Market against State. About relative strength and values

Intermediate Examination Paper 2013 8 Pages

Economics - Other


Market against State – about relative strength and values

In this review, I will discuss the texts of Rothschild (2001), Stiglitz (2002), Judt (2010) and Bakker/Miller (1996) which deal with economic thinking in the broadest sense, and the role of market and state in particular. This review starts with the question what the intention of the different theoretical paradigms in economic thinking is. The three schools of economy, i.e. the neoclassical, Keynesian and political economy, follow diverse paradigms in order to explain the conditions under which markets work well and under which they do not. On the one hand, the three paradigms agree that the governments have a role in creating a framework for the economy. On the other hand, they disagree on the precise role of the state and the values that shape our opinion (see Stiglitz 2002: 219).

1. Economic theory - are we driven into the arms of relativism?

“One model cannot be used to judge another” (Blaug: 1997: 6). Instead, one method is appropriate to analyse a particular economic environment and another method is better applicable to a different setting. Nevertheless, when Blaug (1997: 6) states that the findings of one method cannot be employed to pass judgment on the findings of another method, it does not mean that economic thinking is about relativism. Rather, it is about the author’s intention and focus of analysis. In other words, it is about the question that is raised and about the issue we are interested in explaining.

Accordingly, the exchange of arguments between Russell S. Sobel and Alberto Alesina in the Journal of Economic Perspectives illustrates very clearly their diverging points of interest (see Rothschild 2001). Both authors have the intention to explain the federal budget surplus of the United States in the nineties. Whereas Alesina combines market factors such as economic performance, low interest rates and a slower expenditure growth in order to explain the development, Sobel argues that such an explanation of the changes in the US budget is too short sighted. Sobel would like to understand the underlying political processes. He is interested in the larger political situation of the economic phenomena of the budget surplus and he criticizes Alesina’s statements as pure mathematics. Therefore, Sobel shows that the number of political action committees (PACs) correlates directly with the expenditure growth. He draws a more detailed picture of how PACs influence the federal expenditure through the output of legislation. Basically, Alesina does not disagree with Sobel but responds that it was not his intention to explain the political context but rather the economic processes.

While I understand Alesina’s point of view, I agree with Sobel that we cannot ignore the societal, and in particular the political context, in which these economic processes occur, especially when we look at the budget of a state. Of course, there are general economic processes underlying the budget growth. Nevertheless, it is the particular political situation in the defined time frame that is of special interest if we would like to explain the budget surplus in the nineties. Applying the paradigm of political economics – “a public choice explanation” (Russel S. Sobel in Rothchild 2001: 219) – seems more appropriate to understand the forces and power relations behind the changes in the federal budget than a deductive method that uses mathematical techniques such as the neoclassical.

2. The complexity and interrelation of (the globalized) reality

Political economy does not restrict itself to simple or superficial causalities, but looks at the interactions of various processes. Similarly, Stiglitz (2002) looks at the multiple causes and determinants of globalization. He demonstrates why government activity has to become a central part of the global economic development.

Stiglitz (2002) raises the question of how and by whom globalization should be managed in order to bring together the diverging interests of all the stakeholders in a globalized world. Whilst analysing the current processes and consequences of globalization, he points out some important aspects. First, the discussion among the different agents (politicians, economists, unions, etc.) is always shaped by arguments that are derived from self-interest, although everyone pretends to defend general interests. For example, the workers are concerned about their jobs and the moneylenders worry about inflation (see Stiglitz 2002: 215ff.). Second, there is not just one understanding of how a market should be organized and hence a vigorous debate about what the precise role of government should be (Stiglitz 2002: 218). Stiglitz is convinced that governments make a difference by guaranteeing social justice in the markets lead by an imperfect invisible hand which produces many market failures (see Stiglitz 2002: 218). Third, the globalized world of today is very complex so that collective action becomes very difficult, but nevertheless imperative. Stiglitz describes very clearly the interrelations of globalization, e.g. how economic performance and social cohesion depend on each other, or how the needs of the poor and problems such as environmental degradation are directly linked (see Stiglitz 2002: 224).

Finally, Stiglitz demands that all stakeholders have to have a seat at the table of global institutions such as the International Monetary Fund (IMF) in order to manage globalization in a way that is inclusive, and which considers all needs and offers opportunities to everyone (Stiglitz 2002: 225). Stiglitz has a balanced view on globalization and acknowledges its benefits as well as its downsides. He draws a complete picture of globalization. He includes not only market features and societal needs, but also the diversity of stakeholders and the interrelations and power effects that shape the current management of globalization. Stiglitz clearly promotes an active role of a strong state in order to ensure economic stability and “to make any society, any economy function efficiently – and humanely” (Stiglitz 2002: 218). He also acknowledges that the disagreement lies in the different opinions (‘values’) of how and how much a state should intervene in markets. Hence, it is very difficult to find common solutions to global challenges such economic stability, poverty or environmental issues. Nevertheless, I think his suggestion to strengthen international public institution such as the United Nations, and in particular the IMF, seems to be the only viable approach to manage globalization within global structures of governance.

3. The future role of the State – stability and equality versus freedom

Referring to Stiglitz’s (2002: 218) “disagreement of values”, Judt’s (2010) position becomes very clear in his article. Judt goes much further and enters on a more radical way than Stiglitz. Judt (2010: 195ff.) basically questions whether globalization is of any good in the light of the increasing inequality, absence of political freedom and the frequent economic crises. Therefore, he claims that a strong state has to take the the initiative to fix the harm that the destructive market forces in a globalized economic competition do to nations and the market itself in the long term: “The market, over time, is its own worst enemy” (Judt 2010: 204).



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Title: Market against State. About relative strength and values