Government Intervention in the Economy
John Maynard Keynes in the 1930s, a pioneer of macroeconomics, published a book entitled "The General Theory of Employment, Interest, and Money". Through the book, Keynes put out an idea of the need for government intervention policies. This idea was motivated by the Great Drepession which made the unemployment rate high.
Keynes believes that the best way to eliminate a country from recessionary conditions (conditions of demand and supply under optimal capacity) is to involve the government primarily to push back the position of demand and supply in the market through investment and expenditure policies. In addition, to control social and environmental impacts, the government must also start pressing products that endanger social and environmental problems with tax policies. The government must also take a role in the supply of public goods that are not in demand by the private sector, so that of course requires sources of income. This policy related to government spending and income is what we now know as fiscal policy.
Modern Macroenomy Science
In the modern world of macroenomy, government intervention is highly dependent on the conditions of each country. There is no theory explicitly used to decide the extent of government intervention in the economy. For example, New Zealand positions its government as a regulator, tax collector, owner (asset) and provider (public service), whereas America, positions its government as a provider (public service), regulator and supervisor, and promotes growth and stability.
The New Zealand Government has more interventions compared to America, mainly related to asset management. Based on existing practice, in general, government interventions can be classified into two groups, viz
sometimes enough as a regulator and supervisor and
sometimes it has to act as a provider and manager (provider and manager).
Specifically for providers and managers divided into two functions;
service providers and public goods and
provider of community needs that cannot be met by the market.
Government Intervention in Market Mechanisms
Government intervention in providers and management is so dependent on market conditions. If the market is effective, government intervention tends to be low.
In general, the government will only position itself as a regulator and supervisor, while the provisions are submitted to the market (private sector). But if the market is ineffective (for example, there is still a gap between public demand and its supply), the government must be willing to enter as a market player, both directly and through established institutions, such as SOEs. An effective market or will not change along with economic development, the level of government intervention must also be adaptive.
Example of intervention
Sending troops from one country to another that has problems or is fighting is none of their business
Embargo on countries that are hostile to other state institutions
Do war blocking to other countries, even though there is no connection at all.
Examples of Government Policies in the Economy
In overcoming market failure, namely price rigidity, monopoly, and externalities that can be detrimental, the government has a very important role in this country's economy in this case. This role can be carried out in the form of interventions either indirectly or indirectly. Direct and indirect government intervention in determining market prices to protect consumers or producers through basic price policies and the highest price policy.