The United Kingdom has a mixed economy based on the Capitalist system on free trade and global economic, despite its limits being established by the Government. ‘A Capitalist economic system is one characterised by free markets and the absence of government intervention in the economy.’ Most decisions in the UK are made by the market. However, some decisions are made by the government e.g. those relating to road building, school and hospital construction, the supply of medicines in hospitals etc
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The UK economy although viewed as a mainly capitalist economy has government spending taking up 35% of GDP. For the reason that the government pays for health, education, national defence etc. The overall economy is still perceived as capitalist as in the area of private enterprise companies are free to decide what to produce and for whom, and allows for an efficient allocation of resources. Although government intervention means there is a mixed of both planned and market economies.
In the real world, many economies which are viewed to have a capitalist economic system may have government spending taking up 35% of GDP. This is because the government pays for welfare, health, education and national defence. However, the economy is still viewed as capitalist because in the area of private enterprise firms are free to decide what to produce and for whom. (Tejvan.R)
Economic systems based around Capitalism allow for free enterprise and market forces, allocate people and resources to their best use. When profits are re-invested labour and capital become increasingly productive (Hawken,) Firms have to remain competive and productively efficient or risk going out of business, survival in a capitalistic system requires innovation and flexibility to keep up with the changes in supply and demand. Such a system is generally prepared to deal with the influx of competition from external sources and helps create dynamic efficiency, firms change and respond to demand and consumer trends. Any resource shortages that do occur bring forth the development of substitutes.
In a mixed market economy both market forces and government decisions which goods and serviced are produced and how they are distributed. It combines both the characteristics of a free economy and and command economy.
The mixed market economy allows the market to operate and the government to only intervene where the market fails. This means providing such services as law, healthcare and educated which would have been left un-provided by the free market. Public goods are consumed collectively by the market rather than individually so it is difficult to finance their supply through the market.
A greater free market economy is susceptible to boom and slump periods, such as those seen in the UK, it is argued that these downward cycles are built into capitalism. Marxists and others, such as Fredrick Soddy are certain that these crises are endemic to capitalism.
‘Anti- cyclical’ measures of state intervention help to mitigate conjucturual fluctuations. From as far back as the 1930 recession the Government has employed over time an increasingly strong influence on aggregate demand to prevent the boom and bust periods. It provides a growing number of jobs in the non-commodity area, regulates the growth of the social wage. It influences the level of economic activity by means of public sector contracts as well as other forms of intervention.
The government also regulates other problems of a free market such as monopoly power, which operate against public interest. ‘The Privatisation movement n Britain, which began in the Conservative Government in Britain in the 1980s provided force for economic regulation in the last 2 decades of the 20th Century’ (Select Committee of Regulators)
Most of the nationalised industries had monopoly power and retained that when privatised, regulation was needed to prevent abuse of that power, to bring in line prices and standards of service in that of a competitive market. Through government bodies created such as the office of Fair Trading and The Monopolies and Mergers Commission.
The private sector only takes into account their costs in producing goods, and not any negative externalities created, these costs to society such as pollution, noise etc. Government involvement and regulation accounts for these negative externalities which would no be considered with in a free market.
The government intervenes to assist in the correction of inequalities in income and wealth, a characteristic of capitalist economies. This is through the use of taxation system and the government expenditure; such as transfer payment, like retirement pension, sickness benefits and unemployment benefit. Some forms of taxes are relatively more progressive than others, such as Income Tax which take a higher percentage of income of the wealthy.
Some economists do argue that the inequalities in wealth and income provide incentives for us to work harder, conversely some believe governments should intervene more.
The financial global crisis has presented numerous challenges to the UK economy that the increase in the libor rate and the uncertainty of the climate meant many banks were not lending money, amongst themselves and amongst consumers. The fall of the Lehman Brother and Bear Sterns in the US, as well as problems faced to Northern Rock.
‘The Government injected tens of billions of pounds to help increase the liquidity. Banks were able to swap potentially risky mortgage debts for secure government bonds to enable them to operate’ (BBC news)
A lack of lending and decrease in consumer spending and confidence led to a fall in house prices and arise in inflation. In an attempt to kick start the housing market the Treasury introduced a one year rise in stamp duty exemption. Making houses more affordable in the hope of increasing the amount house sales. The Bank of England cut interest rates to their lowest in its 315 year history in an attempt to make mortgage lenders pass it on to consumers. Hoping again to increase house sales and prevent house prices further faller. This was important to the government as many home owners had fallen into negative equity and risked losing their homes.
The Governement announced a £37bn nationalisation of banks in a attempt to fight back from the financial crisis. Banks will effectively be state-run, with the Government-appointed board members put in place to ensure they once again begin lending to businesses and individual customers.
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As demand decreased across all sectors, production decreased in line. This leading to many production industries being affected such as car manufacturers. As well as the production sector the retailing sector was also affected, consumer confidence has decreased and led to a decrease in demand across all retail, leading to the bankruptcy of many retailers such as Woolworth etc.
The government introduced further intervention tactic by temporarily lowering VAT from 17.5% to 15.% which was aimed at increasing consumer spending. This would hopefully increase demand in the retail sector and help save further retailers from becoming bankrupt.
During and economic slowdown business look to cut costs through many ways, one option is to make a reduction in the workforce. During the financial crisis unemployment has raised, the number of people claiming benefits is the highest since 1997, the claimant count has increased for 19 months in a row.
There has also been a decrease in the amount of people coming out of unemployment due to the reduction in the job market. More companies are becoming bankrupt creating more unemployment. Companies are not expanding as they may otherwise have done due to lack of capital so fewer jobs are being created.
Jobs across all sectors are being lost, in production the lack of demand has led to loss in jobs in areas such as car manufacturers. In the retail sector many retailers are going bankrupt due to a decrease in consumer confidence leading to a decrease in consumer spending. Due to the lack of available capital the construction sector has seen a considerable rise in unemployment.
White collar workers have also seen an increase in unemployment in sectors such as banking and finance, where companies cannot afford to pay overhead and look to cut costs and rationalise their business.
As the financial crisis continues and the unemployment rate continues to rise there are fewer jobs for an increasing amount of people. Consumer habits have chased, more consumers are deciding to save and be more conservative with their disposable income. Many households have been affected by the recession and unemployment directly so have seen less income coming into the household. Consumers may have been affected by wage freezes or wage cuts so have become more cautious with their income. Consumers are choosing to spend money on necessities and less on luxuries such as eating out, new clothes etc etc. Therefore demand has not increased and as such companies cannot begin to recover and create new jobs.
Consumers shopping habits have changed since the recession and there has been a fall in spending in the luxury goods area. Discount retailers have seen an increase in trade as consumers become more aware of how they spend their money. Consumers are more likely to switch brands in a recession and go for a more affordable option
Bigger items such as car sales have seen a drastic fall, along with the housing market, as consumers are cautious of and preferring to improve what they have, than make a large outlay.
In conclusion the UK has a mixed economy, developed through free market and global economy, which is regulated by the Governnment to prevent market failure.
The mixed market economy allows the market to operate and the government to only intervene where the market fails. This means providing such services as law, healthcare and educated which would have been left un-provided by the free market.
The government also intervenes to help regulate problems created by a free market such as monopolies and wealth inequalities.
The free market allows goods and services to be produced when they want, for who they want, and as such can respond to the demand and supply of the market. The government attempts to regulate the cyclical nature of the market. But in times of recession into also intervenes to solve challenged created in times such as the current financial crisis. Increased unemployment is a major challenge in the financial crisis, which affects consumer habits and the market as a whole.