The scope for macroeconomic policy depends upon the economic system in operation, and the framework of laws and institutions governing it. The system may be capitalist or Communist—that is, a free market economy or a command economy. Or it may be a preindustrial or postindustrial economy.
Significant differences exist between economists over the extent to which government intervention should be welcomed in an economy. Some economists take a laissez-faire view and put their trust in market forces. Other economists look to the government to remedy the deficiencies of existing arrangements. In their view economic policy should be designed to eliminate unpredictable changes in economic activity, reduce unemployment, promote faster economic growth, reduce the monopoly powers of large corporations, and prevent deterioration of the environment. The more apparent it is that market forces yield undesirable as well as desirable results, the greater the pressure on the state to devise and implement economic policies to cope with the defects.
Economic policy may, however, do more harm than good if it is based on a mistaken diagnosis of the economic forces at work, or if those who seek to improve upon market forces lack the necessary understanding and skill. Employment policy, for example, must adequately understand the causes of unemployment. Most employment policies took shape only after British economist John Maynard Keynes demonstrated that unemployment was primarily due to a deficiency of demand. The resulting government economic policy took the form of a timely injection of additional purchasing power through government spending. Similarly, a policy to control inflation must be based on a view of its causes. American economist Milton Friedman, for example, proposed that inflation results from letting the money supply grow too fast.
As a result of these insights, much of macroeconomic policy revolves around what is known as demand management—that is, regulating spending and thereby, regulating demand. This generally takes the form of measures that can be classified as monetary policy or as fiscal policy.
On the monetary side, bank interest rates may be driven down or up, the banks may be obliged to restrict credit or lend more freely, and a target may be set for growth in the money supply. In some circumstances these actions could be supplemented by imposing restrictions on loans, such as requiring larger down payments or shorter payback periods.
On the fiscal side, the government may vary the level of taxation or change the tax system in ways intended to encourage or discourage consumer spending or capital investment (investments by business in new factories or machinery). Or it may itself spend more or cut expenditure, again with a view to affecting the level of demand. In all such measures, the government operates through the market, giving market forces a new direction but not attempting to supervise them. The government may also intervene directly to regulate the level of demand via rationing or licensing, or fixing limits to consumption; it may also regulate production by legislation of various kinds, such as requiring employers to follow certain practices in relation to their workers, operating conditions, final product, agreements with other firms, and so on. Such intervention may be economy-wide, as when a limit is set to hours of labor, but it frequently concerns one industry or activity only and thus is essentially part of microeconomic policy rather than macroeconomic
0 comments
Post a Comment