The Role of Government in the Economy

America points to its free enterprise system as a model for other nations. The country’s economic success seems to validate the view that the economy operates best when the Government leaves businesses and individuals to succeed – or fail – on their own merits in open, competitive markets. But exactly how ‘free’ is business in America’s free enterprise system? The answer is, ‘not completely’. A complex web of government regulations shape many aspects of business operations. Every year, the Government produces thousands of pages of new regulations, often spelling out in painstaking detail exactly what businesses can and cannot do.

The American approach to government regulation is far from settled, however. In recent years, regulations have grown tighter in some areas and been relaxed in others. Indeed, one enduring theme of recent American economic history has been a continuous debate about when, and how extensively, the Government should intervene in business affairs.

Laissez-faire Versus Government Intervention

Historically, the US government policy toward business was summed up by the French term laissez-faire – ‘leave it alone’. The concept came from the economic theories of Adam Smith, the 18^th-century Scot whose writings greatly influenced the growth of American capitalism. Smith believed that private interests should have a free rein. As long as markets were free and competitive, he said, the actions of private individuals, motivated by self-interest, would work together for the greater good of society. Smith did favor some forms of government intervention, mainly to establish the ground rules for free enterprise. But it was his advocacy of laissez-faire practices that earned him favor in America, a country built on faith in the individual and distrust of authority.

Laissez-faire practices have not prevented private interests from turning to the Government for help on numerous occasions, however. Railroad companies accepted grants of land and public subsidies in the 19^th century. Industries facing strong competition from abroad have long appealed for protections through trade policy. American agriculture, almost totally in private hands, has benefited from government assistance. Many other industries also have sought and received aid ranging from tax breaks to outright subsidies from the Government.

Government regulation of private industry can be divided into two categories – economic regulation and social regulation. Economic regulation seeks, primarily, to control prices. Designed in theory to protect consumers and certain companies (usually small businesses) from more powerful companies, it often is justified on the grounds that fully competitive market conditions do not exist and therefore cannot provide such protections themselves. In many cases, however, economic regulations were developed to protect companies from what they described as destructive competition with each other. Social regulation, on the other hand, promotes objectives that are not economic – such as safer workplaces or a cleaner environment. Social regulations seek to discourage or prohibit harmful corporate behavior or to encourage behavior deemed socially desirable. The government controls smokestack emissions from factories, for instance, and it provides tax breaks to companies that offer their employees health and retirement benefits that meet certain standards.

American history has seen the pendulum swing repeatedly between laissez-faire principles and demands for government regulation of both types. For the last 25 years, liberals and conservatives alike have sought to reduce or eliminate some categories of economic regulation, agreeing that the regulations wrongly protected companies from competition at the expense of consumers. Political leaders have had much sharper differences over social regulation, however. Liberals have been much more likely to favor government intervention that promotes a variety of non-economic objectives, while conservatives have been more likely to see it as an intrusion that makes businesses less competitive and less efficient.

About the USA, Outline of the US Economy