Economic Intervention by Government

In todays world there are various kind of entities. Some entities can do no wrong, such as the WHO or greenpeace. They can do whatever they like and still end up smelling of roses. The government, however can evidently do no right. Today, wherever you turn you find some bloke clamoring for less government intervention or more government intervention and generally complaining about how governments have not been this bad since the bad old days of Muhammad Bin Tughlaq. My aim in writing this paper is to present a model of governance through which the debate regarding intervention may perhaps be put to rest.

Firstly let us look at what government intervention is and why it can be a problem. The primary task of the government is to form legislation to ensure the external and internal security of its people and propagate an environment where it is possible for any one and every one to self actualize. So, a criminal in jail is not entitled to protest the government intervention. Government intervention refers to an intervention purely in an economic sense which distorts the market for any or all goods by affecting demand, supply, or (more likely) both. The theory of free markets says that if everybody is left to do what they like, sellers will charge whatever price they like and buyers will pay whatever price they like. However for business to ensue they must be brought on to the same page, that is, the same price, a price at which the seller is happy selling and a buyer is happy buying.

Then the government crashes the party. A prime example of how the government can intervene in a market is through taxes. If, a tax is levied on a particular good, it becomes more expensive and some people can no longer afford it, so the demand contracts. The sellers are now selling far less than they were initially. This is known as a distortion in the market.

Other ways in which government intervention may distort a market is through subsidies, through price regulation, through trade tariffs etc.

When there is no government intervention, the role of the government is to just stand around lamely while business is conducted and to help out in case of emergencies, for example the government of the US bailed out major banks during the recession.
However, it is entirely possible that some timely intervention by the government may just have nipped the problem in the bud. So, to intervene or not to intervene, that is the question.

I believe that the government should exist in the market as a corporate entity. That is, it should be a participant, not a regulator and therefore it can alter the market without distorting it. Here we must note that in all non economic matters the government must continue to function as it does presently, so if you kill someone, you will still go to jail.

The government would be like any other large company with multiple diversified interests, such as construction (housing, roadways etc) , banking, power generation, telecom etc. All public sector industries will be opened to up to allow private players free entry and exit.

Initially the government will be humungous with its influence extending to more or less every industry in the country. However, like every large corporation the government will face skyrocketing costs and sluggish revenue growth. Why? The government has a very large workforce which is very hard to monitor, and therefore tends to be a tad less productive than it ought to be. This is known as managerial diseconomies. This will prompt the government to externalize as many process’ as it can to try and minimize its technical and managerial diseconomies. This will lead to a lot of collateral growth in these industries.

This will allow the government to enforce all its welfare measures without distorting the market. Consider the case of the minimum wage. Earlier this acted like a price floor in the factor market, which was distorting the market. It was also a mammoth failure as hardly anyone complied with the norms. However if the government, as a company was to offer employment at a particular wage rate, all the other companies would be forced to comply, otherwise they would find themselves without an adequately large labour force.

The motive of the government will be long term welfare maximization, however it will have to generate at least normal profits. Now, ordinarily normal profits are the factor rewards for the entrepreneur, however in this case these profits are used to pay the dividends to the investors

This company like all companies will be run on investment, with one major difference;

The government of india as an institution belongs to every citizen of india. Similarly, the government of india as a company also belongs to every citizen of india, that is every citizen is a shareholder, however, it is not compulsory for every citizen to invest their savings, therefore investing in the government does not make you a shareholder, it only entitles you to claim a dividend. Also, the amount that one invests does not determine how much of the government one owns, every citizen has an equal share, however a larger investment will necessarily mean a higher dividend. What this does is, it still maintains the democratic nature of our country, but it incentivises' investment.

The largest implication of this model is that the citizens now have to pay far lower taxes. The only areas that the government is entitled to fund from tax revenue are defense and law and order. All other industries are now funded by investment. This would make it possible for the government to only tax the higher income groups, or to tax the middle and higher income groups a lot less than they do at present. All the various indirect taxes such as sales tax, vat, excise etc can no longer be levied.

This step would make the government far more accountable to the people on a day to day basis. If the government is not performing then their stock price is going to fall massively. This will force the government to shake their malaise in order to compete in the market. It will force the government to be aware of all the corruption in the system to which it would ordinarily turn a blind eye. It will force the government to appoint competent ministers. No more will sick industries be allowed to lumber along for years, if a particular part is not performing the government will have to shape up or ship out, it cant afford to have any non performance. This would force the government to set up large think tanks in order to find solutions to these problems. This would create a large demand for highly educated researchers.

The problem with our country is that our government is too complacent. Once elected, they know that for the next five years they don’t have anyone to answer to. The bureaucratic machinery is large and unwieldy and this makes officers at every level corrupt because they feel like they can get away with it. Public sector industries are sick and underperforming.The problem is that there are no consequences that the government has to face for these inefficiencies

If the government was to enter the market, the government would be forced to be efficient in order to compete, or they would lag behind.

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