Over the past few tutorials we have been discussing free market economies,
command economies, and mixed economies. This leads to the obvious question of 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 economies. 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 six specific ways governments attempt to do this.
#1: Achieving full employment. Governments 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. As stated in a previous tutorial, 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 governments 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 will be needed to both build and maintain all that housing.
Second, governments can loan 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, governments can build or fund 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 businesses would have less of a tax burden than they normally would.
Those are just five of the ways that governments attempt to achieve full employment.
#2: Securing financial markets. A strong financial market 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,
bond markets, commodity markets, and derivatives 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 derivatives 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 derivatives 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 order 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. Governments 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.
Again, governments generally attempt to protect two types of property: private property and
intellectual 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. Governments protecting copyrights
and contracts is extremely important for supporting economic growth. 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. Governments grant copyrights by controlling how many copies are made
and who is authorized to perform or distribute the creative work. Countries with robust
copyright laws often foster economic growth. Private property is usually protected through
contracts. 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.
Governments 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 prioritized 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 electric 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 productive members of society. Researchers have found that a better
educated society leads to less crime, improved public health, and greater civic engagement.
#6: Providing a general welfare system. By having a strong safety net for those
struggling to meet basic, everyday needs, governments have found that such an investment
can also lead to more economic growth down the road. Welfare is a general term describing
government aid for those in poverty. For the past 100 years, the main way governments have
attempted to ease poverty has been to collect taxes from wealthier individuals and businesses,
and redistribute some of those funds to those in poverty. Examples include assistance for buying
food, acquiring a home, or having access to healthcare. As previously discussed,
governments also create a minimum wage, in part to reduce the burden on a country’s welfare system.
In conclusion, governments 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, so let’s move forward and examine these as well.