Where is all Confidence?

Confidence within the market is fundamental to encourage trade; both international and domestic trade; and overall economic growth. After the 2008 downturn many large financial bodies agreed that confidence had been lost and restoring confidence was key, to aid recovery. But what is confidence? Confidence is such an ambiguous measure that it is difficult to determine the levels of confidence within the market and restoring high levels of confidence. To a number of economists a number of actions are needed, these include; government intervention, trust and certainty, and market regulation.

Government intervention is necessary for any market structure. The government’s role within the economy is to provide public goods, regulate the private sector and overall lead the economy. The government’s leadership of the economy is most important when restoring confidence. When confidence is lost within the market, spending, trade and risk is overall reduced, in the attempt to minimise loss. The dilapidation of confidence minimises any potential economic growth and creates a vicious cycle of lose in confidence and overall reduction in the economic output. This is where the government can intervene it stop the cycle and restore confidence. If the government reduce risk and increase spending then activity can be restored to market, increasing confidence. The government can reduce risk with such economic actions as subsides, which encourages new smaller businesses to be set up and encourages larger organisation to increase spenditure, as some of the cost is covered by the government. This, in turn, increases government spenditure and encourages private spenditure. Once economic activity begins to increase, confidence will follow. However, although this is a method to help restore confidence, it can lead to government failure. Over spending can damage the government’s deficit and cause cuts to be made within the public sector and an increase in taxation. These consequences damages public relations with the government and can deter the government from using such methods.
Moreover, if spenditure is managed and disrupted appropriately then the effects will be readily seen.

An environment of trust and certainty needs to be created to aid a rise of confidence within the economy. Trust creates more trade and market efficiency by allowing compromise between producer and consumer. This helps to bring about better quality products at affordable prices. This concept can be applied to any part of the economy. For example, an increase of trust between investors and a hedge fund means that investors will give larger proportions of money in return for a suitable dividend. This increases investment by the hedge fund and overall economic activity. Certainty is not only important in creating confidence it is also important in creating trust. Certainty within an economy can only mean stable economic growth. This is achieved by reducing risk an economic body takes. Although certainty does not create as larger profits as risk, it does not produce substantial lose. This allows for steady economic growth, instead of fluctuating markets which inflates risk. Certainty in turn creates trust and confidence for the economy. Sustainable economic growth runs parallel to confidence and decreases the chance of the economy from turning into recession, where confidence in the economy is at its lowest.

Market regulation is one of the final factors to restore confidence into the economy. Market regulation can be implemented by both government and the private sector, with government providing economic laws and the private sector investigating economic bodies. Through simple and clear regulation of the market firms and economic bodies are held creditable for their actions, creating a equal and fair economy for both the consumer and firms. An example of this is through the tax system. If government implement a clear and simple tax system, which is both fair and encourages honesty, then firms are less enticed to tax evade. This raises revenue for the government and creates a more creditable economic environment. A more creditable market, where appropriate and necessary actions are taken to those who go against regulation, will decrease the chance of firms breaking regulation and stopping the same mistakes being made in the economy, which are then passed onto the consumer. Market regulation provides a fair environment that encourages stable and sustainable economic growth, which creates a base to build confidence in the economy.

Confidence is a key component of international economic stability, recovery and growth. With such an ambiguous concept there is never one overall solution and will take a combination of economic activity. With each economic downturn lessons will be learnt. Lessons that will allow future downturns to be fixed readily to help minimise the overall ripple effect around the world economy and get the economy back to steady, sustainable, economic growth, which is the overall objective.

Contributed by Giles Robinson

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