I don't understant this paragraph. ECON 201

Question

I read this paragraph many times, but I still don't understand what is it talking about.

"Since governments perform all of these society-enhancing functions, in large measure governments reflect the social ethos of voters. So, while these voters may be maximizing at the individual level in their everyday lives, and our models of human behavior in microeconomics certainly emphasize this optimization, economics does not see individuals and corporations as being devoid of civic virtue or compassion, nor does it assume that only market-based activity is important. Governments play a central role in modern economies, to the point where they account for more than one third of all economic activity in the modern mixed economy."

Source: Principles of Microeconomics by Douglas Curtis and Ian Irvine

Thank you

Answer 1

I think what they are basically trying to say is that economics does not say governments are bad. Economics gives us the tools to see what is the "right amount and the right price" In some cases it may be best for government to produce certain products (defense police and fire protection where there is non-exclusion and economies of scale) In other cases it may make sense to provide incentives for production and or consumption to get to these goals. In many cases it may simply be to define a legal framework which establishes property rights and enforces contracts. A simple example might be a homeowners association where everyone is supposed to kick in $10 per week for the maintenance of lawns and plowing driveways. If all of the homeowners signed a contract to that effect then the government wouldn't have to provide the service they would simply need to enforce the contract. Some economists favor more government production , others favor more focus on defining property rights and enforcing contracts. That however is a normative or philosophical debate.

Economics has often been called the dismal science because people acting in there own self interest tend to push resources towards where there are most needed.

Adam Smith talked about the invisible hand. He used the example of candle makers in Paris. If, there were a shortage of candles prices would rise. This would induce more people to make candles to capture the benefit of these higher prices ultimately eliminating the shortage and bringing the price back down. However, I could see there is a shortage of candles in Paris and Produce more because I have the thought of a Frenchman in the dark (not really , I kind of like that thought, but pretend I do). I could produce a whole bunch of candles and soon Paris will no longer be in the Dark. However, I will have accidentally mad a profit on the Way. You as an outside observer can not see my motives (which were purely altruistic) you can only see my actions. My actions and the results were identical.

I really think what they are trying to get at is that Economics is not a "dismal science" and Economists do not feel hat government is necessarily evil. Of course that does not preclude the existence of governments.

Best,

Lenny