Tuesday, September 13, 2011

Economic Functions of the Government

The functions that a modern government should perform basically hover around securing freedom from want and better working conditions. The functions that a modern government is expected to perform can be categorized under the following eight heads.

1. Securing Full Employment

In any modern day economy unemployment is a serious problem. One who is unemployed has to depend upon others to satisfy his basic economic wants. He cannot afford to raise his standard of living, which always remains low. This way he remains frustrated also. Unemployment in a large scale leads to social and other kinds of disorders. A country facing large scale unemployment thus wastes a lot of its human resource, which is the most valuable of all economic resources.

There may also be under-employment and disguised unemployment. These are also equally bad as unemployment. Unemployment leads to low income, low effective demand, and low level of national income.
The government should take up more public works and make fresh investments in areas like building of roads, bridges, dams etc. This will create employment for many. Also the government can induce private investors to invest in new areas by lowering the cost of investment, primarily interest rate, and by providing better infrastructural facilities.

2. Improvement of the Standard of living

Everybody wants better food, better clothes, better housing and the like. All economic policies of the government should be directed towards the fulfillment of these wants. Endeavours by the government to create fresh income for the people will ensure improvement in the standard of living. Increasing the per capita income seems to be the objective here.

In less developed countries development of the agricultural sector is of great importance as a large number of workers engaged here have primarily a low level of income. Development of the industrial sector, transport, commerce, foreign trade also helps to improve the overall standard of living of a country.

Ensuring a sustainable level of investment seems to be the goal with scope for future growth. This will go a long way in fulfilling the desires of the people.

3. Reduction of Inequalities in Income and Wealth

Uneven distribution of income and wealth can be seen in almost every country in varying degrees. When wealth and income gets concentrated in the hands of a few, it becomes a very harmful thing for every economy and society.

Redistribution of income and wealth is absolutely necessary from time to time, and its duty lies with the government. The government can do this by revising the tax system, thereby collecting more taxes from the rich and giving tax relief to the poor. Excess tax collected from the rich can be spent by the government to provide free education, free medical facilities, low cost housing etc. to the poor. Ensuring minimum level of wages, giving foods at a subsidized price are some other measures through which the inequality can be eliminated to some extent. However, in a free economy some level of inequality will always be there.

4. Keeping the Value of Money Stable

A stable price level is always necessary for the well being of the people of a country as well as for its economy. Rising price level reduces the real income in the hands of people. They can buy less things with their income. Income does not increase at par with rises in price level. So rising level of prices affects the living standards of middle class and the poor.

When prices fall, producers start producing less to curtail the supply with an expectation that it will bring the price level up again.

Through adoption of various fiscal and monetary measures a government can keep the price level steady to a great extent, though some fluctuations will always be here. Fiscal and monetary measures help to keep the value of money stable.

5. A Stable Currency and Banking System

Money is the central element of every economy. In order for the economy to function healthily a good, stable currency system is necessary. This is connected with the banking system of a country, which handles the major portion of the currency. A government should ensure a sound banking and currency system so that the economy can function smoothly.

6. Controlling Monopolistic Practices

Monopoly is harmful for the society as well as the economy. Consumers get exploited by it as they have to pay higher prices charged by the monopolists. Monopolists can control affairs unfairly by paying lower wages to workers and thereby increasing their profit. This promotes income inequality. So it is the duty of the government to curb the growth of monopoly.

7. Better Terms and Conditions

As labourers are poor, they cannot bargain with their employers. So they somehow have to accept the terms and conditions of work laid down by the employer. Such terms and conditions may at times be unfavourble for the labourers. Here the government must step in and make laws in order to protect the interests of the labourers. There should be laws to govern the pay, the working conditions as well as the welfare and other benefits of the workers.

8. Social Security

Financial insecurity is in itself a very serious thing that affects everyone. When there is sickness, accident, death or unemployment, the poor finds it very difficult to tackle the situation. They do not have savings to fall back upon. In such situations it is the duty of the government to come to the help of the poor.

A fund is created where the worker, employer and the government contributes. When some worker falls sick, meets with an accident etc. he is provided with a certain amount out of that fund to tackle the situation. Old age benefits, pensions to widows, orphans, maternity benefits, unemployment benefits etc. can also be provided out of this fund. Thus social security eliminates certain insecurities of the poorer sections of the society. In case of social security contributions made by the government is of prime importance as contributions made by the workers and employers are highly inadequate. Governments of developing countries have fewer funds to contribute in this regard.

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