The Role of the Government in the Economy Indiana State Standard 4.1

Mercantilism Society was viewed as savage and required a strong government to manage society and the economy. A nation gained wealth by acquiring gold and silver. A nation needed colonies in order to import cheap raw materials and export expensive manufactured goods.

Adam Smith and LAISSEZ-FAIRE Scottish philosopher An Inquiry into the Nature and Causes of the Wealth of Nations (1776)

The wealth of a nation is the productivity of its workforce. Self Interest will direct citizens to undertake economic activities that benefit society (“The Invisible Hand”). LAISSEZ-FAIRE – The government should stay out of the operation of the economy and the economy will run itself

The Progressive Movement The power of the government can be used to improve to correct errors in the economy and society “Trust Busting” Pure Food Laws Pro-Worker’s Rights Legislation

John Maynard Keynes ? English 1883 – 1946 Mathematician

GDP = C + I + G + (E – I) GDP = Gross Domestic Product C = Consumer Spending I = Business Investment G = Government Spending (E – I) = Exports - Imports

GDP = C + I + G + (E – I) $100 = $90 + $8 + $2 + ($2 - $2)

The Government can use the ability to tax and to spend in order to control the economy. The government can encourage or discourage consumers and business from spending money.

Today The government should provide public goods and services that the private sectors cannot or will not provide. The government should redistribute income to help the poor. The government should protect property rights.

The government should deal with positive and negative externalities. The government should help to stop or correct market failures.