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What is Economic Intervention?

By Osmand Vitez
Updated May 16, 2024
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Economic intervention is when a nation’s government takes action to alter the economy for political purposes. In a free market economy, individuals and businesses have the ability to act in their own self interest. Property ownership is protected by the courts so individuals do not have to worry about the loss of their goods to other individuals. Copious amounts of economic intervention will result in a mixed economy, where government agencies will play a larger-than-normal role in the economic planning of the nation.

Economic planning is when a nation attempts to create a sense of equality among the citizens within its borders. Types of economic intervention or planning include minimum wage laws, ability to unionize workers, price controls, tariffs or import quotas and tax deductions or credits. Governments often use these plans to help create an economy free from unfair competition, which is the inability of one individual to achieve the same level of economic wealth as another person. Heavy-handed economic intervention will often result in a centrally planned economy, such as in socialist or communist societies. These economies rely on their government to direct the economy as necessary and provide the allocation of resources according to specific purposes.

Free market economies often experience a concept known as the business cycle. This is a natural period of expansion and contraction based on changes in a free market economy. Expansion occurs when consumer demand increases for particular goods or services. Large-scale expansion often results in the growth of a nation’s gross domestic product, which is the total of all products manufactured inside the nation. Contraction occurs when demand decreases or resources become scarce, driving down the supply of goods produced by companies. Although natural, these contractions may incur the most economic intervention from a government.

Governments often attempt to create policies during economic contractions in order to soften the blow of economic hardship. However, free market generally will correct itself, although it may not occur as quickly as individuals may desire. Additionally, policies implemented during an economic intervention will still exist after the economy corrects itself, resulting in additional rules for companies and individuals to abide by in the economy. This falls into the theory of unintended consequences, where a government’s intervention — while well meaning — will have an effect that hamper the economy in the future. However, individuals may prefer this intervention if it promotes a more socially responsible environment regardless of the cost to businesses.

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Discussion Comments
By Clairdelune — On Aug 16, 2011

My brother, a finance and economicss major, believes that there should be a minimum of government intervention in economics in our country. He believes that in a free economy market, some measures like minimum wages and unionization (with restrictions),and restriction of products from overseas are good.

But he says to fool around with supply and demand of products by the government is not the best policy. The market for products will stabilize in time, naturally.

I don't agree. Look at our past economic ups and downs. Sometimes a down economy, with little intervention, has lasted a long time. And who knows that kind of economic problems will appear in the meantime?

By Misscoco — On Aug 15, 2011

I must say, government economic intervention is a complicated subject.

At one end is a communist or socialistic form that some governments adopt. It didn't work for the big country of Russia and its republics.

Cuba has had a communist economy for over 50 years. I don't hear too much about it - but I have heard that almost everyone is literate. I don't know about jobs and housing.

I have relatives in Sweden and they tell me that the high level of government intervention in economics works quite well. It is pretty close to a socialist society. Yes, the taxes are high - but everyone gets a free education, health care, and companies are regulated enough that the products that people want are available and most companies do well too. I think socialism works better if the country and population are small.

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