Role of the government in different economic systems

We have noted that the interference of the government with the market mechanism is indispensable because of the failure of the system. Now, the question arises as to what the government role of should be the appropriate in economic management of the country or what should be the form, nature and extent of the government’s interference with the market
mechanism. These questions remain controversial. The reason is that all is not well with government that can be established by a priori reasoning”. In fact, the issue of appropriate economic role of the government is an ideological question and a matter of collective social choice. However, the economic roles of the government can be broadly categorized on the basis of the three economic systems presently prevailing in the world, viz., capitalist or free enterprise economies, socialist economies and the mixed-economies.

1) Role of the Government in a Capitalist/Market Economy

A market economy is known as a capitalist economy. There is no central authority to guide production and solve central problems. The individual buyers and sellers decide the nature and amount of goods and services to be produced. Every worker is free to offer his services to anyone who promises highest reward. Thus, there is freedom of contract. Similarly, every person has the right to own property and use it in any way he thinks most profitable. Under the conditions, prices system tries to solve the central problems of an economy. What the central authority does in a socialist economy is done by price mechanism in capitalist economy. The price system operates in completely impersonal way through which all central problems get solved.

In a market economy each person is guided by self-interest. The producer tries to get maximum profit. The employees prefer to work where they get maximum salary. Likewise, consumers want to get maximum satisfaction from their limited income. The place where this drama is interacted is called a market. It is the price mechanism through which such aims are achieved. There are markets for every commodity and factor service known as commodity market wherein firms are sellers and the households are buyers.

Generally, the sellers sell more at higher prices and the buyers buy more at lower prices. As a result of competition among buyers and sellers, a price gets determined where demand for the commodity is equal to the supply of the commodity. This is called the equilibrium price of that commodity.

In the capitalist system, the primary roles of the government are essentially:
  • To restore and develop the free market mechanism wherever it is possible to ensure workable competitive conditions.
  • To remove all unnecessary restrictions on the operation of free competitive market, and
  • To provide a background through necessary government interventions, and controls in which free competition can work effectively. Besides, government intervention and its economic activities should deliver what the free market mechanism cannot.
Meade has recommended the following eight kinds of activities for the state to perform: control of inflation and deflation mainly through indirect measures, like fiscal and monetary regulations; control and regulation of monopolistic powers to large corporate undertakings with a view to avoiding, inefficiency, unemployment and wastage of resources; ownership and state monopoly of essential goods and services. E.g., railway transport and generation and distribution of electricity and such other services on the ground of efficiency and economies of scale; promoting equality of opportunity by providing equal access of education opportunities and restricting the restrictive trade practice and activities of trade unions, etc; administration of justice and maintenance of law and order, and ensuring freedom of activities; aiding private planning in view of the uncertainties of the future by some measure of government indicative planning; making central planning for large structural changes in the economy; and tackling the problems of environmental controls, of the use of exhaustible resources, and of population growth.

It may be inferred from these propositions that the government’s role in a capitalist society is supposed to be limited to (a) restoration and promotion of necessary conditions for efficient working of the free market mechanism; and (b) to enter those areas of production and distribution in which private entrepreneurship is lacking or is inefficient. Any planning by the government is indicative and should supplements the private plans for safeguard against future uncertainties.

2) Government Role in a Socialist Economy

The role of the government in a socialist economy is all pervasive. While in the former, the government is supposed to play a corrective and complementary role in the economic sphere, in the latter, it exercises comprehensive control on almost all economic activities. In the socialist system, not only is there a complete disregard for private ownership of property beyond the permissible limit, free enterprises and market mechanism, but also these institutions are abolished by law. The private ownership of factors of production is replaced by state ownership. All economic activities are centrally planned, controlled and regulated by the state. All decisions regarding production, allocation of resources, employment, pricing etc., are centralized in the hands of the government or its Central Planning Authority. The individual freedom of choice and decision-making in regard to economic activities is drastically curtailed. Individuals are provided freedom of choice, but within the policy framework of the socialist economy. Prior to the disintegration of the Soviet Union in 1989, the Soviet economy was the most prominent example of the socialist economic system. The other countries with socialist economic system are China, Poland, Czechoslovakia and Yugoslavia.

The social aim of the socialist economic system is the same as in the free enterprise system, viz., efficiency growth, social justice and maximization of social welfare. But, their methods of achieving these goals are totally different. The motivating force in a capitalist economy is private profit, whereas in the socialist economy, it is maximization of social welfare. Socialist way of management of the economy eliminates many evils of the capitalist system. E.g., exploitation of labor by capitalists, forces generating economic fluctuations, unemployment and social and economic inequality. The socialist economic system in its classical form in, however, disappearing from the economic scene.

3) Government Role in Mixed Economy

A mixed economy is one which combines the features of both free enterprise and socialist (centrally planned) economic systems. A mixed economy is essentially an admixture of private and public undertaking. In this system, the major part of the economy, the private sector, is allowed to function on the principle of free enterprise system or free market mechanism within a broad political and economic policy framework of the government. The other part of the economy, the public sector is constituted of industries and utilities promoted, owned and managed by the government largely on the principles of a socialist economy. The public sector is created by reserving certain industries, trade, services and activities for government ownership, management and operation. The government prevents by law the entry of private capital into the industries reserved for the public sector is the nationalization of private sector industries. The nationalization of private commercial banks and insurance companies are prominent examples of the public sector extension in India. The promotion, control and management of the public sector industries is the sole responsibility of the state.

Apart from controlling and managing the public sector industries, the government controls and regulates the private sector through its industrial, monetary and fiscal policies. If necessary, direct control is also imposed.

The mixed economies of free enterprises system can, however, be distinguished from the mixed economies of ‘socialist pattern’ on the basis of the rationale of public sector in the two systems. The public sector in a free-enterprise system is a matter of pure economic necessarily and is complementary to the free market mechanism. It functions with the objectives of aiding, supplementing and strengthening the free enterprises system. On the other hand, creation of the public sector is a mixed economy like India, is a matter of ideological and social choice. Its creation and functioning are aimed at creating a ‘socialist pattern of society’ through the market mechanism. It is another thing that India has failed to achieve any of these social goals. Another point of destruction is that the public sector of the socialist pattern of society has comprehensive economic planning whereas in a free enterprise system such plans are mostly indicative.

In the mixed economy or a socialist pattern of society, the role and responsibilities of the government are much wider than in the free enterprise system, and much less than in the socialist society. The government in this system undertakes to perform all the functions that the state performs in a free enterprise economy. In addition, it assumed the responsibility of making and implementing the plans for economic development of the country. The government has also to perform the task of coordinating private sector activities with the public sector, and controlling and regulating the former to bring it in true with public sector policies.

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