A concept of a free market economy, described by a number of theorists, including Adam Smith and David Ricardo, is a hypothetical state of the national economy or the type of economic system where supply and demand are the only forces to set and regulate prices for goods and services on all national markets. However, in each modern national economy, there are such market forms as monopoly and oligopoly that downgrade a level of competition on the market and can not be ruled by the market forces only. Oligopoly refers to a number of companies (sellers), which dominate specific market or industry and altogether set a price for goods and services that results in higher consumer prices. Monopoly has even more threatening consequences for a free market system â€“ in a situation when there is only one single seller in the market, a monopolist can set any price, beneficial for the company and unfavorable for the customers. For this particular reason, government regulation of the economy is essential. Moreover, social guarantees, such as insurance, pension etc. are absent in the hypothetical free market economy. Thus governments complement free market regulation with antitrust and social economic policy, resulting in a so called â€œmixed economyâ€, the most popular type of modern national economy worldwide, which â€œincludes elements of both capitalism and socialismâ€.
However, some economists of the 19th century had a strong persuasion in favor of a free market theory. The government economic policy of some European countries in the 19th century was influenced by the doctrine of â€œlaissez-faireâ€, also known as â€œlet-alone principleâ€. The policy presupposed a minimum interference of a government into the economy. This idea was supported in Great Britain by the classical economist and philosopher Adam Smith. However, the role of a government in this doctrine was significant only in a particular aspect, â€œlaissez-faire advocates nonetheless argued that government had an essential role in enforcing contracts as well as ensuring civil orderâ€. With the industrial development and growth of production in the late 19th century, this theory appeared to be not effective in the new circumstances.
Market economy in the U.S. has been historically developed under the influence of several major factors. â€œThe economic growth of the United States was achieved to a great degree at the expense of Native Americansâ€ (Markham). Indians were forced to relocate from their native lands to the so called â€œreservationsâ€ on the territory of modern Oklahoma. The U.S. government sold public lands to the farmers, which stipulated an agricultural boom in the middle of the 19th century. The second factor of the U.S. economy development was urbanization and migration of the U.S. population to the new lands, encouraged by development of railroads and transportation system, as well as the immigration from other countries to the U.S. Investments, industrial inventions, creation of new industries and opening of new markets had a significant influence in the development of the U.S. economy.
Most American political leaders of the 18th and 19th centuries adhered to the laissez-faire principles and did not provide an active involvement of the government into the regulation of private sector of the economy. However, the situation changed in the beginning of the 20th century, when the world’s economy has declined into a state, known as a â€œGreat Depressionâ€. It originated from the crash of the U.S. stock market in 1929 and is characterized by a huge decrease in consumer spending, volumes of production and increase in unemployment. Economic theorists argue about the causes of the Great Depression: advocates of the classical Keynesian economic theory believed it was a failure of a free market self-regulatory mechanism, while monetarists insisted it was a failure of government regulation of money supply.
Herbert Hoover, who was the U.S. Secretary of Commerce in the 1920s, provided the program of â€œeconomic modernizationâ€, which resulted in the development of industries, construction boom and increase of consumer demand. However, with the beginning of the Great Depression, he became the President of the U.S. and was blamed by the opponents for the government interventions into the economy and for the enormously long duration of the recession period. â€œA â€œHoovervilleâ€ was the popular name for shanty towns built by homeless people during the Great Depression.
On the edge of Great Depression, the primary goal for the government was ensuring sustainable recovery and economic growth, aimed at reaching the â€œwelfare stateâ€.
Concept of a â€œwelfare stateâ€ is based on the key role of a government in ensuring social and economic well-being of a nation. Therefore, â€œwelfare stateâ€ can be reached due to the equal distribution of national wealth, social spending, and equal opportunities for all society members.
Franklin Roosevelt has become a new President in 1932 and he is known for the â€œNew Dealâ€ â€“ a combination of various economic, political and social programs of his advisors in order to reach a â€œwelfare stateâ€.
As a part of a â€œNew Dealâ€ the so-called â€œAlphabet Agenciesâ€ or a â€œNew Deal Agenciesâ€ were created. They were federal government agencies aimed to deal with the negative consequences of the Great Depression and to ensure effective government regulation. It was at least 100 agencies created as a part of a â€œNew Dealâ€, including Fair Labor Standards Act, Emergency Banking Act, Federal Loan Agency and others.
After the Great Depression, the U.S. economy has become a mixed type of economy, which is characterized by â€œfree enterprise with a progressive income tax, and in which, from time to time, the government stepped in to support and protect American industry from competition from overseasâ€. Such approach is known as â€œvolunteerismâ€ or â€œvoluntary export restraintâ€. Volunteerism is usually implemented on a bilateral basis between countries that may suffer from import of goods from particular countries. For example, in 1981 under the threat for the U.S. automobile industry, volunteerism agreement that restricted import of cheaper Japan cars to the U.S. was implemented.
Current U.S. economic policy, based on the government fiscal stimulus program of 2009, being far from a â€œmagic wandâ€ to the national economy, shows effectiveness and slowly leads the country to recovery. John Maynard Keynes, an outstanding British economist of the early 20th century, expressed the idea that national economy, regulated by fiscal policy with an emphasis on social spending, can help the countries overcome recession. Keynes’ theory is known as a â€œstimulusâ€ approach. Nowadays, it is considered as an â€œorthodoxyâ€ economy along with monetary regulation, described in the works of Milton Friedman.
Prerequisites of the stimulus drive for the economy appeared after financial crisis of 2008 that had put national economy into a tailspin. Administration of the President’s Barak Obama had to deal with the need of economy recovery and restoring economic growth.
However, Obama’s administration was criticized for the stimulus approach by many economists. They doubted an ability of the fiscal stimulus to stabilize and revive the economy as well as also warned about a potential threat of inflation, because of floating the economy with budget money. Nobel Prize winner, American economist Paul Krugman, supported the stimulus approach of the President’s Obama administration. However, he expressed the opinion that the amount of the bill should have been much bigger in order to overcome all the negative social and economic consequences of the recession period.Â It is obvious that the greater losses from crisis are, the more finances are needed to recover from it.
The U.S. $789 billion economic stimulus bill was spent on infrastructure investment, renewable energy and energy efficiency, advanced vehicles, and many other projects. The policy proved its effectiveness, resulting in the short-term boost and creating favorable conditions for the short and middle term investment. â€œIn the longer term infrastructure investment can deliver positive returns to productivityâ€.
On the other hand, current national debt of the U.S. is now greater than $16 trillion and the budget deficit totals $1.1 trillion in the current year. These factors can have a negative influence on the national economy by significantly slowing it.
On the top of the world economic recession, many national governments keep up to the austerity approach in the economy. Austerity is opposite to the stimulus and presupposes decrease in public spending, aimed at reducing the budget deficit.
According to Krugman, â€œausterity in depressed economies would deepen their depressionâ€. Current economic situation in the Eurozone has proven this assumption.
Â However, as each national economy is unique, each of the stimulus and austerity theories can succeed under certain circumstances, as well as none of them could bring a desirable result under some other conditions.
Consequently, the most effective approach to the government regulation of a market economy is a compromise and taking into account economic cycles. It is a stimulus in the current U.S. economic policy. As soon as the economy would reach a stable growth on the peak of the economic cycle, the regular scheduled debt pay downs should take place. Such approach was expressed by Keynes and it is known as countercyclical fiscal policies.