The newest Nobel laureates for economics - Norwegian Finn Kydland and Edward Prescott of the United States - are proposing a major theory: Governments should avoid implementing short-term economic-stimulus policies, and should refrain from interfering directly with the economy.

When formulating their theory, they downplayed the importance of demand, and stressed the role of innovative technologies and shocks - such as wars and rising oil prices - in causing economic booms and recessions.

They think governments' interference in their nations' economies can only alter demand, which, according to their core premise, has a limited role in the economic cycle.

Over the past 30 years, most of the Nobel prize winners in economics have emphasized - although their reasons have differed - governments should have limited roles in concrete economic operations.

For example, Frederich Hayek (1899-1992), winner of the 1974 Nobel prize in economics, argued governments always receive limited information. Therefore, he suggested, a government, by interfering with market operations, will disrupt the market's spontaneous order.

Even "New Keynesian" economists - including Michael Spence and Joseph E. Stiglize, who won the 2001 prize - have abandoned Keynes' theories, which support governments' need to interfere with market operations.

Spence and Stiglize, however, argue governments' interference should be limited to introducing legislation to prevent unbalanced information - between consumers and producers - from disrupting the market.

In addition to the implications contained in their theories, the Nobel laureates suggest governments should have a little, if any, role in the market because governments are never "interest free."

Government departments tend to have their own interests, which may differ from those of market players, and many government officials tend to use their power for corrupt purposes.

In developing countries such as China and India, the seemingly apparent weakness of the market often provides government officials with an excuse to interfere in the market.

For example, when the Chinese Government implemented its proactive economic policies, it dramatically increased its investments in the market. That money was disbursed mainly at the whim of government officials.

With such financial strength, officials are in the position to initiate projects to enhance their communities' images, create employment and even embezzle money.

Such officials, however, overlook the negative effects of their huge investments, such as losing their investments and/or curbing private sector's development.

Furthermore, under tightening economic policies, officials have to determine which projects must be controlled, and which ones may proceed.

In most instances, those judges are government officials who have made investment decisions under the proactive economic policies.

As a result, these officials often decide to stop the projects invested by private investors instead of those by themselves.

This is why Kydland, Prescott and several other Nobel laureates argue governments must always avoid the temptation to directly interfere in their nations' economies.

Governments must focus their efforts on promoting the development of innovative technologies, and on avoiding, or minimizing, shocks, Kydland and Prescott suggest in their research.

Regarding the development of innovative technologies, it is crucial that governments are not directly involved in research either, because governments cannot grasp the actual need of the market.

Also, when governments become major players in technological innovation, they often place political aims - such as catching up with the world's newest technologies - ahead of aims that can be easily accommodated by local markets.

Enterprises must take the lead role in the development of innovative technologies.

Governments should support, financially, the basic and theoretical research, establish long-term rules, which encourage innovation, and create research incentives for scientists.

It is also very important to prevent government officials from making biased decisions when deciding which projects to fund.

There must be public participation and evaluation to ensure governments do not unfairly allocate research funding.

China currently has some governmental committees, composed of experts, to evaluate science programmes. But in many cases, officials speak louder than experts.

Wider participation should be designed in China to ensure technological progress truly answers market demand, and, hence, directly stimulates economic growth.

(Business Weekly 10/26/2004 page18)