Is there an alternative to the neoliberal discourse that currently informs the dominant view on the role of the state? This article, published by the United Nations Research Institute for Social Development (UNRISD), outlines the limitations of the neoliberal theory of the state and market and contends that Institutionalist Political Economy (IPE) provides a serious alternative theoretical framework by incorporating the role of institutions and politics into its analytical core.
Following the end of the Second World War, a variety of interventionist approaches – collectively known as Golden Age Economics (GAE) – emphasised the need for state involvement to correct market failures. However, from the 1970s onwards, neoliberal economists set new terms of the debate and brought about signficant changes in the role of the state.
Neoliberalism emerged from an ‘unholy alliance’ between neoclassical economics and Austrian-Libertarian political philosophy. Despite the pretence of intellectual coherence, serious internal contradictions arise from the tensions between its neoclassical and Austrian-Libertarian roots. Equally, the basic assumptions underlying the neoliberal conceptions of the state, market and politics and the inter-relationship between these concepts are highly problematic. These basic assumptions include:
- The role of the state: the state is viewed as an organisation run by self-seeking politicians and bureaucrats who are not only limited in their ability to collect information and execute policies, but are also under pressure from interest groups.
- The imperfect nature of the state results in government failures, regulatory capture, rent seeking and corruption.
- The primacy of the market: the market is seen as a natural economic phenomenon, whereas the state and other non-market institutions are viewed as man-made substitutes that only emerged after market failures became unbearable.
- The role of politics: politics inevitably distorts the market and efforts are required to restrict the scope of the state through deregulation and privatisation and to strengthen the rules of bureaucratic conduct.
Institutionalist Political Economy (IPE) offers an alternative approach to the neoliberal theory of the state and market by explicitly incorporating the role of politics and institutions into its analytical framework. This is achieved by:
- Emphasising the institutional nature of the market and applying the political economy logic to the analysis of the market.
- Recognising that markets are political constructs. Markets are defined by a range of formal and informal institutions that embody certain rights and obligations and their legitimacy is ultimately determined in the realm of politics.
- Acknowledging that individual motivations or preferences are not necessarily motivated by selfish concerns. Individual motivations are varied and are fundamentally shaped by institutions.
- Highlighting that it is not possible or even desirable to completely rid markets of politics. Politics is an integral part of the market’s construction, operation and change.
- Emphasising that politics is a process through which people with different, and equally legitimate, views vie with each other, rather than a process in which interest groups try to change the ‘natural’ order of ‘free markets’.
- Illustrating that politics is an institutionally structured process because it influences people’s perception of their own interests, of the legitimate boundary of politics and of the appropriate standard of behaviour in politics.
- Advocating the need to break the neoliberal mould by viewing institutions as both a constraint on people’s behaviour and as constitutive of their motivations and perceptions.
