Chapter 5

Market economies have become nearly universal since the end of the Cold War, with the state involved to a varying degree in each instance. In such situations, the government does not directly control the economy, but it can and usually does try to encourage economic growth and influence how the benefits of that growth are distributed. This chapter analyzes the fundamental relationship between the modern state and market economy, contemporary debates over economic policy, and the questions raised by globalization.

The roles the state has come to play can be divided into essential roles, beneficial roles, and politically generated roles. Many of these roles involve the provision of public goods by the state. The essential roles are providing security, establishing and enforcing property and contract rights, and creating and controlling currency. Roles the state commonly plays in the modern market economy that are not absolutely essential, but are usually considered beneficial to the overall economy, include providing infrastructure, education, and health care and responding to market failures like externalities, incomplete information, and monopolies. Politically generated functions of the state include improving working conditions and redistributing income.

Major economic theories lie behind the debates over how governments should intervene in the market, especially during periods of economic crisis. The central debate is between Keynesian and monetarist theories of when, why, and how the state ought to attempt to guide the economy. Keynesians accept deficits in the interest of stimulating the economy, while monetarists are more concerned with the effects of too much deficit spending. The debate has reignited in the United States with the responses of various governments to the Great Recession of 2008-09.

A parallel debate in developing countries is that between those advocating neoliberalism and free trade, and those who embrace development economics such as import-substitution industrialization. As countries such as Mexico have moved from protectionism to neoliberalism, they have seen greater growth, but also greater inequalities. Although neoliberalism appears to be winning the debate, its success has been mixed, as seen by the debate over the success of structural adjustment programs.

Globalization has raised new questions in the realm of political economy. Some see it as leading to “the end of the nation-state,” a world in which states no longer control their economies.  Most scholars, though, see it as a new phase of capitalist development in which increasingly mobile capital has gained power vis-à-vis states but in which the same core debates about economic policy still matter. These debates are explored in case studies of the US, Germany, Japan, Mexico and Nigeria.

Learning Objectives

After reading this chapter, you should understand:

• Different opinions on the role of the state in regulating the economy.
   
• The primary differences between Keynesianism and monetarism.
   
• Debates on the causes and potential responses to globalization.