RESUME BUKU

YOJIRO HAYAMI DAN YOSHIHISA

GODO
BAB 8
MARKET AND STATE

NAMA : MAGFIRAH AYU MEILANI

NIM : 15060053
JURUSAN : ILMU EKONOMI
 MARKET AND STATE

Analyse economic systems to determine which is

most appropriate to promote economic
development.
In reality, an economic system is expressed as a
combination of various economic organizations
A. The Economic Functions of the Market and the State1
A market is the organization that coordinates the
production and consumption of goods and services
through voluntary transactions. The simplest example
may be a morning bazaar of vegetables in a local town
plaza, at which producers and consumers get together
and make transactions directly
Amongst themselves. It can take much more complicated
forms in which consumers' demand meets producers'
supply after passing through various marketing stages,
transportation, and storage processes, across space and
over tim.
the state is an organization for monopolizing legitimate
coercive power.
1. Efficiency of the competitive market
The orthodoxy of economics from Adam Smith and the English Classical School to the
neoclassical school indicates that competition in a free market results in a socially
optimum allocation of resources. Adam Smith clearly recognized that the mechanisms of a
free market would guide people towards the promotion of total economic welfare in
society.
In contrast, free-trade advocates, from David Ricardo to the neoclassical school, were mainly
concerned about the proof of static efficiency in the free market, that is, efficiency in the
allocation of existing resources in a given period while disregarding accumulation of the
resources over time.

2. Market failure
If the market can achieve a socially desirable allocation of resources, there should be no need
for government to coercively intervene in economic activities. However, the market is not
able to achieve optimality in all economic activities. Divergence of market equilibrium
from the point of Marshallian net utility maximization or Pareto optimality is called
market failure. Government activities are needed to correct this failure.
Market failure emerges in the supply of public goods.
In the real world, both pure public goods endowed with perfect nonrivalness and non-
excludability and pure private goods completely lacking these attributes are rare.
3. Government Failure
Government is a monopolist of legitimate coercive power and has no danger
of bankruptcy.
The government failure is not limited to misuse of budget, but arises from
undue regulations to bias resource allocations. There are many regulations
that made positive contributions to such purposes as pollution control and
safety when they were instituted, but later had socially negative effects.

4. On the choice of economic system

According to the principle of democracy, the state is the possession of
citizens, and government is an agent commissioned by citizens to exercise
coercive power for the supply of public good.
Since politicians and bureaucrats are agents for the citizens, they must
endeavour to do their best to serve the welfare of the nation.
Moral hazards are not a serious issue if a principal can recognize the agent's
intent and action and discharge the agent before he causes moral hazards. In
the real world, characterized by information asymmetry, however, moral
hazards can be a major source of market failure, as explained before
 B. Around the Infant Industry Protection Argument

Throughout the history of modern economic growth, a

major confrontation has persisted on the choice of
development strategy between emphasis on the
efficiency of the free market and the control on market
activities through government planning and command.
This confrontation has often revolved around two
opposing views on international trade—the argument for
free trade along Adam Smith's tradition, and the
argument for trade protection, commonly called 'infant
industry protection'.
1. Market failure in dynamic economy
In general, the less developed the economies, the more
imperfect the information, and, hence, the more prone
they are to market failure. This problem is especially
serious in the dynamic process of economic
development involving capital accumulation and
technological progress.
2. Ricardo vs. List
Doctrine of free trade advocated by the English
Classical School. It was structured as an antithesis to
Ricardo's ([1817] 1966) theory of comparative
advantage in international trade.
3. The Listian trap
As a theory, List's infant industry protection argument does not
contradict Ricardo's theory of comparative advantage. List
expanded Ricardo's static theory to a dynamic theory applicable to
the long-run development process characterized by major changes
in the production cost structure. In other words, the theory of
comparative advantage was incorporated into the economics of
development by List who recognized the possibility of serious
market failure in dynamic economies.
 C. The Rise and Fall of Developmentalist
Models6
'Developmentalism' is defined as the ideology that, in developing
economies aimed at catching-up with advanced economies,
economic development produces a higher value than its material
value, such as satisfaction of national prestige and security.
1. The limit of information and the role of ideology
2. Defeat of the old developmental market economies
3. Collapse of the centrally planned economies
4. Trap of populism
D. Success and Failure of the New Developmental Market
Economies12
The receding tide of centrally planned economies has coincided with
the rise of a new developmentalist model which may be called
'new developmental market economies‘.
1. The system of new developmental market economies
2. The source of success
3. Beyond achieving the catch-up goal
The new developmental economies typically practised in North-
east Asia comprised a catch-up model. As such, their positive role
ends when the catch-up goal is achieved. Further improvements in
economic welfare cannot be expected from this model, as it will
face increasingly severe external and internal constraints.
E. Resurgence of Market Liberalism and its Consequences
The models of economic development that dominated nearly
three decades following World War II emphasized the need to
correct market failure in the development process by means of
government planning and command for the promotion of
target industries.
The defects of this developmentalist strategy became
increasingly clear from the early 1970s with the failures of the
import-substitution industrialization policy as well as the
malfunctioning of centrally planned economies. These
empirical tests led to the restoration of the market mechanism
to a central role in development policy, consistent with the
traditional emphasis of modem economics (neoclassical
school).
F. From the Washington Consensus to the Post-Washington
Consensus

The strategy aimed at accelerating the growth of

developing economies based on the efficiency-enhancing
power of free markets, which had established itself as a
paradigm under the popular title of the Washington
Consensus by the early 1990s, was replaced by a new
paradigm quickly, in less than a decade. The nature of
the new strategy and the factors underlying the paradigm
change will be discussed in this section.