The State and Its Role in the Economy - Essay Example

The and its role in the economy- perspectives of the alists and Marxists Introduction The nature of the and its appropriate role in economy has been a subject ofconstant discussionamongst sociologists and economists for nearly three centuries,right from the time the subject was conceived (Deane, 1989). There have been various changes in opinion on the subject during this period; however, two major changesthat took place during the post WWII years are significant in their scope and abruptness (Chang and Rowthorn, 1995). The initial years just after the WWII witnessed wide scale rejection of the then prevalent ‘laissez faire capitalism,’ whichshowed complete failureduring theyears between the two Great Wars, and it resultedin the demand for greater state activism. By the 1960s, there was ageneral opinion of living in a ‘mixed economy’ (also known as organised capitalism), which changed dramatically since the mid-1970s, when Neo-Liberalism came into existence thataimed atending mixed economy and bringing back market principles unimaginable inthe years just after the WWII.The emergence of Neo-Liberalism in the last few decades has changed the nature of debate on the State’s role, and the state is no longer regarded as a neutral guardian of its citizens, but as a major tool in the hands of the economically powerful social classes or as a predator (Chang, 1994). In this context, the essay will examine the Institutionalists and Marxists notions on the state and its role in the economy, two major theories on political economy that were popularduring the latter half of the twentieth century. Discussion Concept of state intervention The term ‘free market’ generally refers to economy that is free from state intervention. To analyse whether a particular market is free or not, one must review the underlying institutions thatframe the structure for obligations and rights of participants in a specific market,along with various other ‘externalities’ (Schotter, 1985). The institutions that must necessarily be analysed includeregulations(formal and informal ones) that govern the organisation and exercise of interests (regulations on lobbying, political relationshipsand incorporation);ideologiesassociated with concepts of rights and justiceprevalent in that particular society; andthe institutions that ascertainstructural changes in rights and obligations, such as processes for social or legal changes. Therefore, by defining ‘free market’ and ‘state intervention’one can also analyse whether market failure is evident and if state intervention may make the failing market more efficient. From the perspective of the institutionalist, defining a free market is futile, since in reality there is no free market, owing to some degree of state regulations that always exist in controllingthe nature of market participants and terms of participation.In instances where some of the regulations arecompletely accepted (by market participants and observers both) there appears to be no state intervention, hencegiving the semblance of a free market (Gamble, 1988).On the other hand, Marxism suggested that when a society becomes classless, it becomes free from state intervention in all forms, since the state stops existing from that very moment. Until this classless society (which according to Marxism should be the ultimate goal for any society) comes into existence, state remainsan important part of the social ‘superstructure,’ and the latter controls the economy, based on which emerges legal and political structures of the society. Traditionally, the extent of state intervention is measured by the budget allocated by the state as a ratio of GDP, and the public sector share or investment in the GDP. While such measures reveal the strength of the state/public sector, they fail to indicate the extent of state intervention adequately (Gamble, 1988). This is primarily owing to the fact that a big government may not necessarily mean a more interventionist one and vice versa. The way one measures state intervention is important, as one particular method used for visualising a specific role of the state may lack a universal application, since institutional assumptions underlying that particular vision may lack relevancein other contexts.Therefore, measures of state intervention vary, based on the various theories that debate the role of state, which includevarying assumptions onthe institutions and a state’spolitical economy. Institutionalists theory on the State and its role in economy From WWIIuntil the 1970s, the western nations showed aform of capitalist economy,often referred to as a mixed economy, where the markets were stringentlyregulated by the states, income redistribution took place in the form of social welfare and taxation, the state protected its citizens from various market risks and there came into existence many state owned companies. State intervention in market economy was justified by the opinion that in reality markets fail to function in a manner asproposed by Walras in theGeneral Equilibrium Model, which is a part of the neoclassical theory. Vilfredo Paretofurther developed itthrough a specific approach using the concept of individual preferences, wherein preferences ascertained an individual’s choices, which in turn determined his/her well-being, and the usefulnessof a productis an attribute, which cannot be compared ormeasuredand can be only ordered (Vira, 1997).With these assumptions, Pareto framed a principle that theorised, “The group of individuals increases its welfare in moving from a to b if at least one individual is better off in b and no individual is worse off” (Acocella, 2000, 23). This is known as the Pareto principle, and is considered within economy as the ‘efficiency’ concept, and there came into existence the Pareto optimum that implicatedinvolvementofa social state, wherein the neoclassical theory established a link between Pareto optimum and the balance in a perfectly competitive market. This desirable social state, considered as “a, is Pareto ‘optimal’ if in moving from that state to any other state it is not possible to increase the welfare of one member of society without worsening the condition of at least one other” (Acocella, 2000, 24). These theories have led to the formulation of two principles,applicable toa market system, suggesting: Within a state economy having complete markets and perfect competition, an existing competitive balance will be Pareto optimal; In complete markets with specific conditions that meetproduction functions and individual utility functions, the state of Pareto-optimal will be the result of a competitive equilibrium based oncorrectresource redistribution among individuals (Acocella, 2000) In the first principle, the neoclassical theory thus backsstate intervention in case of ‘market failure,’where there is a lack of appropriateresource allocation. The second principle, to some extent, also justifies state intervention in the context of resource redistribution toachieve equity,without conceding on efficiency (Acocella, 2000).In the 1970s, instead of the Austrian school of thought as developed by Hayek and Mengerthat did not supportstate intervention in economy, there was noticed a wave of reform within the neoclassical theories that favouredstate intervention, and was primarily used toshow failure of Keynesian theories infacing the oil crisis (1973).Since the 1980s, owing to the various reforms within the neoclassical theory the General Equilibrium Model (GEM) ignores the complex market nature and acknowledges only individual actions as determinant of causality, and this theory remains popular even in the current context. Karl Polanyi was critical of the classical economists’narrowtheories of the individual and for relatingsocial exchange of products with market economy. According to Polanyi, the institutional changes that occurred during 19th century in the UK, primarily owing to the Industrial Revolution, created a capitalist state that treated money, nature and work as mere commodities. In this context, he claimed, “to include them in the market mechanism means to subordinate the substance of society itself to the laws of the market” (Polanyi, 1944, 71).Polanyi’s institutionalist perspective conceptualised that empirical economycanbe describedas an instituted procedure that comprised of interactions between an individual and his surrounding environment. Polanyi differentiatedmonetary exchange at an individual level from the institutional rules of the market, and suggested that the two levels were both interdependent and autonomous, wherein “institutional patterns and principles of behaviour are mutually adjusted” (Polanyi, 1944, 49). Karl Polanyi in his work showed how the market economy in the UK that was conjectured to have emerged automatically, had state intervention playing a major role in entire the process. He contended “road to the free market was opened and kept open by an enormous increase in continuous, centrally organised and controlled interventionism” (Polanyi, 1957, 140). In case of the US, evidences clearly show state intervention during the early years in developing basic infrastructure, creatingproperty rights, inventing in agricultural researches, led to the creation of a successful economyduringin the initial years of industrial revolution (Kozul-Wright, 1995). Various reviews showed that except Hong Kong that gained the status of an industrialised nation without much state intervention, no other countries have created successful economies without state intervention (Short, 1984). There are different forms ofstate intervention that varied from framing post-war industrial policies in France, pre-emptive welfare state in Germany, support of the state in changing the Austrian manufacturing sector after WWII,and developments in some of the Asian nations that were state-led (Short, 1984). From the perspective of the institutionalists, economy and the entire economic system exists only due to state interactions. In fact, not only in some cases the state creates the economy right from beginning, no economic system would function without the regulating framework created and enforced by the state (Toye, 1991).Therefore, any economy or market emergesonly with state intervention, coupled with other social institutions andvarious non-market factors.The institutionalistsclaimed that within a society, the state plays the role of a meta-institution and controls the social system. It has the supremepower toframe laws and enforce them, while different social groups, some of which comprise of political groups opposed this monopoly of the state.The institutionalistsclaimed that the state is not an inactive guardian of the society interest, nor does it possess unlimited scope to gain all knowledge necessary forframing policies andimplementing them.  In this context, Chang claimed that “In the real world, successful countries are the ones that have managed to find ‘good enough’ solutions to their political economy problems and went on to implement policies, rather than sitting around bemoaning the imperfect nature of their political system” (2009, 19). Marxists theory on the State and its role in economy A study of Marxist theory on state reveals a paradox. On the one hand, Marx vigorously opposed the very concept of a state, and claimed that the primary goal of any society should be toabolishthe institution of state. On the other hand, most of the Marxist groups that have come into power believed incomplete control of the state over a society (Shlomo, 1968). The major element inthis apparent paradox is the theory thatthe state isthe very tool forabolishing a state. According to Marxism, during the early years of civilisation, there were egalitarian societies or primitive communism; however, with time there was an increase in productive labour, wherein there was surplus production of goods within the society. This led to the emergence of classes within a society, where ahandful of individuals who owned the surplus assumed power and controlby force and became the ruling class showing economic dominance (Elster, 1986).Therefore, here the state emerges out of ‘relative scarcity,’ a condition wherelabour productivity produces surplus, whichin turn divides the society into classes: the worker class that forms the majority, spend their life working, yet receive very little monetary gains in return; and a tiny minority form the ruling class that exploit the working class majority, without undertaking any productive labour and gaining political control, which further helps them to exploit the oppresses class (D’Amato, 2006). In this context, Engels claimed that, “As the state arose from the need to hold class antagonisms in check, but as it arose, at the same time, in the midst of these classes, it is, as a rule, the state of the most powerful, economically dominant class, which, through the medium of the stat e, becomes also the politically dominant class, and thus acquires new means of holding down and exploiting the oppressed class. Thus, the state of antiquity was above all the state of slave owners for the purpose of holding down the slaves, as the feudal state was the organ of the nobility for holding down the peasant serfs and bondsmen, and the modern representative state is an instrument of exploitation of wage labour by capital” (cited in, Utley and Maclure, 2013, 143). As capitalism develops within the economic system,there comes into existence periods of intermittent crises and the state is forced to assume controland regulate the economic system as a whole.Therefore, according to Marxism the capitalist state pre-empts capitalists, whereinstead of removing capitalism, it creates a scope for the working class to assume control of state power and production. According to Engels, “All the social functions of the capitalists has no further social function than that of pocketing dividends, tearing off coupons, and gambling on the Stock Exchange...At first the capitalist mode of production forces out the workers. Now it forces out the capitalists...” (cited in Capaldi and Lloyd, 2011, 463). One implication of this theory is that the state, which is a tool in the hands of the ruling class, is passive with little interest and power to control the economic system of a society (McLellan, 2007). Marx claimed that an economic system, which is a society’s system for production, is the most important social determinant, controlling its legal system, education, values, and morality, and all theseare elements form an integral part of the ‘superstructure’ known as society (Kolakowski, 1978). Marx further contended that principal ideas are the outcome of economic conditions; therefore, mere changes in ideas fail to transform the society and must resort to revolution or other violent means to bring in changes. Marx in his agenda claimed that State was economically dependent on the bourgeoisie. As trade developed, the bourgeois accumulated property and individuals became richer, at the same time the state moved into deeper debt. This was observed first in Italy, and later, in Holland during the eighteenth century, and more recently in the UK. Therefore, according to Marx, as the bourgeoisie turned richer, the state started begging from them and soon was bought by the former. Even after being bought the state requires money, hence remains dependent on the bourgeoisie. Therefore, soon a situation is created where society controls the economic system, while the state becomes passive in nature, functioning as a mere tool in the hands of the ruling class to control the oppressed class, until there emerges a classless society that leads to the withering away of the state. Conclusion From the above review, it can be suggested that the Institutionalists view active state intervention in the form of framing policies and regulating procedures is an absolute necessity within an economic system, and no country can achieve economic success without state intervention. Polanyi in his researches clearly showed that industrialised nations like the UK experienced major economic growth and development primarily due to active state intervention, especially during the initial years of industrialisation. The Marxists on the other hand view society as playing a major role in framing policies and regulating the economic system, while the state remains passive and functions as a mere tool in the hands of the ruling minority to control the oppressed majority. References Acocella, N., 2000. The Foundations of Economic Policy: Values and Techniques. Cambridge: Cambridge University Press. Capaldi, N., and Lloyd, G., 2011. The Two Narratives of Political Economy. NJ: John Wiley & Sons Chang, H., 1994. The Political Economy of Industrial Policy. London: Macmillan. Chang, H., and Rowthorn, R., 1995. Role of the State in Economic Change. Oxford: Oxford University Press. Chang, H., 2009. Industrial Policy: Can We Go Beyond an Unproductive Confrontation? A Plenary Paper for ABCDE (Annual World Bank Conference on Development Economics) Seoul, South Korea. Accessed 30th December 2013, http://siteresources.worldbank.org/INTABCDESK2009/Resources/Ha-Joon-Chang.pdf D’Amato, P., 2006. 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