Thoughts Of Government In The Economy example essay topic

Governments play a big role in our economy today. From environmental rules to price regulations, it is generally assumed that governments are needed to keep the economy moving. It was Adam Smith who first challenged the thoughts of government in the economy. His theory was that an economic system functions best when there is no interference by government. This theory was known as "laissez-faire" or "let things be". Smith concluded that the capital follows its most lucrative course.

It is based on the belief that "the natural economic order tends, when undisturbed by artificial stimulus, to secure the maximum well being for the individual and therefore for the community". 1 Laissez-faire is basically the doctrine that government should almost always leave people alone and let them do as they please, as long as they respect the personal and property rights of others. Although Smith strongly supported this theory, he did not believe in it absolutely. He believed that there should be no government intervention except in three cases. "The only time that governments should intervene is with defense, justice, and certain public works". 2 Smith believed that the production and exchange of goods, and a rise in the general standard of living could only be attained through private industrial and commercial businessmen, with minimum government control.

He believed that any further government intervention would affect the major aspects of a market economy, such as competition. "Adam Smith believed that human progress could only be possible in an economy where everybody follows his or her own self-interests". 3 The general argument was that individualism would lead to more order and progress within the community. In order to make money, people will produce things that they know other people want, or need. When the consumer and the seller meet in the market, a pattern of production develop that result in social harmony. Therefore, through self-interest the producer is motivated to produce that which society wants.

Thus the consumer rules the market and not the producer. In the case of perfect competition, Smith's theory works flawlessly. But if one or a few companies have cornered the market, his theory is useless. This is known as a monopoly, or oligopoly. A monopoly can be best described as a situation in the marketplace where one, or a very few companies exist with very few, or even no competitors. Adam Smith was against monopolies and stated that government makes only those regulations which would stop companies from gaining significant competitive advantage against each other.

That is where the government regulations we see today come into play. These include environmental, and anti-talk laws. "If a monopoly is allowed to operate in an economy, entrance into that market is nearly impossible leaving that monopoly to dominate the market for a very long time". 4 "When Smith's idea was first introduced, it was accepted widely throughout society". 5 People thought that laissez-faire made a lot of sense. It was something different than they were used to and it seemed like it would make the marketplace a fairer place.

"Later on though, people started to say that laissez-faire did not solve many of the problems that the economy had". 6 Eventually, contrary to Smith's theory, government began to add rules and regulations to the areas where problems occurred. The idea of laissez-faire is basically a "survive or die" thought. Although beneficial to middle and upper class citizens, it pays no respect to the lower class.

Under a laissez-faire government, there would probably be no social housing, inflation would flourish, and the poor would be wiped out. Laissez-faire is partially applied in our economy today and as time goes on into the 21st century, it seems to be becoming more and more popular especially with right-wing politicians. From the privatizations of hospitals and utilities, to talks of a flat tax, people are beginning to think more along the lines of laissez-faire. It is strange how theories from a political economist who existed in the late seventeen hundreds can still be applied today.

That just goes to show the insight that Adam Smith had and the relevance of his economic thoughts. Even though there is still a lot of government intervention today, many aspects of laissez-faire are still used. So, should the government stay out of the economy and let it be run by the doctrine of laissez-faire, or is government intervention necessary to the survival of the economy In the end, if "operating under a completely competitive marketplace, the government's spending and intervention in the economy is detrimental". 7 But in a realistic marketplace, like the one we operate under today, there are going to be flaws. Monopolies will always exist in some form, and the greed of the individual will always cause him to strive for more. Government is needed in the economy to help those who cannot survive in a harsh world of throat slashing greed where everybody is in it for the next dollar.