Economic Policies
Given the number of applications for the study of economics, policy recommendations for governments have been a major recipient of economic theory. Although governments over history and around the world have interpreted the effects of economic theory differently, here are some general considerations and policies governments have made which have been affected by economic theory.
Trade Policy
The ways governments maintain trade policies are heavily influenced by economic theory. Countries may opt for more laissez-faire trade policies versus protectionist policies. While most governments use a mixture of both, it is important to make distinctions between laissez-faire and protectionist policies.
Laissez-fair policies are trade policies in which governments opt to harbor free trade and lower trade barriers with other countries. In doing so, the idea is that governments will be able to use their comparative advantages over other countries and realize greater prosperity than if they were to avoid trading at all.
On the other hand, many governments may instead opt to use protectionist policies. Protectionist policies usually entail closing trade borders, or at least making it more difficult to trade with foreign companies. Many governments choose protectionist policies in order to protect their domestic companies, which may not be able to compete against companies from foreign countries.
Government Expenditures
Governments may also be swayed by economics through their spending. For example, when deciding what public services to spend tax revenues on, governments must decide how to most efficiently allocate their resources. Some governments may choose to use their funds to create “safety nets,” or essentially public goods which help its citizens in hard economic times, while others may opt to reduce tax revenues and allow its own citizens to choose where they want to spend their money.
Financial Regulation
Governments may also use economics to influence their decisions on financial regulations. Many laissez-faire economists suggest that governments impose as little regulation as possible on financial markets. In doing so, they will eliminate many inefficiencies, which will allow financial markets to become productive and free-moving. Furthermore, doing so will allow assets to be accurately priced, creating an environment as close as possble to a theoretical equilibrium.
In contradiction to this, other economists support the impositions financial regulations. Since financial actors will find ways to take advantage of a lack of regulation, these economists view the market inefficiencies associated with regulation as necessary costs. As many blame the recent financial crisis on a lack of regulation, many economists see adequate regulation as the only way to prevent future crises.