Question

In: Economics

Should the market system be allowed to solve the problem itself and why?

Should the market system be allowed to solve the problem itself and why?

Solutions

Expert Solution

According to the mainstream economics i.e. classical and neoclassical, market outcomes are efficient in a free capitalistic market economy. The market works the best, when it's left free. In persuance of Adam Smith, everyone acts according to their own self interest which gives optimal quantity of output, employment, consumption etc. Any deviation of the economy from the track, the free market is self-adjusting in necessary variables to ensure the economy with full employment equilibrium level of outputs. It's only when market deviates from optimal path, Keynes argued in favour of government intervention to help the economy to get back to its optimal level through appropriate policy intervention. The great depression, energy crisis 1973, the great recession 2008 etc are the reality which disapproved the Idea that free market is always efficient, and supported the idea of time to time necessary policy intervention given the business cycle situation of the free market economy.


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