zingales28_ Michael NagleBloombergGetty Images market state economy Michael NagleBloomberg/Getty Images

Burying the Laissez-Faire Zombie

The long-standing dichotomy between the state and the market is misleading, and poses a major obstacle to understanding and addressing today’s policy challenges. We should instead aim to improve both, and to contain each within its respective sphere.

CHICAGO – “The return of the state” is a phrase seemingly on almost everyone’s lips nowadays. Given the global challenges posed by the COVID-19 pandemic and climate change, the argument goes, it is governments, not markets, that should be responsible for allocating resources. The neoliberal revolution started by Ronald Reagan and Margaret Thatcher has apparently run its course. New Deal-style state intervention is back.

But this opposition of state and market is misleading, and it poses a major obstacle to understanding and addressing today’s policy challenges. The dichotomy emerged in the nineteenth century, when arcane government rules, rooted in a feudal past, were the main obstacle to the creation of competitive markets. The battle cry of this quite legitimate struggle was later raised to the principle of laissez-faire, ignoring the fact that markets are themselves institutions whose efficient functioning depends on rules. The question is not whether there should be rules, but rather who should set them, and in whose interest.

In the twenty-first century, this state-market contrast is obsolete. State intervention can promote markets. The portability of mobile-phone numbers that most developed countries have introduced has spurred competition among cellular providers. US Federal Aviation Administration safety regulations persuade passengers to trust new airlines, thereby encouraging new entrants and competition in the sector. Not only did Operation Warp Speed accelerate the development of a COVID-19 vaccine, but it also promoted more competition among vaccine producers.

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