The Objectives of Economic Policy
November 4, 2008 · Posted in General Economics
Goods, that is land, factors of production, consumer goods, and media of exchange on planet earth are limited. These scarce goods need to be utilized in a manner so as to satisfy the most urgent needs of the largest number of people at any given point in time. But every individual aims at different objectives and prefers different goods. What he prefers to what and by how much is determined by his value preference.
Prices on the market put into relation and reconcile different individuals’ value preferences, interest rates accomplish the same for differing time preferences. On the market different actors have a natural incentive to attain an optimum utilization of all goods. If there are factors of production that are not being utilized in lines of production where they satisfy the most urgent consumer needs or the needs of the largest number of consumers, opportunities to reap an entrepreneurial profit arise. Entrepreneurs have an incentive to withdraw those factors of production and put them into new lines of production where they produce goods that satisfy more urgent or simply a higher number of consumption demands.
The ultimate objective is to reach the theoretical state of market equilibrium where no further demands need to be satisfied. The market enables individuals and goods to be allocated in a way so as to move toward this market equilibrium. It shall hence be the objective of economic policy to do everything that enables the market to move as quickly as possible and as closely as possible toward the state of market equilibrium.