The missing role of government in markets

The extractive institutional design, perpetuated under the garb of neoliberal thought process and created by the collusion of the politico-economic elites, limited the role of government in markets. This they did by creating a smoke-screen through employing weak assumptions of neoclassical economics that had little connection with neither history of economic development, or the overall selfless ways in which humans behaved as economic agents in real life. These assumptions primarily asserted that left on their own, humans will reach self interest in such a benevolent way that it will serve the best interests of society as a whole. As a corollary, therefore, economic agents and the markets in which they interact needed little support or interference of governments. Clearly, as the following two quotes indicate, such assumptions had weak basis in either history or logic:

'Most economists rightly emphasize the role of the state in providing public goods and correcting market failures, but they often neglect the history of how markets came into being in the first place. The invisible hand of the market depended on the heavier hand of the state.' - 'The starving state: why capitalism's salvation depends on taxation' by Joseph E. Stiglitz, Todd N. Tucker, and Gabriel Zucman.

'The conventional view in mainstream economics is that governments have little capacity to spark innovation.The state should play as limited a role in the economy as possible, the thinking goes, intervening only in cases of "market failure."This is far from the truth. The truth is that in some of the world's most famous technological hubs, including Silicon Valley..., the state has played a critical role in creating and shaping markets for new products.' - 'The creative state' by Mariana Mazzucato.

The irony is that while most advanced economies have realized about the seriously negative consequences of Neoliberalism - 'a creed built on faith in free markets, deregulation, and small government, and that has dominated societies for the last 40 years as pointed out by Miatta Fahnbulleh in her article 'The neoliberal collapse: markets are not the answer' - and strong activism is giving a serious challenge both in government and among general public, such a realization has not really appeared on the policy tables of the highest levels in developing countries, including Pakistan. In the government, while there is talk of undoing 'elite capture', there is contradiction in terms of policies that allow perpetuation of extractive institutional design by not really checking neoliberal policies, and which is in turn, the basis on which this elite capture stands in the first place.

Hence, extensive privatization, mostly deregulation, and overall small government with little role in markets or entrepreneurship, are seen as the right policy directions overall, when the same course of action over many decades has allowed the collusion of the politico-economic elites to create unjustifiably favourable economic circumstances in markets that has allowed them to continue to get richer, while the income inequality has increased at the same time, and with it disenfranchisement of the demos, generally. PTI had come into power on the agenda of 'change', of 'transformation', but if their economic policy direction remains neoliberal in most aspects, then it cannot truly and sustainably dismantle the extractive institutional design or the elite capture. Moreover, the government would most probably not be able to create the culture of taxation, while taxpayers see that the big holes in the revenue boat are allowed to be kept open by this extractive institutional design.

There can be no salvation for the economic agents if the prices are not right, and without proper role of government and regulation, markets have continued to work in the favour of those with power and money, and not adjusted correctly most often than not. This is no mean thing, since the price of services and the prices of goods need to have some semblance of parity. Hence, quality education, health services, and overall life have gone out of the reach of the most. The government by continuing to take the back seat has not provided the needed support to allow greater number of economic agents to create more of these quality services and goods. Moreover, the unjustified pricing has only 'demand-pushed' these quality goods and services to such heights that these can only grabbed by a few in the society.

This has also had an incentivizing impact on the morally weak economic agents to succumb to the short-cut of corruption. Such inequality of opportunity on one hand, and the wrongly amassed swaths of money, on the other, have allowed the collusion of the politico-economic elites to influence the market of elections in an increasingly significant way over the years.

The PM and his economic team are either unaware of the link between elite capture and Neoliberalism, or there is little conviction to go for a broad-based crackdown on this extractive institutional design. The writer, among others, has tried to draw the attention of government in these and other op-ed pages, including other platforms, towards the need to understand the gravity of problem created by Neoliberalism in economic, political economic, and purely political domains in Pakistan, and how such a situation has had deep negative consequences for inequality, poverty, quality of democracy, and environment/climate change. Hope this is understood by the government sooner than later, and the policy is shifted away from Neoliberalism, whereby government takes the driving seat, among other non-neoliberal measures.

(The writer holds PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund) He tweets@omerjaved7

Copyright Business Recorder, 2020