GOVERNMENT INTERVENTION TO FREE MARKET

There is an ongoing war for decades on the virtue of free market and the intensity of arguments are only magnifying. The theories have divided the most prominent economists of the world literally into two schools of thoughts. The recent turn moil has only made the quibble more debatable. The faith on Milton Friedman’s free market is eroding as government looking back to the theories of Keynes. But the argument is still going whether to allow the market operate independently or there should the government intervene now and then to correct the extreme situation in the economy jeopardizing taxpayer’s fund.
The fact is that the so called free market i.e. the market which is exclusively driven by demand and supply and market finds its own equilibrium based upon some assumptions. In fact free market is just the myth as assumptions are purely non-applicable in the contemporary world. The proponents of free market have given no space to the sentiments in their theories and have created the concept on the assumption that all investors and players are rational which itself is the irrational notion. In the modern market, sentiments seems to be playing the most significant role deciding the ups and down in the market. “we have been dying because of sentiments and not because of sub-prime crisis”, statement given by Lehman Brothers at the time of filing bankruptcy just proves the point.
Everything has been changed in past few months and the financial world is no more the same. Wall Street giants are crumbling and Detroit based automakers are continuously banging government door to bailout. The companies across the globe finding it tough to raise the capital in any form because of bad sentiments. The firms are under immense pressure, investors are redeeming the funds. Global market has lost have of the valuation in stock markets. The circulation of liquidity is declining and it is all because of sentiments. Companies have lost all their trust and each other and the way business is being done has all changed. Credibility has declined and situation is getting worst , again as a result of sentiments. If the government doesn’t intervene at this stage and allow the existing sentiment to sustain, it could create havoc and would have unprecedented ripple effect across the globe that could send the world into another great depression, one like 1929.
The sentiments not only affect the financial economy but also the real economy. It reduces the demand for few specific sectors, which in turn response by cutting employment. This in turn affect demand for other sectors as well and they again response in the same manner causing vicious circle led to fall in overall demand as well as GDP. This also creates higher demand supply mismatch and may cause deflation which could be the worst scenario. Many of the followers of Freidman might not be in favor of government intervention but the need of the time is to send a strong message, a spark which could turn back the market sentiments and take the economy back to its track. It might cost trillion of greenbacks and but could save many times more in the future. Free market sound good in normal period and admired much during boom but intervention is essential during time of overheating and bad times. It becomes necessary for the government to leave relinquish their abode and take the rein of the market in their hand to save the broader mass.

-Nitin Kumar Dalmia
(to contribute for further discussions
Contact at nitin.k.dalmia@gmail.com)