ECO 203 Principles of Macro Economics
My Understanding of Market Economy
Market economy began to develop much earlier than Smith wrote his “Wealth of Nations”. Even in biblical stories, people were trading among each other and self-interest was the key factor of those economic relationships. However, industrial revolution has changed the way of the development of the economy and overall situation in the market place. Today, wealth can be produced without any difficulties but there are some challenges in distribution of that wealth among nations. Capitalism is not able to distribute its wealth wisely but it distributes its resources very well. Another (not economic) argument which justifies market economy is the role self-freedom. Market economy regulates economic relationships without forcing people. Due to high competitiveness in the market economy, the quality of goods and services are always in the high level. Therefore, productivity of employees and workers is also increasing. However, new technologies have caused the level of unemployment rate to go up. Economic situation has changed a lot for last few decades and market economy does not fit all the requirements of the changing world. People create their well-being by themselves and labor is the key factor in creating it. Socialism, especially during the Soviet Union, was based on labor but capitalism is based on self-interest and money. If self-interest is vice of human being, money is evil. Obviously, market economy is not able to eliminate unemployment rate. For example, according to David Manuel (2012), current unemployment rate situation in the United States is 8.2% and 20 years ago in 1982 it was 10.8% (Manuel, 2012). In contrast, Paul Gregory and Irwin Collier (1988) claimed, in 1930’s the Soviet Union was able to liquidate unemployment rate (Gregory & Collier, 1988). We have just looked at previous years but if we consider our days, we will find out that unemployment rate will be increasing even more and partly because of new technologies. The easiest example which illustrates replacement of people by machines is current situation in the grocery stores. Today, the one can be easily served by machines and stores do not need a bunch of cashiers anymore. Business owners do not want to pay more, when they are able to make their costs lower and generate more profit. Another problem of market capitalism is monopoly. Competition regulates many economic relationships but some of the industries of the economy can be monopolized. Monopoly reduces competition and takes control over prices. Only few monopolistic players share market. Now, we are again coming back to the question of unequal distribution of wealth among people. Income is distributed unequally and it divides the society in different social classes (Fedotova, 2011). Monopolistic businesses are directed to satisfy consumer needs and get as much profit as possible but they do not care about communal needs. In such circumstances it harms the economic situation of the country as whole. Existing unemployment rate and overproduction will cause decline in the economy. Some kind of war can fix the situation because people would be employed and the economy would start grow. Even taxation system is not perfect. If we remember Laffer and his curve and the theory of “fairness”, we can conclude that in order to keep high revenue, government would not increase taxes rate (Mankiw & Taylor, 2006). Then, rich will get rich and monopolistic business will keep growing. Government does not have a big impact on these processes because its function is a little bit different here. Today, government regulates more social relationships than economic relationships. Its function has changed for the last few centuries because today most of the economies in the world became more liberal. However, the government still has to control some of the businesses and therefore the term...