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ElizabethBertolino
ProfessorMagnusson
ECON2020
30April2014
MixedEconomy:FreeMarketvsGovernmentIntervention
Amixedeconomyistheimplementationoftwoseparateextremeformsofeconomicrules
meetinginthemiddleandcoexistingtoreachanoptimallevelofoutputandlivingstandard.Our
economyisabalancingactofatotallyfreemarket,andaneconomywithgovernmentpowerand
regulation.Governmentinterventionintheprivatemarketwillalwaysbecontroversialbecause
essentiallywhatitcomesdowntoisthebattlebetweenbeingfiscallyprosperousormorallyjust,aswell
astheimpactontheaverageperson.Inafreemarketunlimitedprosperityispossible,butthecostisa
wideninggapbetweenthehavesandthehavenots.Thisgapcausestheneedforintervention,
somethingthatismorallydrivenbutfiscallyunsound.OurKeynesHayekmixeconomicsystemallows
neitherClassicalorKeynesianEconomicstoprosperindividuallyandleavesthequestionofwhichone
wouldactuallywork,andhoweachsystemaffectstheindividualcitizen.Inthispaper,Iwillcompare
andcontrastthefreemarketwithandwithoutgovernmentinterventionwitheconomicprinciplessuchas
opportunitycost,marginalprinciple,andtherealityprinciplethatwillultimatelyconcludewithwhetherI
believeoneisfavorabletotheotherinprovidingtheoptimalamountofgrowthandenrichmentina
mixedeconomy.
Tobegin,bothsidesofamixedeconomy,whetheritbethefreemarketorheavilyregulated,
canbecomparedthroughevaluatingtheopportunitycostofeither.Inafreemarket,Ihavethe
opportunitytogrowhowevermuchIwish.IfIhaveagoodidea,Icangofromhavingnothingto
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owninganempire.ThinkofBillGates,acollegedropoutwhoisnowoneofthemostsuccessful
entrepreneursintheworld,isaperfectexampleofhowafreemarketcanproducesuccess.Thisis
becausewearedrivenbyourownselfinterest,andindoingwhatwebelievewillproducethemost
fruitfulbenefits,weconsequentlyhelpthemarketgrow.Iamnotgoingtogooutandstartacompany
thatIdonotthinkwillyieldmesomesortofreward.Inordertodothat,Imustprovidesomethingthat
peoplewanttobuy,thuscreatingaprofitablebusinessthatdrivestheeconomy.Thepricepaidofwhat
Igiveupinafreemarket(opportunitycost)isstability.Wherethereissuchalargeopportunityto
prosper,thereisalsoahugeopportunitytofail.Icouldputallofmysavingsintostartingabusinessand
loseitall.Thisalsocausesagapbetweentheverywealthyandverypoor,apartofafreemarket
economythatiscontroversialbecauseatsomepointpeoplestarttothinkitisunfair.
Thenextwaytoevaluateamixedeconomyiswhenthebenefitsequalthecosttoprovide
optimallevelofactivity.Thisisalsoknownasthemarginalprinciple,andcanbeappliedtothefree
marketbecauseatsomepointtheprosperousmustbeabletoequalouttheunprosperousinorderto
achieveoptimalgrowthoftheeconomy.Thiscanseemlikeacoarsestatement,butinafreemarketthe
marginalprinciplecanleadtomoregrowthwithaspillovereffect.IfIownabusinessthatisallowedto
grow,Iamgoingtoneedmoreworkersasitexpands.Thismeansmorejobsarecreated,thegrowth
potentialhasrisen,andmoreworkerscanbehiredbeforetheirproductivitydiminishes.Whenthereis
anincreaseinjobsandgrowth,thereismoremoneyforpeopletospendandputbackintothe
economybecausepeoplereallyjustwanttohavemoneywithpurchasingpowertosatisfytheirdesires.
Inafreemarket,thefocusistodrivetheeconomywithopportunityforpeopletogrowasthey
wishwiththeideathatpeopleactingintheirownselfinterestwillultimatelyleadtoanexpanding
economy.
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Whenthegovernmentintervenesinafreemarket,itseemstobecausedbyafeelingofmoral
obligationthatgoesagainsttheideaofselfgrowthandentrepreneurship.Theappealingaspectthatis
offeredbygovernmentinterventionismorestabilityfortheaveragecitizenthanthefreemarket,and
manyarewillingtosacrificeeconomicgrowthforthatstability.IfIcompletelyfailandloseeverything,I
canapplyforunemployment,foodstamps,andothergovernmentprograms.Also,thegovernment
controlsthemoneysupplytocontrolratesandinterestifIneedtoapplyforaloan,ortostabilize
inflation.Byintervening,thegovernmentprotectsmymoney,andprotectsmeifIloseitall.The
opportunitycostofsteeringthemarketsandmoneyisafalsesenseofentitlement,limitedgrowthand
negativelyinfluencingthenaturalboomandbustcycle.WhatweareseeingmoreofintheUnitedStates
isagrowthofpeoplefeelingentitledtomoneygivenbythegovernment.Insteadofworking,many
collectunemploymentastheirjobandfeelitisowedtothem.Whenthegovernmentintervenesso
muchwithoutregulating,spilloveriscausedwheremorepeoplearesatisfiedwaitingforapaycheck
insteadofworking,whichtakesthemoutoftheworkforce,stuntingthemaximumgrowthpotentialof
ourcountry.
Thisimpactsthewholeeconomybecausemorepeoplewillhavetobeprosperousinorderto
makeupforpeoplewhodecidetocollectunemploymentinsteadofenteringtheworkforce,thus
decreasingthepotentialgrowthoftheeconomy.
Governmentinterventionalsoslowsgrowthfromtheperspectiveofanentrepreneur.IfIama
businessownerwillarapidlygrowingcompany,thereisapointwhereIwillhavetodecidetoeither
keepmycompanygrowingandeventuallyreachapointwhereIpayamuchhighercorporatetax,orifI
slowthegrowthIcanstillhaveaprosperouscompanywhilemaintainingmyplaceinalowercorporate
taxbracket.Inthissituation,Iwouldwanttostayinthelowertaxbracket,whichwouldeliminate
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potentialjobsfortheaveragepersonthatmycompanywouldhavecreatedifithadgrown.Another
issuesthatariseswhengovernmentintervenesiswhenmoneysupplyiscontrolled.WhenIgointothe
bankforacarloan,Iwantalowinterestrate.Thishappenswhenthebankhasenoughmoneysupply
initsreserves,andcangiveoutmoreloansatalowerrate.Whenbankscannotreachtheirreserves,
theeitherborrowfromotherbanksortheFederalReservewillsupplymoremoneytobanks.This
causesaproblemwhentoomuchmoneyissuppliedbecauseitcanbecomegreaterthanthedemand,
resultingininflation.Anotherworryiswhenthebanksholdontothemoneysupplyinsteadofloaningit
out.Thesupplybuilds,andwhenbanksfinallystartloaninghyperinflationcanhappen.Ifhyperinflation
happened,IwouldbepersonaleffectedbecauseIhavemostofmymoneyininvestments,whichwould
becomeworthless.SinceIambeingputthroughcollegeasaresultoftheseinvestments,Iwouldhave
todropoutandjointheworkforce.Thistakesawaythepurchasingpowerofmoney,whichiswhat
drivespeopletostartwith.
Thequestiontobeginwithiswhethergovernmentinterventioninthefreemarketisfavorableor
notandwhyamixedeconomyisessentiallythesweetspot.Inmyopinion,interventionisgoodtoan
extentinourmixedeconomy.Rightnowwehavefartoomuchinterventionfortheeconomytoreally
flourish,butwealsocannotmorallydisregardthosewhoaretrulyinneed.Therehastobeawayto
findabalancewhereunregulatedopportunityisnotcompromisedandthoseinneedarenot
disregarded,whichonlywillcomefromheavyregulationandopportunityforthosewhofeelhopelessto
findawaytoentertheworkforce.Oneideawouldbecuttingcorporatetaxoncompaniespaying
employeesmoreandofferingmorejobs.Thisgivesmoneybacktothepeopleinsteadofthe
government.Thisisonlyoneideaamongstmanythatcouldhelp.Overall,thefreemarketshouldbe
abletothriveandgovernmentshouldstepinonlywhereisitmuchneeded,whichwouldmakeforthe
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bestformofamixedeconomy.