Economic interventionism is an action taken by a government or an international institution in a market economy or market-oriented mixed economy, beyond the basic regulation of fraud and enforcement of contracts, in an effort to impact the economy. Economic intervention can be aimed at a variety of political or economic objectives, such as promoting economic growth, increasing employment, raising wages, raising or reducing prices, promoting equality, managing the money supply and interest rates, increasing profits, or addressing market failures. The term economic intervention assumes the state and economy are inherently separate from each other; therefore applies to capitalist market or mixed economies where government action interrupts the market forces at play with orders or sanctions, which will benefit the state (although this does not apply to state-owned enterprises that operate in the market).
Red tape binds 19th century documents, the origin of phrase "red tape" to describe economic interventionist laws and regulations
Economic planning in market economies is sometimes considered to be a form of intervention when it intervenes in the setting of prices and the distribution of goods determined by the market.
Economic planning tends to be associated with the political left, while economic interventionism is often associated with centrism, which believes that certain market outcomes are undesirable or ineffective and ought to be mitigated. Economic interventionism and planning are sometimes practiced by national conservative, fascist, economic nationalist and right-wing parties with the thinking that the free market can damage national traditions, social order, or the authority of the state itself.
Types of interventions
Economic interventions common in contemporary governments include targeted taxes, targeted tax credits, minimum wage legislation, union shop rules, contracting preferences, direct subsidies to certain classes of producers, price supports, price caps, production quotas, import quotas, and tariffs. Demand management and Keynesian economics (helicopter money) are sometimes cited as mild forms of economic planning, designed to overcome cyclical instability inherent in market economies, or to make market economies function properly in a desired fashion.
Economic planning refers to planned economic activity in production. Planned economic activity may be direct (directive planning), or indirect as in the case of indicative planning. An economic system that is characterized by the primacy of economic planning over the market is referred to as a planned economy, where resource allocation and the quantity produced is allocated by non-market means, usually through state-led planning.
Government regulation can also be a type of intervention when it inhibits, corrects or distorts the market mechanism in setting the price of a good or service.
The effects of government economic interventionism are widely disputed. Libertarians and other advocates of free market or laissez-faire economics generally view government interventions as harmful, due to the fallacy of central planning, the law of unintended consequences, and other considerations. Government officials tend to be naturally disposed to seek more power and authority, and the money that usually goes with those things, and this quest often takes the form of economic interventionism which they then seek to justify. Many on the political left are inclined to support this agenda, seeing state economic interventionism as an important means of achieving wealth redistribution or other social engineering goals. A minority of Marxists and those on the far left, meanwhile, feel that government welfare programs in the context of a mixed economy might interfere with the ultimate overthrow of capitalism. Political conservatives of the nationalist variety also frequently support economic interventionism as a means of protecting the power and wealth of a country or its people, particularly via advantages granted to industries seen as nationally vital.
Regulatory authorities do not consistently close markets, yet as seen in economic liberalization efforts by states and various institutions (International Monetary Fund and World Bank) in Latin America, "...financial liberalization and privatization coincided with democratization". One study suggests that after the lost decade an increasing "diffusion of regulatory authorities" emerged, these actors engaged in restructuring the economies within Latin America. Latin America through the 1980s had undergone a debt crisis and hyperinflation (during 1989 and 1990). These international stakeholders restricted the state's economic leverage, and bound it in contract to co-operate. Multiple projects and years of failed attempts, for the Argentine state to comply, the renewal and intervention seemed stalled. Two key intervention factors that instigated economic progress in Argentina, were substantially increasing privatization and the establishment of a currency board. As one can see this exemplifies global institutions including the International Monetary Fund and the World Bankinstigate and propagate openness to increase foreign investments and economic development within places including Latin America.
Why the government intervenes in the market: (Within a Western Liberal Democracy) government officials theoretically weigh the cost benefit for an intervention for the population or they succumb beneath coercion by a third private party and must take action. Also intervention for economic development is at the discretion and self-interest of the stake holders, the multifarious interpretations of progress and development theory could mean. To illustrate this during the 2008 debt crisis; the government and international institutions did not prop Lehman Brothers up therefore allowing them to file bankruptcy. Days later when AIG waned towards collapsing, the state spent public money to keep it from falling. These corporations have interconnected interests with the state. Therefore their incentive is to influence the government to designate regulatory policies that will not inhibit their accumulation of assets.
- Crowding out
- Economic planning
- Keynesian economics
- Mixed Economy
- Indicative Planning
- Red tape
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