19.08.2020 in Economics

Economic Policy and Global Environment


The problem of state intervention in the economy is one of the main issues of any country. Along with the maintenance of order and legality, the state performs a specific function in the economy throughout its history. State regulation of the economy has a long history. Even during the period of early capitalism in Europe, there was a central control over prices and quality of products and services. In the modern conditions, any state regulates the national economy, with varying degrees of intervention in the economy in order to correct the country’s level of unemployment or its inflation rate.

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The state has always a major impact on the functioning of the economy in all countries has, and therefore, influenced the development of society. The national legislation governs the modern market economy in almost all countries. For this reason, the government regulation is an important part of the functioning of the economy and, therefore, deserves close attention.



The attitude to government intervention in the market economy was different at different stages of its development. During the period of formation of market relations in the XVII and XVIII centuries economic doctrine of mercantilism, based on a recognition of the absolute necessity of government regulation for the development of the country’s trade and industry dominated. The mercantilists wrote that only the detailed guidance from the government is able to maintain order in the economic sphere. They saw means to achieve social justice in the state leadership. A business class gained momentum with the expansion of market relations began to consider government intervention and related restrictions as an impediment to their activities. It is not surprising that the idea of economic liberalism of late XVIII century that replaced mercantilism immediately found a huge number of fans with negative assessments of government intervention in the economy.

With regard to the market economy, the ideas of economic liberalism firstly most fully substantiated by Adam Smith in his work “The Wealth of Nations.” According to Adam Smith, the market system is capable of self-regulation based on the “invisible hand” – a personal interest associated with the pursuit of profit. It is the main motive force of the economic development. The followers of Smith, representatives of the so-called classical school, believed that the less the government intervenes in the economy, the better markets are functioning, and the better it is for the economy. A period in which economists realized theoretically and practically confirmed that the only hope for the market self-adjustment may jeopardize the very existence of the capitalist system, preceded the return of interest in the classical conception of the last decades.

The revolution in the classical views on the role of government in a market economy has been associated with the name of a prominent British economist John Maynard Keynes. His work “General Theory of Employment, Interest and Money” was published in 1936. The ideas of the “Keinsian revolution” triggered a revolution in the classical views on the market economy. He argued the impossibility of self-healing of an economic recession, the need for government intervention as a means capable balancing aggregate demand and aggregate supply, pulling the economy out of a crisis, and contributing to its further stabilization.

As a practical matter the economic policies, reflecting the idea of John. Keynes conducted most of the developed countries of the world after the World War II, when by appropriate monetary and fiscal policies regulated aggregate demand. It is believed that it has greatly contributed to mitigate cyclical fluctuations. An expansionary government policy reduces the unemployment rate, and contractionary policy, in turn, slows the rate of inflation.

The market failure as a reason of state regulation of an economy

The market mechanism has many advantages. Its capabilities are great, but they are limited. There are areas where free competition mechanism does not work, the market is failing and requires government intervention. The government regulation acquires the particular importance in the period of general economic crisis, as well as processes in the sphere of international economic relations such as import-export operations, international specialization of production, and currency relations.

The governmental intervention to the market economy is necessary in cases of so-called “failures” of the market when, for various reasons, market competition, and free pricing are of place, do not reach the target, or do not provide a satisfactory solution to the economic and social problems. States make up social programs designed to provide financial assistance to people who are on low incomes, to provide a variety of benefits to large families, the unemployed, people with disabilities, to provide free education and medical care.

The “failures” of the market include some macroeconomic problems: the general imbalance of the national economy; the fluctuations of the industrial cycle; employment and inflation. A feature of the market organization of the economy is that in certain situations it is not able to provide self-regulation, a return to normal conditions after too large deviations from it, to ensure a balance of all the elements of the system. In such cases, the market mechanism not only persists, but even aggravate the adverse effects on the economy. The appropriate economic functions of the state, an administrative regulation, and tax policy compensate the market imperfections.

Fiscal policy influences the national economy through commodity markets expanding or restraining aggregate demand for goods and services. Government “injects” into the national economy, leading to the expansion of production volume by increasing government purchases. The direction of tax impact on the economy is opposite to the effects of government spending. Decreasing in taxes increases the disposable income and consumption. Consumption growth leads to the expansion of aggregate demand in the short run, when the prices are constant, stimulates the growth of output and incomes, reduces the unemployment rate. However, over time, when GDP reaches its potential level, the growth in aggregate demand leads to the increase in prices. Considering this, the maximum effect of the fiscal policy results in the short term while in the long term fiscal policy can lead to the negative results.

Governmental participation in Japan

One of the leading countries in the world is Japan. During the post-war decade, Japan has made impressive strides in the development of the national economy. According to the dynamics of growth, the motivation of economic activity, forms of business organization and management, achievement of competitiveness and quality of marketable products this country has had no analogues among industrialized nations. The accumulated economic potential put Japan to the second position after the United States in the modern world. The Japanese model of development different from the American and Western European with higher degree of state participation in the economic and social life. One of the main features of the Japanese social and economic policies is the creation of a common direction for the future development and specific economic programs and incentives based on their economic development.

Throughout the post-war period, the Japanese government consistently implemented economic policies based on medium and long-term plans, targets which varied according to the phase in which the economy was in its development. Economic Planning made a significant contribution to the economic development. A specific feature of Japan is the cooperation between private business and the government, especially in periods of depression.

The most important factor contributing to the high dynamics of economic development of the past decades of Japan became the restructuring of the economy. The main direction of restructuring was the automation of production and resource conservation, the development of new high-tech industries and production, scientific and technological progress, improving the management and organizational systems.

During this adjustment, the course to a relative decline in production in the resource-intensive sectors performed. Development of high-tech industries such as electronics, biotechnology, etc., introduction and development of electronic devices in the equipment, the development of computer science and information structures are accelerating.

Japan government paid particular attention to science and education, which became the main structural factors of economic growth. Of fundamental importance in the mechanism of Japan’s economic growth is a solvent market demand of the population and its base – the dynamics of wages. A solvent market demand of the population and its base – the dynamics of wages – are of fundamental importance in the mechanism of Japan’s economic growth.

Since the 1990s, Japan’s economy is going through an unstable stage of development. Japan’s problem is not the sources of capital. It is in a reasonable, balanced, and corresponding to a situation economic policy.


All the negative aspects of the market economy can serve as an explanation of the reasons for strengthening the role of government in the economy. The smoothing and preventing the negative effects of market regulators is the main purpose of the economic activities of the state, whose major instrument is fiscal economic policy.

The fiscal policy pursued by the government bases on the position that the change of tax exemptions and government expenditures affect aggregate demand and, consequently, the value of GDP, employment and prices. Stimulating measures provide upward pressure on aggregate demand, and vice versa, an increase in taxes and cuts in public spending reduces aggregate demand. In the long term, fiscal policy can have a negative impact on economic growth. Fiscal policy is effective only in the short term. Best of all government regulation of the economy works by combining fiscal and monetary policies.

In any case, government regulation must be effective, that is, make the most of the entrepreneurial energy to deepen partnerships and catalyse business. It is effective in the case where the support areas that are not regulated or poorly regulated with market mechanisms. These areas usually include health, education, macroeconomic stability, the protection of the poor, etc.

Typically, the market does not have the aim of the development in the field of basic science, because it is associated with a high degree of risk and uncertainty, and with huge costs. This area requires a government intervention. Since the market does not guarantee the right to work, the state has to regulate the labour market and take measures to reduce unemployment. The foreign policy, the regulation of the balance of payments, exchange rates also fall on the shoulders of the state.

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