Hi Everyone,
The debates about the extent of the roles of free market operations and government intervention are unlikely to end anytime soon. The success or lack of success of government intervention has very little bearing on this debate. Free markets will always remain flawed and the only non-market solutions conceived by government is their own intervention. The only questions they ask is of how to improve intervention and to what extent it should be applied or changed. In my posts 'Blockchain Government Part 1' and 'Part 2', I discuss the use of blockchains as an alternative to Government involvement. The ideas in these posts are ambitious and radically different to the ideas that support our existing systems. To add more context to my ideas, I take a big step backwards and investigate the fundamental roles of an economy.
In this post, I explore how needs and wants can be met. I investigate the traditional questions posed by economists regarding production and distribution of outputs (i.e. goods and services). I consider where the influence lies in determining what, how and for whom outputs are produced. I discuss and describe the involvement of the market and authority (In the context of this post, authority mostly refers to government bodies and agencies. However, the term authority is broader than government. For example, it could apply to countries run by a controlling monarchy).
Everyone has needs and wants. Some of these needs and wants we can satisfy ourselves. However, most of the time we need a little help meeting them. In exchange, we help others meet their needs and wants. We trade what we can offer to obtain something else, which we believe will fulfil our outstanding needs and wants. These arrangements form the basis for our economy.
As populations grow larger and wealthier, economies become more complex. People’s needs and wants change and expand. The methods of meeting these needs and wants become more complicated. The operations of an economy are often summarised with three simple questions.
Most economies operate somewhere between free market operations and authority driven responses.
For a free market, the three questions are answered based on interactions between buyers and sellers. The free market responds directly to what buyers indicate they need and want based on what they are willing to exchange to obtain these needs and wants. Sellers are incentivised to meet the buyers’ needs and wants, as they are able meet their own needs and wants from the sale of their outputs.
Motives behind authority responses is strongly Influenced on how that authority was formed and operates. Authority could be formed and/or maintained by force. The motives behind this form of authority could be self-serving or based on the perceptions of the few in-charge of the authority. Authority could be formed through public vote/election. The motives behind this form of authority needs to be consistent with the manifesto on which the authority was elected. A once in a 3/4/5 year election only covers a very basic outline of what this authority will offer. It is highly likely many actions and polices pursued during a term of office would not face public scrutiny for possible rejection. An election may not offer voters real choice. If campaigning parties/candidates offer limited differences or there are few candidates, the authority will not be representative of a large proportion of voters. The authority could be held to account on a regular basis through polls, petitions, and referendums. On this basis, the authority could represent the voters. However, frequent involvement by the public is very time consuming and costly. Authority may also be able to manipulate the public involvement through propaganda and misinformation.
Most economies operate with a mixture of free market activity and involvement by authority. The extent of authority’s involvement can vary considerably. Authority may only intervene to provide outputs undersupplied or neglected by free market operations. Such outputs could include public goods (e.g. national defence, police force, and street lighting) and some merit goods (e.g. healthcare, education, and parks). Authority may also restrict or penalise demerit goods (e.g. cigarettes, recreational drugs, and gambling). Authority may also provide some basic allowances (e.g. disability payments, pensions, and jobseeker allowances). On the other end of the scale, authority could control almost all production. They could determine what is produced, how it is produced and who receives it (i.e. the three economic questions).
What should be produced is determined by people’s needs and wants and societies’ ability and willingness to produce outputs that meet these needs and wants. Society would include individuals, groups of people, businesses, representatives of society, authority, etc. What should be produced is likely to change for various reasons.
Perception can play as big a role as genuine needs and wants in influencing what outputs will be produced. Producers of an output desire people to want that output. The output may address particular needs and wants but the producer would want people to believe that it is more valuable or important than it is. Producers engage in marketing. The marketing can be informative and can enable people to understand how an output can address particular needs and wants. Marketing can also be persuasive and even misleading. This can lead to people wanting outputs that they do not necessary need and only believe they want.
Extent of competition plays an important role in determining what should be produced. More competition puts pressure on businesses to meet peoples’ needs and wants more adequately, as a competitor is likely to offer a superior alternative output. More competition requires businesses to be more agile and be able to adjust to peoples’ changing needs and wants more quickly. More competition also implies the existence of more businesses. Therefore, there will be more entrepreneurs. Entrepreneurs tend to be more motivated to succeed than employees; this is because they have more to lose from failure. For smaller businesses, employees are closer to ownership and therefore may feel more self-motivated to succeed for people they know personally.
Authority can also play a significant role in what is produced. Authority can act based on its perceived notion of what needs to be produced. The extent of how informed authority might be in regards to people’s needs and wants could vary significantly. They may receive significant valid input. Unlike free markets, they do not need financial incentives to produce an output. Therefore, it could be possible to produce a sufficient quantity of that output. However, it is often the case that authority is not well informed regarding peoples’ needs and wants. Even if the authority are listening to the people, they are likely to be poorly informed. This is because they are relying on expressed opinion rather than action. Whereas, the market responds to actions, which is normally a much better representation of what people actually need and want.
Whoever produces the output determines how it is produced, how much is produced and where it is produced. Motivations for producing outputs will vary depending on who produces the output. Some of these motivations are as follows.
These motivations strongly influence how the output is produced. A producer who is most motivated by short-run profit is likely to be focused on achieving and/or maintaining low costs of production. A producer who is most motivated by capturing a large market could be focused on lower prices and/or marketing. A producer who is motivated by controlling supply could be interested in creating barriers to entry. A producer who is motivated by environmental objectives would be most interested in producing the output in a manner that causes least harm to the environment. They may also want to prevent other producers from causing harm with their methods of production.
Another important influence on how an output is produced is the level of competition. Competition pressures businesses to be efficient; otherwise, they are likely to fail. In a competitive environment, both short-run and long-run profit is likely to be important. This could also mean that philanthropic and environmental objectives could become less important if these objectives do not support profit and survival objectives. In a less competitive environment, more objectives are likely to be possible but there is also a higher risk of inefficiency.
Society can influence how an output is produced. This can be done through purchasing decisions. A purchase can directly fulfil a need or want. A person might be happy just to fulfil the direct need or want from a purchase. The person could be most focused on the price he/she pays as well as how well a particular output meets his/her need/s and/or want/s. However, a person’s needs might be a little more complex. For example, they might want to fulfil a need while causing minimal harm to the environment. This could lead to different purchasing decisions. This person may choose to purchase a good at a higher price if production causes less harm to the environment.
Society can influence how an output is produced through authority. Authorities can impose restrictions on how outputs are produced, they could issue penalties for unfavourable production methods, or they could provide subsidies for more favourable production methods. Authority run departments and businesses could even produce outputs themselves. In regards to production, one of the biggest problems authority faces is the incentive to be efficient. Authority does not face the risk of business failure. It can make losses but remain in business as long as the public continues to fund it. Mandatory taxes ensures that the authority’s business activities remain funded.
Whoever produces the output determines who consumes the output. This decision is also influenced by the motivations of the producers. A producer who is most motivated by short-run profit could be focused on supplying to those who are willing to pay the most. A producer who is most motivated by widespread distribution would be most interested in distributing to as many people as possible. A producer who is most motivated by philanthropic objectives could be most interested in supplying the output to those who they deem need it the most.
Society could also influence who consumes the outputs. This influence could come from individual actions or collective actions. Individuals could offer more money to acquire an output. They could offer to buy high quantities (e.g. bulk buying or prepay for future orders). Collective action could be taken. Groups could purchase output on behalf of those that lack the resources to acquire outputs individually.
Authority can influence or even control who receives which outputs. Authority could also control the quantity that is distributed to each person or family. They could argue that some outputs need to be distributed evenly amongst the population. These would prevent hoarding by some while ensuring the less wealthy are enabled access. For example vaccinations. In some countries, authorities have the sole responsibility of distributing vaccines based on their criteria rather than based on willingness and ability to pay for the vaccine. Authority would argue their criteria is superior to allowing market forces to distribute the vaccine.
I am strong believer in freedom. I believe in freedom of thought, speech, and action. As an economist, I believe in freedom of markets. I believe in most cases, markets can move towards an equilibrium price and quantity. I acknowledge that the impacts of trade can extend beyond the buyers and sellers (i.e. externalities). I also acknowledge that insufficient competition and cooperation between businesses may also be a problem. Some markets are naturally competitive; this occurs for markets with minimal barriers to entry. However, competition can be restricted in markets with natural barriers to entry. Such barriers include high start-up costs or a high output to achieve economies of scale. Cooperation is necessary for smaller businesses to compete in markets that favour large businesses.
In regards to externalities, third party costs and benefits need to be considered. Authority often steps in to penalise negative externalities (e.g. taxes or fines), reward positive externalities (e.g. subsidies) or even provide outputs with positive externalities directly. Intervention could be argued to be the best approach to handling externalities but the extent of externalities (positive or negative) still depends on the perception of authority. This perception may not be accurate or even presented honestly. Society can respond by supporting outputs with perceived positive externalities and not outputs with perceived negative externalities. An example of such behaviour are movements to reduce meat and dairy consumption. Businesses themselves can opt to reduce negative externalities by incentivising other businesses in the supply chain to reduce negative externalities such as pollution.
In regards to barriers to entry, if authorities do not impose them, they can be reduced through various means. Businesses can pool funds to acquire assets and they can arrange to share usage. Potentially, businesses that would be expected to be very large can be made up of many small businesses that specialise in particular areas or operate like departments. Existing large businesses could vertically disintegrate to create a similar effect. Competition between various businesses could exist at various levels of the supply chain. Such arrangements would require cooperation between various non-competing areas for the overall structure of businesses to achieve economies of scale.
I have worked as an economist for almost 15 years. I have specialised in microeconomics and for the majority of that time I worked in project evaluation conducting Cost Benefit Analysis (CBA). One of the most significant observations I have made over these years is the focus on outputs. The fundamentals of demand and supply is focused around outputs. It is often assumed that people need or want a particular output. Therefore, the focus is placed on providing an output rather than the needs and wants that resulted in the demand for that output. It is possible that an output believed to be a necessity could become redundant if the needs and wants provided by that output is addressed more effectively by an alternative output. Free market operations are best suited for revisiting the questions about needs and wants, as there is incentive to create new outputs to address them. There is little to no motivation or foresight for a central authority to look beyond existing outputs as solutions. Inputs to decisions are limited and pursuit of new outputs for solutions offers only risk with no reward to those holding power.
Free market operations are needed to determine how to address many of our needs and wants. However, it is not perfect. Government intervention has typically been seen as the only solution to fix the shortfalls of free market operations. Even though, Government intervention has had limited success and in some cases made situations worse, it is constantly revisited to fix problems. During the Covid-19 pandemic increased Government intervention has been automatic. This has led to the destruction of economies and societies. The World Economic Forum is proposing ‘The Great Reset’, which advocates for even more Government intervention despite the failures of existing Government intervention.
We need a much better plan to move society in a better direction. The Greater Reset offers alternative perspectives. My posts regarding Prevent, Solve, or Manage as well as the Blockchain Economy offer possible alternatives to solving problems in our societies and economy. We need to move forward with an open mind. We live in a world with potentially endless opportunities.
If you want to read any of my other posts, you can click on the links below. These links will lead you to posts containing my collection of works. These 'Collection of Works' posts have been updated to contain links to the Hive versions of my posts.
The course contains over 10 hours of video, over 60 downloadable resources, over 40 multiple-choice questions, 2 sample case studies, 1 practice CBA, life time access and a certificate on completion. The course is priced at the Tier 1 price of £20. I believe it is frequently available at half-price.
