Question

If all forms of economic organization (markets, firms, government) are more or less failures how do we choose one over the other? By what criteria can we say that an organizational option “fails least”?

Answer 1

Government, firms and markets are indispensible constituents of an economy. Economy may collapse due to many factors such as global recession, political instability, financial bankruptcy.   Though it is very rare situation when three pillars of an economic organization i.e., firms, markets and government fails. In such scenario, government of a country should play major role to revive both firms and domestic market. When there is continuous rise in inflation rate and market demand is all time low due to poor show of core sectors, falling employment rate and natural calamities such as drought, cyclone and flood, government should take corrective steps such as asking central bank to revise key interest rates of lending, providing tax incentives to boost core sectors. Furthermore, government can also levy surcharge on luxury items such as luxury cars to raise emergency funds for natural calamity.

Next role is for firms who can use government incentives for business diversification, expansion and process upgradation. Moreover, business organizations should also utilize tax savings in job creation and reduction in price of products and services that will ultimately raise economic growth, standard of living of people and market demand. When government don’t have sufficient funds for public expenditure, private investment becomes necessary in financing infrastructure projects, health and rural development programs of the government. The situation is mostly prevalent in developing countries. In a developing economy, government do not have sufficient revenue and it also has huge debt burden and import bills.

Market behaviour is dependent on government policies, consumer demand and organizational structure. Therefore, market forces i.e., demand and supply do not have direct role in managing government and firms.

When economy is in full employment state, government have zero or less fiscal deficit, inflation rate is constant and there is equilibrium in demand and supply situation in the market, we can say an organizational option “fails least”.