ATAR Notes: Forum
VCE Stuff => VCE Business Studies => VCE Subjects + Help => VCE Economics => Topic started by: Collin Li on September 16, 2008, 07:12:23 pm
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So, what are the reasons you're taught for government intervention?
Microeconomics basically teaches us that we rarely need a government right?
So how does macroeconomics ever fit into this? Why should the government be controlling GDP growth, unemployment and inflation? Sure, these all relate to society's well-being, but we know from microeconomics that well-being is maximised by individuals interacting in the free market. Why does the government have a role in this?
Does anyone wish to tackle this beast of a question?
If anyone is interested in the schools of Economic thought behind this, I believe this is a point of conflict between the Chicago school (pro-macroeconomics) and the Austrian school (anti-macroeconomics).
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Could be wrong.. but
I think that government intervention is required when an open market fails to allocate resources to best satisfy societies needs and wants(i.e when market failure occurs).
Government intervention is essential for things like Public Education and Healthcare(an open market would be unlikely to provide these at free or subsidised prices to the public due to lower profits), Restricting socially undesirable goods and services(alcohol, cigarettes, porn etc) and so on.
I'm not sure that "well being is maximised by individuals interacting in the free market" is true.
Sellers want maximum profits and buyers want maximum satisfaction. In theory this works well, but in reality I don't think it performs as well.
The poor would be worse off and the rich better off wouldn't they?
Might be wrong but thats how I see it.
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And you're taught that market failures occur when there are:
* externalities
* monopolies
These are both fixed by microeconomic policies. Taxes and subsidies to internalise the costs. Another way to deal with this is also to simply rely on property rights. For example, if we privatise lakes, pollution to lakes would be prevented by the owner who has an interest in maintaining it's quality, in order to sell its water, or sell access to it for enjoyment and recreation, for example. As for monopolies, there are watchdogs set up to regulate these, but also, because of the profit incentive, the market often finds ways to produce substitutes to compete with the monopoly, to grab a share of the market power.
Unfortunately, the VCE Economics course does not explicitly show you that "well-being" is maximised by individuals interacting in the free market (in the absence of market failures). This is shown in any introductory microeconomics course. Think about a two-party voluntary transaction. Consider a carton of milk being sold at the milk-bar. I buy it because I benefit more than it costs me, and the owner sells it because he will benefit more than it cost him. If that was not the case for either the buyer or the seller, the trade could not have gone ahead! It takes two to tango! Hence, it should be clear from this simple example that voluntary trade-offs only increase "well-being," it cannot reduce it - unless our expected net cost-benefit of the transaction was wrong, in which we would revise our expectations for next time (trial and error, the evolutionary process, and the buzz-word: equilibrium, are actually all related).
Why would the poor be worse off, and the rich be better off? The relative wealth gap may increase (not clear, can you show this?), but the poor certainly would not be worse off under a system of voluntary transactions (a free market). They simply wouldn't accept the transactions that would lower their well-being.
You have pointed out some microeconomic policy concerns, and I have replied to show how microeconomics is employed to attempt to fix these problems. But more importantly, none of the arguments you brought up actually justify the macroeconomic policies that aren't designed to target any of these problems, such as the manipulation of credit (monetary policy), and the aimless fiscal policy used to control the "macroeconomy."
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Macroeconomics is much more fun to study, I feel that it's more related to what I see in the world and more relevant to politics which I find interesting. I don't really like some of the assumptions employed by microeconomics, but I suppose those assumptions have to be made, otherwise you can't build any models at all.
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IMO, macroeconomics is a silly game played by politicians and economists designed to toy around with a few economic variables and objectives, when the only one we want to maximise is utility, and we don't need central planning to do that.
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But don't we need the government to stop large cyclical booms and recessions?
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It's almost an assumption the business cycle just occurs. Here's one theory that believes central banks are actually the problem:
http://en.wikipedia.org/wiki/Austrian_Business_Cycle_Theory
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Four Words: Tragedy of the Commons.
Governments come in handy there.
Oh, big picture: governments exist 4 reasons beyond the realm of economics, though their very existence causes inherent economic problems.
I got shit micro tute test result 2day, so I'd rather not think bout anything economics beyond that this evening.
Thankfully only the best 3 count, so I can count this as my stuff-up.
*wanders off*
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Four Words: Tragedy of the Commons.
Governments come in handy there.
Oh, big picture: governments exist 4 reasons beyond the realm of economics, though their very existence causes inherent economic problems.
What you say is valid, but nothing you said supports the need for macroeconomic toying around that currently happens.
Tragedy of the commons is because there is a lack of property rights. It's a problem of communist societies, more than capitalist societies, because proper capitalist societies have well-defined property rights. You don't have commons when you privatise. Once again, it's a microeconomic solution to a microeconomic problem.
The question here still persists: what's so important about toying with the macroeconomy?
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Why would the poor be worse off, and the rich be better off? The relative wealth gap may increase (not clear, can you show this?), but the poor certainly would not be worse off under a system of voluntary transactions (a free market). They simply wouldn't accept the transactions that would lower their well-being.
You have pointed out some microeconomic policy concerns, and I have replied to show how microeconomics is employed to attempt to fix these problems. But more importantly, none of the arguments you brought up actually justify the macroeconomic policies that aren't designed to target any of these problems, such as the manipulation of credit (monetary policy), and the aimless fiscal policy used to control the "macroeconomy."
Well, you clearly know much more about economics than I do, and it seems logical that in a free market when two people meet it is only likely to increase "well-being", otherwise why would they interact..?
But wouldn't market failure still occur?
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Yeah. Market failure still occurs, but try not to think of it as merely an "excuse" for any government intervention. They are microeconomic issues that should be targeted by microeconomic policies. For example, pollution isn't best targeted by a central bank which increase interest rates, because that won't only discourage pollution, that will discourage spending in general!
The fix is to privatise air (sort of silly, idealistic and impractical), or to tax pollutants (more practical). Respectively, those two solutions are from the Austrian school of thought (more pure classical liberalism) versus the Chicago school (utilitarianism plays a greater role in their analysis).
(There are many other schools of economic thought too, if you are interested. I think Wikipedia will give you hours of reading if you want. These are the two schools of thought I align myself most closely to, however. I am leaning to the Austrian side, but I pick parts from whichever school I think is better.)
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How about the need for a welfare system for the equitable distribution of income or more so, to ensure that the poor have access to basic necessities for life?
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How about the need for a welfare system for the equitable distribution of income or more so, to ensure that the poor have access to basic necessities for life?
Economists of the Austrian persuasion disagree with this so-called 'need' on both an economic and moral basis.
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But isn't that just one view? What about the generally accepted view...
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I think that government intervention is required when an open market fails to allocate resources to best satisfy societies needs and wants(i.e when market failure occurs).
Government intervention is essential for things like Public Education and Healthcare(an open market would be unlikely to provide these at free or subsidised prices to the public due to lower profits),
Of course a free market can't provide "subsidised" places because that is by definition is a government intervention so it is meaningless to say so. Also since when does "allocate resources to best satisfy societies needs and wants" mean providing things for free?
I'm not sure that "well being is maximised by individuals interacting in the free market" is true.
Generally it is.
The poor would be worse off and the rich better off wouldn't they?
compare south korea and north korea.
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How about the need for a welfare system for the equitable distribution of income or more so, to ensure that the poor have access to basic necessities for life?
I would make a distinction between an "equitable" distribution of income and alleviating the effects of poverty.
But wouldn't market failure still occur?
Why?
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How about the need for a welfare system for the equitable distribution of income or more so, to ensure that the poor have access to basic necessities for life?
Unfortunately, the VCE Economics course does not go into any exploration of utility or well-being. I have told you they are maximised in free markets.
Those two synonymous terms are catch-all variables that represent the value-judgements of individuals working the free market. What I am trying to get to is that utility should really pick up on our values, including the value to have equitable income distribution, if that value really exists. So if we left the market free, and there was little to no charity, it simply means that society has not valued this (equity) as much as the government thought we did. That is exactly what I am opposed to, the coercion of values (that some bureaucrats have decided upon) onto others.
I lean towards the Austrian side on this issue. The generally accepted view is not good enough for the government. That is the raping of the few by the many. One-size, or one set of universal values, does not fit all.
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This is my understanding of an equitable distribution of income:
"Where everyone has access to the basic goods and services needed to avoid absolute poverty so as to guarantee basic material living standards. It does not imply that there would be 'equality', but that there should be a fair final distribution of personal income"
I only believe in ensuring that everyone has 'access to basic goods and services to avoid absolute poverty'. The 'fair' bit is open to interpretation and I think that's where you'd find a lot of lefties pushing 'equity' closer to 'equality' and I don't believe that is desirable for obvious reasons.
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"Where everyone has access to the basic goods and services needed to avoid absolute poverty so as to guarantee basic material living standards. It does not imply that there would be 'equality', but that there should be a fair final distribution of personal income"
Well it sure isn't a definition that an economist would use as it is not very objective.
'access to basic goods and services to avoid absolute poverty'.
If you believe that then you must also believe that someone else has a obligation to provide these things whether they like it or not.
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How about the need for a welfare system for the equitable distribution of income or more so, to ensure that the poor have access to basic necessities for life?
Unfortunately, the VCE Economics course does not go into any exploration of utility or well-being. I have told you they are maximised in free markets.
Those two synonymous terms are catch-all variables that represent the value-judgments of individuals working the free market. What I am trying to get to is that utility should really pick up on our values, including the value to have equitable income distribution, if that value really exists. So if we left the market free, and there was little to no charity, it simply means that society has not valued this (equity) as much as the government thought we did. That is exactly what I am opposed to, the coercion of values (that some bureaucrats have decided upon) onto others.
I lean towards the Austrian side on this issue. The generally accepted view is not good enough for the government. That is the raping of the few by the many. One-size, or one set of universal values, does not fit all.
But poverty will always exist, whether or not government intervention has a hand in it or not. It's not so much that people wouldn't value equity if we had no welfare system, but there would not necessarily be a means by which we could ensure that our values of equity flowed through to alleviating poverty. Eg. We may want to help, and we may help some by donating to local charities etc, but how about for people who live in remote areas where giving assistance to the people through charities etc would not be administered properly? I think you'd also find that the general sentiment in the community is that some forms of welfare to "help the elderly have their cup of tea" are necessary and valued.
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If it is truly the general sentiment, voluntary action will drive this, because it would increase their utility to do so (the feeling of goodwill).
You are suggesting that the government can provide a better charity service than charities that operate on the basis of consumer demand? If consumer demand dictates that hard-to-reach communities are to be helped, then charities will supply it. Not-for-profit and government agencies are too complacent to do the job effectively. They will plunder and waste resources.
Personally, I don't have much belief in charities. It is a lot like giving a man a fish, rather than teaching a man to fish. I respect the entrepreneur who expands his business and creates many jobs (serving society through his own self-interest), far more than the philanthropist.
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How can charities do it better? They shouldn't have a profit motive, therefore they would just be as inefficient as an government body administering welfare/charity.
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How can charities do it better? They shouldn't have a profit motive, therefore they would just be as inefficient as an government body administering welfare/charity.
Competition.
Your argument is clearly wrong, because we know that private schools do better than not-for-profit public schools, for example. The distribution system of a State government (Soviet Union) failed, of course - there was no competition, there was no profit motive.
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Competition for what? What are charities competing for?
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Profit.
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Competition for what? What are charities competing for?
To serve their clients, and hence survive. Even a NPO has to be financially sustainable. Every organisation needs cashflow to operate.
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Competition for what? What are charities competing for?
To serve their clients.
That's how they get their profit :)
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Greg Mankiw, Harvard Econ Prof, on Micro vs Macro: http://gregmankiw.blogspot.com/2006/04/micro-versus-macro.html
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I should add, however, that NPOs can be as competitive as private charity, as long as the competition is open. NPOs can be competitive as long as intrinsic benefits exist (non-monetary rewards - which contribute to utility). However, without competition and choice, there will be complacency, which is what the biggest-monopoly-of-all, government, is the best at.
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It's almost an assumption the business cycle just occurs. Here's one theory that believes central banks are actually the problem:
http://en.wikipedia.org/wiki/Austrian_Business_Cycle_Theory
I withdraw my support for the Austrian Business Cycle Theory. Here is why it goes wrong for me:
"The objection is simple: Given that interest rates are artificially and unsustainably low, why would any businessman make his profitability calculations based on the assumption that the low interest rates will prevail indefinitely? No, what would happen is that entrepreneurs would realize that interest rates are only temporarily low, and take this into account."
Source: http://www.gmu.edu/departments/economics/bcaplan/whyaust.htm
The essence of the ABC is that the short-term interest rate will affect investment decisions in a way to promote malinvestment (to promote investments that would not have been profitable had there been no intervention). That passage above drives a nail through the theory.
However, the need for a constantly expanding monetary base (what Milton Friedman argues for) still baffles me. I am also unsure whether the Chicago school is in favour of the current style of central banks that we have.