State Control of Investment

State Control of Investment In recent years, the economists have been advocating something farther than direct public investments for the purpose of counteracting business fluctuations. They urge that private investment should also be effectively control

State Control of Investment

In recent years, the economists have been advocating something farther than direct public investments for the purpose of counteracting business fluctuations. They urge that private investment should also be effectively controlled by the State for the same purpose. Control of private investment in certain countries dates from the thirties when it was adopted as an emergency measure. It was further extended and tightened during the war of 1939-45 by the belligerent countries and by some neutral countries as well. But then the object was the diversion of resources for war purposes. After the war, though such control of investment was relaxed, yet its role is being greatly emphasized by the economists as a permanent measure of economic stabilization. In developing economies like that of India, which have adopted a course of planned economic development, control on new capital issues is generally instituted.

The danger of such a policy lies in this that too much State direction and intervention will hamper private enterprise. But leaving private investment entirely free is also not at all safe. A happy mean will have to be struck.

Miscellaneous Domestic Measures

(A) Price-wage Controls: In a boom period, generally governments impose direct controls over prices and wages in conjunction with, or without, consumer rationing and materials allocations to suppress a generalized total excess demand and to direct productive resources into channels desired by the Government. While monetary-fiscal measures are generally more useful in a situation where excess demand in general is sought to be kept in check, the afore-mentioned direct controls can be more useful when they are applied to specific scarcity areas.

Direct controls have several advantages to commend them:

(i) they can be introduced/changed quickly and easily;

(ii) Depending upon the situation, intensity of their operation can be varied, and

(iii) They can be more discriminatory than monetary and fiscal measures.

However, apart from serious political objections, direct controls suffer from several economic and practical drawbacks:

(i) they suppress individual initiative and enterprise;

(ii) inhibit innovations such as new techniques, new products;

(iii) May have destabilizing effects by inducing large-scale hoarding,

(iv) Presuppose honest and efficient administration, which is seldom the case in developing countries.

(B) Price Stabilization Measures. Sometimes to check further price deflation and to support producers, the State may buy the whole stock of certain goods at notified minimum prices. This is generally done in regard to agricultural commodities. Apart from the need for an efficient administrative organization and ample finances, such a policy has little significance as a contra-cyclical measure, since it cannot remove the basic cause of depression. At best, it may help mitigate the severity of a deflation.

(C) Unemployment Insurance Scheme. Most developed countries have evolved schemes of unemployment insurance for workers. In prosperity substantial funds collected under such schemes are used to compensate the unemployed workers during the period of depression and thus the level of effective demand can be maintained. Although the scheme helps achieve social justice, it cannot prevent unemployment during depression.

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