Economy

“Economics is a choice between alternatives all the time. These are the trade-offs“

Paul Samuelson, Nobel Laureate in Economics (1970)

Trade-off lies at the heart of economics; a social science that studies how individuals and groups coordinate their wants and needs in the face of limited resources. When a decision is made to accept having less of one thing in order to have more of another, the result is known as a trade-off. A trade-off implies that one thing must be sacrificed in order to obtain more of another.

Trade-off creates opportunity cost, the thing that is not chosen whenever a trade-off is made. Opportunity cost is inclined by the benefits that could have been obtained by choosing the best alternative opportunity.

A market economy has constantly confronted three fundamental and interdependent coordination issues: what, how, and for whom goods/services are produced. As an elaborate mechanism, the market addresses these issues through the spontaneous coordination of people, activities, and business.

Nevertheless, the invisible hand of the market mechanism does not always work perfectly to create an efficiently ordered, stable, and fair market. Instead, the imperfect market mechanism may result in inefficiency, instability, and inequality.

As a result, the visible hand of the government is required to improve efficiency, stability, and equality. The government is expected to correct market failures, pursue economic growth, price stability, and full employment, and redistribute income.

The government’s visible hand can be seen in four functions: (i) adopting a regulatory framework for market mechanisms; (ii) influencing economic efficiency of resource allocation; (iii) governing economic stabilization; and (iv) influencing income distribution. These functions are carried out through economic policies, which are the results of political and technocratic decision-making processes that take into account all relevant domestic factors and, in many cases, the external economic context.

Policymaking entails making trade-offs between multiple, sometimes conflicting, objectives. Because the process must choose between competing policies, adopting one of these policies may imply reducing the effectiveness of the others. However, most policy trade-offs are not all-or-nothing decisions; rather, they aim to achieve a certain level of Pareto Improvement: improving a specific policy objective by minimizing the worse-offs of others.

The government’s visible hand indicates that the economy will not be left to its own devices in a laissez-faire: policy of minimal governmental intervention in the economic affairs of individuals and society. The issue is how the government intervenes at the appropriate level to address imperfect market mechanisms.

Finally, the effectiveness of the visible hand influences the economic state of play, which is reflected in factors such as economic stability, growth, income, and equality.