Does Government Intervention Help Promote Economic Stability and Growth?

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Does Government intervention help promote economic stability and growth?

Economic stability I will define as a phase of steady control for an economy. Growth is a rise in the productive capacity of an economy. Steady growth is arguably the main over-arching economic objective when looking at macroeconomics. Government intervention is defined by actions on the part of government that affect any economic activity.

The question has implications; in a modern context a society without state intervention is almost non-existent. I wish to explore whether it is useful and if so to what extent. Because the basic economic problem in deciding how to allocate scarce resources affects all economies, some vastly different approaches and perspectives have formed in order to find a solution. The question is highly contentious and has no definitive answer. Each perspective has its own advantages and disadvantages.

The first perspective is often classed as a ‘mixed economy’ approach, which encompasses state capitalism and other similar systems. There are different types of mixed economies. China and Russia are both advocates of state capitalism – a form of capitalism that relies on the intervention of the state to boost and support certain industries. Over the past three decades, China’s GDP has grown at an average rate of “9.5%” according to the Economist in a special report. (1) Not only is it successful on a macroeconomic scale, it can also show success on a microeconomic scale: three Chinese state owned companies rank among the world’s ten biggest companies by revenue, and the top 129 Chinese state owned enterprises in 2010 had net profits of $151 billion, according to the same report. It is also argued that it makes it “easier for emerging countries to learn from the rest of the world.” This system does also have issues, Josh Lerner, a professor at Harvard Business School, describes state-sponsored innovation as a “boulevard of broken dreams.” This is due to the problems with productivity and innovation within state owned enterprises and the general support of the state. As a source Mr. Lerner is both credible and unreliable, Harvard business school is ranked amongst the top business universities by many which gives him a reputation, at Harvard Mr. Lerner would have easier access to information and this makes him reliable, however, he may have a vested interest in opposing state capitalism because his US roots. As a capitalist country it would be expected that he’d oppose other systems. This is less likely amongst prestigious liberal universities like Harvard where differences in academic opinion are welcomed. Government intervention particularly in state capitalism can lead to extremely competitive and contestable markets. It can result in private companies simply not being able to compete with state owned companies, as the Economist puts it: “China’s ability to make huge strategic investments, […] puts private companies at a severe disadvantage.” Because there is typically less internal regulation in state owned company’s, productivity is often lower, consumer satisfaction is less valued therefore risks to improve are rarer. Even in more capitalist economies if firms are bailed out and cushioned with state support then unsafe risks become more frequent. This has dire effects, as illustrated by the recent global recession in which credit was unwisely traded, which stunted growth and made the global economy volatile. State capitalism seems to promote economic stability, and propel growth, but keep the economy too stable by choking innovation and productivity, and propelling growth too far to create monopolies.

The Economist as a source is generally reliable, however it must be noted that its alignment is against state capitalism; they are advocates of economic liberalism. According to a former editor Bill Emmot “the Economist's philosophy has always been liberal, not conservative,” (2). As a generally balanced paper...
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