by Development of capitalism during 17th and 18th centuries and during the early 19th century emphasized that the role of state should be restricted to formulation and enactments of laws, rules and regulations and maintenance of law and order in the country. There should be least state intervention in areas of industry and business.
According to Adam Smith and his supporters of laissez faire policy, personal freedom and optimum utilisation of economic resources ensure accelerated pace of economic development. Thus, in the initial stage of economic development, the only function of the state was to protect the life, wealth and property of the society. But, gradually the doctrine of laissez faire started losing its shine and the state capitalism was born.
Form # 1. Role of Government in Capitalism:
Under capitalism, all factories and other productive resources are controlled by individuals and private firms. The main objective of investment is to earn profit. What to produce, how to produce and for whom to produce etc. are determined by the demand and supply and market mechanism.
Some special features of capitalist economy are as follows:
(i) Every individual has a right to maintain private property and sell the owned property.
(ii) Every individual has a right to select any profession or business as per his likings. Similarly, any individual can enter into contract for profit with others.
(iii) Main purpose of entrepreneurial activities is to earn profit.
(iv) Society is divided into haves and a have not and there is also conflict of interest between the two.
(v) Economic system lacks coordination as there is no Government regulation in economic activities.
Capitalism is governed by the price mechanism and it experiences high level of competition.
Level of Intervention under Capitalist Economy:
Under capitalist economy the regulation of business by the Government is quite negligible. There are some areas or limitations under which Government is generally forced to intervene in business activities. This level of intervention is necessary to maintain continuity and dynamism in defence for protecting the existence of the country and economic system.
Thus, rationales of capitalist economy are as follows:
(i) Regulatory and controlling framework is necessary to establish coordination in industrial development process.
(ii) Government ownership over industries under defence sector is necessary as these industries are directly related with safety and sovereignty of the country.
(iii) Government intervention is needed to ensure maximum and profitable utilisation of economic resources for the economic development of the country.
(iv) Government always tries to control the ownership of public utilities and industries of monopolisting nature as to avoid exploitation of public at large. Besides, it also ensures judicious distribution of economic power and wealth of the country.
Form # 2. Role of Government in Socialism:
Under socialism, public ownership is ensured on physical resources of production. Under this type of economy, industries are not required to earn profit by sale or purchase but these industries are meant for public service which directly controls the lever of political power. A socialist system is one where main portion of the productive resources is invested in socialist industries.
Following are some important features of socialist economy:
(i) State is empowered for production and distribution of goods and services. Distribution of productive resources of the society is undertaken under the guidance of central authority.
(ii) Abolition of private ownership in terms of production units and nationalization of productive resources are the main features of the socialist economy.
(iii) State works as an entrepreneur, landlord and capitalist. State also undertakes the implementation of production and residual income after paying wages and other costs if any, are rest with the Government.
(iv) Classless society is created by abolishing the gaps exist in rich and poor and haves and haves not.
(v) Socialist economy does not give guarantee of equality but it guarantees the equality of opportunities.
(vi) Main objective of economic activities is the social welfare but not the private profit. Under capitalist system working behaviour is guided by the market mechanism. Whereas in socialistic economy operational behaviour is controlled by the centralised economic authority.
Types of Socialist Economy:
Socialistic economies are generally categorized into two categories:
(a) Role of Government in Democratic Socialism:
Under this type of socialism, Government does not own all the productive resources but only important segments of the national economy are controlled by the Government. This form of socialism is based on the assumption that development of the economy should not be left at the mercy of the private sector. The Government must take initiative for the accelerated pace of the development in the national economy.
In practice, the role of the Government is deigned in the following way:
(i) The Government owns and controls important and key productive resources of the country. The Government makes it possible for the direction and use of these resources.
(ii) Distribution and exchange resources or other mechanism are also under the control of the Government. Domestic and international business, banking and insurance, transport and communication etc., are all under the control of the Government.
(iii) The Government establishes control on those industries which are responsible for promoting concentration of centralization of economic power. Similarly, Government also controls industries where possibility of gaps exists in the demand and supply of the products being produced by them.
(b) Role of Government in Authoritarian Socialism:
Authoritarian Socialism also includes communism which is also in existence in Russia and China. However, it is the toughest form of the socialism. Under this type of socialistic system, the role of central authority is quite important one. The central authority determines the economic targets and ensures ownership on all productive resources of the country. It also directs and controls the distribution system as per the economic targets.
Under this type of socialism, the role of the Government is designed in the following way:
(i) Generally, private enterprises are not in existence. Direction and implementation of production process are exercised by the state or public enterprises. With the help of public enterprises, Government ensures social benefits by paying wages and other costs. There is no problem of payment for interest and rent to capitalists and landowners respectively. The state acts as a capitalist, landlord and entrepreneur and makes the production process possible through the public enterprises.
(ii) Public enterprises are as a powerful agency of the state and are responsible for maintaining effective control on production and distribution. Distribution of productive resources of the society is generally guided by the dictates of central authority.
(iii) Social welfare and social security are relatively given more importance. The objectives and targets of economic process are the social welfare. But in capitalistic system, individual profit is the most objective of the production system. Thus, under this type of socialism control authority directs all economic activities towards social welfare and security in place of market system. The central authority or Planning Commission gives utmost importance to social welfare at the time of formulating and fixing economic priorities and targets.
Form # 3. Role of Government in Mixed Economy:
The mixed economy is a middle path between capitalistic economy and socialistic economy. It includes important features of capitalism and socialism. Under the mixed economy, ownership of productive resources is rest with the private entrepreneurs. The Government directly control and regulate the working of the economy through the monetary and fiscal policies.
Besides, public enterprises have also been assigned crucial role in production and distribution of goods and services. The ownership and management of basic and important industries are under the control of the Government.
Important roles assigned to the Government under mixed economy are as follows:
(i) Under this type of economy, public and private sectors both are in existence. The industries are categorized in two parts. First part includes those industries where Government is responsible for the development and it also keeps their ownership and management under own control. The private sector is responsible for the development of other industries but Government reserves’ it’s right to intervene in the development and working of these industries.
(ii) The operation of the economy, pricing mechanism and distribution etc. are under the direction of the state. The Government takes necessary decision with regard to production, pricing and investment etc. in public sector.
(iii) The private sector is expected to keep the nation’s interest along with its own interest. The Government regulates and affects the smooth working of the private sector with suitable mechanism.
(iv) The Government controls and regulates the investment and industrial production through industrial licensing. The Government also regulates the privates sector through monetary and fiscal policies.
(v) The consumer is free to buy goods and services as per his choice and private entrepreneurs produce the goods and services as per the consumers demand and expectations. However, Government regulates the pricing system through suitable means so that producers cannot exploit the consumers.
(vi) The Government protects the weaker section of the society especially labour from the exploitation. It also determines the minimum wage and rates and also the hours for minimum work. It also prohibits the employment of children.
(vii) The Government controls and regulates the monopolistic practices. Necessary steps are taken to ensure equal distribution of wealth and income. The government establishes public enterprises to control the demerits of private sector and monopolistic practices. The Government develops the industries in a way to facilitate timely achievements of plan targets.
Thus, under mixed economy, scope of working of public and private sector is clearly defined and both are required to co-operate with balancing efforts for the achievements of desired economic growth. Generally, basic industries, defence industries, atomic energy, mining and minerals are under the control of the Government for necessary development.
On the other side, heavy industries, consumer goods industries, micro, small and medium enterprises, agriculture development are in privates sector. The Government also provides necessary incentives and support system for the development of private sector.
Market pricing mechanism and Government policies and programmes are the guiding factors for the distribution of productive resources. Since 1991, economic policies have been formulated to give more freedom and access to the private sector in the Indian economy. Besides, efforts have been made to strengthen the public sector for better performance.
