Analysis On The Role Of Government In Economic Transition Perspective

This paper analyzes the relationship between government and market and the role of government in economic transition. The paper includes three parts :The first part is about the theories of government role. Smith's "night watchman" theory, Keynes'theory of government intervention and economic freedom principal of neo-liberalist are introduced and reviewed in the part. Modern Economics originator Adam Smith argued that, like an "invisible hand", the market system guides selfish behavior individuals, forming economic order which promotes the public interests; while the government is a "night watchman" of the order and its role is indirectly reflected in economic legislating for economy and establishing rules for market economy. Thus, he maintained a laissez-faire economic policy and opposed government's intervention. After Adam Smith, David Ricardo and Say inherited and further developed his economic thought. They believed that the capitalism is a market economy, which can be competed and adjusted freely and is no need for the government to intervene in. Different from the liberalism of Classical economics, Keynes opposed laissez-faire and advocated government's intervention in economy. He pointed out that, because of insufficient effective demand, the economy is in the state that total demand don't match total supply. The government should meet the needs of the economy to control and guide the operation of the economy by fiscal policy and monetary policy and other macroeconomic policies. In the 1960s and 1970s, the emergence of "stagflation" in western nations caused the return of traditional laissez-faire.