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The classical economic model proposed by Adam Smith depends on the market free of controls with the market price instead of the government allocating the resources of the nation.

In this century, the government has become increasingly important in answering the basic economic questions.

This lesson will consider the role of the government in the economy of the modern world.

Government, like a business, pays out money and is paid for its activities.

How government prepares its budget, what outlays are included in that budget, and what taxes government imposes are questions that affect everyone in the nation.

Let's go back and see how the historical role of the government has evolved during the 20th century.

Time out for a quick review!

In the years after World War I (1914-1918), economists made great strides in describing and analyzing the economic world of developed and developing regions.

Before World War I, economists were still influenced by the Classical Model of laissez-faire that was created by Adam Smith in 1776.

There was still one problem that had not been resolved by the great economists of the world.

Economic theories had been initiated that could describe the business cycle and how it affected all of the elements of an economy including households, businesses, and government levels.

What was needed was a model to accurately measure or analyze the total economy, a macroeconomics model.

The Stock Market crash of 1929 would change forever the way America looked at politics and economics.

Politically, the change in our economic policy and the new role of government is associated with the New Deal and Franklin Roosevelt, who became President in 1933.

In economics this change in our policy is associated with an English economist, John Maynard Keynes (pronounced canes).

As the originator of a new model, Keynes was responsible for bringing about a revolution in economic thinking.

Many economists turned away from classical and classical theories so popular before World War I, to the "new economics" based on Keynes's theories.

John Maynard Keynes (1883-1946), more than any other economist in the 20th century, is responsible for modifying classical thinking among the industrial nations of the Western Europe and North and South America.

During the 1930s, the United States and the nations of Western Europe were mired in the Great Depression.

It became apparent early in the Great Depression that the classical economics model did not have any mechanism to correct the problems of the economy.

Under the philosophy of laissez-faire, or hands off, the government would not become involved in the economy.

Keynes emphasized in his writings the correlation between national income and employment.

He showed that consumption, investment, and government spending determined income.

Keynes believed that the government should become involved in the problems of the people in order to promote full employment.

Point To Ponder!

This lesson presents some of the most difficult decisions every citizen has to face. We have discussed some of these questions in earlier lessons.

Do you remember the controversy over the cutting of old-growth forests?

How should we improve technology?

Computers for the school children or jet planes for the U. S. Navy?

Almost everyone wants to see better schools, universally available medical care, and good roads; but are you as a taxpayer willing to help pay for them?

If government is short of revenue, should it raise money by imposing new taxes, borrowing, or save money by cutting the services to the people or public works projects like roads, bridges, schools, sewer systems, water treat plants, etc.?

We have already examined the historical role of government in the economy.

In the classical model the role of government was laissez-faire approach or "hands off" the economy.

We saw how the abuses of business made it impossible for the government to stay out the economy.

The historical role of government in the economy can be classified into the following five areas:

Government as a help to business with tariffs, land grants to railroads etc.

Government intervention to enforce competition with antitrust laws, etc.

Government as a help to weak economic groups with minimum wage laws, and child labor laws, etc.

Government as a producer in the absence of business venture, such as the public works projects during the Great Depression, etc.

Government as a stabilizer, by changing the supply and demand through control of the money supply, etc.

How much should government be involved in the economy?

One of the primary controversies today concerns the degree of government involvement in the economy.

Most Americans, accepting the free enterprise system, agree that government should take the steps necessary to preserve capitalism.

Protecting property, ensuring enforcement of contracts, and assuring economic freedom require government involvement.

Most citizens agree that the government must have the right to protect the consumer from monopolistic power.

However, sharp differences of opinion exist concerning the government regulation of the market.

Even greater differences exist about what government should produce.

Many political campaigns have been, and undoubtedly will continue to be, waged over government's role in the economy.

There is a broader area of agreement than disagreement among Americans, although campaign oratory sometimes might seem to indicate otherwise.

We will examine the boards and commissions of the federal government that exert an influence on our economy.

Please approach our discussion of these boards and commissions from the social science prospective. How do these controls affect the daily lives of the American citizens?

The Executive Departments

Much of the work of the federal government is done by the 13 executive departments. They are the traditional units of federal administration, and each of them is built around a broad field of activity.

All of these departments make up the President's cabinet. These departments and the year they were created are as follows:

State, 1789

Treasury, 1789,

Defense, (originally called the War Department) 1789,

Justice, (originally called the Attorney General), 1789,

Interior, 1849,

Agriculture, 1889,

Commerce, 1903,

Labor, 1913,

Health and Human Services, 1953,

Housing and Urban Development, 1965,

Transportation, 1967,

Energy, 1977,

Education, 1979,

Veterans Affairs, 1988.

Look at the titles of these departments. Now think like a social scientist. What were the social problems that led to the creation of these departments? Let's take a look at the economic duties of each department.

Treasury

Internal Revenue Service - Administers, enforces most federal tax laws, collecting nearly all federal taxes (including, especially, personal and corporate income, social security, excise, estate and gift taxes).

United States Customs Service - Administers, enforces customs laws, collects duties on imports; combats smuggling, other illegal practices in international trade.

Bureau of the Public Debt - Supervises most federal borrowing operations and manages the public debt.

Financial Management Service - Government's central bookkeeper and principal financial reporting agency.

Bureau of Engraving and Printing - Designs engraves, prints all currency (paper money), Treasury bonds and notes, postage stamps, food coupons and similar financial items issued by the government.

Bureau of the Mint - Manufactures all U. S. coins; holds government's stocks of gold, silver; operates United States Mints (Philadelphia, Denver), Assay Office (San Francisco), Gold Depository (Fort Knox, Kentucky), silver Depository (West Point, New York).

Department of Justice

Antitrust Division - Handles court cases involving violations of antitrust laws, other federal laws covering business practices.

Tax Division - Handles both civil and criminal cases arising out of the tax laws; most often, acts as the in-court attorney for the Internal Revenue Service.

Federal Bureau of Investigation (FBI) - Investigates most cases involving violations of federal criminal laws; pursues, arrests most persons suspected of or charged with federal crimes.

Department of the Interior

Bureau of Land Management - Controls, manages some 300 million acres of public lands (most of the land located in the far west and Alaska); manages timber, oil, gas, minerals, rangeland, recreation and other resources of those lands.

Geological Survey - Conducts surveys and other research to describe (map) the geography and geology of the United States and locate the nation's oil, gas, mineral, water power, and other natural resources.

Bureau of Mines - Conducts research, issues factual reports on mining techniques, mine health and safety, environmental pollution, the recycling of solid wastes, and nearly all other phases of mining activity in this country.

Office of Territorial and International Affairs - Works to promote the economic, social and political development of the territories of the Virgin Islands, Guam, American Samoa, and the Trust Territory of the Pacific Islands.

Department of Agriculture

Farmers Home Administration - Makes several different types of low-interest, long-term loans to farmers and farm groups who are unable to get credit at reasonable terms from other private lenders.

Rural Electrification Administration - Makes low-interest, long-term loans to farm cooperatives and other rural-based nonprofit groups to provide electric power and/or telephone service to people in rural areas.

Agricultural Cooperative Service - Helps farmers to form and run cooperatives, especially to market their crops and to purchase farm supplies.

Agricultural Marketing Service - Provides assistance to farmers in marketing their products and issues daily reports on crop conditions, demands, prices, and other local and national agricultural market data through press, radio, and television; enforces several laws that prohibit fraud and other deceptive market practices.

Animal and Plant Health Inspection Service - Conducts inspections to prevent, control, or eradicate animal and plant pests and diseases; licenses and regulates the manufacture and sale of chemical and non-chemical products used in the prevention or treatment of animal and plant pests and diseases.

Food and Nutrition Service - Administers the food stamp program (which provides coupons to low-income persons and families to increase their food purchasing power); provides grants and/or foodstuffs for several other food assistance programs (most notably, the National School Lunch Program).

Food Safety and Inspection Service - Inspects food and meat processing plants grading their products under federal laws and making sure that those products are safe, of good quality, and properly labeled.

Agricultural Stabilization and Conservation Service - Administers several price supports, commodity loans, and subsidy payment programs to maintain farm incomes and market prices for certain crops.

Commodity Credit Corporation - Holds (stores) crops purchased or accepted as payments of loans under the various programs administered by the Agricultural Stabilization and Conservation Service; reduces surplus crop holdings.

Federal Crop Insurance Corporation - Offers (sells) insurance to producers of certain crops to protect them against unavoidable losses from such causes as weather, insects, and diseases.

Forest Service - Manages the National Forest System (155 national forests and 19 national grasslands, totaling 191 million acres in 44 States, the Virgin Islands, and Puerto Rico); provides grants for research in all phases of forestry.

Department of Commerce

Minority Business Development Agency - Promotes and coordinates federal and other public and private efforts to help organize and strengthen businesses owned and operated by members of minority groups and furnishes technical assistance to minority firms.

Bureau of Economic Analysis - Collects, analyzes, and publishes data to provide a reliable and detailed picture of the structure, condition, and prospects of the nation's economy; makes continuing reports on the gross national product (the GNP, the total national output of goods and services, measured in dollar terms.)

Department of Commerce

International Trade Administration - Promotes American interests in foreign trade; maintains a network of Foreign Commercial Service offices to report on business conditions and investment opportunities abroad; conducts trade fairs and operates trade centers in other countries.

Summary

This concludes our discussion of the first part of the Role of the Government. We will continue our study of the Executive Departments in the next lesson.