THE INDUSTRIAL REVOLUTION-PART 3 The unemployment benefit disbursal
The role of government
The government plays two different roles in the industrial development of a nation. The first concerns Externalities.Externalities are provision of macroeconomic stability,removal of inequality,efficient justice system to enforce contracts,health and education infrastructure,control of pollution,.These cannot be provided by private enterprises as they have external benefits to the entire public.
The other role played by government is in infant industry protection by providing tariff barriers,production subsidies,conducting research ,. There is considerable debate regarding the importance of both the factors .Most western economists favour the concept that only externalities are important. A few however consider both to be important especially in early industrial development.
Externalities and public goods
Public goods:Public goods are good which cannot be privately owned. Examples are the air we breathe or provision of defence.Governments provide them through taxes or subsidies.They are also called externalities because their benefits cannot be limited. Pollution is an example of negative externality as the person causing pollution indirectly harms people in the surrounding. Pollution can be restricted by a tax on emissions. Public schools are an example of positive externality as education not only benefits the individual but society also gets an enlightened citizen with a civic sense.Government provides education through public schools. However it can provide the same through education vouchers. Construction of physical infrastructure such as roads ,bridges,airports by government opens rural markets which were previously not connected and functional. Rapid transport of raw materials and goods further makes trade more efficient by increasing the volume of same in a given period.
Another positive externality is research on basic science in universities. Basic research has a positive externality as it diffuses and stimulates innovation. Private players cannot do basic research though they do applied product development as they frequently loose knowledge workers to rivals.For same reason government subsidises education loans for university students as their effects on digital economy has multiplier effects.
Poverty is also a type of externality as it is unjust for society to abandon the poor and elderly. Many of the elderly have given their best years of life to society. Many are unfortunate due to lack of education opportunities,single parents,death of parents ,business failures.natural calamities,inborn physical and mental disabilities to enter the job market. Labour tax is used to provide old age pensions,medicaid to elderly,and unemployed.
The intervention in market by government distorts it. Thus taxes on goods reduce the size of the market for that commodity due to the increased price. Though it benefits the entire population the net effect is a decrease in market efficiency.Aprice ceiling ,say on sale of petrol protects the consumer from high price. However the producer suffers a loss due to production costs being higher and profit margins diminishing. It thus leads to lower production of goods and waiting time to obtain it. Subsidies to producers can offset this scarcity effect and todaygiving subsidies by governments is less wasteful due to digital transactions.
Externalities and Macroeconomic stability
Inflation and unemployment can affect an economy and the entire population may be subject to lower standardards of living,erosion of wealth and falling into poverThey thus constitute a principal externality to be controlled.
Duringinitial industrialization in Britain in 1850 to 1900 firms were of small size and they competed on price. This was the phase of competitive capitalism and there were boom and bust cycles in economy due to overproduction or change in consumer preferences. Boom and busts occur due to two types of income ,wages and rent in the economy for remuneration. While labour income is usually spent on consumer good purchase ,rents obtained by capitalists can rarely be spent entirely due to the limits on individual consumption. These unspent rents are reinvested leading to overproduction and bust cycles.
Increase in productivity due to technological innovation allows less workers to produce goods. The surplus profit can now be invested in new firms with the surplus labour. Increased productivity can thus blunt overproduction cycles and increase labours share in a closed economy. In late 19th century competitive capitalism gave rise to monopoly capitalism. Gradually as mass production occured in railways,steel , motor cars in late nineteenth century there was growth of huge monopoly firms in each sector. These resulted in markup prices of goods and goods produced were priced more than labour used. due to market power of the monopoly firms.This resulted in less labour share in income . The Great Depression of 1929 probably resulted from inequality in labour and rent incomes leading to prolonged decrease in purchasing power of the population, closure of firms,banks.
When there is excess money in the economy which is waiting for inadequate oppurtunies for investment the money can drive stock markets prices. This happened in the financial crisis of 1929 which preceded the Great Depression.Stocks markets investments are not based on risk assessment as in bank loans. Morever market leaders can create false narratives and cause stock market collapse by fraud.
The government intervened in the Great Depression to create changes in market institutions Extensive rules were formulated to prevent bank bankruptcies and stock market frauds. Antitrust laws had been made earlier to control monopolies in oil and steel. Whenever business cycles occur government tries to stimulate the profitability of firms so that they can reopen and provide employment and income.Goverment invests in infrastructure which stimulates demand in steel,cement and other basic industries.The worker in these industries buy consumer goods produced by consumer good producers. This is called fiscal stimulus. Governments though central banks also increase money supply so that credit becomes cheap and both firms invest and consumers buy. These measures are effective in a closed economy without capital flight to other nations restricted. After Great Depression capital movements were restricted by Bretton woods agreement between nations. Since 1970 pressure from neoliberals have watered it down and today any nation attempting to create low interest rates to stimulate the national economy cannot achieve it as it leads to capital flight to other nations where interest rates and rent are higher.
To reduce inequality minimum wages are applied . This allows the lowest wage worker to lead a reasonable standard of living. The risk of increased unemployment due to lower labour market demand is however there as in presence of wage negotiations by labour unions. Both however are essential in a adversial situation in firms.However the principal means to decrease inequality is by marginal income tax for higher incomes and capital gains.
Ack:principles of economics(Mankiw),The profit paradox,, The finance curse,capital in the twenty first century,capital and ideology,The great divergence
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