Introduction: Market System and the Role of Government

Abstract

The level of budgetary activities in a government is directly related to the economic system of which it is a part. In a command economy, where there is no private sector, budgeting is central to all economic and noneconomic decisions of the government. In a free market economy, such as the United States, while the presence of a strong private sector limits the role of government, it is still substantial considering the size of the federal budget that runs into several trillion dollars each year. Although not as high as the federal budget in percentage terms, state and local budgets also constitute a significant percentage of their respective gross products. Therefore, to understand the nature of budgetary activities in a government it is important to understand how the market system operates—its strengths and limitations and, more importantly, the role government plays in a market system. As the conventional wisdom goes, the more efficient the market system, the less the role of government (The idea of an efficient free market, also known as “the efficient market hypothesis,” has its roots in the works of Milton Friedman, an ardent advocate of free market system. The hypothesis, which has been refuted by most economists, simply says that market works better than individuals who intervene in a discretionary manner. Nevertheless, it does provide the basis for a system that, according to Friedman, if left alone, could address many of the economic problems, at least, in principle.). In budgetary parlance, it means less government expenditures, less taxes, and less regulations. Ideally, if the market system could address all our needs and fully regulate its own behavior, there will not be any need for government intervention, but, in reality, that is seldom the case. A market system, by itself, cannot perform all the functions necessary to meet the needs of society nor can it fully regulate itself, hence the need for government intervention. This chapter briefly discusses how the market system operates, the problems an unchecked market system creates for society, and why government intervention is necessary, including an overview of some of the measures commonly used to address the problems.