As governments around the world have responded to the global economic crisis, questions about the appropriate relationships between states and markets are once again a matter of intense public and policy debate. As the discussion proceeds, the subject's long history is worth bearing in mind. The canonical authors one might think to start with --Adam Smith and Karl Marx -- are not actually all that helpful. Smith's writings on the state should be read against his indictment of the mercantilist system, not in relation to the modern world, and Marx's writings on the state, despite some notable epigrams, are also not particularly relevant to the contemporary era. The texts that follow, in contrast, offer readers a deep historical and theoretical understanding of the relationship between states and markets over time.
Going back a thousand years, Charles Tilly describes how European societies developed differently by relying on various combinations of coercion (force) and capital (cash). He distinguishes between coercion-intensive empires, capital-intensive cities and city states, and a third, hybrid option, "capitalized coercion," which generated the modern nation states that ultimately survived. Countries such as Britain and France, he argues, sought to enhance the fiscal capacity of their states in response to competitive pressures, and in doing so, they built a set of institutions (the modern state) that transformed society's class structures and paved the way for capitalist development.
Possibly the most beautiful and enjoyable book in all of political economy, Albert Hirschman's The Passions and the Interests is a tour de force that takes readers from St. Augustine and Machiavelli to the French physiocrats and the Scottish Enlightenment. Along the way, Hirschman shows that the idea that markets are "natural" was put forward not as a description of reality but rather as a political argument in their favor. He also details how the invention of capitalism depended on the creation of a new type of political actor -- an individual liberal subject who was the product of a liberal state. This is magical stuff -- Foucault without the long words and in less than 120 pages.
If Hirschman presents capitalism as a "revolutionary ideology" tied to a specific form of state, Karl Polanyi's classic shows how the development of markets has been a political project pioneered by the state (as opposed to something that emerged in opposition to it). "Laissez faire was planned," he writes. "Planning was not." The creation of markets, that is, has been a violent process involving the wrenching of society from its traditional norms and institutions -- a process that has generated a natural reaction of society against the market itself ("planning"). The limited liberal state has spread the market, Polanyi argues, but its very success has called forth other sorts of states charged with protecting the society that markets have dislocated: fascist, communist, and social democratic.
Economists since David Ricardo have seen states that practice free trade (rather than trade controlled by the state) as the engine of development in the global economy. Ha-Joon Chang disagrees. He develops Friedrich List's mercantilist idea that free trade between equally developed and differentially factored states may be welfare improving, but free trade between unequally developed states locks in the advantages of the more developed ones, thus "kicking away the ladder" from those beneath. Drawing on extensive data from the nineteenth century, Chang shows how the United States had the highest tariffs in the world during its period of exceptional growth; how the United Kingdom's practice of free trade was selective at best; and how the much-trumpeted Cobden-Chevalier Treaty of 1860 effectively halted French industrialization for 50 years.
In the modern era, only some poor countries have managed to achieve strong, continued economic growth and development. Those that have succeeded (primarily in East Asia and, more recently, South Asia) are outnumbered by also-rans (in Latin America) and chronic cases of underdevelopment (in sub-Saharan Africa). Peter Evans argues that the explanation for this pattern lies in the difference sorts of states countries have been saddled with or acquired. Where the state has "embedded autonomy" -- that is, where it can rise above societal interests and implement long-term projects but remains embedded in society's networks and information flows -- it can foster growth and development. Such "developmental" states avoid klepto-patrimonialism, corrupt clientelism, and stagnation. The take-home lesson is that certain kinds of state can be developmental hindrances but other kinds can help promote growth and development.
States and the Reemergence of Global Finance: From Bretton Woods to the 1990s. By Eric Helleiner. Cornell University Press, 1994.
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Capital Rules: The Construction of Global Finance. By Rawi Abdelal. Harvard University Press, 2007.
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Eric Helleiner gives the clearest historical account of how the world moved from restricted capital flows in the 1950s to open and integrated financial markets by the 1980s. He takes readers through the emergence of the "embedded liberal order," the challenges it faced in the 1960s, and its denouement in the 1970s and 1980s. Combining economic and political analysis, Helleiner shows how the neoliberal order that has emerged is not a turnaway from the state but rather dependent on the state for its deployment and operation. Privatization, deregulation, and openness, he argues, mark less the withdrawal of the state than its redeployment in support of a pro-market position. Rawi Abdelal's book builds upon Helleiner's, explaining why the neoliberal order took the form it did. For Abdelal, what is most striking about the current open financial order is the number of rules it has. Far from seeing a "flat" world where economic forces run roughshod over powerless governments, Abdelal sees a rule-governed world where globalization has a French, not an American, accent. He argues that a group of French politicians operating within the "more state than market" institutions of the European Union, the Organization for Economic Cooperation and Development, and the IMF constructed the rules for global capital, institutionalizing on a global level the types of practices usually associated with the state on sovereign and domestic levels.