What Role Should the Government Play in Economic Life - Essay Example

Economics Governments, societies, civilizations, and cultures are largely defined by the distribution of wealth and resources. While the history of man illustrates the need to cooperate in the marketplace and how mankind has depended on the exchange of goods for survival, modern economics has evolved into a paradox of a well planned system of free market enterprise. Capitalism has freed man to pursue the realms of modern philosophies on the limits of wealth and the fair distribution of resources based on free market policies. Other economic philosophers of the recent centuries, such as Karl Marx, have questioned the right of private property, and have called for an active part in controlling the generation and distribution of wealth. The marketplace and the government meet head-on in the division of authority in the creation and distribution of goods, services, and wealth. All economists, except the most conservative capitalists, believe that the government has some role in constructing and guiding the economy. The role of the government in economics is to assure that the economy of the country is able to express its culture and societal will. Taxation is one of the primary policy functions that a government can use to stimulate or discourage economic activity. Indeed, governments require taxation to provide the necessary funding for needed projects. Ideally, it is hoped that taxation would be fair and all citizens would bear an equal tax burden based on their abilities and needs. However, capitalism has been able to develop concentrated wealth and this unbridled economic freedom has the possibility to create the perception of a shortage of resources. The sixteenth and seventeenth centuries were characterized by food riots as production increased the supply, markets agitated a sense of shortage, and the threat of unfair taxes interjected a sense fear into the system. The governments role in economics is to assure the fair implementation of tax laws and eradicate the fear of taxes. According to Rothschild, "Commerce will flourish only in a state with a regular administration of justice" (14). The governments role in taxation is to sustain a high degree of confidence in the application of the existing tax laws. The governments role in economics, in regards to taxes, is the generation of confidence in justice and not directing society through tax encouragements. Governments often assume the role of directing a societys culture through a series of punitive taxes or rewarding credits. Taxes are often levied against a product, such as tobacco, whose use is viewed as deviant or costly to society. In contrast, tax credits are given to stimulate an industry, such as oil exploration, that is seen as a benefit to society. These functions are beyond the role that the government should play and become invasive into the marketplace. While special interest groups call for windfall taxes on excess oil company profits, others call for tax credits for using solar energy. When the government assumes this role, they have taken away the free market expression of the peoples will in regards to what energy they will consume. The governments role in the economy should be to make the marketplace available to everyone, without the artificial rewards and punishments offered by individually crafted tax laws. Societys will should be reflected through the free market and not government intervention. While taxation to stimulate or deter a product or industry usurps the markets role in economics, the government does have a role in taxation to assure a fair and prosperous fiscal policy. Colander defines fiscal policy as "the deliberate change in either government spending or taxes to stimulate or slow down the economy" (583). Defining and directing fiscal policy is the primary role of government in the economy. The Federal Reserve Board has the task of calibrating and steering the economy through the regulation of the money supply and interest rates. This helps to assure adequate capital markets and an environment that is profitable for long-term business interests. While the government does not have a role in the control of wages or prices, the role that the government plays does have an impact on both through the regulation of inflation. The governments role is the management of the economy, and not the individual entities that comprise the economy. While the governments role in managing prices and wages is an indirect consequence of fiscal policy, they also set a minimum wage. The minimum wage law is central to the issue of governments role in setting wages. It is in line with Keyness philosophy of demand side economics by putting more money into the economic system. While this seems to go beyond the role as a fair and impartial guarantor of justice, the minimum wage law can be viewed as a regulator of the economy in that it does not favor an industry, a product, or an individual. Moralists have long viewed poverty as a self-imposed isolation from the system of wealth and is a burden to the economy and society. Indeed, civil society could not exist with a large poverty class that necessitates subsidizing their marginal survival. The government does have a role in minimizing poverty, which Condorcet is in part caused by "insufficient wages" (qtd. in Rothschild 172). Minimum wage is an indirect tax that redistributes wealth from the producer and entrepreneur to the worker. However, it is also a policy that buffers the economy from creating restricted demand by an increasing level of poverty. The minimum wage law is not a moral issue about the undesirability of poverty. It is a valid component of a sound fiscal policy that attempts to reduce poverty, rather than supporting its victims. The governments role in the economy is primarily to indirectly adjust and regulate prices and wages through fiscal policy, but it also serves a function as mediator in the economy. Fiscal policy should be structured to insure the opportunity for upward mobility for any citizen wishing to accomplish it. Adam Smith wrote extensively about educations relationship to wealth and governments role in providing equal access to education for the poor as well as the rich (Heilbroner 101-104). The impact of education has become even more important since the era of Adam Smith. The government has taken on this role in the institution of public schooling, though has lagged behind the needs of society. The governments role in providing education should be the access to a publicly financed higher education to anyone within their limit of ability. This role serves all of society without directing its cultural concerns. It generates the necessary pool of qualified labor and mediates a condition of fairness in regards to the opportunity to acquire wealth. The governments role as mediator in the economy also extends to the areas that are necessary to regulate. While in an ideal capitalist economy we could expect the marketplace to be the ultimate decision maker about a product or its price, mass communication and rapidly developing technology have hindered the markets ability to make these decisions. New drugs that may be dangerous will eventually be taken out of the market due to their ineffectiveness. However, this places the buyers at risk during the period of product evaluation. The Food and Drug Administration (FDA) fills the role of evaluating the product before it enters the market. Ineffective or dangerous products are prevented from entering the market through a consensus of experts at the publics expense. Deciding which products are available to the economy becomes a shared obligation very similar to law enforcement. While police agencies protect the public from cultural deviation, government regulation polices the economy to prevent unsafe products from exploiting the consumer. Our economy is built upon the trust we have in the contractual agreements made by the parties involved. To make a binding contract there must be significant reassurance that the contract can be enforced. The system of contracts and torts is an essential condition to eliminate fear in the market and create "reasonable hopes, imagination or expectation (Rothschild 14). The governments role is the creation of a system of law that can be used as a framework for agreement. When a disagreement arises, it is the role of government to mediate the dispute and enforce the contract. Without a meaningful enforcement mechanism, the producers and buyers, manufacturers and laborers, would have no common basis for agreement and would spiral into a system ruled by force and intimidation. Without the government, the economy would lose the basic underpinning of wealth which has been established by promise and agreement. The governments role as mediator extends beyond the contractual agreements and also protects the public from exploitation. The market has some ability to eliminate bogus products as the consumer becomes more informed and is dissuaded from the purchase of snake-oil type products that are falsely advertised. Truth in advertising may well be the responsibility of the consumer as well as the producer. However, the exploitation of a natural resource, a community, or the environment should be viewed as a key component of fiscal policy. When a company pollutes a regional area, it is likely to substantially reduce property values and become a major disruption to the local economy. This creates a situation where the owners are able to redistribute the value of the local property to their own profits. Individuals, activists, and organizations usually do not have the financial resources to prevent a corporation from this indirect transfer of wealth. It is the governments role to prevent this exploitation through the implementation of environmental laws, and to insure redress for those individuals who are exploited. The government has a role to play in the elimination of exploitation of the public, but also serves to protect the citizens from the unlawful use of individual property. In a free market system, counterfeiting and the theft of intellectual property place the individual at great risk if there is no mechanism to police and enforce the laws. Without this government role, producers would have no reason to create new products or technologies (Colander 404). Without new products the market would soon dwindle and be replaced by unemployment. Once again, governments role in policing private property rights is a matter of sound fiscal policy. While the market may decide what to buy or how much to pay, it is the government that decides the distribution of the profits. No issue is more topical in regards to the governments role in the economy than the issue of underwriting risk. The current situations in the financial markets are a direct result of banks and lenders assuming unmanageable risk. When these institutions fail, it places a significant burden on the economy and individual wealth. Generally speaking, banks and lending institutions have done an adequate job of risk management. However, the runs on the banking system prior to the Great Depression were able to contribute to a lack of confidence in the system. The Federal Deposit Insurance Corporation (FDIC) was instituted to reassure an uneasy public on the safety and solvency of the financial system. In the new global economy transactions take place across borders with less reassurance. It has been noted that lax banking supervision and little risk management "threaten the prosperity and stability in the fast growing economies of Asia, Latin America, and Eastern Europe" (Caouette, Altman, and Narayanan 17). The current home and lending crisis in the United States highlights the issue of how far the government should go in bailing out the lenders or the borrowers. The government has a responsibility to insure economic stability in the times of crisis. Capitalism would dictate that the risk in the housing crisis was assumed by the borrower and lender, and that the government has little if any role to play. Ideally, the government would only be an instrument to insure that the contracts were being enforced. However, collapse within the system may have a further deteriorating effect on the employment situation in the Midwest and elsewhere. If the governments role is to provide a prosperous economic environment, then the health of the mortgage market would be a part of that philosophy. When an issue becomes so paramount as to degrade the economic conditions of all of society, then the government has a role to step in and mediate a way out of the crisis. Free market policies may dictate that the chips fall where they may, but it is the governments role to see that the chips do not crush the economy. The new global economy and international markets have necessitated that the government take an active role in trade policies. Once again, the ideals of free market policies and philosophies can direct our economy but can not be expected to control it. International economies and cultures demand explicit agreements to assure cross border fairness and economic justice. The governments role is to assure the public that trade will be for their benefit. The public also needs a level of protection against product dumping, below cost pricing, and unsafe products. No individual or corporation is in a position to protect our economy from unfair trade practices. Only the government is in a position to formulate and enforce the broad trade agreements necessary in international trade. Governments failure to fill this role would result in economic isolationism in the world. The governments role is most basically that of providing a stable economy with a potential for economic growth. In keeping with this most basic tenet, the government assumes some responsibility for economic stimulation. Government spending directs tax dollars from one source and invests them in another. The building of a bridge may be undertaken as much for economic reasons as for the need for a new bridge. The government has a role to help insure that the spending of tax dollars stimulates the economy as well as providing the necessary infrastructure. Government research grants should be allotted by their potential to stimulate the economy by providing new products and technologies. Government subsidies may also be necessary to stimulate the production and distribution of raw materials (Schumpeter 129). The government has an active role in redistributing taxes and subsidizing the production of resources in an effort to sustain and grow the economy. Economic development is a key component of fiscal policy. In conclusion, the governments role in the economy is to assure that there is an opportunity for everyone to acquire wealth within the limits of their ability. While the government should not dictate the cultural desires of its people, it can make sure that society can express itself through the marketplace. The limited role that the government plays in classical capitalism has been expanded in recent years. New products and technologies have necessitated the formation of regulating agencies to prevent the exploitation of the consumer. The government also has a role in subsidizing risk management. This may take place as a form of government insurance, such as the FDIC, or may be accomplished retroactively through bail-outs and compensation. In any event, the role is to provide and promote economic stability. The new global economic environment has brought the importance of international trade agreements to the forefront. Without an active government our economy could fall victim to illegal trade practices. In addition, the government serves the role of stimulating the economy through the redistribution of taxes. Appropriate research and development grants helps to insure the continued innovation required by the marketplace, while the enforcement of private property rights protects the profits for the entrepreneur. Sound fiscal policy has many tentacles, and governments role is to enhance these avenues without the directness of a redistribution of wealth. This allows the free expression of society and its culture without the intrusiveness that results from undue government intervention. Works Cited Caouette, John B., Edward I. Altman, and Paul Narayanan. Managing Credit Risk: The Next Great Financial Challenge. New York: John Wiley and Sons, 1998. Colander, David C. Economics. New York: McGraw Hill, 2004. Heilbroner, Robert L. Teachings from the Worldly Philosophy. New York: W. W. Norton & Company, 1996. Rothschild, Emma. Economic Sentiments: Adam Smith, Condorcet and the Enlightenment. Cambridge, MA: Harvard University Press, 2001. Schumpeter, Joseph A. Joseph A. Schumpeter: The Economics and Sociology of Capitalism. Cambridge, MA: Princeton University Press, 1991. Read More