Arguments for and against Government Regulation of the Economy

Arguments for and against Government Regulation of the Economy
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Arguments for and against Government Regulation of the Economy
In the article “Government Failures vs. Market Failure: Principles of Regulation,” author and economist Joseph Stiglitz argues for the need of government intervention in a capitalist market. The author bases his argument on the general principle that government intervention is always intended to enhance social welfare (Stiglitz, 2008). History is full of cases and events that exemplify the failure of markets to regulate themselves efficiently. In an absolute free economy devoid of any form of government intervention, the market becomes a jungle in which only the mighty survives at the expense of the weak. Lack of perfect competition is one example that testifies the need for government regulation. Free enterprise encourages the rise of monopolies, which, if unwatched, can exploit helpless consumers with high prices and substandard products. Consequently, governments intervene from time to time to implement zoning restrictions and limit the free reign of anti-competitive forces in the economy. Similarly, Stiglitz points out that the irrationality of individuals and societies require government intervention. The model for a perfect competitive equilibrium assumes that individuals and societies are rational in their choices and actions. However, markets often suffer from irrational pessimism and exuberance, which results from market speculation. Under these conditions, it is easy for investors to make risky investments that may end up in huge losses. Since it is often the government’s moral responsibility to bail them out,(such as big banks that cannot be allowed to collapse) it has the right to discourage investors from taking excessive and costly risks through regulations.
In “Future Prospects for Economic Liberty,” Walter Williams argue against government regulation by referring to the principles of liberty and free enterprise as provided for in the American Constitution. Williams begins his argument by posing the question: What is the legitimate role of government in a free society? He observes that the government’s role is to promote justice and fairness. Accordingly, it is the government’s responsibility to promote individual freedoms, where individuals are free to own property without incurring unnecessary government taxes. Respect for private property is one issue that the author singles out as one aspect of liberty that the government violates through market regulations. He argues that the government has no constitutional right to tax private property in order to subsidize farms, car manufacturers, or bail out banks. Market regulation, therefore, departs from the principles of limited government that was envisioned by the nation’s founders (Williams, 2009, p. 2). Programs such as The New Deal limit free enterprise by taxing private property to fund the government’s social welfare projects. He observes that this is legal theft, since the government passes laws that allows it to forcibly tax private property and use the money on projects that do not benefit those taxed, such as in social welfare. In the long run, this trend will lead to tyranny. Quoting the philosopher David Hume, the writer observes that “liberty is seldom lost at once, but bit by bit” (p. 3). In this regard, government regulation of the economy is a gradual process of suppressing people’s liberties and control over their property.
Strengths and Weaknesses of the Two Arguments
Joseph Stiglitz’s argument in favor of government regulation is justifiable on account of the consequences of an unregulated economy. Recent events such as the 2007 economic meltdown in which governments had to bail out several banks prove the writer’s argument that markets are irrational. The dangers of market irrationality and speculation are visible in the risky investments that greed and over-confident investors make. At the same time, economic scandals such as insider trading and fraudulent internal audits, like those carried out by JP Morgan prior to the economic meltdown, shows that markets can be self-destructive if left on their own.
Secondly, government regulation is often intended to achieve a common good or to protect vulnerable consumers from the effects of corporate greed. With regards to enhancing social welfare, regulation is necessary to help marginalized and poor communities. For instance, subsidizing of basic goods is necessary to cushion the poor from high costs of living. The government raises funds for welfare programs like food stamps by taxing the rich and businesses. This is a necessary practice that helps redistribute wealth and create stable societies. History has shown that when the poverty reaches unbearable limits, revolutions and antigovernment demonstrations, which all have negative effects on the economy, are likely to break out. Thus, it is equally in the long term interests of corporations and the upper class for governments to tax them and support social welfare, which in turn ensures social and political stability, the two factors necessary for businesses and the economy to thrive. Regarding the protection from corporate greed, Stiglitz points out a serious concern of many governments today. Some businesses, such as alcohol and cigarette manufactures, profit from the addiction of consumers. It is the government’s responsibility to ensure that manufacturers do not endanger the lives of consumers by increasing the addictive properties of their products.
Nevertheless, one of the weaknesses of the pro-regulation argument is that it fails to consider market dynamics and the ineffectiveness of governments in avoiding the risks they intend to prevent through regulation. The market is in constant evolution, and government policies may become ineffective as investors find more ways of navigating around them. For instance, anti-pollution laws are not uniformly applied in all states in America. As such, it is easier for some investors to take their business to states that have waivers on regulations. Secondly, the argument for regulation fails to outline safeguards against the possibility of investors anticipating muted punishment, such as fines instead of serving jail terms. The common punishment measurers involve imposing fines on businesses that violate regulations such as anti-pollution laws. Under these circumstances, investors can make decisions on a cost-benefit basis, whereby they can violate laws and pay a fine if the gain is greater than the punishment.
Walter Williams’ argument for free enterprise accurately portrays the nature of the economy. Economic stability is not dependent on individuals’ willingness to do good for others, but on the pursuit of “enlightened self-interests” (Williams, 2009, p. 3). The market functions as a result of the seller and the buyer benefiting mutually. The forces of demand and supply are enough to dictate the relationship between buyers and sellers. Businesses do not pick the buyers’ pockets. Rather, the buyer pays voluntarily for what the market has to offer. As argued by Adam Smith in The Wealth of Nations, the social good is best served when individuals pursues self interests. Since individuals are motivated by self-interests, they can take better care of their property than the government. Accordingly, free enterprise is better suited to lead to prosperity than government intervention.
Nevertheless, the argument’s shortcoming is the author’s failure to ignore the fundamental reason that encourages government intervention. Governments do not regulate the economy to help individuals manage private property, but to ensure that individual actions, some of them motivated by greed, do not have adverse effects on others and the economy. For instance, economic crises can be triggered by the actions of a few individuals/businesses, but their consequences affect everyone. In this case, government regulation is often intended to protect “bystanders,&rdquo...