State functions in economy

Student: Cojocaru Robert – Iulian

Specializare: Cibernetica Economica
Materie: Engleza
Content:
1. Functions of Modern State
2. Provision of defense and security?
3. Economic Function
4. Direct Social Activities
5. Main functions of government
1. Protection of private property / national security.
2. Raising taxes
3. Providing public services.
4. Regulation of markets.
5. Macroeconomic management.
6. Reducing inequality/poverty.
1.Functions of Modern State:

The activities undertaken by the modern state are complex and varied. This is due to the fact that
there is a strong demand by the people for active state intervention in the social and economic
affairs of the country. The statesmen of today do not place any limitation on the powers of the
government to interfere in the social and economic spheres.

The only governing principle is whether state action promotes general welfare. In every country
of the world, the laissez-fair policy has been discarded and there is a strong swing towards
adoption of Socialism.

The main functions which the modern state now performs are as follows:

2.Provision of defense and security?

The primary function of the state is to protect the country from external invasion and to maintain
peace and security within the country. For smooth and progressive working of the economic
machinery, it is very essential that people should live in perfect peace. They should not be in fear
of external aggression. Every member of the society should have full protection from the
injustice or oppression of every other member of it. The stale expenditure providing security and
justice is productive because it helps indirectly in carrying out the activities which are labeled as
productive.

3.Economic Function: The modern slate is actively intervening in economic spheres. Though it
recognizes the individual rights in private property, it allows freedom of enterprise and contract.
When it finds that its laws are being violated, it immediately intervenes for regulating the
economic affairs. If the state finds that private capital is not forthcoming in certain industries, it
assists private enterprise in establishing and running the industries. Sometimes, the government
itself takes initiative and sets up industries. The modern economists justify state interference in
the following cases:

 Where Business is of Monopolistic Nature: There are certain businesses like railways,
post and telegraph, canal, electricity, water supply, etc., which are extremely useful for
the people. If they are given into private hands, the consumers can be easily exploited. So
the government, in the interest of the people, takes control of these businesses and runs
them almost on a non-profit basis
  Where Private Capital is not Attracted: If in a certain industry or industries, the private
capital is shy because of the inadequate return or there is no return at all, the state must
step in and provide the requisite capital. The cases where private capital is not attracted
are public health, libraries, museums afforestation, road construction schemes, parks, etc.,
etc.
 Protection of economically weak persons: In a competitive society, the factory workers
are often exploited by their employees. The State therefore, must take suitable steps for
protecting the legitimate rights of a class having very weak bargaining powers.
 Exploitation by Forming Monopolistic combination: Sometimes the businessmen form
cartel and trust and exploit the consumers by charging very high prices. The state in such
cases must intervene and prohibit the formation of such combination.
 Protection of Consumers: The state must protect its citizens against adulteration of food,
sale of intoxicants, etc.
 Supply of Currency: The state must take full control of the supply of currency in the
country. This will help the government in securing stability of prices, suitable steps to
reduce inequality of the income in the country. For this purpose, it adopts progressive
system of 'taxation, levies death duties on inherited property and provides social services
among the poor section of the community.
 State and Economic Planning: The state in order be speed up the economic development
in a balanced manner, formulates programmes and policies to harness the human efforts
and-physical resources to the maximum possible extent. It fixes targets and priorities and
then proceeds to complete them within the specified period.

4.Direct Social Activities: Every modern state takes keen interest in providing social services to
its citizens. The government gives funds to the needy, sick and unemployed persons, ft provides
them free education, free medical and old age pensions. It takes care of public health and
provides them housing facilities. It opens parks, libraries, for the benefit of the people.

In short, the state's intervention in economic affairs takes the form of:

 Provision of facilities to the businessmen for carrying on their businesses.

 Direct encouragement of the business by providing them protection from foreign
competition, granting of bounties, subsidies, relief and taxation, etc.
 Regulating economic enterprise on proper footing.
 Taking actual control and ownership of certain important industries.
 In the last decade of the 20th century and in the 21st century, the role of the state is being
considerably reduced. Instead of performing the role of producer, controller and
regulator, it will act as protector, promoter and provider.
What are the functions of government in a capitalist economy?

In summary, the economic functions of a government include:

 Protection of private property and maintaining law and order / national defence.
 Raising taxes.
 Providing public services not provided in a free market (e.g. health care, education, street
lighting)
 Limit market failure through the regulation of markets, e.g. regulations on
environment/labour markets/monopoly.
 Macroeconomic management, e.g. use of fiscal and monetary policy to control business
cycle – recession and inflation.
 Reducing inequality/poverty.
5.Main functions of government

1. Protection of private property / national security.

If a country has a problem with crime, then it will discourage investment and the quality of life.
The role of the government is to ensure basic law and order, through ensuring the rule of law.
This involves protecting the rights to private property. In a free market, there is an incentive to
free ride on the provision of law and order, therefore it tends to be under-provided. A
government can pay for policing through general taxation. A similar function of the government
is to provide for national defence – paying for an army. It is military spending which often was
the primary cause of the first taxes. Kings raising taxes to pay for his army.

Policing and courts are an example of a public good – which usually require government
provision.

2. Raising taxes.
To provide public goods and public services, the government needs to raise tax. They can do this
in a variety of ways – taxes on goods (customs duties), taxes on income, taxes on people (poll
tax) and tax on property and land. The government has to consider the best way of raising taxes.
A good tax is efficient (doesn’t distort economic activity); easy to collect (hard to avoid); fair
(may involve taking a higher proportion of high earners). If the government run a budget deficit,
they will need to raise the shortfall through borrowing and selling government bonds.

3. Providing public services.

Public goods tend to be not provided in a free market because of the free rider problem.
Therefore, these goods and services need to be provided by the government. Examples of public
goods include street lighting, roads and law and order. There are also public services which are
provided piecemeal in a free market, like education and healthcare. However, the government
may feel that these merit goods are important for equality and improving labour productivity.
Therefore, most governments provide some form of state provided education and health care.

4. Regulation of markets.
Adam Smith in ‘Wealth of Nations‘ noted that in a free market, firms were often able to create
monopoly power. This enables them to charge excessive prices to consumers. The government
may need to regulate monopoly power, e.g. prohibiting mergers or setting price limits in natural
monopolies (industries like tap water and railways).
Also, firms may develop monopsony power, where they are able to pay low wages and provide
poor working conditions for workers. In this case, the government may need certain regulations
on labour markets, such as minimum wages, minimum age of working and provide basic levels
of health and safety.

5. Macroeconomic management.
Capitalist economies can be subject to economic cycles – economic booms and recession.
Recessions can lead to lost output and higher unemployment. In this case, the government may
use fiscal policy to influence aggregate demand. The government may also use monetary policy,
though, in recent years, many governments have delegated monetary policy to an independent
Central Bank. In addition to trying to solve recessions, the government will also try to avoid
inflation. This can involve higher taxes and higher interest rates.

6. Reducing inequality/poverty.
In a capitalist economy, we may see a growth in inequality and poverty. This can be due to
inherited wealth and opportunity. It can also be due to monopoly power. The government may
feel the need to ensure everyone has an equal opportunity, for example providing education so
even those from poor family have the opportunity to get qualifications. It may also involve
redistributing income from high earners to low-income earners, e.g. progressive taxes such as
higher rate of income tax and providing means-tested benefits such as income support/housing
benefit and state pensions.
 Public Expenditure Statistical Analyses 2015
HM Treasury statistical data setting out the year's information on government spending.

Bibliography:
1. https://economicsconcepts.com/functions_of_modern_state.htm
2. https://www.economicshelp.org/blog/21699/economics/what-are-the-economic-functions-of-
a-government/
3. www.economicshelp.com
4. https://www.gov.uk/government/statistics/public-expenditure-statistical-analyses-2015