Emily Nielson of Williamstown, Massachusetts asks:
Why not let the market's regulate themselves? (isn't that the way capitalism is supposed to work?) What is a good way to teach about these complications?
Bruce Damasio responds:
Well, if you are an advocate of Adam Smith and letting the
market decide, then you have to go back to the 1930's and see the thinking then
that led to the acceptance of Keynesian thinking and the intervention of
government spending into the economy. This idea of yours is being debated in
the news now as the supporters or detractors of the mortgage bailout argue over
its impact on the society as well as the economy. Clearly, all costs are
variable over time and the costs of markets regulating themselves impact
people, directly and indirectly.
I would suggest looking into a good college intro text for
background and ideas here as well as going to www.ncee.net
or www.economicshelp.org for ideas
on lessons and materials.
Peggy Pelt responds:
This was the prevailing theory when the Great Depression
began. The unemployment rate reached 25% at the depth of that event. It is
natural to want those who made unwise financial decisions to be the only ones
to suffer the consequences. However, in the current economy the effects go much
further through the multiplier effect. (A person who loses his/her job must
reduce spending which impacts on another and so on.) If society is willing to
let the market system prevail it must be willing to accept the increased
unemployment.
Another consideration is the impact on the government's
budget. As the economy goes further into recession not only does the government's
revenue decline but its spending for unemployment related social programs
increase. There is a "cost" whether there is a stimulus plan or not.
Also, government money comes at the expense of taxpayers. It
is also accompanied by government involvement in economic decision making. Deciding
whether the additional cost and government involvement in economic decision making
is worth it is a difficult question.
David Tucker Responds:
The classic example Keynesians tend to use is the
laissez-faire approach of President Herbert Hoover to the economic woes of
1929-1933. However, there are those who argue that markets need to "correct"
themselves. There is merit in these ideas, say when talking of allowing home
prices to move in a more affordable direction, then prompting buyers to begin
shopping. Others say, relief must be provided to working people who must bear
the brunt of economic corrections.
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