.com/en/assets/bp59_The_Rural_Poverty_Trap.pdf
According to FAO statistics more than 900 million people live on less than $1 a day in the rural areas of the developing world (The Rural Poverty Trap, 2004)
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