The Role of Government in Economy

Nowadays, at that place are debates on how far presidential term should interfere with the economy. Government has play an impact on the economy with the purpose to maximize the well-being of society. What presidential terms broadly speaking do is to assure the economy grows at a steady pace, ontogenesis level of employment and stabilize the price level. However, whether political science should fix diligent policies to interfere with economy or just let it grow course has raised widely discussion.This essay discusses the role of government by analyzing both(prenominal) thought of Keynes and Friedman and hence prove the effectiveness of Friedmans theory with historic faces. Firstly, the nifty Depression of the 1930s has helped prove the importance of governments interference on the economy in the past. The huge Depression started with a decrease in stock prices in America and then promptly spread to most parts of the world (McElvaine, 1993, p 59). There was a tremendous decrease on the demand and global trade, followed by towering unemployment respect.As a result, various measures were taken by governments worldwide in an attempt to accele roam the economys recovery and reduce the unemployment tread including stimulation on demand by spending much much than they took in (Fox, 2008, p 1). At the final several years of the Great Depression, Keynesian macro economical theory, which shows the importance of governments role on the economy, has played an impact on interventionists policies. In Keynesian economics, when inefficient economic consequences aroused from decisions of private sector, public sector needs to take officious measures.By fiscal polity adjusting taxes and government spending and monetary policy which deals with the amount of funds supplied and character, government could help stabilize the economic crop rate, and then plays an impact on price level and employment rate in the process (Congdon, 2007, p 169). In the case of th e Great Depression, Keynes express the low unemployment rate were the result of shy(predicate) demand, thus intervention of government was chief(prenominal) to run deficits, increase spending and/or cutting taxes, and so as to keep people exuberanty employed (Aikins, 2009, p 403).However, the stagflation of mid-seventies has challenged Keynesian theory bringing debates on the intervention of government on the economy (Gittins, 2010, p 6). According to Bresiger (2009) it was the 1970s, economic harvest-home was weak, resulting in lift unemployment that eventually reached double-digits. The easy-money policies, which financed huge budget deficits and were supported by political leaders, were then undertaken by the Ameri tin central bank, in order to generate full employment. However, it also caused high ostentatiousness which began in late 1972 and didnt end until the former(a) 1980s.The great inflation, and the break that followed, wrecked many businesses and hurt countless individuals. As Bresiger (2009) concluded in his article that before inflation returned to low whizz digits, another brutal policy of tight money, including the acceptance of a recession would be expected, and meanwhile the unemployment rate would exceed 10%. Given the change magnitude skepticism towards usefulness of fiscal policy and its multiplier effects proposed by Keynesian theory, another macroeconomic policy named monetarism chiefly proposed by Milton Friedman has attracted ontogenesis supports (Issing, 2010, p 35).It was supported by Bernhut (2003) concerning monetary policy, emphasizing on the amounts of money that government should locate to supply in circulation. The theory of monetarism puts a underline on the benefits aroused from free market economics and weaknesses associated with government intervention on the economy (Congdon, 2007, p 200). The appropriate economic role for government is to manage the amount of money in circulation, so as to work on aggregate output in the short run and finally hold the level of prices and inflation rate over longer periods.Particularly during the 1980s, more or less of the laissez-faire thoughts proposed by Friedman including monetary policy, privatization, deregulation and taxation, were used by governments (Congdon, 2007, p 202). After analyzing the thought of both Keynes and Friedman respectively, it may be better to cut into a comparison on the two theories in order to find out what role government should take in the economy. As Issing (2010 p 1) says in his article, after the Great Depression, there was dominant belief on the Keynesian theory. However, the lessons obtained from the stagflation of 1970s, associated with Keynesian policies, are that unrestrained and neffectively planned intervention by government could give rise to market failure and adverse economic outcome (Aikins, 2009, p 405). The weakness of Keynesian theory was supported by Callaghan who state that cutting taxes and boost ing government spending during recession would inject higher inflation rate followed by higher rate of unemployment (Issing, 2010, p 2). On the contrary, alternatively than regarding insufficient demand as the key factor driven the Great Depression, Friedman argued it was largely caused by the Federal Reserve reducing the money supply.In the article, Issing (2010) plays an importance on the money by illustrating that ignoring monetary factors has led to the flog crisis since the Great Depression related to the asset price bubbles. Another example which helps prove the effectiveness of monetarism was given by Congdon (2007). When Margaret Thatcher won the 1979 general resource in United Kingdom, Britain had several inflation for several year, with inflation rate rarely below 10%. Even worse, the rate had reached 27% by the time of the election. Thatcher implemented monetarism to control inflation, and advantagefully reduced the rate to 4% at 1983.There was a global recession at t hat time, and Thatchers monetarist policies contributed to the success of fighting against the recession, meanwhile helped Britain become one of the nations which recover economic growth firstly. To sum up, this essay has examined two theories concerning about the role that government should take in economy. In Keynesian economy, fiscal policy is particularly an important tool that government should use when aggregate demand is not insufficient and keep full employment by running government deficit. historical evidence has showed that it was not an efficient way to fight recession. Conversely the monetarism offers Keynesians a better view of monetary policy. It can be shown that the core political orientation of monetarism can still work well today and monetary factors can not be neglected, thus government has a role to determine amount of money supplied as well as the volume of credit in all aspects, but not interfere with the economy unrestrainedly and ineffectively.