The Changing Determinants of Economic Performance in the World Economy
New Horizons in Institutional and Evolutionary Economics series
Chapter 13: Government role
There is a broad consensus among economists that the two main duties of governments are to increase the overall efficiency and growth of national economies and reduce social inequities among their citizens. The first duty stems from the presumption that, left on its own, a market economy cannot achieve rapid economic growth and efficient use of its productive resources. Indeed it could be argued that without any government intervention a modern, highly specialized market economy could not even exist (North 1990). As a result government intervention is needed to overcome specific inefficiencies of the market mechanism, i.e. market failures. However even efficient markets could not guarantee a fair distribution of income and opportunities in the society. Thus governments are also needed to make the outcomes of market forces socially more acceptable. As Jacob Viner once put it: ‘no modern people will have a zeal for the free market unless it operates in a setting of “distributive justice” with which they are tolerably content’ (1960, p. 68). This second duty of government gives rise to their ‘welfare state’ functions in areas such as education, health care, housing, poor relief, social insurance and other social services. It is important to note, however, that many of these activities also involve market failures and hence may contribute to economic efficiency and growth (Barr 1987). 1 HISTORICAL EVOLUTION OF GOVERNMENT ROLE The two principal duties of government have been given different weights in different countries and in different historical time periods. Despite some national variations...
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