It is customary to argue that if government is large in relation to the rest of the economy, then it has considerable influence over the private sector. This influence will presumably grow as the ratio of government expenditure to GDP grows. Therefore, if the government wishes to control inflation, or improve employment prospects or improve growth prospects by increasing the ratio of capital investment to GDP, then the greater its relative size, the more likely it will be that such policy objectives will be achieved. So the argument goes. This is not the place to begin a survey of modern macroeconomics; it is sufficient to say that there is considerable controversy as to whether altering the size and composition of government expenditure (taxes and borrowing) can by itself achieve such objectives in a way which can be considered satisfactory. Certainly, the simultaneous achievement of objectives is a complicated task, particularly in the open economies of Western industrial nations, where governments have no direct control over the decisions taken by overseas suppliers and buyers. Even if it has the power to use the budget, or to regulate the economy in some other way, the size of government will not guarantee the achievement of macroeconomic objectives.
The outline of the growth of government and its causes points to a much more important limitation on government action, which re-emphasizes the point made in the previous module. As government grows in power, those affected by its actions do not stand idly by and let the government do what it likes, but are given added reason for using the instruments of political participation (see Section 1.3.2) in order to protect and advance their interests. Any expansion of government activity, therefore, brings with it political feedback. Much of the examination of political feedback in countries with strong democratic institutions concentrates on how politicians are influenced by interest groups. This is, however, too narrow a framework in which to look at the bargaining relationships between government and industry. While it is certainly true that industrial interest groups do try to exercise influence over politicians, the impact of government at company level is felt much more directly in negotiation with the administration, i.e. with government departments which regulate companies' activities, which tax and subsidize them, and which purchase their goods. The consequence of the growth in government which is of relevance to this analysis is therefore derived from the increasing extent to which the fortunes of individual companies will be governed, not by their success in competing against each other and against overseas firms, but by the efficiency of their investment in managerial resources able to negotiate with government departments and agencies.
