Free Market advocates, such as Milton Friedman, will argue that Governments should interact with the business world as little possible so that the ‘invisible hand’ of the market (the price mechanism and bankruptcies of badly managed firms) can occur with no guidance from external bodies. They would argue this is the fully ‘liberal’ approach to trade, and that any interference is ‘not free’. I do in part agree with this ‘laissez-faire attitude’ but it can be seen that this form of capitalism does not always proviide a fair and adequate distribution of scare resources, and that it can be seen to have poor human welfare implications.
In 1930, as the US of A braced itself for something that was not seen as a normal recession (the Great Depression) it was Keynes who advocated that Government was needed to fix the economic engine. Keynes described the problem as an ‘economic alternator problem’, which implied there was no fundamental issue with the system but that it needed intervention to ‘kick start’ the machine. World War II was this spark.
I believe that Government should be as small as possible, but that it is absolutely vital to the fair distribution of economic wealth. Governments are there, in my opinion, to protect the little people, and to ensure the rules of the game are fair for all and adhered to. I am dubious and reluctant to say that one of its roles is to provide full employment or income for all (ie the Welfare State), but that there should be some support for those less fortunate or educated to be encouraged into work, so that they have the opportunity to work, make a living and find a purpose in life.
I do believe the Governments functions are to provide education, protection i.e. police and army, a legal and judicial system, the regulation and limitation of negative effect externalities of business (ie a chemical firm dumping toxins into a water supply) and in part health services (here in the UK the Government funds the NHS – which i am not 100% sure is the best way to provide free and adequate health care to the poorest in our societies – but that is another discussion altogether!!).
The Government is responsible, in the UK, for fiscal and monetary control, and can use regulation, taxes and subsidies to affect the prices and availability of goods and services in the private sector. More Governmental control is normally justified due to ‘Market Failure’, as in the 1930’s US Depression. Keynesian followers see the role of Government as Macroeconomic Managers, and not Microeconomic Regulators. The two main tools for this, as suggested above are:
- Fiscal Policy Management – managing the level of public spending and taxation.
- Monetary Policy Management – managing the quantity of the money supply (ie Quantitive Easing) and interest rates.