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Basic Problems Of An Economy And The Role Of Government
Business Environment and Law-Business And Its Environment
Basic Problems Of An Economy And The Role Of Government
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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.
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.
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.
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.
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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