The relationship between government and business is complex, with both positive and negative aspects in terms of what can be called the “public good.” To make things even more complex, notions of the public good change depending on a person's ideology. Thus an accurate and complete understanding of this relationship necessitates an examination of the three main theories of political economy.
The Free Market
The first theory of political economy revolves closely around the idea of “laissez faire” capitalism. Translated effectively as “let it be,” this system proposes that there be little or no formal relationship between business and government. Growing out of the theories of Adam Smith, the essentially free-market approach argues that the public good can be seen as synonymous with economic efficiency and gains in the standard of living for individuals. According to Smith, the “invisible hand” (the aggregate of undisturbed decisions by buyers and sellers in the open market) tends to produce better goods, at cheaper prices, for more people. These cheap, high-quality goods allow for a better standard of living through material abundance, utility and comfort.
In response to inequalities inherent in a system of open competition, socialism proposes action to ensure economic equality for the entire population. Furthermore, Karl Marx argued that the essential structure of capitalism required that those who own the capital continually lower the wages of the working class. Additionally, Marx argued that free market capitalism was inherently dehumanizing and tended to force people into monotonous labor for the sake of producing massive quantities of goods in order to satisfy selfish profit motives. According to socialism, the public good is seen in terms of economic equality and of checking the exploitative power of business. Therefore, the only remedy would be for the government, on behalf of the people, to take control of business and direct what goods would be produced at what prices.
The Third Approach
A third option in terms of political economy was proposed by the economist John Maynard Keynes. It was his contention that business fully controlled by government would inherently lead to inefficiency and a lowering of the standard of living. On the other hand, he also argued that a purely free market system would tend to undermine itself in the long run, and lead to an unstable social situation due to inequalities and contradictions. It was the role of the government to push the private sector into socially desired outcomes, but to leave it alone in terms of how those outcomes should be accomplished. For example, using monetary policy the government can increase the supply of credit in the market, creating incentive for investment over savings and thus “stimulating” the economy.
Keynes and the Depression
Many of Keynes's ideas featured prominently in the policies of the Roosevelt administration during the Depression of the 1930s. Government infrastructure projects and the “New Deal," for example, were seen as measures the government could take in order to stabilize the economy and promote new growth when systemic issues could not be resolved by the free market alone.
The Current Relationship
Currently, most developed countries use a variation of Keynes's policies, allowing a large degree of private business while maintaining strict regulation of certain aspects of the economy through the government. Today's relationship between government and business is thus neither lassez faire nor socialist, but rather a combination of both, essentially what is called a “mixed economy.”