The Market Failure
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The market is a relation of commodity and money that occurs from the sale of goods and services and establishes an interaction of three major economic subjects. They are the state (the government), the enterprise or the company (business) and households.
In other words, the market is a complex economic process. Any economic process has its own cycle. Term economic cycle means rise and fall in economic activity that follows one another for several years. Individual economic cycles differ in duration and intensity. There is no exact formula to predict the duration and time sequence of economic cycles. Irregular economic cycles are more like the weather changes. However, they all have the same phase, which is called differently by various researchers. Economic history shows that economic growth is never steady and uniform. In most cases, several years of recovery in business activity and prosperity are followed by decline, panic or even crash. Economic cycle covers various aspects of society. It penetrates everywhere, including manufacturing, construction, employment, income, stock market and in politics. Cyclical nature of the economy is divided into several stages: the crisis, depression, recovery and growth. The market failure is a component of the crisis in the economic system.
Recession (reduction) is a state of the economy when the gross domestic product in the steady decline becomes smaller, indicating a fall of production or the slow of its development. Crisis (failure) of market economic system is characterized by a sharp decline in production, which gradually begins to narrow and is followed by the reduction of business activity (bargains are rare, the volume of business conducted in credit and cash is reduced). Crisis is characterized by the imbalance between supply and demand for a product or in a particular industry sector. It occurs as a general overproduction followed by a rapid decline in prices, inflation, banks bankruptcy and enterprises production collapse, the growth of loans interest and rate of unemployment. Amid the causes of the crisis there can be discrepancy between the money supply and quantity of goods and services in the economy.
Let’s give an overview of the industrial crisis of XIX - early XX centuries. Market easily absorbed all manufactured goods, became crowded, goods continued to arrive, while demand was gradually reduced and finally stopped. The fear of crises spread throughout the market. Demand disappears, while there were huge reserves of goods and many companies continued to operate at full capacity and dumped on the market more and more masses of products. The rapid decline in prices began. Truly heroic efforts were taken to save the day. However, all the tools were useless. Many businesses were not able to withstand the sharp decline in prices. It was time of liquidation and bankruptcy. Banks and lending institutions fell first. Trust entities of the market economy were undermined. Everybody longed for cash payment. Bills that the day before had not initiated any doubt got the value of plain paper. Lending rate increased. A largest business failed, the machine stopped and factories closed. Crowds of unemployed appeared on the street. Famine and epidemic of suicides began.
The first crisis was in England in 1825. The next occurred in the UK and the U.S. in 1836, being followed by the one in 1841 in the U.S., then in 1847 in the U.S., Britain, France and Germany. The following crises happened in 1873, 1882, 1890. Crisis of 1900-1902 was the most devastating. It began almost simultaneously in the U.S. and Russia, and above all, hit the steel industry. After hitting the American metal market, the crisis spread to England and Europe. The textile industry suffered first and was followed by construction, chemicals, machinery and electrical industries. The crisis spread with incredible speed to all European countries such as France, Austria, Germany, Italy, Belgium, and soon became universal. Prices rapidly fell down. Reputable businesses became uprooted. Busting industry was accompanied by a rapid rise in unemployment.
However, during the crisis of the XIX and XX centuries commodity prices decreased, thus creating the potential for sales and the prospect of recovery. After World War II crises regularly rocked Western economies. However, the character became different especially after the crisis of 1929-1933. The grand stock exchange crash in "Black Tuesday" October 29, 1929 marked the beginning of the crisis, which in its depth exceeded all previous ones. Falling prices, which still did not know the U.S. economy, Germany, France and England, a sharp reduction in profits, the catastrophic credit crunch, currency collapses, a catastrophic fall in the value of securities – these are a few of the ills that fell on the national economies in more recent period of time and was considered a good and successful. The crisis of 1929-1933 forced many governments to attempt the recovery of the national economies from the economic gap.
The government is the subject of a market economy. It operates via a system of public institutions and public offices that perform the functions of state regulation of the economy. State represented by the government procures a wide range of products. In the labor market it relates to labor, necessary for service in government offices and state-financed organizations. The market of means of production and consumption acquires commodity of public use, including weapons, buildings, machinery and other goods. These goods come into the state property and then partially go to public.
The most ambitious attempt to overcome the crisis through public events were held in the United States. They were done with the aimed at:
- rescuing the credit system by the deposit guarantee by the state;
- reduction of the debt burden by 40% by the depreciation of the dollar;
- the increase in prices of agricultural products through prescribed and subsidized by the state to reduce production;
- the promotion and the formation of monopolies, in many cases means a compulsory cartelization;
- the fight against unemployment through public works;
- the regulation of wages.
Activation of economic role of the state and anti-crisis policy gave some results, and for more than half of a century the market economy was not facing devastating shocks similar to the disasters of 1900-1901 or 1929-1933. However, the industrial crises continued to affect the dynamics of interest rates, income, production costs, and salaries to the mid70.
Under the conditions of falling demand the following industries suffered most of all:
- Industries that produced the means of production (production and / agriculture equipment) while an investment in the means of production sharply decreased;
- Industries, producing durable consumer goods, because people were starting to put off the purchase of these goods;
- The building industry, as reduced demand for the construction of residential and industrial buildings.
Structural economic policy of the government during the crisis is to create conditions for further growth, coupled with short-term measures that are aimed at preserving the country's payment system and mitigating acute social problems.
Creating the conditions for further growths include:
- rejection of targeted support suffering difficulties companies, banks, financial institutions, etc;
- the maintenance of a balanced budget by reducing inefficient and destructive of expenditure, such as direct support to enterprises and implementation of sectorial programs that are not directly related to the security of the country;
- reduction of the redistributive government activities such as tax reductions, while maintaining a balanced budget;
-implementation of structural reforms in the infrastructure sectors;
- a moratorium on the creation of public corporations;
- the reduction of import tariffs and the abolition of all import quotas;
- neutralization of destructive aspects of antitrust regulation;
- interaction with the outside world during the constructive policy.
Decrease in demand has an impact mainly on output and employment in the industries, producing investment goods and consumer durables, as a small number of large firms dominated in this market. They had sufficient monopoly power to oppose of lower prices over a period. In the recovery phase, these industries are the greatest impetus for development. Production of the goods for short-term use is usually less vulnerable to decline. People have to eat and be dressed, so they cannot stop purchasing for a long time. The fall of demand effects prices more than the production, as these industries are characterized by low concentrations. Enterprises with large capital and greater financial capacity retain the opportunity to get a profit by reducing the production costs in case of crisis. Medium and small enterprises, especially non-efficient equipment and technology, cannot stabilize the worsening economic situation and often go bankrupt. Busting technically weak enterprises have their pluses for the industry as a whole, since they lead to an increase in the general level of the productive forces. The consequence of the overall level of productivity increase is to reduce the costs of goods and, as a result to weaken the falling rate of profit.
The economic crisis is inevitable as the cyclical nature of the economy. In economic theory, there is a lot of understanding of its nature. The most popular conception of the cycle that results from a free market economy comes from Karl Marx and is not in vain. Moreover, the media introduces the messages from his monumental work "Capital" and emphasizes its demand in the world. Marx noted that the recurring economic booms and recessions became apparent after the Industrial Revolution in the late XVIII century after the formation of the modern industry. Therefore he concluded that business cycles were an inherent feature of capitalism. Major schools of economic thought, regardless of their differences concerning other questions, agreed on opinion that free market economy is the reason of the business cycles. Karl Marx believed that the periodic crises would be harder and harder until they pushed the masses to revolt and destroyed the capitalist of the transition to socialism, where the state controlled the economy, planning its development and owning the means of production.
Less radical modern economists believe that public authorities are able to stabilize the crisis and the cycle itself. Thus, many agree that the fault lies in the depths of the market economy and only the state can somehow save the situation.
However, I believe that in the modern monetary - credit system the crisis and market crash are unavoidable and the state cannot prevent it, as it is the subject of this system. In the modern economy, where money supply is constantly increasing by interest rates of central banks and the production of goods remain unchanged or declining, inflation is inevitable. Thus the crisis is difficult to omit as well. Governments can only adjust their policies for the crisis to pass with minimal damage and in the shortest time. The current global crisis was the result of an unprecedented in human history, the credit boom, triggered by the policy of governments and central banks of the industrialized countries of the world, gave rise to imbalances of unprecedented scale. It will be deep recession caused by this boom. "Anti-crisis" measures of governments around the world will lead to its tightening and the transition to a period of economic stagnation.
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