Interventionism

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The intervention of the State is the state's policy of "interfering" in the economy and influencing the economy. It is the system of the state's economic policy, it depends on the direct influence of the state on the economy. Interventionistism is called every conscious influence of the state on the course of economic processes.

Arguments for the use of state intervention

  • Necessity to secure the economic system from the institutional and legal side. This is primarily about the creation by the state of legal standards and institutions that protect property rights
  • The imperfection of the market and competition in practice, related to the monopolisation of the economy and factors such as imperfect information, which lead to socially unallocated allocation of economic resources and possible reduction of well-being of the poorest sections of society. You upholding competition may limit these losses, enhancing the information flow system and removing barriers to entry to the market
  • Occurrence of negative external effects in the scope of production and consumption. The state may persuade economic entities to cover all or part of the costs associated with limiting the negative side effects of their activities in the sphere of production or consumption (e.g. costs of installing devices reducing environmental poisoning)
  • Existence of public goods, such as pavements, street lighting, services provided by the fire brigade police. Due to the difficulties in enforcing the use of these goods and services and the high costs associated with them, they are not profitable for the private sector and without state involvement they could disappear
  • The occurrence of phenomena such as large fluctuations in economic activity, unemployment and inflation, which lead to destabilization of the economy, uncertainty and waste of economic resources. States with various means of influencing the economy, may take stabilization measures limiting the intensity of such phenomena
  • The existence of unprotected old, handicapped and sick people who are unable to cope alone
  • The formation of too large, unacceptable, income and property differences, which weaken the motivation of low-income people, foster conflict and protest.

Arguments against the use of state intervention

  • The emergence of market imbalances (shortages or surpluses) as a result of state regulations, especially when these regulations affect the prices of products and services
  • Distorted information, the greater the state's intervention, the more information is distorted
  • Reduced flexibility of the economic system caused by bureaucratization and stiffening of decision - making processes
  • High costs of state intervention
  • Weakening of market-related incentives
  • Limiting the individual's freedom and inhibiting a bottom-up initiative.

The role of the state

The state can implement the policy of interventionism by:

  • undertakings aimed at increasing employment without an increase in the supply of goods and services (public works)
  • fiscal policy
  • monetary policy
  • financial policy
  • supporting failing enterprises (subsidies, preferential loans or nationalization)

State intervention policy usually leads to an increase in the budget deficit (as a result of increased public spending). In this context, there is the problem of sources of financing for interventionism. Financing through any form of commercial credit is unrealistic due to the inability to return the funds obtained. Usually public debt remains the source of financing. A side effect of demand management is higher inflation.

The most commonly used tools of interventionism

The state has an extensive range of means by which it can influence the functioning of the market mechanism. The most commonly used are:

  • pay and price policy,
  • subsidies,
  • government orders,
  • intervention buying or selling,
  • fiscal policy,
  • monetary policy.

Historical context

A major breakthrough in the economic history of the world was the Great Depression of the 1930s. Its uniqueness was not so much on a wide geographical range or on the fact that it covered all branches of the economy, but at the depth of the economic collapse. The Great Depression brought a drop in production by about 40 percent. (previous crises caused a decline of 8-12 percent). The market mechanism could not cope with the occurring phenomena. This led to a departure from the liberal economic policy and the use of state intervention policies in many countries. The view was won that the state has certain responsibilities in the economic sphere. The active policy of the state, whose main goal was to create a boom, appeared already during the First World War. It was supposed to be an extraordinary solution related to the ongoing war. After the war, it was planned to withdraw from the policy of state intervention and return to economic liberalism, but the Great Depression showed that the state's influence on the economy is also needed in peacetime. It should be noted that the increase in the role of the state in the economy and the gradual change in the approach to economic policy (the so-called Keynesian revolution) are the long-term consequences of the Great Depression.

Theoretical basics

The theoretical basis for intervention was created by British economist John Maynard Keynes. Based on the analysis of phenomena occurring during the Great Depression, Keynes created and published in 1936. The general theory of employment, interest and money - a book that gave rise to macroeconomics. Keynes emphasized the role of aggregate demand in macroeconomic fluctuations. His successors persuaded economic politicians to drive aggregate demand, i.e. to manipulate government demand, to smooth out fluctuations, mainly to avoid a prolonged recession. Keynes pointed out that the policy of interventionism is not unambiguous - it brings both benefits and costs.

It is worth noting that three years earlier, the Polish economist M. Kalecki formulated the basic elements of Keynen's theory. He created a macroeconomic model based on mass unemployment in the 1930s.Kalecki's scheme was more perfect than Keynes's, but his work was translated into English later, when the Keynes model already existed in the west. According to Keynes' views, the capitalist economy can not fail to function without disruptions, in the form of imbalance and the under-utilization of productive capacities and unemployment. The most important source of disturbances is the insufficient willingness to invest by private entrepreneurs, which creates a field for state intervention. Under such conditions, state income instruments such as tax breaks, loans and expenditures, e.g. subsidies, have become the main tools of state intervention. The purpose of these instruments was to:

  • stimulate effective demand in the economy, which determines the development of investments through production increase and decrease in unemployment
  • mitigating fluctuations in the business cycle by using automatic stabilizers of the economic situation in the form of a tax scale - tax scales depending on the business cycle and unemployment benefits.

Dispute over interventionism

It is believed that from the beginning, macroeconomics is divided into two main schools of thought - Keynesianism and monetarism. Keynesians and monetarists continue the old discussion on the differences between laissez-faireism and interventionism and never cease to argue about the proper role of government in the economy. Keynesians believe that the market is imperfect. The government, as a participant in economic life, has an advantage due to the information it possesses. Keynesians, therefore, believe in an effective and active intervention policy. Monetarists, on the other hand, perceive the state (politicians, bureaucracy) as obstacles in successfully removing market failures. They expose the impropriety of government intervention and its inability to stabilize the economy. They regard the imperfection of the market as a less important phenomenon.


Interventionism — recommended articles
Etatism — Money emission — Expansionary monetary policy — Austrian business cycle theory — Monetarism — Demand shock — Galloping inflation — Centrally planned economy — David Ricardo

References

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