Question

The core of most economics debates comes back to the three core questions that we are trying to answer (what to produce, how to produce and for whom to produce). Do you favor a laissez faire approach or government intervention? Why? How does the government approach impact economic growth in the long run?

Answer 1

The core of most economic debate does come back to the three question, and those questions are directly related to the market allocation of products (with the purpose of both consumption and production), resources, profit, etc. The magnitude/intensity of allocation of the elements by the market is measured as the efficiency of the market. There exists a 'dichotomy' among economists that whether the efficiency can be increased by government intervention or would it get worse due to it. But historically, it has been seen that markets can fail and do fail, and without government intervention, the recovery of the market would be quite slow. I do favor government intervention, but yes, up to some extent.

The laissez-faire approach to deal with the market is quite of an ideal scenario, where there are firms and consumers, along with their motive of profit maximization and utility maximization, respectively. Yet, the laissez-faire approach goes back to Adam Smith and other major economists, it has a major limitation. The subject economics describes the real economic events by theories, via a set of assumptions and proposes how would the system run in a 'perfect' environment. Of course, by assuming the perfection is kind of an invalid attempt to alter real situations, but it is necessary to abstract and explain the essence of how do things work. One may reduce the perfection and see what happened to the theory, and hence either update or eradicate it. The laissez-faire is such an assumption. In that environment, a market does not fail usually, and even if it does due to some exogenous factors, it recovers automatically in a spontaneous manner. The proposers of laissez-faire in macroeconomics state it as an essential feature of their approach and thereby saying that the government intervention would worsen the situation. One can refer to the arguments of monetarists for that. They argue something like that as our ability of forecasting is far from a certainty, an interference in an automatic recovery would more likely to induce the elements to react adversely. That is indeed true (refer OPEC's oil shock in the 70's), but only to some extent (refer to the recent crisis). The market does fail, even in laissez-faire in the real world, as the result of less intervention of government induces, even naturally, the problem of moral hazard and economic corruption.

The environmental economists have severely criticized the laissez-faire approach, and have deemed it as an 'unnecessary evil'. According to them, a huge unaccounted damage throughout the history has been done due to this laissez-faire, on the environment. They claim that the so-called market allocation doesn't care how much of forests are cut to produce house-furnitures, how much of land-water-soil-air is polluted due to industrial dumps, how much of the life in ecosystem is ruined to make profit, and there SHOULD be a responsibility and moral obligation towards these problems, otherwise life on earth would certainly be threaten. Apart from them, there are cases which do suggest that for a profit of the 'few', they exploited the 'many', in economic terms. A firm should seek profit, but should not induce moral hazard. The recent crisis, in a way, did show the necessity of the government intervention. The basic problem which seems is indeed corruption from both corporate and government's side.

The long-term economic growth has itself a debatable definition. As the mainstream economics would say that the long-term growth is a critical real GDP growth rate for a long period of time, there are others who advocate that the numbers such as GDP are far from abbreviating the actual well being of the people. According to them, the long-term growth should be measured by the indexes of the standard of living, human development, etc. In that case, government interventions are indeed very necessary for a stable long-term growth. But, in case of mainstream economics, the intervention of government is considered as a support/rescuer in times of crisis, otherwise, operate as a laissez-faire. A bit extreme case of government intervention termed as centrally planned economies faced a huge failure in the 90's (such as East Germany and USSR), and they are considered henceforth outdated and invalid for now. But the extreme case of laissez-faire is also seen as unstable due to either several debatable internal assumptions such as people are rational and have perfect knowledge of market, or ignorance of equity over efficiency and negative externalities.

Even in theoretical terms, it can be stated that sure the government might worsen the situation, but that is when their forecast is just the opposite of what is necessary for reality. We have indeed learned from many events in history, and yet not perfect, but are better at forecasting than the previous era. The market does recovers from market failures, but would recover better as well as faster if proper policies are employed by the government. Yet the government should not obstruct the functioning of the market, but it should act as soon the system seems to fail, either in terms of economic or in terms of the negative externality.