In this article we will discuss about the Role of Government in Different Economic Fields.
The most important current problem facing the US economy is also a very old problem. This is the continued cold war’ between business and government, with organised labour and agriculture running interference for both, and increasing the noise level. K. E. Boulding
The role of the government in managing and controlling the macro economy has been a controversial subject even since the time of Plato and Aristotle. Aristotle’s view was “that government is the best which rules the least”.
And Adam Smith, the father of economics, advocated the doctrine of laissez faire which implies non-intervention by the State (Government) in economic matters. The classical economists also sang the praise of free trade and opposed the policy of protectionism. Adam Smith introduced the concept of the invisible hand which, he thought, would maximise social welfare.
However, the Great Depression of 1929, which lasted for four years, shattered the views of classical economists. And in 1936 J. M. Keynes first suggested that the visible hand of the government should replace, at least partly, the invisible hand of the market in stabilizing the economy.
And Keynes specifically recommended the use of government fiscal policy to control business cycles and create jobs and incomes. Some western economies followed the Keynesian prescriptions and succeeded in achieving high-employment growth even in the absence of demand-pull inflation.
The post Second World War (1939-45) has witnessed a tremendous expansion of government activities in most non-socialist countries. And this very fact led to the emergence of the mixed economy concept. Even the present American economy is an example of a mixed economy.
The Government of India also adopted the mixed economy principle in 1948 (just one year after Independence). Such an economy in characterized by the co-existence of private and public sectors as also the operation of both the price (market) system and the planning system (i.e., government control and regulation) in solving society’s economic problems.
Today liberal economists like Milton Friedman and others want government to correct flaws in the market mechanism and alleviate poverty and inequality. But conservative economists like James Tobin and his followers demand that governments ‘get off our backs’ so that markets can work their miracles in raising the standard of living of the country.
A more balanced view has been taken by Paul Samuelson and others, who advocate selective government intervention in economic matters. The truth is that the market system has, over the last two centuries, proved to be a very powerful factor in stimulating the economies of industrial countries.
In spite of this about a century ago, governments in most capitalist countries began to intervene in economic matters to correct the perceived flaws in the marketplace.
As Paul Samuelson and W.D. Nordhaus have rightly commented: “The increase of government involvement has brought a vast increase in the influence of the state over economic life, both in the share of national income devoted to transfers and income- support payments and in the legal and regulatory controls over economic activity.”
However, government control over the private sector has not consistently been on the increase over the years. Rather, due to frequent political changes most modern mixed economies take two steps forward and then one step backward, on the road to greater government involvement.
And the recent collapse of socialism and the consequent re-emergence of the market in new-born post-socialist countries have brought into light the controversial role of the government. Nonetheless, the fact remains that the government has a profound effect on economic activity in any modern economy.
In this section we attempt to analyse the nor-negative role of the government. The basic objective is to explore the economic rationale for government management of the economy.