Why Do We Need A Government ?

The frequent expressions of anger against the establishment, particularly those in government, belies the fact that the government is our own creation. The governments may have failed to deliver, but we must also need to be sure what we wanted them to deliver in the first place, or is it that we expect the government to deliver something that it cannot, and by making it indulge in what it cannot achieve, we might be sowing the seeds of its inevitable failure.
Why do we need a Government ?
Source - Wikimedia Commons (https://commons.wikimedia.org/wiki/File%3AAmbrogio_Lorenzetti_-_Allegory_of_Good_Government_-_Google_Art_Project.jpg)

Government was not given to mankind by god or nature. It is our own creation, especially in a democracy, where people of a country give to themselves a state and the government that is supposed to run it. This seems odd, if we take into account the general sense of disappointment that most people seem to have with their governments, particularly in developing countries. Last few years has seen this disappointment take the form of anger, protests and even revolutions. Maybe it is time to ask what is it that people want the government to deliver and whether it is

rational to expect the government to deliver those results.

Simply put, why we do need a government ?

Government is Just another Social Institution

In ancient times, the monarchs used to claim a special status representing divinity or something close to it, to strengthen their claim of inherent authority over the lives of people whom they ruled. Those myths have shattered long back, and we do not treat our governments as super-natural any more. The democratically elected governments of today are just another social institution that we have ourselves set up to serve certain functions of the society. Governments, thus, are meant to compliment the family and the market, which are two of the most important institutions of our social life.
In spite of the spread of individualism during the last century, family remains at the center of our social existence, and at the core of our evolution as a civilization. The modern free market is an institution that has taken major strides during the last few centuries and has been responsible for creating the right incentives for surplus production and economic growth and thereby created to the wealth that we enjoy today. Family and market, both work best without government interference, yet both may find it more difficult to survive in the absence of governance. In a way, we need government mainly to ensure that these two institutions are able to achieve what they are meant for.

In short, one can say that safeguarding our values, our civilization and our culture is best left in the hands of the family household, while the economic efficiency and economic growth are best left to the forces of the free market. Appreciating this perspective allows us to understand the role, the expectations and the limitations that one associates with the government.

Three Essential Functions of Government

While the free markets are the best tools for obtaining economic efficiency, yet there are three essential functions in a modern economy that must be undertaken by the government and which cannot be substituted by any other institution. These functions are provisioning of public goods, redistribution of income and taking care of market failures.

Provisioning of Public Goods

Public Goods are goods that once supplied are available for all to benefit from. No one can be excluded from benefitting from them and the benefitting of one does not prevent another benefitting from it. The classical example is that of national defense. Once a country is made safe from foreign invasion, the benefit of this safety is available to all, and benefitting one does not prevent another from benefitting from this safety from foreign invasion and plunder. Other examples include law and order, roads, street lights and other similar amenities open for public use without restriction.

The free market cannot provide these public goods, even in theory, because of the problem of free ridership. Take the case of national defense. Since everyone knows that he or she cannot be excluded from the benefits of secured borders, they will be willing to spend less than the value they place on such safety. If everyone does that, and that is what they would – as rational economic agents maximizing their utility, the demand for national defense will be under-expressed and the free market will never be able to supply enough national defenses that we may need. The case of roads is similar – people would be much more willing to spend on cars that they own rather than spending on roads because they know that once the road is there, they can always use it.

To take care of this problem, we need an authority, which can assess the demand of the society as a whole for these public goods and collect money from all, depending upon their ability to pay or other considerations of the society, and with that, provide for these essential public goods. This authority is called

the state and the people who run it are called the government. Public goods provision remains an essential responsibility of the government alone.

Redistribution of Income

Our society, since eternity, has been bound together not by laws but by trust and empathy. Laws, in fact are merely a formal expression of this bonding and not always a very effective one either. For most of our existence as a society, the differences between wealth of people were limited. In most societies, there were concepts of charity and donation that partly took care of it. Religion and missionaries, in whatever name and form they existed, also played a part.

In modern, impersonal life of today, people live in large masses and unknown to each other. Moreover, with accumulation of capital and mechanical production, the differences in income and wealth have attained unprecedented proportions. On one hand this extreme inequality is dangerous for the sustainability of our society. On the other hand, it creates economic efficiency too, if some people can afford to waste what many others never get a chance to consume. To take care of this problem, society itself mandates redistribution of income by way of progressive taxes and subsidy for poorer people. The only institution, which can take money away from rich and transfer it to poor, is the government. No other social institution has the mandate, authority or capacity to do it. It is a function that must be performed by the government.

Taking Care of Market Failures

In theory, free markets optimize economic well being of the society. However, the economic theory also tells us that the markets are vulnerable to failures too. They can fail because of a number of reasons, like monopolies, cartels, high transactions costs, significant externalities and asymmetry of information between buyers and sellers. Most economic crisis result from these market failures, and the most common cause of recent market failures are asset bubbles and busts based on fluctuating expectations, an area on which economists still need to do a lot of work.

When market fails, they become a problem for the society, and the only institution of the society, which has a mandate to interfere in the market and take care of its failures, is the government. The problem is that excessive interference or wrong interventions can themselves result in market failure, and so, in the hands of poor decision makers or vested interests, government can end up creating bigger problems than it wanted to solve in the first place. This function of the government, then, needs to be undertaken with a lot of caution, with the help of expert advice and only to the extent it becomes extremely unavoidable. Nevertheless, dealing with market failures is one of the responsibilities that the government cannot and should not shy away from.

What does it mean?

Thus, the modern government has a well defined role in our society. Taking care of these three responsibilities is what we need a government for. It also means that government is not an omnipotent force that can make everyone rich or ensure all amenities for everyone. In fact, whatever, government provides, it must collect from the people only, who actually produce everything. To that extent, government can only give back what it gets from the people in the first place. It also means that government is not a panacea for all ills. Government can neither ensure high economic growth nor provide a solution to all problems faced by the society. At the same time, it also does not mean that the governments are powerless. Government is the most powerful institution that we have, but we must recognize its limitations and appreciate what it can do and what it cannot. In fact, expecting government to do what it cannot, will only lead to all kind of interventions that may consume a lot of resources, and end up only in worsening the problems that they were meant to solve.

The appreciation of what government can do and what it cannot is the first step in effective governance.

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