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Is laissez-faire economic policy a relic of the past? Is constant intervention by governments and fiscal stimulus a necessity now?

SHREYA KHASTAGIR SCMHRD, Pune

"It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest," - Adam Smith. This idea reflects the concept that each person when works for his/her own benefit inadvertently helps to create benefit for all. This can only be done by creating an environment for free trade and free from any government intervention which can promote individuals and firms to maximize their returns by efficient utilization of resources. This concept of laissezfaire, "leave it alone, came into prominence with the advent of political and economic liberalism in Europe. As long as markets are free and competitive, the actions of private individuals, motivated by self-interest, would work together for the greater good of society. For past two centuries, two economic principles and policies have dominated the political debate, one being social democracy, which favours government intervention, and the other being liberalism, favouring laissez-faire. In general, liberals hold laissez-faire to be the key to economic growth, prosperity, and rising standards of living. Conservatives, on the other hand, favour regulation as a necessary means to achieve social justice, and to protect the weak from being quashed by the strong. In the modern world today, some forms of government intervention are required even in laissez-faire to establish the ground rules for free enterprise. The role of government in todays world cannot be eliminated even in countries which may seem to follow the policy of Laissez-faire but the extents to which these government policies have played their roles in such countries have differed. The main aim of government regulations and checks is to ensure that Capitalists, which follow the Laissez-faire concept, does not have unchecked power over the weaker sections of the society. Government regulation of private industry can be divided into two categories - economic regulation and social regulation. Economic regulation seeks to control prices, designed to protect consumers and small businesses from more powerful companies. Social regulation, on the other hand, promotes objectives such as safer workplaces or a cleaner environment. Social regulations seek to discourage or prohibit harmful corporate behaviour and to encourage behaviour deemed socially desirable. As an example, the government sets emissions standards for factories and also provides tax breaks to companies that offer their employees health and retirement benefits that meet certain standards. Government has played a significant role in major economic reforms in the world, thus establishing that the Laissez-faire economic policy does not hold true in todays world. All governments in the economy work towards allocation of scarce resources among competing users. Fiscal policy of government which includes government purchases of goods and services, taxes and transfers affect the distribution of income and aggregate demand and thus influences economic activity. During times of recession, the role of government is altogether more important since it works towards stabilizing the economy with its fiscal policy, also providing unemployment benefits during these times.

Industries facing strong competition from abroad have long appealed for protections through trade policy. A look at US economy would reassure the significance of the role of government in easing hardships with the New Deal during the Great Depression. It created many U.S. regulatory agencies that seem indispensable today like the Food and Drug Administration, and the Federal Trade Commission, security and exchange commission, social security system etc. protecting the rights of workers and consumers. It Enforces workplace safety and health codes, regulates nearly every product sold in the US so that safety standards are met and consumers cant be misled. American agriculture, almost totally in private hands, has benefited from government assistance with government providing subsidies to farmers and agribusinesses. In a country like India where there is huge disparity in terms of income, government can influence overall distribution of income and wealth by applying higher tax rates on the rich and increasing welfare benefits for the poor. Government action plays a role in improving information to help consumers and producers value the true cost of a product. It also protects the smaller industries as well as regulates FDI, etc. Historically the economic policy of Hong Kong was based on Laissez-faire economic policy of positive non-interventionism which restricted the role of government to respond when industries with social obligations ran into trouble and when an institution needed regulation to prevent inequitable practices. However, Hong Kong has not been as noninterventionist as earlier. The government has intervened to create economic institutions such as the Hong Kong Stock Market which is the 6th largest by market capitalisation, and has been involved in public works projects and social welfare spending. Also, certain restrictions to free trade between nations such as China and the U.S. helped Hong Kong to thrive. But it is also important to stress the fact that too much of government intervention can take away opportunities for the growth of the entrepreneurs and researchers. Innovations and new technology, which play a significant role in the progress of the economy, can get hampered too. Too much of government intervention also brings corruption in the economy and leads to politicization of business decisions in the private organizations. There is the risk that, in order to achieve political objectives (like preserving jobs), the government continues sinking money into certain companies - money that would do a better job of creating jobs elsewhere in the economy. As a result, government positions in private companies need to be managed according to clear rules and with a high degree of transparency.

References:

http://www.investopedia.com/articles/economics/08/adam-smitheconomics.asp#ixzz1lCm2RRQy http://www.hkpri.org.hk/bulletin/6/anthony.html http://www.imf.org/external/pubs/ft/issues1/index.htm http://economics.about.com/od/governmenttheeconomy/a/intervention.htm http://en.wikipedia.org/wiki/Economy_of_India http://www.unescap.org/pdd/publications/apdj_12_2/lal.pdf