Role of Government in Capitalism

Free market capitalism is a system of economics that minimizes government intervention and maximizes the role of the market. A free market economy is based on supply and demand with little or no government control. A completely free market is an idealized form of a market economy where buyers and sellers are allowed to transact freely (i. e. buy/sell/trade) based on a mutual agreement on price without state intervention in the form of taxes, subsidies or regulation. Government regulations, trade barriers, and labor laws are generally thought to distort the market.

In practice, no country or jurisdiction has a completely free market. How Much Government is needed in the free capitalism arena? Should we expand our faith in free market capitalism, or do we need government intervention in each and every aspect of business economy? The role of government just considered is to do something that the market cannot do for itself, namely, to determine, arbitrate, and enforce the rules of the game. Railroads, Parks, Highways are an excellent example. A good society requires that its members agree on the general conditions that will govern relations among them.

The basic roles of government in a free society is to provide a means whereby we can modify the rules, to mediate differences among us on the meaning of the rules, and to enforce compliance with the rules. According to Adam Smith, self-interest (not selfishness), property rights and division of labor are three important interrelated pillars of economic growth. Some of the market values include the below and the failure can happen if we miss any of the below qualities. * Discipline * Honesty and trustworthiness * Tolerance * Cooperation * Courtesy * Enterprise * Responsibility Market failure occurs due to many reasons.

Some of those reasons are: * Monopoly power * When producers do not fully bear total costs of products or are unable to capture all benefits of producing products. * When there is a common property resource. Common property is nobody’s property, hence the property is misused. * Lack of information, misinformation or asymmetry of information. * Risk and/or uncertainty * Economic Bubbles * Environmental Pollution. * Exploitation of Workers. * Unsafe and Ineffective Products. * Corporate Fraud and Theft. * Neglect of Public Goods. * Neglect of Social and Public Investments. * Hidden Information. * Inability to Plan. Boom and Bust Cycles. * Lack of Markets. * Poverty and Economic Inequality. * Lack of Opportunity and Economic Mobility. There are a host of other areas where free markets will not work efficiently and promote public welfare without some government intervention. For example, areas of product safety, workplace safety, airwaves allocation, oil and gas exploration. Therefore government intervention is essential for the working of free and competitive markets. Role of a government in a market economy should: * Provide a legal system to make and enforce laws and to protect private property rights. Provide public goods that individuals or private businesses would not provide. * Correct market failures such as external costs and economic slowdown (unemployment) * Maintain competition by regulating monopolies * Stabilize the economy by reducing unemployment and inflation and promoting economic growth. We can give two great examples where government intervention is needed 2001 dot. com bubble and subprime mortgage crisis. For 2001 . com bubble, government has to step in and put some regulations in the market to curb the crisis. In late 2008 US financial markets seemed near collapse.

The financial community’s near collapse had been most directly ignited by the subprime mortgage crisis; a situation in which the nation’s housing bubble burst and millions of Americans were no longer able to pay their home mortgages. Lending had essentially frozen. A great name in banking, Lehman Brothers, went bankrupt while Wall Street powers Bear Stearns and Merrill Lynch, facing failure, were sold. One estimate is that the total Federal Reserve aid package, at its peak, reached $3. 3 trillion. Through its Troubled Asset Relief Program (TARP) and other initiatives, the government assisted companies considered “too big to fail. The government undertook various stimulative measures including tax breaks, bond sales, and direct injections of federal money to prop up the badly faltering economy. In a centerpiece of the stimulus effort, about $800 billion was spent on such projects as road construction, extension of unemployment benefits, help to states in meeting Medicaid costs, and high-speed rail transportation. National unemployment was in the 10 percent range, and the government decided to use all of its powers to quickly build jobs and otherwise rescue the economy to avert a total crash.

Some of the government programs might put the country in more and more debt situation and for example cash for first-time homeowners, cash for clunkers, payroll tax reductions a year at a time, Obama Care, subsidies for electric vehicles, cash for investments in green energy, taxes on medical devices, a Fed that now is not just managing inflation, but also trying to improve the economy through artificially low interest rates over a very long period of time and a major increase in new regulations.

All of these interventions have impacts on the costs of products and services, prices of those products and services. Even biggest democratic countries like India are planning to privatize lot of government sectors for example trash, transportation. The government currently ties a noose around the neck of the free market in a multitude of ways. It has rules and regulations, favors to special interest groups, currency debasement by inflating the money supply etc. , All these things disrupt the free market.

There is no doubt that government alone cannot make an economy work for the betterment of all its citizens. It does need to partner with a progressive private sector to make that happen. Limited government and show the presence wherever needed, makes government the strongest ally in the business world and we can create a better business together. References: http://books. cat-v. org/economics/capitalism-and-freedom/chapter_02 http://highered. mcgraw-hill. com/sites/dl/free/0073525006/928301/McAdams_10e_Chapter_1. pdf http://www. governmentisgood. com/articles. php? aid=13;print=1