An economic system is an organized approach to producing and distributing goods and services. It is an organize way to answer the three economic questions of what, how and to whom to produce. Although every country must have an economic system to answer these three economic questions, their method of producing and distributing largely depends on the country’s historical experience, form of government, objectives and ideologies. To some people, government intervention in the economy are consider significant to protect against the worst elements of capitalism while others think that such regulations are unnecessary invasions of their freedoms.
To what extend should the government get involve in the economy. The government should take a limited role in the economy while allowing private enterprises because such involvement would eliminate the negative aspects of capitalism while adopting the positiveness of Socialism. This would benefit the economy in variety of ways. Firstly, government regulations allow businesses to remain in the private hands while removing some of the worst abuses of pure capitalism. Secondly, a government intervention protects the consumers, producers, and the community as a whole.
Finally, limited government involvement prevents crises such as inflation, unemployment and depression. The nineteenth century period was a memorable period in the history of human kind. The Industrial Revolution transformed society from an agricultural to a mechanized society. The output of production increased enormously thus creating a substantial amount of jobs. Although the economy was drastically affected by the increasing industrialization; many people were horrified at the evils of the Industrial Revolution.
It was this period of time when new ideas and philosophies began to emerge regarding the government intervention. For example; the Liberal ideology was reform and transformed by John Stuart Mill. Initially, many supported Adam smith’s Lassez-faire capitalism. However, as the abuses of Industrialization multiplied and as the Industrialists showed little concern for the plight of their workers, a new period emerge known as the enlightenment era. In this period, philosophers of the time such as Mill gradually came to believe that government should play a role in the economy.
The ideas of Mill and his fellow philosophers influenced the passage of several factory acts and spread the ideas of market oriented economy. The market oriented economy allows private enterprises while removing the worst abuses of capitalism. For example, Health and safety controls ensure that safety standards are met while fairness laws prevent false advertising and discriminatory hiring practices. The implementation of progressive taxes by government agencies also created equality and eliminated the negative aspects of pure capitalism.
With the global instability of the economy in recent years, the government started to take an active role in the economy. This is because it prevents the economy from going further down the spiral. The government intervenes both directly and indirectly. The government intervenes directly by setting regulations to prevent unsafe working conditions, racial discrimination, and contributes directly by fiscal or monitory policies. It is important that government set regulations in the economic activities because it would protect the consumers from wrong done of capitalism.
For example; the government interventions in democratic society would bring fairness and equality in the economy while promoting competition to produce products in the cheapest way possible. Not only does this ensure the right of consumers but as well protects the producers; allowing them to take risks and to not worry about fraud in the business cycle. The government intervention plays even a larger role which is to protect the community as a whole.
For example; the pollution control legislation restricts larger corporations to limit releasing harmful chemicals into the atmosphere, while provision of child-care facilities provides a place for the children. The government involvement in the economy in areas such as health, education, and welfare, provides incentives and motivates citizens to be innovative creating a hybrid of public and private enterprises thus an idealistic society. Historians claim that twentieth century was the most important period in which the government involvement increased significantly.
It was a period in which many catastrophic events occurred, and government intervention was necessary to stop the spreading of these crises. For example; the increasing demands of the Second World War and the increasing unemployment and the plunging inflation during the Great Depression stimulated the government to act. During such crises the government started to act by implementing policies such as fiscal or monetary to lower inflation and unemployment. The impacts of these crises were unbearable and to some nations it led to the establishment of authoritarian state.
Therefore it is significant that government set limitations to prevent such crises. The tremendous growth of government involvement during the twentieth century led to present day government programs. The programs such as the unemployment insurance, pension plan, social-insurance, and welfare capitalism are such examples of today’s government intervention. The government involvement in the economic and by providing such programs are necessary because it encourages innovation, entrepreneurship, competition and over-all prevents crises such as depression in today’s unstable economy.
In a free market approach too economic decision-making, there are several advantages. First, there is a great deal of individual freedom in the decision making process. Secondly, the free market approach is efficient at allocating resources into various uses. This efficiency is achieved through the price system. Changes in prices act as signals to buyers and sellers and direct their behavior. Third, the competition among sellers ingrained in a free market system provides for lower prices and better quality goods. However, this is only true in a model free market. Markets are not always perfect in their operation.
Buyers and sellers often don’t have proper information to make informed decisions and competition may be controlled by a few large companies. Also, the free market system may not provide certain services that society considers important and there may be such huge gaps in income distribution that many of the underprivileged cannot compete and earn very little in terms of income. Free markets are not immune to fluctuations in the level of economic activity and as a result of these market imperfections, the government intervenes and tries to maintain an order of balance in the economy