The recent global financial crisis has called for a re-invention and re-definition of the relationship between the market and the state. This relationship has pre-occupied economic and political arguments for centuries. Political economists have constantly grappled with the question of the state’s role in the economy, of whether it should or should not intervene with the self-regulated market. Karl Polanyi, Adam Smith, Karl Marx, Rousseau and John Locke are five theorists who hold disparate views on the role of the economy in the economy. Marx and Polanyi argue for a more active government while Smith, Rousseau and Locke thought that the state should limit its involvement to protecting private property and defending the state from outside aggression. This paper argues that Polanyi and Karl Marx offer the best explanation of the state’s role in the economy. It further examines Smith, Rousseau and Locke’s arguments on state intervention and regulation of the market and how it supports some of Polanyi and Marx’s claims.
Karl Polanyi is the first point of exploration since we now live in a more Polanyian than Marrxist or Smith world characterized by government caution towards a self-regulating market free reign after the subprime mortgage crisis and the recession of 2008-9. Polanyi’s argues that the free self-regulating market as presented by classical economists like Adam Smith is unrealistic and impossible since it calls for the treatment of land, labor and money as commodities that can be marketed. These three elements land, labor and money are however nothing but nature, human beings and mythical social relations which cannot be subjected to the free market. Their value lies in their destruction. This is where the state comes in since it consists of society’s creation and guard against fluctuations and unforeseen developments. Human beings protect themselves by embedding the market into society. Polanyi dismissed the idea of the self-regulating market as erroneous and dangerous. It leads to unregulated individualistic risky behavior which as recent history has proved is dangerous for the economy and social wellbeing as evidenced by the 2008-9 financial crisis. I agree with Polanyi that the idea of a self-regulating market is prone to abuse by those seeking to profit from a system that the state’s faith in its ‘fair’ operations.
Of particular importance to Polanyi’s defense of the state is his “double movement” thesis or argument. It consists of two elements separateness and embeddedness. Separateness or disembeddedness involves the slow movement of the economy from embeddedness to self-regulation which is characterized by commodification of land, labor and money. The argument against disembeddness is that it changes human relations with their environment. It easily turns beings into commodities. This point is quite clear in reflections of developments of the economy were it has been possible for individuals to abuse the market and in the long run abusing individuals through the provision of fictitious commodities like sub-prime mortgage loans whose effect on society is still being felt. Disembedding can be limited and regulated by the state which can provide protection for workers and the greater economy from competition.
Elements of Polanyi’s argument for an active government can be found in Karl’s thesis on political economy. Marx took a more radical approach advocating for not only state intervention but the abolishing of private property that Rousseau and Adam Smith thought were sacred. He did not seek the balance that is found in Polanyi’s argument for harmony between the state and the free market. According to Marx, market failure was nothing but the failure of government to protect citizens from the excesses of business exploitation of labor. The answer lies in shifting the means of production from capitalist to workers and institution of a pure egalitarian state. Like Polanyi, Marx has made a return due to the financial crisis of 2008-9 though Western liberal governments still downplay his arguments about the state and the economy.
Polanyi and Marx are responding to the dominant view that dates back from Adam Smith that the government’s role in the economy should be limited. To fully understand the importance of Polanyi and Marx, it is also critical to consider their ideas about the state role in the economy alongside those of Smith, Rousseau and Locke. This begins with an analysis of Adam Smith’s argument for the state and the economy. Unlike Polanyi, Smith is argued to be the father of modern day self-regulating market economics. His views on the state’s role in the economy have been misrepresented, misappropriated and misquoted. His arguments for state intervention have been ignored and misinterpreted. As Heilbroner observes, the world’s conception of the economy and government changed after The Wealth of the Nations was born (41). Part of this change was the slanted reading of The Wealth of Nations as a self-regulating market manual.
For Adam Smith, the state has a number of roles to play in the economy. He notes that the survival of the free market relies on the ability of the state to ensure that national security is guaranteed. The state is there to make sure that commerce is not disrupted hence the need for strong national defense. According to Smith, the payment for use of public services and works was supposed to be done by those who use them. This suggestion is contrary to the refusal by the better half of the population to increase taxes so that highways and bridges can be built and maintained.
In addition to national defense, public goods and institutions Smith also lent his voice to the issue of taxation which he argued was necessary since it helped caution the economy in the long run. Unlike general popular opinion, Smith’s contribution on the role of the state is not limited to the state just creating an environment for commerce to flourish. He also advocates for interventions in education and monetary policy.
While Smith focused on a number of limited places in which government can intervene in the economy, Rousseau’s understanding of the economy and the state is derived from the assumption that property rights are sacred and the role of the government is to make sure that those rights are protected. He observes that that it is certain that “the right of property is the most sacred of all the rights of the citizens, and more important in certain respects than freedom itself.” The preservation of property and ensuring individual freedom of man constitutes the core of Rousseau’s argument. Rousseau however, advocated for limited taxation. He believed that higher taxes would infringe on property rights. This argument still exists today especially when it comes to estate taxes. The argument is that higher taxes are regressive and negatively affect economic growth. I think that government should be in a position to effect higher taxes on luxurious properties with little economic development input.
Rousseau shared the same sentiments on liberty, the economy and government as John Locke, who argued that the role of government was limited to protecting private property. His desire for individual freedom made him leave little room for the state’s role in the economy. Locke’s ideas greatly influenced America’s founding fathers which has made the debate about the role of government more animating. For some a break from a Lockean understanding is a break from the founding fathers’ principles. A break is however needed considering how unfettered markets have attempted to destroy economies and society.
In conclusion, I agree with Polanyi and Marx that the belief that the free market is sacrosanct and that the state is an enemy of the free market is erroneous since the state performs more duties than mere taxation. As reflected in the work of Polanyi and Marx, and, even Adam Smith, the state does more to the economy than just take. It provides services that the free market is incapable of providing. It has an active role to play in public works, regulating unfettered markets and bridges the gap between society and the economy. Active government intervention should be advanced as long as it creates an environment of equal changes for citizens, is responsible and efficient.
Works Cited
Heilbroner, Robert. The Worldly Philosophers: The Lives, Times and Ideas of the Great
Economic Thinkers. New York: Simon and Schuster, 1998.
Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. Indianapolis,
Ind.: Liberty Press, [1776] 1976.
Polanyi, Karl. The Great Transformation. Political and Economic origins of Societies and
Economic Systems, 1944.
