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Cause And Impact Of 2008 Recession Economics Essay

September 2008 marked the first recession of the 21st century which resulted in stock markets all over the world in red for almost a year. The reason behind the recent recession was due to the lax monetary policy adopted by the privatised banks (Carmassi et al. 2009, p.977). The mortgage and banking crisis had begun around the early 2007, then the equity market reaction occurred in July/August 2007 and then the collapse started in September 2008 with the bankruptcy of Lehman Brothers and the bailout of AIG (Bartram and Bodnar 2009, p.1247). The phenomenon of financial crisis has been common, such as Great Depression of the 1930s. The difference between earlier and present financial crisis is the severity and global impact of the crisis (Allen and Gale, 2007 and Reinhart and Rogoff, 2009, cited in Bartram and Bodnar 2009, p.1247). The recession revealed centrality of finance to United States and it also exposed the problems with arcane securities traded by financial institutions which went out of control and lead to the global financial crisis (Davis 2009, p.27). United Kingdom economy was hardest hit among the other European Economies. The financial crisis that began in 2007 had adverse effect on the British banks since 1866, which neared the meltdown 12 months after the financial crisis (Hodson and Mabbett 2009, p.1041). The financial crisis lead to unemployment in United States of America as well as in United Kingdom within the six months, which affected the circular flow of income i.e., from households to firms and vice-a-versa. The firms not only reduced the employees but also the output and investment made by the firm. This had a negative impact on economies around the world and leading to longevity of the financial crisis. The concentration should not only be on the causes of financial crisis but also on the reducing the impact and avoiding the crisis in the future.
In 1973 it was observed that, in United States, majority of the population were working in service – based industry rather than in agriculture or manufacturing and it comprised about 60% of the labour force (Bell 1973, p.15 cited in Davis 2009, p.28). Same is the case with United Kingdom where majority of the labour force work in the retail and financial service sector. In United States, as majority employees work in retail sector they are provided with lower wages, benefits and tenures than that of manufacturing sector and it was proved when Walmart, United States largest retail chain, employed more employees than 20 largest United States manufacturing firms combined in year 2009 (Davis 2009, p.30). The change in type of employment opportunities from manufacturing to retail can be referred to industrial upgrading i.e. from manufacturing to retail and many developed countries have passed this phase. The retail sector did not provide the employees with lifetime employment guarantee but it did provide employees with life – time employability by training, adaptability and making them mobile to explore other opportunities (Lagace, 2001, p.1 cited in Davis 2009, p.31). The shift from manufacturing to service base in developed countries such as United States and United Kingdom led to employment tenures and workplaces to get shorter, whereas in traditional rationale, the long term employment would encourage the firms to invest in firm – specific skills and employee mobility goes hand – in – hand with lower firm – specific investment (Davis 2009, p.31). In United States large – scale employers use to provide employees with job securities, provided mobility through career ladder and health and retirement benefits and these were main factors that were used to tie employees with the employers. The employers such as General Motors notified its retirees, in July 2008, that they would be no longer be covered by their private health insurance and were compensated by $300 increase in their monthly pension checks (Bunkley, 2008 cited in Davis 2009, p.31).
The problem with financial institutions was the room created by reducing the capital requirement by choosing counterparties or tailoring operations in legal constraints in order to economise capital and once Basel requirements were met, the management felt that they are exempted from any further scrutiny of actual risks (Carmassi et al. 2009, p.993). The Basel rules and Securities Exchange Commissions (SEC) allowed the international banks (IBs) with low cost of capital. Due to this their leverage ratio was high and they attracted only 20% capital weight under the Basel requirements for any banks lending them. Therefore these businesses grew at high rate than they would have done with high cost of capital and better regulation (Blundell – Wignall and Atkinson, p.542). Until early 1980s employers used to pay pension through “defined – benefit” plans that paid retirees according to tenure spend in the organization. In early 1980s employers began shifting towards the portable pension in which both employees and employers contribute to individually owned pension funds and these could be transferred if employee changes the organization, this is known as “defined – contribution”. This transferred the risk from employer to employees, who were solely responsible for investment choices were offered by the employer (Cobb 2008, Hacker 2006 cited in Davis 2008, p.31). The “defined – contribution” pension funds were invested in the mutual funds and it led to enormous growth during 1980s and 1990s as it offered better returns than any other saving schemes. Nearly after three decades of individual participation in mutual funds led to the concentration of ownership into the hands of financial institutions (Davis 2008, p.31-33). Therefore share prices were used to measure the corporate performance (Useem 1996 cited in Davis 2008, p.31). Due to this firms make their decision regarding strategies and structure according to the expected market reaction. In traditional banking the asset were turned into securities that were traded on market this known as securitization. The best – known form of securitization is mortgage – backed bonds, which are pooled together and divided into bonds and this was regarded as more predictable and safer returns (Davis 2008, p.33-35). When the house – prices were increasing, these financial institutions encourage the people to borrow money for their houses without concern whether they would able to service their debt (Carmassi et al. 2009, p.980-981). The present scenario favours the short – term employment and their job stability will depend upon the level of personal touch involved such as personal fitness trainer (Davis 2008, p.39-40).
If UK government or any other national governments want to resolve the crisis without outside help then it would require adequate tax – collecting capacity, accurate policy advice and appropriately skilled labour (Kane 2002, p.217). It has been argued through public and private financial crisis report that large complex organizations require a different layer of regulation in order to deal with systematic risks by considering their sheer size and particular functions (G-30 2009, IMF 2009 cited in Carmassi et al. 2009, p.995). The difficulty in applying these layers is to define in their domain of application and without creating new incentives for regulatory arbitrage. As these financial institutions often act as main counterpart for derivate contracts and moreover legal structures and business functions often do not coincide (Hupkes 2008 cited in Carmassi et al. 2009, p.996). The specific safeguards are needed in order to preserve the integrity of clearing and settlement for securities. It would be recommended to have concentrate institutions at European Union level in order to ensure greater co – ordination and interoperability between these bodies across main financial centres (Carmassi et al. 2009, p.996). The creation of regulatory incentives to move a significant share of over the counter (OTC) transactions in order to organise clearing platforms with capital in order to encourage pooling of counterparty risks with well capitalized institutions and standardised financial products (Cecchetti 2007 cited in Carmassi et al. 2009, p.996). Insurance providers should ensure that contracts resembling insurance should not be written off without adequate capital reserves and externally validated models in order to ensure business is risk free (Carmassi et al. 2009, p.996). The policies that are required to reduce the risk of future recurrences of financial crisis are choosing less distorting emergency steps, undertaking fundamental reform relating to causes of crisis and unwinding the measures taken in order to avoid the crisis i.e., exit strategy (Blundell – Wignall and Atkinson 2009, p.546).
The financial crisis of 2007/2008 has affected multi – national corporations such as General Motors (GM), Chrysler, etc., these corporations were under impression that economy would continue to grow. Whereas organizations such as Ford Motor Company which were deteriorating earlier were much more stable during the crisis as Ford have sold lot of their asset in order to survive. The crisis would be profitable to the organizations that are well prepared as they can invest in capital, hire the employees, acquiring the other organizations etc. The reason behind the longevity of financial crisis was the growth of the retail sectors in United States and other developed countries. These retail stores employ fewer employees than the manufacturing companies and they import from China and other South Asian countries in order to obtain the lower price. The money was driven to these Asian countries and was struck due to tendency of Asian people to save the money for the future. Therefore, there is a requirement of the detail analysis of the current financial crisis in order to safeguard from the future threats (Davis 2009, p.42).
Bartman S. M. and Bodnar G. M (2009) ‘No Place To Hide: The Global Crisis in Equity Markets in 2008/09’, Journal of International Money and Finance, Forthcoming, March, 1-70. Available at SSRN:
Blundell – Wignall A. and Atkinson P. (2009) ‘Origins of the financial crisis and requirements for reform’, Journal of Asian Economics, 20, 536-548.
Carmassi J., Gros D. and Micossi S. (2009) ‘The Global Financial Crisis: Causes and Cures’, Journal of Common Market Studies, 47, November, 977-996.
Davis G. F. (2009) ‘The Rise and Fall of Finance and the End of the Society of Organizations’, Academy of Management Perspectives, 23 (3), August, 27-44.
Hodson D. and Mabbett D. (2009) ‘UK Economic Policy and the Global Financial Crisis: Paradigm Lost?*’, Journal of Common Market Studies, 47 (5), 1041-1061.
Kane E. J. (2002) ‘Resolving systemic financial crisis efficiently’, Journal of Pacific-Basin Finance Journal, 10, 217-226.
Multinational enterprises (MNE) are those firms which have production facilities and/or sales operations in more than one country excluding home country; usually they are large corporations in domestic markets such as General Motors in United States of America (USA). When MNEs expand their operations to foreign countries then they have to invest in the purchasing or building the production facility in that country (Bartlett et al. 2006, p.2). MNEs can also acquire or merge with existing country in the foreign market that can provide them perfect foundation and competitive advantage in order to sustain in foreign market. Foreign Direct Investment (FDI) is said to be occurred, whenever company invests in the foreign market. There is a significant growth in FDI since 1990s, but there has been a decline in recent years and it can also be argued that FDI is large but not entirely global. If we split the recipients of FDI into developed and developing economies then, USA and Europe led in developed economies whereas in developing economies it is led by China. The main reasons why firms to turn multinationals can be related to the high production costs in domestic markets and to increase the revenue of the firm (Begg and Ward 2007, p.335-339). How firms invest in the foreign markets can be related to Dunning’s eclectic paradigm and model of internationalization by Johanson and Vahlne.
The firms becoming multinationals can be linked with the motivation in order to increase the revenue, increasing the sales, reducing the input cost of manufacturing, etc., motivation can be divided into two types traditional motivations and emerging motivations. In traditional motivations, companies invest in foreign countries in order to secure the key supplies of the raw materials, such as oil companies open up the new oil fields in Canada, Middle East and Venezuela. Firms try to exploit their intrinsic advantage especially related to their technological or the brand recognition. The initial motivation is often opportunistic, but gradually they exploit the economies of scale and scope and that provides them competitive advantage over their domestic rivals (Bartlett et al. 2006, p.4). It can also be argued that firm’s growth is limited by the size and growth of domestic market (Begg and Ward 2007, p.339). For example, Walmart entered United Kingdom (UK) through Asda chain and they also set – up their own supply chain in China. This not only provided them revenue growth in terms of sales but also competitive advantage over its domestic rivals such as Aldi, Target, etc. The developed countries such as US and Western European countries usually have high labour costs and they reckon that their products had competitive disadvantage over the imports. With decrease in tariff barriers by 1960, this triggered the firms to access the low cost factors of production in the developing countries such as China, India, etc. In – case of emerging motivations, the forces such as increasing scale economies, increasing Research and Development investments and shortening product life cycles has motivated firms to turn multinational by not only by choice but also to survive in the market. Whenever the firm is drawn offshore in – order to secure the raw materials, the firm is likely to come across the alternative low – cost production facilities and it might also be exposed to new technology or market needs that would develop its product. It benefited the firms with competitive positioning, that they would not have achieved if they would have remained onshore (Bartlett et al. 2006, p.4). The firms in the developing countries have the international cost advantage, by considering raw materials, labour, etc., and it would enable them to compete effectively in the foreign markets. This would be vice – versa for the firms in the developed countries, as it benefit the firms with cost advantage by expanding in foreign countries (Begg and Ward 2007, p.339).
How the firms become multinationals can be linked to Dunning’s eclectic paradigm and model of internationalisation by Johanson and Vahlne. While understanding growth of FDI, several economic and business theories suggests that, it depends on investing firm to possess some kind of unique and sustainable advantage or advantages that would lead to competitive advantage over the foreign competitors. Ownership sub – paradigm of Dunning’s eclectic theory states that competitive or ‘O’ specific advantages reflects the resources and capabilities of the host country of the firm and firm will invest in foreign countries only when benefits of exploiting competitive advantages from foreign location more than that doing in the host country. The Location sub – paradigm is the main aspect of the Dunning’s eclectic theory as it is a key determinant of the foreign production of MNEs. The firms invest in foreign countries only when if location offers cross – border value added activities. Firms will particularly look for exchange rate, political risks, regulations and policies of the supra – national entities, inter – country cultural differences and also value of other variables common both to domestic and international preferable countries. The firms are also interested if foreign country has good market or it has plenty of natural resources or created resources such as China developed a Special Economic Zones (SEZ) or the country has foreign policy advantage over the other countries. The third important sub – paradigm of eclectic theory is Internalization it states that transaction costs of investing in foreign country is positively correlated to the imperfections of the market (Dunning 2000, p.168 – 183). Whenever firms become aware that it is better to add value to its ‘O’ advantages rather to sell them, or their right of use, to foreign firms, these advantages are called market internalization ‘I’ advantages (Dunning 1993, p.79). The internationalisation model put forward by Johanson and Vahlne consists of four main components namely, Market Knowledge, Commitment Decisions, Current Activities and Market Commitment. Market Commitment can be divided into two parts degree of commitment and amount of resources committed, in first part; firm commits the resources for the particular market, but firm also should not disregard commitment that followed from employing parts of present capacity for a particular market. Whereas in second part relates to the size of investment firm makes for marketing, personnel, organization and other areas. Then it is Market Knowledge, whenever firm enters in new market it does not have experiential knowledge to begin with, but it acquires it over the time. Many commitment decisions are related to knowledge related opportunities or problems and the evaluation of alternatives about the market environment and the performance of various activities. The next phase is Current Business Activities, it can be argued that consequences may or in fact will not surface until activities are repeated continuously. Current activities can also be source for the experience. It is also possible to gain experience by hiring of personnel with experience or taking advice from person with experience. This can be divided into firm experience and market experience, these are essential for firms in order to internationalize. The Commitment Decisions depend on the decision alternatives are raised and how they are chosen by the firm (Johanson and Vahlne 1977, p.26-31). When the firm tries to internationalize it has four main options exporting, licensing/franchising, joint ventures and FDI. The firm chooses the path depending upon degree of resource commitment needed, potential balance of risk to return, degree of control in maximising success and degree of learning it affords. In exporting the firm is involved only in selling goods and services from one country to another. It can be divided into two types indirect and direct, the former involves some intermediary concerned in selling to foreign markets, whereas later deals directly with sales channels overseas. Licensing is a process in which firm, i.e. licensor provides the permission to another firm, i.e. licensee, to utilise or sell its intellectual property in return of finance. Franchising is form of licensing, in this franchisee firm undertakes the business activity as per prescribed manner for a certain period of time and at a specific location in return for royalties or fees. The joint venture can be defined as commercial collaboration of two or more firms whereby they pool, exchange, or integrate their resources. FDI can be defined as establishment and acquisition of assets in foreign country that would provide income for investing firm and firm has full control over its operations. The contractual forms of international business that firm take into consideration are management contracts, turnkey operations, contract manufacturing, countertrade, etc. (Loughton 1995, p.4-26).
Every firm in private sector tries making maximum profit and it provides the motivation for the firms to internationalize. Then the firm goes through series of processes as described in model of internationalization and eclectic theory. When the firm selects the foreign market it chooses the entry mode that provides the firm platform to carry on its operations smoothly. It can also be argued that even FDI is large, but it is not entirely global. Many firms are attracted towards small number of economies especially developed instead of developing (Begg and Ward 2007, p.338). The recent MNEs activities have added to, rather than subtracted from, the robustness of the eclectic and model of internationalization and they continue to meet the most the criteria the firms follow in the process of internationalization (Foss 1996 cited in Dunning 2000, p.184).

Market Systems Not Able To Allocate Resources Efficiently Economics Essay

A market may be of variety of different systems, institutions, stages, social relations, and infrastructural facilities whereby buyers and sellers trade, goods and services are exchanged, forming part of the economy, in other words market is any convenient set of arrangement whereby buyers and sellers communicate to exchange goods and services. The basic concept of market is any structure that allows the exchange of goods, services and information. There are financial markets, prediction markets, and so on. Market can be seen in two ways: as a study of abstract mechanism whereby supply and demand meet (equilibrium) and deals are made. And second, it is used as a symbol of integrated and cohesive capitalist world economy. A market system is any systematic process enabling many market players to bid and ask: helping bidders and sellers interact and make deals. It is not just a price mechanism but the entire system of regulation, qualification, credentials, reputation, and clearing that surrounds that mechanism and makes it operate in a social content. -writework (n.d) (online)
There different types of market system such as perfect competition, monopoly, oligopoly, monopolistic competition, monopsony.
Perfect competition market Perfect competitive is a market characterized by buyers and sellers. In this market there is a high degree of competition due to the high numbers of buyers and sellers. The number of buyers and seller in a perfect competitive market cannot and will not be able to determine the price of goods and services in the market. If so, buyers have no other alternative than to pursue. Buyers and seller have the freedom to enter into the market freely; also firms must be able to establish themselves in the industry easily and quickly. A market if ready and willing to stop production, they must be free to do so.
Monopoly A monopoly is the exact opposite of a perfect competition market system. In a pure monopoly, there are usually only one producer producing goods and services. In such a market system, the monopolist as the right to charge whatever price supplier wishes to due to lack of competition and also lack of substitute, thereby causing exploitation. Hence, the output might increase or decrease at the long run at the same minimum average cost. For example
Net social cost of a monopoly industry monopoly
_economicishelp (n.d) (online)
Since the industry is a monopoly, output will be MC=MR at OQM whilst price would be on the demand curve at OPM. Price is higher and output lower in monopoly industry. The welfare loss is shaded in the triangle.
Oligopoly Oligopoly is so much in many ways like monopoly. The main difference is that instead of having more than one producer of a good and services, there are a lot of producers, or at least a lot of producers that make up a dominant majority of the production in a market system. However, oligopolists do not have the same pricing rights as monopolists, but it is possible with the influence of the government that oligopolists could collide with one another and set prices as that of monopolists.
Monopolistic competition Monopolistic competition is a type of market system is that combines both monopoly and perfect competitive type of market system. Unlike perfect competitive market, each competitor can be differentiated from the others, that some can charge higher prices than that of the perfect competitive firm. Also in the monopoly market, things are very different in the monopolistic competition market. For example for the monopolistic market, the market for music has many artists but yet is not perfectly substitutable with other artist. However, the monopolistic competition curve is elastic, due to presence of substitute goods. The following diagram can be used to represent the cost structure of a monopolistic competitive firm, whereby the shade the shaded part shows the supernormal profit
Monopolistic competition in the short run
In the long run the demand curve of an individual firm will move to the left, as more firms come into the industry, more differentiated products would be produced. This means that the demand for the product will remain constant, that is unchanging due to introduction of new firms into the business.
Monopolistic competition in the long run
This is a shift in demand curve whereby the demand curve comes in contact with the ATC curve. There is then a single price and quantity at which the firm can produce to break even. No supernormal profits are made as AR = ATC. At any other output ATC >AR, so the firm will make losses. -cyroc.cs-territories (n.d) (online)
Monopsony Monopsony unlike monopoly has many sellers of a product but only one buyer. So therefore the buyers are given the major right to determine the price of the product. – (n.d) (online)
Whereby, free market economy primarily means a system where the buyers and sellers are solely responsible for the choices they make. In a way, free market gives the absolute power to determine the allocation and distribution of goods and services. These prices, in turn, are fixed by the forces of supply and demand of a particular commodity. In cases, whereby, demand falls short of the supply of a particular commodity, the price will fall as opposed to a price rise when the supply is inadequate to meet the growing demand of a good or services. For example, in Nigeria, petrol being a worldwide need, there has being an increase in demand and shortage in supply and yet there is an increase in price of petrol.
A graph illustrating a positive shift in demand of petrol from D1 to D2, resulting in an increase in price (p) of petrol, and quantity supplied of petrol in Nigeria. Free market economy is also characterized by free trade without any tariff (tax paid on goods and services going in and out of the country) or subsides imposed by the government
The role of the government of a nation is only limited to controlling the law and order of a country and to ensure that a “fair price” is charged by the sellers to the buyers. That is to say, the government having no role in stating the price of a commodity has to see that the prices taken by sellers is true and commensurate with the prices determined by forces of demand and supply, so as to prevent exploitation of the consumers, thereby, enforcing effective allocation of resources.
An economic system is a system used in allocating resources because resources are limited. According to B.B.G Dictionary of business terms of (1987),” an economic system can be defined as the basic means of achieving economic goals, which is the basic and most important aspect of an economic structure of a society”. There are various types of economic system which are: household economy, the national economy, the local economy, and the international economy. There are also free market economies which aid in solving the economic problem with the little intervention from the government and command economies where the state makes most resources allocation decisions.
According to Anderton.A (2008) the main function of an economic system is to work out the basic problems of a country’s economy, which are: what to produce, how to produce, for whom to produce and how efficient these resources are. Considering the problem what to produce, an economy as the right to produce mix goods. For example, what proportion of output should be spent on defence? What proportion should be spent on the protection of the environment? What proportion should be invested for the future? What proportion should be placed on manufactured goods and what proportion should be placed on services? Also all other problems should be considered. The main causes of these problems are due to limited resources and unlimited want of consumers. Therefore, every country should adopt an appropriate system which would lead to good allocation of goods and services so as to avoid scarcity.
There are three major system adopted, which are: command economic system, Mixed Economic System and Free Market Economic System.
In a command system resources are allocated by the government through the planning system. The main actors in this system are the government, consumers and workers. All factors of production are owned by the government. This system has been linked with the former communist regimes of Eastern Europe and Soviet Union and China while the mixed economic system resources are allocated by both the government and private individuals with the help of the planning mechanism and the market mechanism. This is a very confusing system because it is believed that the roles of government and private individuals often clash, because there is the belief that too much government spending is problematic for the private sector meanwhile the government is expected to prevent market failure.
The Market system of economy which is also called the price system simply put is a means of allocating resources in which the resources are allocated by the “market mechanism” and the major economic problems are resolved by private individuals (Anderton, A. 2006). It can be seen as a type of laissez-faire economy. In a situation whereby demand does not meet supply, in other words, when there is no equilibrium, that is to say, it is a situation in the market whereby the price is such that the quantity that consumers wish to demand is not correctly balanced by the quantity the supplier or firm is willing to supply. -writework (n.d) (online)
Moreover, using market mechanism for resource allocation in distributed system is not a new idea, nor, is it one that has caught on in practice or with a large body of computer science research. Yet, projects that use markets for distributed resource allocation recur every few years, that is, 1 to 3 years, and a new generation of research is exploring market based resource allocation mechanisms for distributed environments such as planet lab, net bed, and computational grids.
This topic has three main goals. The first goal is to explore why markets can be appropriate to be used for allocation of resources, when simpler allocation mechanisms exist. The second goal is to demonstrate why a new look at markets for allocation could be timely and not a re- hash (change or improvement) of previous research. The third goal is to bring out some of the difficult problems persistent in the market deployment and suggest suitable action items both for market designers and for greater research community.
This topic is specifically about the power of market design, but it is also believed that the key challenges exist for market system integration (combining two things together, so they can work together) that must be overcome for market based computer resource allocation to succeed.
The first thing to consider is that: is there a problem…..
In the past decades, it was noticed that, the emergence of systems that are owned, deployed, and used by multiple self-interested stakeholders, considering the differences that existed between the traditional distributed system and the current distributed system. Current environment or current system has so many properties, and they are:
Many resources, many users, and more complicated needs Multiple self-interested stakeholders can simultaneously supply and consume some set of resources (e.g. machines, time, and so on). Users can demand large set of disparately controlled resources even while resources are scarce in other words living the producers with no other choice than to make choices which will lead into producers making use of opportunity cost.
Allocative efficiency This measures whether resources have been allocated to those goods and services demanded by the consumers. In other word, the good and services demanded by consumers must have enough resources allocated to them.
Factors of production According to Anderton.A (2008), land being a natural commodity is one of the factors of production because of the presence of resources within and above the crust. There are non-renewable resources such as coal, gold, oil and copper in which when used cannot be replaced and renewable resources, such as fish, stocks, forests and water. There are also sustainable resources; these are particular types of renewable resources. They are ones which can be exploited economically and which will not diminish or run out. Example of sustainable resources is forests. There are other factors of production such as capital, labour, and entrepreneur. If there can be a mobility in factors of production it will aid allocation of resources efficiently.
According to Anderton.A (2008), there are different economic actors which are: consumers, firms, workers, and the government.
Consumers In economics, consumers are known to maximise their own economic welfare, sometimes referred to as utility or satisfaction. They are faced with the problem of scarcity. They do not have enough income to be able to purchase all the goods and services they would like. So they have to allocate their resources to achieve their objectives. To do this, they consider the utility to be gained from consuming extra unit of a product with its opportunity cost. (Anderton.A (2008))
Workers Workers are assumed to want to maximise their own welfare at work. Evidence suggests that the most important factor in determining welfare is the level pay. So workers are assumed to want to maximise their earnings in a job. However, other factors are also important. Payment can come in form of fringe benefits, like company cars. (Anderton.A (2008))
Firms The objectives of firms are often mixed. However, in the UK and USA, the usual assumption is that the firms are in business to maximise their profits. This is because firms are owned by private individuals who want to maximise their returns on ownership. This is usually achieved if the firm is making the highest level of profit possible. (Anderton.A (2008))
Government In economics the government have traditionally been assumed to want to maximise the welfare of the citizens of their country or locality. They act in the best interest of all. This is always very difficult because it is most times not immediately obvious what the cost and benefits of a decision are. There are not often any consensus about the value to put on the gains and losses of different groups. (Anderton.A (2008))
Market system may and may not be able to allocate resources efficiently. For example:
According to Udeme.E (2012)”It was noticed that the Spanish and Italian bond yields fell drastically in over half a year on Friday after euro zone leaders firmed up plans for a , common bank watchdog.
Reuters reported on Monday that world shares and the euro remained on course for strong weekly gains despite a slight dip. Europeans leaders at a summit in Brussels said a new supervisor would be in place next year, paving the way for the bloc’s rescue fund to inject capital directly into ailing banks. With the prospect of European central bank support looming, benchmark Spanish bond yields have come down around half a percentage point this week and both Spain and Italy have seen dramatically stronger bond sales. Spanish 10-year yields fell to their lowest in 6-1/2 months as markets digested news from the EU summit. Italian yields also fell to levels not seen in over 7 months, helped by a jumbo sale of four-year bonds on Thursday. ‘There is more of a general understanding that the ECB backstop is actually effective,’ Unicredit chief euro zone economist, Mr. Macro Valli, said of the central bank pledge to buy sovereign bonds on the secondary market. ‘The market has brought yields in Italy and Spain down to levels which, for the time being, seem to be much more consistent with debt sustainability,’ he added. ‘The question now remains that will Spain go for support? And if so, when?'” – Udeme, E (2012). It is so obvious that the market system in Spain and Italy cannot, or will not be able to allocate resources efficiently. It is also obvious that market system as caused a drastic fall in the sales of bonds in Spain and Italy.
Now the question still remains, will market system be able to allocate resources efficiently?
It was often argued that people, in general and regardless of the environment in wish they grew up, acquire the moral values they practice, apart from those they claim to hold, from the economic system they labour under. The opinion is that reality provides them with no other choice, which has been made eternally famous in the maxim; Good citizens tend to finish last. Although it is impossible to provide a solid proof of the claim, there is a short important narrative evidence for it.
It is rather obvious that free market capitalism transforms immorality. It is engine is exploitation, deceit, greed, corruption, and fraud, which results in crime, poverty, and a host of other social ills. I suppose that the United States of America is the best type of example for this. But there are even more convincing evidences.
Israel was founded as a socialist country. “The socialist bit–that’s gone altogether. When Israel became America’s little buddy, she also changed over–not fortuitously, during the Reagan years–to a hard-edged capitalist economy. The operation could be called a success, there is a lot more money in the economy, now; and it is easier to do business. But for the first time, there are also homeless people, and families who say they cannot find work, or enough to eat. [Cramer, Richard Ben, How Israel Lost, p. 26]” The BBC has recently reported that “in the last four years the Israeli police have lost control of the country’s organized criminals, who are making millions from gambling, prostitution and drugs.” And the Israeli government is prevalent with corruption.
A similar situation has existed also in Russia since the collapse of the USSR (union of soviet socialist republic). Again, the BBC has recently reported that “Russian President Vladimir Putin has said that organized crime is still controlling large parts of the country’s economy and not enough is being done to stop it. It was said that many businessmen still faced interference from both criminals and corrupt government. And up to 7,000 murderers had not been brought to justice, partly because of ‘weak’ law enforcement. Murders, kidnappings, criminal attacks and robberies have turned into something of a fact of life,” And poverty is indigenous: “prior to the decomposition of the Soviet Union in 1991, that country’s economic and social system worked in a practical sense, meaning most people had a place to live and food to eat. Although, standards of living were below those in the West, particularly in housing, daily life was predictable. The Soviet leadership was legitimately able to say that their form of socialism had succeeded in virtually eliminating the kind of poverty that existed in Czarist Russia. Russian citizens now live in different times. The country’s transformation to a more open economic system has created a large new group of people in poverty.”
I doubt that these events are mere coincidence, and in each nation, the costs of dealing with these social ills are huge. Just consider how much money Americans spend on police, courts, prisons, welfare, uninsured medical care, abused children, and the host of other American social ills. The cost is enormous and completely unproductive. It follows that if these social ills are caused directly by the economic system, then they have to be attributed to that system.
One of the claims economists make is that the free market system efficiently allocates economic resources, and they praise this as one of the systems greatest advantages. But if the social ills mentioned above are caused by the system, this claim cannot possibly be true.
Aside from this, the claim has never been verified. In fact, no one has ever attempted or tried to verify it. I suppose the claim is derived from some other equally unproven beliefs held by economists. There is the belief, for instance, that profit oriented enterprises are more efficient than non-profit, especially governmental enterprises, and its corollary that efficient enterprises succeed while inefficient ones fail. But I am aware of no studies that have been done that even attempt to prove the validity of either of these claims. Anyone who has ever worked for a successful, for-profit company knows that these claims are not even close to being true. Inefficiency abounds in even the best of them.
So is not it time someone put our economists on the spot? Are our social ills the direct consequence of our economic system? And if so, how can it be called an efficient allotter of economic resources? And if it isn’t, isn’t it time to think of making some fundamental modification or change to it, to prevent these unproductive social costs? -jkozy (n.d) (online)