What is Economic Intervention?

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.