Taxes & Economics

Why Government Intervention in the Economy is Necessary

Capitalism drives innovation. There is almost no doubt in that statement, considering today most of the world lives in one system or another that thrives based on some version of a “free market.” It would be foolish however to also ignore the great costs that these systems bring. When profit is the motive, firms don’t think twice about laying off millions of employees so long as it increases their productivity. These systems can only work if they are kept in balance with government intervention, as this is the key to having fair competition within markets. Regulatory intervention by state governments is crucial for the job security of millions, and essential to the efficiency and stability of an economy through its tightening of wealth gaps.

Capitalism only works so long as markets are competitive. Without competition, the system collapses as monopolies become masters, and consumers their slaves. Proponents of the system will claim that because individuals are motivated by profit, entrepreneurship is more heavily incentivized, resulting in healthy economic competition. While in theory, this does sound promising, the reality of the situation is very different.

Evidence suggests that large veteran corporations tend to dominate market spaces, restricting the growth opportunities for emerging competitors. Consumers are then trapped in an oligopoly where only a handful of firms share the marketplace, essentially subjugating them to higher prices and fewer options. This has been a growing problem in capitalist nations across the globe from the tech giants in the U.S to the chaebols of South Korea. The trend holds true for Canada as well.

For instance, Rogers, Bell, and TELUS hold almost 90 percent of the telecommunications market in Canada, which has resulted in Canadians having to deal with some of the most expensive phone bills in the world. With increased government intervention, issues like this can be put to an abrupt stop. Certain economic policies that foster the growth of small businesses (such as tax exemptions or increased funding to startups), as well as laws that prohibit large corporations from acquiring their competitors, can eventually stabilize the situation. While these policies may not be perfect, they are much more favorable than free markets.

Aside from the difficulties in economic competition, capitalism also brings the threat of severe job loss. With the evolution of technology, automation is becoming increasingly more efficient and cheaper than human labor.  As the primary priority of a firm is to increase profits, it comes as no surprise that these businesses are eager to lay off thousands of employees so long as they can maximize their productivity. In fact, researchers currently predict that over half of all jobs in Canada will be lost to automation. This will not only be detrimental to the millions of individuals who have lost their source of livelihood, but also to the economy as a whole. The level of output would decrease to below what Canada could sustainably achieve, resulting in an economic recession. Once again, such a dilemma can only be resolved through coordinated government intervention. With policies that discourage (or at least slow) the use of automation such as the “robot tax” proposed by Bill Gates, governments could effectively counter this negative effect of the capitalist environment (Vomiero, 2018). Such a tax would increase the costs of implementing automated machinery in firms, discouraging the shift from human labor to machinery. As this issue illustrates, government intervention is key to securing the economic functionality of Canada throughout the future. Without it, the nature of free enterprise would eventually lead to its own collapse.

New York Stock Exchange, Wall street, Manhattan, New York, USA
New York Stock Exchange, Wall street, Manhattan, New York, USA

Perhaps the greatest criticism against the capitalist system is the wealth gap. Countries that adopt free enterprise systems tend to have wealth distributed in largely uneven numbers. For instance, one recent statistic suggests that Canada’s richest families hold as much wealth as the sum of three entire provinces, while almost 4.8 million Canadians are currently in poverty. As the data illustrates, the bulk of the spoils are held at the top of the wealth pyramid. To maximize the efficiency of an economy, wealth redistribution is essential. By taxing more affluent Canadians at larger rates and distributing those funds to the lower classes through social programs, the government will be creating more active members in the economy. This, in turn, will increase money circulation, benefitting both firms and citizens in the long run. Although some critics may contend that by taking wealth from the rich the government would be discouraging innovation, it is important to note that there would still be an upward curve of wealth after taxation, although not as prominent. Individuals would still try to climb up the curve.

Although this is already practiced in Canada’s economy, by increasing the level of government intervention, more promising programs could be funded. One such instance is the universal basic incomes (UBI), a guaranteed annual earning for all citizens. By giving each Canadian a UBI, citizens are likely to be more economically productive. They would be able to support themselves through higher levels of education, earning qualifications necessary to compete in the workspace. More entrepreneurship would likely be encouraged because of the additional income, leading to greater innovation and productivity, benefits that can only be achieved as a result of greater government intervention.

In conclusion, there are many circumstances where government intervention is necessary to bolster the healthy growth of an economy. Free markets without a guided hand from the government are prone to saturated competition, job insecurity, as well as a significant disparity between rich and poor.

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