What degree a government should be involved in an economy?
Now let’s dig in a little bit and see precisely how governments get involved with economics. But before we do that, let’s first remember the primary goal, which is economic growth.
So how does a government grow an economy? This is done by increasing productivity. Let’s look at five specific ways governments attempt to do this.
1- Achieving Full Employment
Government support economic growth by getting as many people working as possible. In other words, the goal is full employment, where nearly everyone who wants a job has one. This means that the unemployment rate would be between roughly 4 and 5 percent, though this range is disputed by some economists. There are many ways government can help increase employment. First it can literally create jobs. For example, if the government decides it needs to provide public housing for those in poverty, workers would be needed to both build and maintain all that housing. Second government can loans money to businesses so that they can hire workers. Third, governments can either reduce or increase regulations so that it is easier for businesses to hire workers. Fourth, government can build or find schools as well as loan money to students to attend schools, to increase the skills of its citizens, such that they qualify for available jobs. Fifth, governments can provide tax incentives so that businesses are more likely to hire more workers. This means that business would have less of a tax burden than thay normally would.
Those are just five of the ways that government attempts to achieve full employment.
2- Securing Financial Markets
A strong financial markets also helps lower the unemployment rate. A financial market is one where investors buy or sell assets. Financial markets are important to an economy for a variety of reasons. These markets function to make assets more productive while simultaneously lowering the cost of transactions.
Common examples of financial markets are stock markets, bonds markets, commodity markets. A stock market is one in which investors make money by buying and selling shares, also known as stocks, of ownership in public companies. When investors buy stocks at a cheaper price and later sell them at a higher price, they earn a profit from the sale. Additionally, in some cases stock holders can receive dividends from that company. In a bond market, investors buy bonds, which are essentially things that represent a promise by a borrower to pay a lender the money they borrowed back, plus interest. Investors make money from the interest they earn after buying bonds from companies or even the government itself. Within an agreed period, a company or the government has to pay back that money, plus interest. A commodity market is where both investors and traders buy and sell commodities, or basic goods that can be easily interchanged with different types of goods. Often these are natural resources. And finally a derivative market is perhaps the most difficult to understand. A derivative is an asset that is based on the value of another asset, and is linked to that asset by a contract. So if the linked asset goes one way, the derivative also goes that way, whether up or down. Because derivative markets can get complex, governments have generally been slow to regulate them. In order for a financial market to be secure, governments intervene to make sure all participants receive fair treatment. This means that one individual or company can’t have access to certain assets unless all individuals or companies can.
In addition, governments intervene in financial markets to make sure they are more transparent to the public. If one company has inside information about a commodity, for example, this can give them an unfair advantage in the marketplace.
In general governments aim to prevent investors from manipulating financial markets, which can have some devastating effects on an economy, as we witnessed recently with the Great Recession of 2008.
3- Regulating Industry
In addition to regulating financial markets, governments also regulate any industry as a whole in preset to support economic growth. Often it is attempting to curb monopolies, or when a single seller dominates a market.
We will learn more about how governments regulate monopolies in a future tutorial.
Governments also set safety standards for products to protect consumers. They regulate working conditions to protect the health and safety of workers. How the regulation occurs depends on what type of industry it is. For example, governments may regulate the money supply in the banking industry to prevent bank runs. They may say factories can’t dump their toxic waste in rivers to prevent catastrophic ecological damage. Government often choose to set strict rules and guidelines in virtually any industry in order to promote economic growth.
4- Protecting Copyrights and Contracts
Before looking at copyrights and contracts, let’s recall what “property” means.
Property
Again, governments generally attempt to protect two types of property: private property and and intellectual property.
Private property
Private property is property owned by individuals or companies, rather than the government or the general public. Intellectual property is any work or invention which is the result of creativity that one has control of. Government protecting copyrights and contracts is extremely important for supporting economic growth.
Copyright
A copyright is a type of intellectual property that gives its owner the exclusive right to make copies of a creative work, usually for a limited time. Government grants copyrights by controlling how many copies are made and who is authorized to perform or distribute the creative work.
Countries with robust copyrights laws often foster economic growth. Private property is usually protected through contracts.
Contract
A contract is an agreement subject to law, so when someone does not follow an agreement, it is called a “ breach of contract” due to contract laws, if someone breaks a contract with you, you can take them to court to resolve the issue. For example, if you buy a house from someone both you and the person selling the house usually sign a contract to confirm the agreement. Often, this contract states the date by which the seller must vacate the house. So after selling the house, if the owner refuses to leave, this would be a breach of contract. Historically we have seen that, as long as governments step in to enforce contracts, Economic growth naturally occurs.
5- Investing in Infrastructure Technology and Education
Government support economic growth simply by helping create capital. Often they do this by redirecting public funds to invest in major public projects. First, governments around the world have highly prioritize infrastructure, which is a broad term for the basic physical systems.
When we talk about infrastructure, we’re usually talking about broad infrastructure across the entire country, and stuff that is usually unable to be financed privately. This includes both “ soft infrastructure and hard infrastructure”. Soft infrastructure is made up of institutions that require human capital. Examples include financial institutions, law enforcement, or a healthcare system. Hard infrastructure is made up of physical systems in order to connect people within a country. Examples include roads, highways, bridges, and electrical grids. Governments also publicly finance major technology projects when they feel such action would fuel economic growth. For example, there has recently been a push from governments around the world to expand broadband, high speed internet connections, as well as build more charging stations for electrical vehicles.
Finally, governments often invest in. Education to support economic growth. By providing public schools and supplementary public school programs, governments aim to create skilled citizens who are better prepared to become productivity members of society.
Researchers have found that a better educated society leads to less crime, improved public health, and greater civic engagement.
Conclusion
In conclusion, government support economic growth by getting as many people employed as possible, securing financial markets, properly regulating industry, protecting copyrights and contracts, investing in infrastructure, education and technology, and providing a general welfare system. However, such government intervention can sometimes lead to unintended negative consequences.
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