“An economy is typically characterised by periods when business activity temporarily pulls it below, moves with or is in excess of normal growth path and is usually left to its own devices, without the government’s intervention.”
According to the Experian news (2002), the number of businesses failing in the United Kingdom in the third quarter of 2002 grew by 16.0 per cent compared with the third quarter of2001. A total of 4,754 companies failed during the third quarter of 2002, an increase of 655 on the same period in 2001. All types of company failure were greater in the third quarter of 2002 than in third quarter of 2001, compulsory liquidations by 53.4 per cent to 1,594.
The industry sector with the highest number of failures in the third quarter was Business Services, with 910 failures, an increase of 110 (13.8 per cent) on the third quarter in 2001. 2,741 companies in the Business Services sector have failed in the year so far, an increase of 348 (14.5 per cent) on the first nine months of 2001. Other sectors with high failure rates include Building & Construction (372 in the third quarter), Information Technology (258), Wholesaling (220) and Engineering (202). Of these, failures among Engineering companies were 34.7 per cent (52 more companies) ahead of the third quarter 2001, and Information Technology 21.7 per cent (46 more companies). There have been more failures in all but eight of the 34 sectors in the year to date than in the first nine months of 2001. Eight sectors Diversified Industrials, Textiles & Clothing, Food Manufacturing, Food Retailing, Agriculture & Fisheries, Insurance, Property and Motor Traders have recorded fewer failures in the first nine months of the year.
The upturn in failures is closely related to the slowdown in economic activity that began in 2001, and coincides with the fall in manufacturing output that resulted in a technical recession in the manufacturing sector during the latter part of the year. Corporate failures have been running at the rate of 355 a week throughout the year and continue to affect every part of the economy. It is vitally important, therefore, that those in business remain vigilant and carry out regular checks on the financial viability of their customers not just of new customers but of all their major customers, however long the trading relationship. Business failure is a realistic eventuality which all would-be entrepreneurs, no matter how confident, have to consider (Bartley, 2003).
What are the implications of these failures to the UK economy? What are the roles of the government in determining the success or failure of the economy? This paper discusses the debate on the effects of government intervention and non-intervention on economic performance.
The growth of government and the implications of that growth for the real economy can be analysed using a number of different approaches which reflect the diverse techniques and theories that historians and varieties of social scientists adopt towards understanding state dynamics (Middleton, 2003). History, sociology, political science and economics thus all have something to offer. What unites recent work in all of these disciplines is the finding that the modern British state has eighteenth-century rather than more recent origins, and efforts to integrate this diverse academic approaches to government growth (Harling, 2001).
In the UK, the period from the mid 1970s to the early 1990s was marked by something of a retreat of government from economic management and from social objectives (Giddens, 1999). In most countries, this has now gone into reverse. Government intervention into the economy and other areas won’t any longer take the form of nationalization. Rather, it is oriented towards achieving a balance between regulation and deregulation, places a very strong emphasis upon the development of human capital, has significant ecological objectives and is concerned to harness the dynamism of markets to public policy objectives (Giddens, 1999). The range of new policies instituted by the current UK government along these lines is very wide.
The advocates of government intervention with the market protest that they do not want socialism, but rather to retain private ownership of the material factors of production, free enterprise, and market exchange (von Mises, 1964). To prevent the misuse of these institutions of the market economy, they want to restrain the discretion of the individuals by governmental orders and prohibitions. The government should interfere with all those actions of the businessmen which it considers as detrimental to the public interest.
According to this interventionist doctrine the government alone is called upon to decide in every single case whether or not the “public interest” requires government intervention. The real meaning of the interventionist principle, therefore, amounts to the declaration: Business is free to act as long as what it does complies exactly with the plans and intentions of the government (von Mises, 2003). Thus nothing is left to the market other than the right to execute meekly what the government wants it to do. Nothing remains of the market economy but some labels, although their meaning is radically altered.
The ultimate determinants of the economic performance of a nation, assuming that market processes guide the use of its productive resources, are its history, its religions, its laws, and the character and culture of its people (Boarman, 1997). It is evident that the institutional influences operative in market-based economies may have beneficent effects that confer competitive advantage upon a particular nation. But others may exercise a malign influence and, unless corrected or eliminated, will tend to inhibit the optimal functioning of the market and will lead eventually to deterioration in its performance at home and abroad.
If, for instance, it can be shown that government has a vital role to play in the provision of an effective regulatory framework for the market economy, it is no less demonstrable that there are limits to the functions of government which, when transgressed, lead to the death of the market (Boarman, 1997). It follows that a critical prerequisite for the successful installation of a market economy is the clear definition of those limits such as the careful and unambiguous spelling out of the functions of government in its many qualitative economic roles–monetary, fiscal, regulatory–and in its quantitative roles as a supplier of public goods and as a provider of essential infrastructures.
Institutions perform a major socioeconomic role, in that they reduce uncertainty. They constitute rules of the game that directly affect the costs of exchange and of production, and thereby affect economic performance. The “game” in question is market activity that arises from timeless and universally applicable assumptions about human behavior–most notably the laws of supply and demand. So that to the extent that institutions are stable and predictable, economic efficiency is increased.
But it is also true that institutions are human artifacts, that they are evolving, however slowly, and that these changes continually alter the choices open to economic agents. The fortunate part of this process is that institutions that are inimical to economic efficiency or are undesirable on other grounds can be changed or eliminated. While the fundamental behavioral responses of market participants in the UK are presumably the same today as they were a century ago, the institutional environment of the UK economy has undergone decisive transformation through the years in the name of economic reform. Much of the change may be presumed to have had positive impacts on economic performance.
Economists typically ground the case for government intervention in a market economy in terms of correcting market failures, with government growth the cumulative result of responses to such market failures. Concomitantly, those opposing such interventions invoke the theory of government failures that are supposedly to be remedied (Middleton, 2003).
The interventionist doctrine fails to comprehend that the two systems—the market economy of consumers’ supremacy and the government directed economy—cannot be combined into a practicable composite. In the market economy the entrepreneurs are unconditionally subject to the supremacy of the consumers (von Mises, 1964). They are forced to proceed in such a way that their operations are approved by the purchases of the consumers and thus become profitable. If they fail in these endeavors, they suffer losses and must, if they do not succeed in amending their methods, go out of business.
However, even if the government prevents the entrepreneurs from choosing those projects that the consumers wish them to execute, it does not attain the ends it wanted to attain by its order or prohibition. Both producers and consumers are forced to adjust their behavior to the new state of affairs brought about by the government’s intervention. But it may happen that the way in which they, the producers and consumers, react appears as still less desirable, in the eyes of the government and the advocates of its interference, than the previous state of the unhampered market that the government wanted to alter.
Then if the government does not want to abstain from any intervention and to repeal its first measure, it is forced to add to its first intervention a new one. The same story then repeats itself at another level. Again the outcome of the government’s intervention appears to the government as even more unsatisfactory than the preceding state that it was designed to remedy.
In this way, the government is forced to add to its first intervention more and more decrees of interference until it has actually eliminated any influence of the market factors—entrepreneurs, capitalists, and employees as well as consumers—upon the determination of the ways of production and consumption.
Economists want to know the turning points in economic activity. The main measure of overall economic and business activity is the gross domestic product (GDP) (University of Missouri, 2003). GDP’s fluctuations are understood as a final, bottom line accounting measure, an economic result, rather than as an indicator of things to come. It could be that some activities take place or that some events occur in advance of changes in the overall economy. If so, economists can focus on these activities and use them to predict with some probability how the economy might behave in the near future.
Future income streams are the result of investment decisions that are made in the present. When firms debt-finance their investments, they acquire cash flow commitments to be paid in the future. Whether tomorrow’s income will be sufficient or not to cover the debt depends on how accurate the expectations were. During an economic boom, expectations about the future returns become increasingly optimistic. Firms undertake riskier investment projects and therefore increase their debts. Banks also participate in this euphoria of expectations by supplying the loans required to undertake such investments.
When firms default on their debt payment commitments, a snowball of bankruptcy could occur leading to a total collapse of the financial system. The government intervention becomes necessary at this point in order to contain the crisis. The central bank plays its role of lender of last resort to the banking industry (preventing the failure of mainly the big banks) and supply the amount of reserves needed.
It is clearly evident that government intervention in a market economy only comes into the picture when business activities go wrong.
According to Clegg (1970), it is generally agreed that in no other advanced industrial economy has the law played a less significant role in shaping industrial relations than in the UK, such that it was voluntary dealings between capital and labor variously organized that determined the form and pace of developments. This voluntarist tradition dictated a non-interventionist stance by successive governments and suggests that, so far economic performance is concerned, it is not what governments did not do rather than what did they do that may be critical (Middleton, 2003).
References
Bartley, E. (2003) How to survive business failure. Graduate prospects. Accessed at [http://www.prospects.ac.uk]. Accessed [17/11/03].
Boarman, p. M. (1994) Beyond supply and demand: the framework of the market economy. Challenge, Vol. 37.
Experian news (2002) Business failure rate continues to climb 30 September Accessed at [http://www.gusplc.com/gus/news/experianarchive]. Accessed [17/11/03].
Giddens, A. (1999) The School in 2000: The Relevance of the Social Sciences. London School of Economics and Political Science. Accessed at [http://www.lse.ac.uk/Giddens/school2000.htm]. Accessed [17/11/03].
Harling, P. (2001) The modern British state: An historical introduction. Cambridge University Press, Cambridge.
Middleton, R. (2003) Government and the economy 1860-1939. Accessed at [http://www.google.co.uk/search?q=cache:n6Or_jtrGDMJ:info.bris.ac.uk/~] Accessed [17/11/03].
University of Missouri, Kansas City (2003) Business Cycle. Financial Instability. Accessed at [http://iml.umkc.edu/econ]. Accessed [17/11/03].
Von Mises, L (1964) Christian Economics, February 4.
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