The gospel of the self-regulating market dominates political and economic debates of our time. The belief that government should play a limited role in the economy has a long history that dates back to the days of Adam Smith, the father of homo economicus. This paper argues that despite contrary opinions from scholars and policymakers, the state has always played an active role in the economy evidenced by the work of classical political economy theorists. At the center of the argument is Karl Polanyi’s defense of the state in The Great Transformation. The paper further explores Adam Smith, Machiavelli, Rousseau and Karl Marx’s contribution to the debate on the role of the state in the economy. I conclude by providing a synthesis of my belief in the state playing an active role in the economy especially in the current environment were income inequality is getting more magnified.
Of the theorists analyzed in this paper, Polanyi provides a strong defense of government involvement in the economy. According to Polanyi's the self-regulating market is a "Utopia" (Polanyi 3). Compared to Smith who thought that the self-regulating market was a blessing to mankind, Polanyi believed that the pure liberal self-regulated market is a myth which if it had existed would have caused immense damage on human progress. It would have “physically destroyed man and transformed his surroundings into a wilderness." (Polanyi 3). this thesis is elaborated in the first pages of The Great Transformation.
Polanyi’s point is 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 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 would have set up.
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.
The other side is embeddedness. Embeddedness entails the immersion of the economy in society and social relations. Polanyi argues that “ultimately that is why the control of the economic system by the market is of overwhelming consequence to the whole organization of society: it means no less than the running of society as an adjunct to the market. Instead of economy being embedded in social relations, social relations are embedded in the economic system” (Polanyi 57). It is an observation that the market economy does not exist in a vacuum. It is part of the market society and the state. In the exploration of socio-political changes that led to the rise of the market economy in England, Polanyi reaches the conclusion that the state and the market economy are one entity that constitutes the market society. In his argument of embeddedness he realized that any philosophical and political economy teaching that emphasize the importance of either an unfettered market or state strong planning of the economy is a wayward teaching that simplifies complex relations between the economy and the state. This point I do agree with since a simple analysis of the way even the most liberal economy like the US operates indicates that without the state, the market economy can barely survive. It took state action to rescue the economy from the recession of 2008-9.
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.
Compared to Polanyi and Smith, Machiavelli’s depiction of the role of the state in the economy is more geared towards the state’s ability to maintain its position of power. He suggests that a state should remain prosperous since a poor performing economy can stir dissent from citizens. The state is also in the business of rewarding the best performers in the economy. Machiavelli does have a theory of the state in the economy; it is however overshadowed by the need to preserve political power.
While Machiavelli focused on power, Rousseau’s understanding of the economy 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.
One influential political economist, Karl 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. According to Marx, market failure was just the failure of government to protect citizens from the excesses of business exploitation of labor. The answer is giving the means of production to the 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.
The belief that the free market is sacrosanct and that the state is enemy of the free market informs most libertarian and conservative policy prescriptions and world view. As reflected in the Work of Polanyi 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.
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,  1976.
Polanyi, Karl. The Great Transformation. Political and Economic origins of Societies and Economic Systems, 1944.