How economic growth and the operation of a market economy

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Last updated: April 20, 2019

This essay is divided in two parts. In the first I will explain how economic growth and the operation of a market economy impact on the global environment. I will explain, using the main key theme of block 2 that nature and society are intertwined, that economic growth and economic markets interact with the environment, often unintentionally, and can lead to destruction of landscapes, pollution and exhaustion of common resources.

To do this we need first to define economic growth and market economy. Economic growth is measured by GDP (gross domestic product) which measures the amount of goods or services produced by a person or country.The product of one year is compared to that of another so the growth of an economy may be measured. It can be measured as a country as a whole or per person and can go down as well[S1] as up. v A market economy is one in which resources (common or not) are distributed through exchange in markets. Also[S2] known as free market or free enterprise markets, the free being that business and consumers are free to decide what to produce or consume and what prices to set or to pay without intervention from the government.

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Indeed, OKvAdam Smith, an economist from the 18th century, introduced the idea of an ‘invisible hand` as a metaphor to describe how markets work. He suggested that there are invisible forces (known as market forces) which bring together a buyer and a seller based on how much it costs to produce something and how much people are prepared to pay[S3]. If a business is not competitive in the pricing of goods consumers will go elsewhere to buy (the natural and the social: uncertainty, risk, change. Hinchcliffe, S. Woodward, K.

Open University 2004). Followers of Adam Smith, known as modern neoclassical economists, argue that the market will efficiently allocate existing resources and satisfy all wants and that economic agents working for their own interests will produce a good service at a competitive price, thus allowing choice to the consumer. Market economy and the ‘invisible hand` are very good at bringing together buyers and sellers and meeting consumption needs, but can all needs be met by consumption? When an economic agent produces he focuses, primarily on his own needs and secondly on the needs of the consumers.But it could be that other people apart from the producer and consumer are affected by the consequences of the actions. For example[S4] deforestation in the Amazon, local Indian tribes are affected as they watch their habitat diminish. In the case of fishing, future generations will be affected by the lack of fish stocks in the future. These consequences are known as ‘externalities` and[S5] are usually unintentional.

If I look after my garden because it brings me pleasure, it also has externalities. It can be appreciated by my neighbours.This is the unintentional consequence of my action, in this case positive, but many externalities are negative. Environmentalist Michael Jacobs (Jacobs, 1991. p. 25) referred to externalities as an ‘invisible elbow` in[S6] that as the ‘invisible hand` reaches out, the ‘invisible elbow` can clumsily knock something over quite unintentionally.

This happens because the structures that rule the market economy make it impossible for a producer to include the full private and social costs in his price. [True! ] Me as a consumer I also have my part of the esponsibility for externalities, if I want cheap fish then the person who fishes has to cut costs to meet my needs. By buying cheap fish I pay only the private costs and the social costs are paid by someone else, society as a whole or future generations (the natural and the social: uncertainty, risk, change. Hinchcliffe, S. Woodward, K. 2004. Open University.

) v In a market economy the people with buying power are those who have most influence, in a market economy like Britain this is good as consumers can protest with their money and sometimes change consumer trends.But in poor countries such as South America the people’s needs are not important to the market economy and so they are often overlooked. The interesting point about externalities is that their effect is usually felt by others than those who cause them so[S7] when Hurricane Mitch struck South America (the natural and the social: uncertainty, risk, change. Hinchcliffe, S. Woodward, K.

2004. Open University) . v It had a devastating effect on the local population, but as the companies were insured and prepared it had very little effect on the market economies like the USA or Britain.

As it was considered a ‘natural` disaster there was very little international aid, and the locals were left to pick up the social costsv. In a high consuming market economy like UK we export the burden of our lifestyle around the world. In fact if everyone on earth wanted to have the same lifestyle as we have in the UK we would need 3. 1 planets to maintain us.

(Extract 1. Assignment booklet 2 (TMA 02) Open University[S8]) This has increased steadily from 1961 when we would have needed just 1 planet. So we can see that the market economy and our consumption needs are [S9]having an effect on our environment, whilst these effects were in the periphery like other countries or continents we could continue to blame the ‘natural`. Slowly but surely externalities are beginning to effect the core of market economies like UK and USA and we can no longer do nothing and hope that the ‘invisible hand` can somehow save us. There are many possibilities to intervene and stop or reduce externalities and the invisible elbow[S10].

Private ownership of common exhaustible resources is one, the theory being that if fishing stocks or forests are privately owned, it is in the owners’ interest to assure that stocks are replenished, they also charge a fee to fish or to cut down trees thus covering the social costs of replenishing the stocks. The problem I see with the privatization is who allocates what to whom? And[S11] as is suggested in Chapter 3 section 5. 1. 1. (the natural and the social: risk, uncertainty, change, Hinchcliffe, S.

Woodward, K. Open University). v It might turn out to be in their interests to flatten forest land and build on it.Also some common resources like air are impractical to privatize. This is where ‘Green Tax` or ‘Green Subvention` are interesting as they encourage producers who despoil little and tax those who despoil a lot. A problem that occurs to me is how do you put a value on the environment? How much to tax[S12]? And maybe I’m being sceptical when[S13] I suggest that a big international company will have ready any number of lawyers and ‘experts` who are prepared to demonstrate that the company is the most environmentally friendly company that has ever existed.

Me personally I would like to see some type of shaming strategy, where companies are obliged to put on the package of a product, where and how it was produced and some sort of environmentally friendly star rating. In this essay I have looked briefly at how a market economy works and what is economic growth, we have seen that externalities of a market economy are the unintentional consequences and that economic agents in market economy are very imited to prevent these externalities due to market pressure. I have also looked at how externalities affect people in the periphery of a market economy and while they do not affect the core, how externalities are often blamed on the ‘natural` which helps some economic agents wriggle out of their responsibility.

I have looked at the UK`s ecological footprint and possible ways to slow down environmental degradation.

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