Whatever the nature of the economic system, all types of economies have been faced with certain common basic problems.
Basic Problems Of An
Economy And The Role Of Government
Whatever the nature of the
economic system, all types of economies have been faced with certain common
basic problems.
The major economic problems faced
by an economy may be classified into two broad groups:
Micro-Economic Problems Called Basic Problems,
which are related to the working of the constituents of the economic
system; and
Macro-Economic Problems related to the growth, stability, and management of the
economy as a whole.
The way the basic problems of an
economy are solved depends on the nature of the economy. While in a socialist
economy they are solved by the government agencies, like central planning
authority, in a free enterprise or mixed capitalist economy this task is
performed by the price mechanism or market mechanism.
Though
free enterprise system is capable of bringing economic growth, it does not
ensure a stable, sustained, and balanced growth. It becomes therefore
inevitable for the government to intervene fair competition, and help the
economy in achieving its goals – efficiency, stability, growth and economic
justice.
Now, the question arises as to
what should be the appropriate role of the government in economic management of
the country or what should be the form, nature and extent of government’s
interference with market mechanism.
Nevertheless, the economic role
of the government can be broadly categorized on the basis of the three economic
systems which presently prevail in the world, viz., Capitalist system or free
enterprise system, socialist system, and the mixed-economy system.
1.
Capital Society:
In this system, the primary role
of the government are: (i) to preserve and promote free market mechanism
wherever it is possible to ensure a workable competition, (ii) to remove all
unnecessary restrictions on the free operation of competitive market, and (iii)
to provide playground and rules of the market game through necessary
interventions and controls so that free competition can work effectively.
It may be inferred 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 free
market mechanism; and (b) to enter those areas of production and distribution
in which private entrepreneurship is lacking or is inefficient.
2.
Socialist Economy:
In contrast with the capitalist
system, the role of government in a socialist economy is much more exhaustive.
While in the former, the government is supposed to play a limited role in the
economic sphere, in the latter,
It
exercises comprehensive control on almost all economic activities. In the
socialist system, not only there is a complete disregard for free enterprise
and market mechanism but also these systems are abolished by law. The private
ownership of factors of production is replaced by the state ownership. All
economic activities are centrally planned, controlled and regulated by the
state. All decisions regarding production resources, allocation, employment,
pricing etc., Are centralized in the hands of government or the central
planning authority.
3. Mixed Economy:
In this system, a major part of
the economy, the private sector, is allowed to function on the principles of
free enterprise system or free market mechanism within a broad political and
economic policy framework. The other part of the economy, the public
sector, is organized and managed along the socialist pattern. The
public sector is created by reserving certain industries, trade, services, and
activities for the government control and management. The government prevents
by an ordinance the entry of private capital into the industries reserved for the
public sector. Another way of creating or expanding the public sector is nationalization
of existing industries. The promotion, control and management of the public
sector industries are 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 controls are also imposed.
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