A common discussion in the field of economics is the extent of which government intervention can benefit an economy. Government intervention is any action carried out by the government or a public organisation with the direct objective of having an impact in the economy, beyond the current provision of public goods. Government intervention can be essential in correcting market failures or to achieve a more impartial distribution of wealth and income. However, many economists are more inclined to raising awareness to the benefits of a free market. However, I disagree with this and believe there is a need for government intervention.
An economy operating under a free market means that private individuals and firms take economic decisions. In a pure free market, there would be no government intervention at all in the economy. Adam Smith in his book ‘The Wealth of Nations’ strongly supported the idea of a free market due to the theory of the invisible hand (something I have talked about in a previous article). In a free market, people attempt to maximise their individual utility, which can indirectly lead to the best outcome for others in the economy. However, this can have its disadvantages.
A significant problem is inequality. A free market provides no social security net for those who are unemployed or on a low income. The nature of a free market is that the benefits tend to accrue to a small number of people who have the advantage of property and monopoly power, leading to less equitable distribution of wealth. Moreover, large firms can dominate certain markets, even when there is competition by exploiting suppliers and consumers to maximise profits, leading to monopolies.
Furthermore, the lack of public goods in a free market can be seen as a problem. A public good is a good with the characteristics of non-rivalry and non-excludability, which is usually provided by the government. In a free market, individuals will be looking to profit maximise and therefore won’t see the need for the development of essential public goods like street lighting or national defence as they’d believe the opportunity cost is too high.
Similarly, due to profit maximisation being the biggest motivation for firms, the quality of goods and services may decreases in an attempt to reduce costs unethically and increase profit margins. This may be in the form of harm to the environment through polluting landscapes (which is likely to occur when there are no restrictions from governments) or by exploiting workers. These are some reasons why I believe a free market would be damaging to an economy and government intervention is a necessity to prevent multiple market failures.