The elusive quest for balance
States and markets should not be viewed as ends in themselves but rather as instruments for societies to achieve noble national aims, particularly — but not only — as the failure to do so spills over into politics
For approximately 40 years, the market ethos dominated economic policy and permeated global culture. A broad centrist consensus reassured citizens worldwide that markets were efficient, wise and fair. The state should not interfere with the natural order produced by the creative destruction of market forces.
This neoliberal ideology began to lose its shine due to mounting inequality, the global rise of oligarchic power in high tech and financial sectors, post-pandemic stagflation, and geoeconomic fragmentation. These outcomes grabbed attention to the limitations and capabilities of market mechanisms.
The work of several Nobel Prize winners for Economics in recent years, including last year's laureates, has highlighted how political power and market power shape macroeconomic outcomes. The proposed alternative, termed "post-neoliberalism", asserts that the state can and must shape markets.
Markets tend to concentrate wealth and create power asymmetries. Collectively, these asymmetries eventually stifle innovation and economic growth. It is the government's responsibility to rectify them, ensuring that capitalism does not remain entrenched in the domination of the economy by a few powerful groups, thereby undermining competition.
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States and markets should not be viewed as ends in themselves but rather as instruments for societies to achieve noble national aims, particularly but not only as the failure to do so spills over into politics.
Individualism versus republicanism
Take a step back into the philosophical notions underpinning this discourse. Liberalism views freedom primarily in terms of individual autonomy and the ability to pursue personal goals. By contrast, republicanism posits that true freedom is found in collective self-governance. Throughout history, these ideologies have existed in varying degrees of interdependence.
Market relationships enable individuals to engage in voluntary exchanges based on mutual benefit, offering unparalleled choices. Traditional markets function efficiently in numerous sectors of the economy, such as producing garments, furniture, rice, tomatoes, cereals, tea, haircuts, and movies, among many others.
However, this abundance of choices has not alleviated societal issues such as deep and pervasive deprivations, loneliness, substance addiction, technology obsession, and susceptibility to conspiracy theories. The quest for a deeper sense of purpose remains unfulfilled, sometimes leading to undesirable expressions in the form of authoritarian populism or extremism.
A recent example of such perverse dynamic is Bangladesh where market repression and manipulation enabled a joint venture of loot and plunder between the dynastic ruling party, connected business conglomerates, and elites in the bureaucracy. The needed dismantling of the regime came through a mass uprising triggered by a court ruling on quotas in civil service. Changes in one thing changed everything.
A different example is US President Donald Trump's unchecked exercise of executive authority challenging the remnants of a global order based on rules. His whipsawing behaviour was tempered when the bond markets reacted strongly, demonstrating the market's influence in easing tensions sparked by his so-called reciprocal tariffs. The President can bully the owners of his Treasury's bills at his own peril.
Both share the distinction of republicanism gone awry.
Striving for economic balance and enhancing production are interconnected; neither alone can wholly address the tasks facing any nation. The dichotomy between market and state is a fallacy. There is a widespread reluctance to address the tradeoffs between the harms of excessive intervention and the damage of insufficient action. The notion of unfettered markets as inherently beneficial is flawed, yet significant disagreements persist regarding the extent to which they should be regulated.
Liberalism and republicanism are mutually dependent rather than antagonistic. Liberalism without republicanism fails to enhance individual choice, leaving broader questions of meaning unanswered. It risks sleepwalking into authoritarian solutions that overlook the desire for participatory influence over economic forces. While republicanism fosters civic engagement and a sense of community, liberalism ensures that individual rights and freedoms are protected.
Turning this theoretical unity into tangible outcomes is complex. Societies dwell within intellectual constraints at any given time. The established wisdom determines understanding of how economies function and the values they serve. They help define what governments should and should not do. The post-neoliberalists are acutely aware of the failings of the government that spawned the literature on public choice and institutional economics.
Fragilities in government's resilience to rent seeking in structuring economies make markets look like the lesser of the two evils more often than the interventionists concede.
A dual mandate
The narratives on both sides are rarely right or wrong in a normative sense. They arise because they help decipher pressing contemporaneous problems. As the problems evolve, the limits of the governing philosophies rise from beneath the surface, making way for the next script.
John Kenneth Galbraith (1956) introduced the concept of countervailing power in his book American Capitalism: The Concept of Countervailing Power. He suggested that in a capitalist economy, large concentrations of economic power — such as monopolies — can be balanced by other forces, like trade unions, consumer groups, or government regulations. These countervailing powers emerge to prevent the abuse of economic dominance and maintain a more equitable market structure.
Over six and a half decades later, in Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity, Daron Acemoglu and Simon Johnson (2023) explored how technological advancements often benefit those already in power, rather than creating widespread prosperity.
They argue that countervailing forces, such as labour unions and democratic institutions, are essential to ensure that technological progress leads to shared prosperity. This aligns with Galbraith's concept of countervailing power, as both emphasise the importance of balancing concentrated power to achieve equitable outcomes.
This pursuit of balance has ventured into various avenues. It has revitalised support for organised labour and propelled more assertive efforts in antitrust and consumer protection. It has fostered greater skepticism towards both unrestricted international trade and the rent seeking behavior accompanying interventions in trade. It has prompted economists and policymakers to scrutinise the financial sector's scale and diversity within the real economy from a societal perspective.
Concurrently, the state must persist in utilizing its authority and resources to directly augment the supply of vital public goods such as primary health care, basic education, advanced computing and clean energy but not million-dollar toilets. Achieving this is possible through both proactive public investment and dismantling the bottlenecks, including the buy one get another government regulations, which render private provision of these goods prohibitively expensive.
Merely encouraging production will do little to rectify how billionaires and mega corporations exploit political influence to manipulate economic rules in their favor and appropriate the benefits of public investment. An improved version of capitalism must harness both the drive for balance and the drive for development.
Recognising the tradeoffs
Striving for economic balance and enhancing production are interconnected; neither alone can wholly address the tasks facing any nation. The dichotomy between market and state is a fallacy. There is a widespread reluctance to address the tradeoffs between the harms of excessive intervention and the damage of insufficient action. The notion of unfettered markets as inherently beneficial is flawed, yet significant disagreements persist regarding the extent to which they should be regulated. Economic solutions that are cost-effective still entail expenses.
Capitalism accommodates a vast array of government actions. A refurbished neoliberalism is no more entitled to the capitalist legacy than Keynesianism before it, nor will its successor ever be. What replaces neoliberalism could potentially be more ominous than its predecessor. The optimality of outcomes depends on our ability to shape the evolving economic landscape, not deny its progression. Turning back history is never an option.
The current global landscape consisting of 195 recognised countries and numerous territories exemplifies the varying degrees of equilibrium influenced by factors such as history, geography, culture, demography, and institutions.
Furthermore, the ongoing coexistence of peace and conflict, both within and between nations, underscores the difficulty some nations face intermittently, others face consistently, and all face perpetually in adjusting to the shifting balance.
Zahid Hussain is a former lead economist at the World Bank Dhaka office.
