State vs Market Debate

Table of Content

In the 21st century, in the era of liberalisation, privatisation and globalisation, debate on the respective role of state and market has revived.

Arguments in favour of more market role:

According to the public choice approach, administrators/politicians are concerned with self-interest instead of public interest.
According to new public management (entrepreneurial government), the government should play an enabling role rather than participating in the market.
The countries which follow excessive state intervention lead to inflated bureaucracy, corruption, skewed distortions.

Arguments in favour of more role of the state:

The great depression of the 1930s and the recession of 2008-09 showed that we could not leave it solely to market forces. Keynesian theory of macro-economic states that massive investment by the government is necessary.
The role of government is needed in third-world and developing countries to provide basic infrastructure and facilities in which the market can operate.
The market ignores equity.
The market cannot ensure optimal allocation of resources; It can’t ensure equilibrium between demand and supply.

Balanced View:

Government should do less in areas where market work (or can work) and should do more in those areas where the market can’t be relied upon. These areas are:

Establishing law & order,
Investing in basic infrastructure,
Maintaining macroeconomic stability,
Delivering basic social services,
Protecting the vulnerable and
Protecting the environment.
A better example of State vs market debate is Indian Railways. Presently, the Railways is being operated by the Government alone. Thus, it can provide affordable transportation facilities to the general public. But at the same time, the opposing argument is that, due to the non-intervention by the private sector, Indian Railways has not developed up to the expectations. It faces many issues like delays, safety issues, poor quality of infrastructure etc.

This notion of state vs market debate is a wrong one, both are irreplaceable, and both need each other.