Government should not be involved in an economy. There are a number of reasons as to why, the first being that government by definition is inefficient. Government intervention usually leads to a misallocation of resources, meaning that resources are not used in the most effective ways. If the market is allowed to dictate prices and the overall movement of the economy, then there are clearer indications of how resources should be distributed across sectors.

 

Moreover, government intervention can negatively affect the business cycle. The business cycle states that the economy will constantly fluctuate between inflationary and deflationary gaps. Inflationary gaps are time periods in which the price level increases, opposite of deflationary gaps-time periods in which the price level decreases. It is common for the government to feel the need to interject when the price level decreases because there is less money circulating in the the economy. While the money is more valuable, it is harder for citizens to obtain it, which could potentially discourage them. However, it is important for that business cycle continues on its natural progression because it is very difficult for the government to maintain perfect control over the aggregate demand. For example, the government may overestimate the amount of money needed in the economy and the result is an inflationary gap. Inflationary gaps can also be detrimental because the value of the dollar decreases during this phase. Because there are boons and setbacks to both sides of the business cycle, it is better for the government to not interfere with the natural process.

 

When the government interjects, it is taking away the decision-making ability of the people it governs. The psychology of the people is dependent upon what they want to achieve and the power that the government allows them. When the government restricts the power of its people, this can lead to a disgruntled population. To ensure the happiness of the people, it can be beneficial for the government to not interject. If the people need the government, then they can indicate their suggested solutions and the government can respond with the necessary actions.