Political Science Essay Paper on Role of Government in the Economy

Role of Government in the Economy

Consumers and producers play a significant role in the molding of the nation’s economy, and may prefer a limited government to enhance smooth running of the economy. However, the input of the government is important in the successful running of any economy. The government should act as a corporate firm in a capitalist state where it has to guarantee continuous growth and profitability through coordinating both internal and external sectors. Some scholars, such as Marshall and Shackle, were genuinely concerned about what might promote human progress, and the obstacles that might emerge in the process. The claim of overconfidence in human rationality may have been the reason why a neutral body has to be in place to direct human behavior in the economy. Thus, the proper role of government in the economy is to ensure that the economy attains the goals of development, full employment, as well as stability in prices.

Why the Government is Important in an Economy

Classical development theorists discovered that long-run economic growth of a nation is a non-linear process. Such process is exemplified by the presence of multiple stable equilibriums that depict low-income-level traps. The theorists perceived industrial production as a subject of technical indivisibilities that resulted to technological externalities. However, lack of proper coordination led to lower returns from investments compared to coordinated investment programs. Uncoordinated investments failed to show increasing returns to scale, and restricted levels of savings, as well as aggregate demand. Thus, the need for government was critical to drive such economy from uncoordinated and static equilibrium to a coordinated dynamic equilibrium.

The relationship between state and economy is quite complex, as the state has to ensure stability in prices and healthy competition. Institutional legitimacy is crucial for organizational survival. The state defines and controls conditions that enhance business transactions, including limiting of contract and possession of property rights. Property rights define who should control the capitalist enterprise and claim the rights of surplus. According to Fligstein, the state has the legitimacy to allow certain concrete institutional arrangements (171).  For instance, the Japanese government has contributed largely in the Japanese economy since the Meiji Restoration. Through borrowing ideas from the Western models, the Japanese government encouraged domestic firms to join the export markets, and extended credit to firms that manufactured goods for export. However, firm’s managements remained in the hands of private owners.

Although several examples have shown that the state has assisted largely in balancing the economy, the state cannot be trusted with all economic activities. There seemed to be a divergence among historians as to why the Nazis managed to rise in power and the actual role of the German government in the economy. Many scholars agreed that big business leaders did not play any role in the Nazis’ ascendant to power, since they feared the rise of Hitler as the imperial chancellor of Germany (Barkai 6). The Nazi party promised to reduce unemployment in the country, and the rapid economic growth came to be because the party implemented its economic policy efficiently. The success of the Germany’s economy in the 1930s was because the government was capable of controlling all branches of its economy, regulated the foreign trade, prices, as well as wages and investment.

Individuals do not progress in the same speed, and different agents require different lengths of time to make economic decisions. Real market economy is normally in disequilibrium because some players take more time to place their preferences in order, but creating a general equilibrium necessitates equilibrium of individual sectors.

Roles of the Government

Government’s contribution to an economy is paramount, particularly to safeguard consumers from exploitation by the private owners. Capitalists support the role of government in the market to safeguard individual property rights. Government should take the following responsibilities to ensure a smooth running of the economy:

  1. Provide a Legal System and Correct Market Failure

Economies usually consist of different institutions that have rules and values, which influence how goods and services are exchanged in a given region.  Such institutions cannot maintain their functions without the judicial system, which interprets and executes law on behalf of the state. Both local and international laws regulate property ownership, individual rights, and international markets. Economic approaches assume that social systems can change to enhance efficiency, as exchange takes place across societal boundaries. This makes different societies develop different rules to guide on property rights, as well as rules for competition, and to create efficiency in the market.

The government is responsible for implementing rules and regulations to guide on smooth running of businesses and drafting policies to transform behaviors of consumers and producers. For instance, the government sets rules for taxation to minimize income inequality and equal share of resources. The state is also involved in creating laws for intellectual and non-intellectual property rights. These rights are crucial for individual freedom, but the free market cannot offer such rights. Establishment of courts and military force aimed at creating order and efficiency in the market. Thus, the state creates and enforces such rights on behalf of its citizens.

Insufficient allocation of products and services within the economy leads to market failure. This usually happens in a free market economy where monopoly power rules the market, and where consumers and producers fail to admit their actions to the third parties. The presence of government is essential when an economy is experiencing a market failure or externalities. Market failures incorporate external costs and internal benefits. In case of no market failure or externalities, there can be a little justification for the government to intervene, as the presence of government in the market creates lower efficiency and low economic growth.

  1. Provide Public Goods

Public goods are products and services that every person has the right to consume and no individual can prevent another from consuming them. The government is the only body that is capable of providing what the private sector cannot offer. The government can intervene in the economy through offering products and services that include education, national defense, and health and road infrastructure. It is quite difficult to measure the effects of such provisions because they are not available at a market value. The state has the powers to decide which goods or services become public goods and which ones to remain as private goods.

Although some services can exist as both public and private, society may question the morality of having such services in the hands of a few individuals. For instance, motorists are sometimes charged to use certain roads while some citizens have the capacity to seek the services of military for their private security. Such incidences prompt the government to provide public goods where every individual can enjoy the services freely.  State security is essential for investment, as investors prefer to establish their businesses where there is an assurance of adequate security. The same case applies to health, even though some states such as the US have made health a private good. The state can distribute the public goods as it sees fit.

The choices of the methods of production can only be a technical matter to be determined by a committee constituted by engineers, rather than having a legal explanation. However, technical knowledge, which is supplied by scientists and engineers provide the basis for selecting methods of production when the factors of production are specific or have a chance to offer a substitute. In such cases, the government is the best agency to provide the detailed information concerning the free consumer goods market. Technology determines the price of a product by stating the best way to produce without incurring much cost. Price movements offer accurate knowledge on the relative scarcity of products to the firms that focus on maximizing profits. To stabilize the price, even when there is a scarcity of resources, a comprehensive planning is necessary, and this is when the government comes in.

Unlike private goods that facilitate individual freedom, public goods allow the state to exercise collective equality, as the public is capable of benefiting from its provision. Communist thinkers assert that private ownership and free market do not serve society interest, as private property holds so much power over other economic players.  The absence of state allows economic competition between people, leading to exploitation and emergence of social classes that differentiate the wealthy people and the majority poor. Such exploitation creates even a wider gap among individuals controlling the economy and the ones who labor for subsistent needs. Exploitation is likely to breed a revolution where a single communist party would strive to control the state on behalf of the people.

  1. Maintain Competition

Competitive markets have a way of allocating goods and services to the market players while ensuring that consumers have the freedom of choice. The freedom and efficiency of such market cannot exist if there is no competition in the market. However, a monopoly power may emerge if the market is under the control of a few producers, which results to consumer exploitation through high prices. Businesspersons cannot be left to direct themselves in the market because they are likely to exploit consumers and, consequently, creating disequilibrium in the production. Thus, government intervention is essential to stabilize prices through offering substitute products.

The private sector cannot be trusted wholly to run the market as it create inequality in resource allocation, and contribute in formation of social classes in society. The private sector can be sluggish when there is no competition. It can create uncertainty, which affect the consumption. To reduce uncertainty, George Shackle suggested that individuals should seek more knowledge to understand effective coordination of economic practices (Hodgson 187). Both Shackle and Marshal acclaimed that private business contributed immensely in material improvement, exploration and invention of new ideas, but lack of competition may delay such practices. The government can only allow natural economy because it is not efficient to create economies of scale in the distribution of electricity, water, and gas to consumers in their own residents.

  1. Redistribute Income

Redistribution of income involves taxing citizens who earn high income and using the tax collected to enhance the life of the poor and needy in the economy. Many people, including the rich, support the government’s action of redistributing income because it is one way of ensuring high consumption and enhancement of the well-being of the disadvantaged. Since the occurrence of the Great Depression, many Americans came to realize that the government plays a critical role in the redistribution of income from the high-income earners to the poor, as well as the disadvantaged, which include the unemployed.

Government intervention in the redistribution of income is driven by the desire to attain social goals, which can be hardly achieved through private ownership. One of the core sources of funds for the state is through taxation. The state cannot afford to provide public goods without having a form of income. Restriction of import is another way of redistributing income, where domestic producers accumulate wealth from the consumers. Domestic producers are essential to an economy as they contribute to the economy through high taxes.

  1. Stabilize the Economy

The government should take the responsibility of stabilizing the economy by reducing the level of unemployment and inflation. Government regulations are crucial in altering economic activities. The shortage of technical skills in an economy can create adverse effect on the unemployment and product invention, leading to imbalance of trade. The government should intervene by establishing more education institutions. The rational theorists argue that the cure for unemployment should be to offer adequate information, and to reduce inflation, which make people fail to differentiate between general price change and relative price change. Economic effects of government regulation offer both benefits and costs, but they cannot be overlooked because they create the balance between taxes and government spending.

An entrepreneurial venture normally depends on conjectures and speculations. There is no guarantee for success, and experiencing a failure after having a full commitment can be very costly to the owner. The exploration and invention of new business ideas requires thorough research, rather than pure imaginations of the future. To ensure consistency in the business success, the government can exercise its research and development department to explore numerous possibilities, in addition to warning entrepreneurs of the future economy.

Fascist economics supports an economy controlled by the state marked by the merger of private and public ownership. According to this type of economics, the success of the private enterprises relies on the state’s goals. Although this ideology is driven by profit, it emphasizes on upholding the national interest above the private goals. This type of ideology originated in Italy during the World War I, and managed to spread to other European countries, and Hitler was among the European leaders who adopted the ideology (Flynn 66). However, fascism was blamed for being slow in realization of development in the central government, which was against the habitual attitudes of Italians.  


The involvement of the government in the economy is fundamental in ensuring equal resource allocation, full employment, and stabilization of prices. Capitalists believe that the presence of government in the market should be minimal to avoid slowing down the growth. Establishing government policies which can regulate markets is quite complex, as policies must offer a balance between encouraging investment and serving the interest of the majority people. The government establishes courts and police force to ensure that businesses are run according to the law and people are safe while carrying out their private businesses. Provision of public goods ensures that every individual enjoy the services that the private sector cannot afford to provide. The government is required in the market to stabilize economy through creating employment and reducing inflation. Collection of tax ensures that income is redistributed, as high-income earners are charged more to provide for the disadvantaged in the society.

Works Cited

Barkai, Avraham. Nazi Economics: Ideology, Theory, and Policy. New Haven: Yale University Press, 1990. Print.

Fligstein, Neil. The Architecture of Markets: An Economic Sociology of Twenty-First Century Capitalist Societies. Princeton, N.J: Princeton University Press, 2002. Print.

Flynn, John T. As We Go Marching. Garden City, N.Y: Doubleday, Doran, and Co., Inc, 1944. Print.

Hodgson, Geoffrey M. The Evolution of Economic Institutions: A Critical Reader. Cheltenham (UK: E. Elgar, 2007. Print.