The government policies can positively influence the economy. Even libertarian economists would accept some government intervention in the form of national defence, protection of property etc. Government intervention in the form policy is essential for economic security of the citizens through welfare measures like unemployment insurance, pensions, basic social security of education and health, provision for public goods etc.
In a free market economy, there is always an increasing trend of inequality in income, wealth and opportunity due to monopoly in the market. Government policies ensure greater equality through redistribution of income and wealth. As per the law of diminishing returns, as income increases, it results in a diminishing marginal utility. From a utilitarian perspective, income redistribution is essential for the net welfare of the society.
Monopoly in power and mode of production results in inequality. Government policies can regulate monopolies by promoting competitions and hence contributes towards fairness and greater economic efficiency. John Rawls in his “Theory of Justice” states that the ideal society is one where somebody would be happy to be born in any situation, not knowing where he/she would end up. If people had no idea where they would be born, it is more likely that they would choose a society with government intervention and redistribution.
Government intervention helps in ensuring public good like defence, road, police, public health, universal education. In free market economy scope for such public good is less as no fiscal incentive is associated with it. Due to its core objective to maximise profit, free market economy also does not give much attention to negative externalities which may cause serious threat to sustainable development too. With government intervention through policies such impact of negative externalities can be positively minimised in the economy.
Macro-economic government intervention through monetary policies helps in maintaining stability in the economy even in the case market failure and recession. Such fiscal policy initiatives help in sustaining economic growth. The essence of government policy interventions in the economy was realised during the Great Depression of 1930s. Keynesian model of economy developed during the Great Depression which talks about positive stepping up of government in economic activates was adopted as the standard economic model in most of the developed nations after the Great Depression, World War II, and the post-war world economies. Although during 1970s’, this model of economy witnessed some sort of stagnation, relevance of Keynesian model of economy and government policy intervention was once again acknowledged aftermath the financial crisis of 2008.
Therefore, positive government intervention through policies helps in achieving greater welfare, equality, fairness, justice and stability through public good, redistribution of income and sustainable development in the economy.