Government’s Role in a Market Capitalist Economy

Subject: Economics
Pages: 2
Words: 313
Reading time:
1 min

Economists disagree about how big the role of the government should be in a capitalist market economy. Some classical economists, such as Adam Smith, devised a set of concepts that remain strongly associated with capitalism. His theory of the “invisible hand” of the market, through which he states that the pursuit of individual self-interest unintentionally produces collective good for society. He criticised monopolies, tariffs, duties, and others.

State enforced restrictions of his time and believed that the market is the fairest and efficient arbitrator of resources. Later, David Ricardo developed the law of comparative advantage, which explains why it is profitable for two parties to trade, even if one of the trading partners is more efficient in every type of economic production. He supported the economic case of free trade. He also held the view that full employment was the normal equilibrium for a competitive economy (Say’s Law). In addition, he also argued that inflation was closely related to changes in the quantity of money and credit and was also a strong proponent of the law of diminishing returns, which states that each additional unit of input yields less and less additional output. These classical economists were strongly associated with the classical liberal doctrine of minimal government intervention in the economy.

On the other hand, neo-classical theorists such as John Maynard Keynes argued that a capitalist economy could remain in an indefinite equilibrium despite high unemployment. He rejected Say’s Law by arguing that some people may have a liquidity preference which would see them rather hold money than buy new goods or services. He challenged the notion that laissez-faire economics could operate well on their own, without state intervention used to promote aggregate demand, fighting high unemployment and deflation of the economy. He recommended ‘pump-primming’ the economy to avoid recession.