Introduction the public sector to ensure macro-economic viability


2008 saw the beginning of the financial crisis, the worst since the great depression. Capitalism appeared to have governed our markets for the past 30 years but had suffered a deadly decline. It proved how lack of government intervention combined with inadequate understanding of complex financial instruments can be disastrous for the macroeconomic environment. Yet the free market approach that had so dominantly expanded through most developed nations continued to remain the prevailing theory governing economic policies in the western hemisphere post-crisis, especially since most scholars didn’t have an answer to the deteriorating neo-liberal ideology implemented initially by Churchill and Thatcher. Consistently emerging examples of market failure have since plagued the economic environment, demanding a more affluent interest by the public sector to ensure macro-economic viability and sustainability.

The Free-Market

A free market economy allows the relationships between product/service supply and consumer demand to dictate prices. And is not influenced by any external factors and cannot be controlled. This essay shall discuss the limitations of the current free market structure.



Neo-Liberal Economics

Early Adoption

Before the turn of the century, since the 70’s, politics and economics has swayed towards Neoliberalism. This steady and certain dominance, built over decades, has in turn placed the supporters of Neoliberalism in powerful positions and offices across the realm of both politics and capitalists. The problem with understanding it rests largely on its extremely pervasive effects on a plethora of social, political and economic issues. A number of neoliberalism’s common features include: privatization, deregulation and austerity measures. The Neo-Liberal ideology provides an inbuilt focus efficiency driven by competition in the market where Adam Smith’s famous ‘Invisible hand’ operates to adjust the equilibrium. Their belief provides proof of positives the free reign market would otherwise encourage. These include inventions, such as the internet and modern telecommunication tools that were so popularly given birth to in the first decade of this century. Innovation also breeds competition among firms, as each firm attempts to improve on previous product generations in an attempt to drive customer choices. An increase in variety in services rendered has created significant employment opportunities in more efficient ways than what the public sector could provide. Theoretically the customer is sovereign in a ‘laissez-faire’ condition, unfortunately, the suppliers by virtue of their valuable political lobbies are the real controllers of the market.


The consequences of the spread of neoliberal economics were, and have continued to be a huge increase in income disparity, a significant increase in severe deprivation for the poorest nations and peoples of the world, a disastrous global business and entrepreneurial environment, an unsustainable global economy and an unaccountable jackpot for the wealthy (Chomsky, 1999, p. 8). In the UK inequalities are at an all-time high, just as they were before the First World War. Resultantly income growth rates have fallen. The effect of Neoliberalism has been much worse in the developing and third world nations. Professor Joseph Stiglitz (former senior vice president and chief economist of the World Bank) himself acknowledged that neoliberalism has never been ‘supported … by historical experience’. Remarkably, even the IMF now admits to the failures of Neo liberal policies claiming they have ‘not delivered as expected’ and their benefits have ‘overplayed’.

The world economy is a shade of what it was during the 50s and the 60s when nations were following nationalistic (Keynesian) policies to streamline their entry into the world of globalization specifically the developing nations. Fast and stable growth with a relatively high equitable income distribution were the common feature of the developing nations before the 70s when neoliberalism started its journey to power. Nonetheless, it has been outlined how in the latter half of the twentieth century neoliberalism grew to become the dominant global economic agenda, affecting both social and political issues to boot.

Figure 1 Mark Weisbrot and Rebecca Ray, “The Scorecard on Development, 1960-2010: Closing the Gap?”

Moreover, an abundance of empirical data revealing just how bad its effects have been on societies over the last three decades on society are very well documented, yet they fail to catch the attention of the mainstream media.


Market Failure


Economical function of any market is dependent upon the viability and the functioning of the market with efficiency. Market failure is the situation where the allocative process of goods and services is flawed and thus leads to inefficiency and mismatching. The economic theory of market failure essentially explains and correlates the reasons for inefficient outcomes in markets that are otherwise ignored or assumed to have no impact in the neo-classical theories (i.e., markets that feature perfect competition, symmetrical information, and completeness). When market failure occurs, the social need to correct the failure in order to formulate a smooth functioning market increases and thus the need for intervention arises.

The quintessential existence of the theory of market failure is  primarily focused on analyzing the impact of external influencers (identified below) upon market systems and then understanding the rationale behind several economic analyses that support government action (intervention).This contradicts the principles of theoretical free markets but creates in depth knowledge of why it is important for such intervention to take place in markets for goods and services , and see if tthat justifies the outright government input. 






Negative externalities

Negative externalities are the cost borne by the third parties due to the negligence of consumers and producers. These third parties that become directly/indirectly influenced by the operations can be individuals, organizations, or communities, who suffer due to the self –interest pursuit of the consumers and producers. Such as the mass creation of plastic bottles for Pepsi Co (producer) so that they may sell cold drinks to their consumers, affects the people living around the production site due to the harmful emissions from plastic.

Capitalistic market forces which concentrate power

Free market challenges the concepts of external forces being perceived as laissez faire usually identified by monopolistic and oligopolistic markets. The concept of free market thus brings us closer to more practical situations and thus helps prompt capitalism materialization.

This then nurtures the conception of power collectivism and when the accumulation of money and power begins due to the concept of demand and supply intersecting, the system enables some people to grow their collective wealth and money. But due to the initial lack of having sufficient purchasing power, the poor people keep falling back into poverty.

Due to this widening gap there is a need for government intervention via policies, law, and direct intervention to ensure other aspects of economics function smoothly.

Informational asymmetry

Markets today offer consumer various consumption choices and variations of the exact same product, this causes the creation of information asymmetry where the consumer can’t form firm claims about how the purchase product will perform. George Akerlof argued on this accord that this is essentially the consumer going in blind and being plunged into the perils of poverty.


Provisos for non-rival and non-excludable goods

Non-rival and non-excludable goods are mostly public goods as is, however the concepts strongly contradict the functionality of free market systems. As the principles focus of demand and supply, but the goods are nonexclusive, the concept of market forces fail to function. For example if street lighting was limited and privately owned, the product wouldn’t be purchased, because nobody would pay a hefty price for a product that many can free load off of.

Unstable markets

Free market systems often are characterized by high instability in terms of the very principles of what it functions on. For example a non-essential good with elastic demand will have high instability due to the construct of the supply and demand functions. This concept applies to essential inelastic goods as well, such as wheat or sugar etc. Artificial shortages can be created by producers to prompt price increases, and thus there arises a needed for this government intervention. This can cause a huge market failure as it will push back consumers from products of need and essentially disrupt the entire concept of market presence.

Inequality and Equity

Furthermore the previous market failure example, helps understand the concepts of inequality. Free markets focus on the concept of if a consumer can match the offer of a producer, this would mean that the consumer continues to be stripped of needs if the consumer is unable to match the producer’s price offering. However, if the producer has a high amount of influence and/or has a monopolistic approach (or oligopoly exists), the consumer will be further pushed into the perils with no redemption.

Property Rights and Demerit goods

De merit goods are goods that are socially frowned upon due to the consumption of the products leading to negative effects, this in inclusive of cigarettes and alcohol. Such goods would be easily manufactured and sold in free markets, as the demand for them will increase as will the supply. However the negative effects of their consumptions extend onto the ones who do not consume it directly as well, thus causing it to be a market failure.


The financial crisis of 2008 exhibited the atrocity that stems from neoliberal meritocracy at a macro-social level , this is directly exhibiting the effect on the Euro-zone countries. Profit prompts political liaisons and sociological ties become a weaker concept when the impact is on prolonged periods of time. The strategic intervention by governmental bodies for regulation becomes more necessary and thus forms the process of dealing with the scenario. This resolution lies within forming a diverse and supervisory body that has sufficient authority to restrict illegal practices and negative actions of the market participants- consumers and producers.

It is thus imperative that a settlement is created between the concepts of free markets and command economics, which are formed under the influences of Keynesian and Classical economic concepts. This is due to the lack of valid economic theories existing that can be implemented. The implementation of the concepts will then cause for higher transparency for monetary and fiscal policies set out by the central bank, and allow the sustenance of the government.

Furthermore it is recommended that a progressive system is set in place with strong adherence laws that will cause for the social circulation of money to take place (flow from high income groups to lower income groups) via physical and financial public tools and services. This will bridge he wealth disparity gap in the economy.

The same concept maybe applied to corporations that often use laws to be bent and influence to ease away from taxes and accountability for externalities (which cost the socio- economic construct of the economy). With the constant improvement being made towards making more control environments for the corporations, there is also a need for more emphasis to be laid upon the corporate social responsibility and organizational sustainability of companies that can cause the externalities exhibited to be transformed into more positive influences.

Furthermore the government must focus on disseminating proper information of products to the consumers to avoid information asymmetry, Such as in India, the Medical Council of India (MCI), has begun to vetting doctors and medical institutions to having more stringent guidelines to ensure best practioning takes place.

A Behavioral Economics Perspective

Behavioral economics expands the concepts of economics, associating it to psychological, cognitive and sociological factors that helps carve out a more plausible and practical view of the policies in line. William Congdon, Jeffrey Kling, and Sendhil Mullainathan have separated this inculcation of psychology and sociological factors into 3 distinct category. These being namely imperfect optimization, bounded self-control, and nonstandard preferences.

 Imperfect optimization contradicts the concept of traditional economics claim that people are sufficiently good at making decisions for themselves. This is aided by a study based on the salience of a sales tax and its influence on the behavior of consumers. So even if the consumer pays the same amount regardless of if the price tag is sales tax inclusive or not (included in price or applied later at checkout), the purchasing pattern differs.

Bounded self-control challenges the traditional economics view that, even when people know what they want, they are unable to act on these interests. These bounded self-control findings include evidence of procrastination and succumbing to immediate temptation, both of which can result in self-harm. The nonstandard preferences phenomenon challenges some of the standard economic assumptions about choice, such as that people value the end state rather than the path taken to achieve an outcome. For example, psychology and behavioral economics find that people value a good differently depending on whether they were randomly endowed with the good, and also that people do not value losses and comparable gains symmetrically.


Karl Marx’s concept of communism perhaps was very well formed, except it failed to inculcate ideas such as need for enrichment of social classes, fetish for consumptions, recession and financial crisis concepts, and concentration of industries. Thus the concept of free market is eluded with the concepts of government intervention being limited to public goods, but not having a wholesome approach to sustainable market structures. Marx’s prediction of the natural inclination to be towards colluding and not competing is thus maybe true, as power lies within collective strength.

It is clear and evident from the discussion above that even though Neoliberal ideology dominated society in the years following the Second World War, its effects have been and will continue to be extremely damaging for most of the world’s nations. The steady increase of world population, coupled with a decrease in economic growth and most social indicators, Neoliberal policies have seen the social and economic inequality reach and all-time high, and its supporters who are charged with the governance of nations and drafting policies (skewed political support and weak democracy) have managed to bring about frequent economic crises in which the costs are socialized, and the profits are privatized.