SEOUL – Populism, nationalism, and xenophobia all contributed to the victory of the “Leave” campaign in the United Kingdom’s recent referendum on membership in the European Union. But these forces float on the surface of a larger sea change: a fundamental shift worldwide in the relationship between the state and the market.
Since the birth of modern capitalism, these two frameworks of human activity have generally been at odds. While the market tends to expand geographically as its participants pursue economic benefits, the state seeks to keep orderly everybody and everything within the territory it controls. A merchant may recognize market opportunities in a foreign country, but he will run into the state – most immediately, that country’s immigration authorities – if he pursues them.
How to reconcile the tension between the market and the state is the central concern of political economy today, just as it was for Adam Smith in the eighteenth century, Friedrich List and Karl Marx in the nineteenth century, and John Maynard Keynes and Friedrich von Hayek in their long debate on the topic through the middle decades of the twentieth century.
Let’s consider two hypothetical extremes in the state-market relationship. The first is a seamless global market in which individuals can maximize their material benefits without any state intervention. The problem with this scenario is that you may live in a country that is vulnerable to all the negative consequences of no-holds-barred globalization, such as currency devaluation, labor exploitation, the flouting of intellectual property laws, and so forth.