Markets and Governments: A Historical Perspective - The Globalist - 0 views
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The idea that competitive markets are sufficient to ensure efficient outcomes and stable economies is under heavy intellectual fire
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Striking the right balance between markets and government is the central issue in policy debates over economic developmen
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What can governments do to seize the opportunities of globalization, while minimizing its downsides?
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we have to recognize that the tension between markets and government is not new. In fact, it has been the central issue in the evolution of political economy over the last 200 years.
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The “rise of the market” began in the late 18th century, shaped by the writings of Adam Smith and David Ricardo. The “invisible hand” of the market guided supply and demand toward equilibrium and efficiency.
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This phase came to an end in the 1930s, when the concept of self-correcting markets collapsed under the weight of the Great Depression.
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Government intervention was necessary to boost aggregate demand during periods of high unemployment.
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This phase began with growing disenchantment with government’s ability to deliver and was driven forward mainly by U.S.-based economists
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The stagflation of the 1970s — persistently high inflation and unemployment — called into question the ability of governments to fine-tune the economy. Meanwhile, the welfare state began to impose an unsustainable fiscal burden,
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Friedrich Hayek and Milton Friedman led the charge against “Big Government.” They argued eloquently how an overreaching government dulled the fundamental human instincts that power the capitalist system:
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In the 1980s, U.S. President Ronald Reagan and UK Prime Minister Margaret Thatcher reduced taxes, deregulated industries, privatized state-owned enterprises, curbed union power, and scaled back welfare programs. The global economy boomed.
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The financial crisis has revealed significant imperfections in market mechanisms: information asymmetry, moral hazard, systemic risks and behavioral or nonrational motivators of choice.
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Yet one thing is certain: The choice is not between big government and small government. It is about creating effective government. What matters is what governments do, not how big they are.