The Role of Government

You know, doing what is right is easy. The problem is knowing what is right. -PRESIDENTLYNDONB. JOHNSON

A modern market economy cannot exist in a vacuum. Market transactions take place within a framework of rules and require someone with the authority to enforce those rules. Government not only enforces its own rules but also enforces contracts and other agreements and understandings among the numerous parties in the economy. Sometimes government also sets standards, defining what is a pound, a mile, or a bushel. And to support itself, governments must also collect taxes, which in turn affect economic decision-making by those affected by those taxes.

Beyond these basic functions, which virtually everyone can agree on, governments can play more expansive roles, all the way up to directly owning and operating all the farms and industries in a nation. Controversies have raged around the world, for more than a century, on the role that government should play in the economy. For much of the twentieth century, those who favored a larger role for government were clearly in the ascendancy.

Russia, China, and others in the Communist bloc of nations were at one extreme, but democratic countries like Britain, India, and France also had their governments take over ownership of various industries and tightly control the decisions made in other industries that were allowed to remain privately owned. Wide sections of the political, intellectual and even business communities have often been in favor of this expansive role of government.

During the 1980s, however, the tide began to turn the other way, toward reducing the role of government. This happened first in Britain and the United States, and then such trends spread rapidly through the democratic countries and were climaxed by the collapse of Communism in the Soviet bloc. As a 1998 study put it:

All around the globe, socialists are embracing capitalism, governments are selling off companies they had previously nationalized, and countries are seeking to entice back multinational corporations that they had expelled just two decades earlier.

Experience-often bitter experience-had more to do with such changes than any new theory or analysis. However, in order to understand basic economics, it is not necessary to enter into these controversies. Here we can examine the basic functions of government that virtually everyone can agree on and explain why those functions are important for the allocation of scarce resources which have alternative uses.

The most basic function of government is to provide a framework of law and order, within which the people can engage in whatever economic and other activities they choose, making such mutual accommodations and agreements among themselves as they choose. There are also certain activities which generate significant costs and benefits that extend beyond those individuals who engage in these activities. Here government can take account of these costs and benefits when the marketplace does not.

The individuals who work for government in various capacities tend to respond to the incentives facing them, just as people do in corporations, in families, and in other human institutions and activities. Government is neither a monolith nor simply the public interest personified. To understand what it does, its incentives and constraints must be taken into account, just as the incentives and constraints of the marketplace must be for those who engage in market transactions.

0 0

Post a comment