Ha-Joon Chang and Mariana Mazzucato: Rethinking the State

What is the role of the state in the economy?

Technocrats preaching the “free market” see the state as merely a tool to correct market failures. But should the state play a more active role in shaping the economy and promoting smart and inclusive growth?

That’s the question that Institute for New Economic Thinking grantee Mariana Mazzucato tackles in her new interview series titled “Rethinking the State.” The series grew out of Mazzucato’s Institute grant on the economics of innovation and asks whether the state is merely a tool to correct market failures or if it should more actively shape and create markets and promote smart and inclusive growth

In a recent interview, economist and author Ha-Joon Chang argues for a more active role for the state.

Chang, who has written best sellers including Kicking Away the Ladder and 23 Things They Don’t Tell You About Economics, debunks the notion that politics and economics can be separated. The state and markets are inherently intertwined.

The problem is, that while “there is no scientifically defined boundary of the market, economists have been convincing people that they know where the boundary should be,” Chang says.

Defining the boundaries of markets within economic systems is impossible because of the variety of the systems themselves, especially between nations. The American capitalist system is fundamentally different from other capitalist systems, Chang says. Each system is “propped up” by its own network of regulations, participants, and currencies. With such variety, it is impossible to define a true market boundary.

However, as political arguments become heated, policymakers and economists often try to present economic data with as representing the objective truth. But reality is more complicated, Chang says.

“People on the left and right try to convince opponents that they know the right answer, but actually the answer has to be seen in light of the prevailing political consensus and accepted moral values of the society of the time,” Chang says. Chang also notes that the claim to purely scientific facts economics is a favored play by those in power who want to avoid political argument.

In other words, political arguments are being passed off as objective truths. This has had grave consequences for countries like Greece and Italy, who are still struggling to regain footing after the global economic crisis of 2008 and who are being told “there is no alternative” to the current economic regime.

“To impose technocratic governments on countries like Greece and Italy is unacceptable. It assumes there is an economic truth and that there are technocrats that should be running society,” Chang says.

Since the relationship between economics and politics is a crucial element to a functioning society, perhaps rethinking the state involves a shift away from old, technocratic economic thinking and towards a view that sees economics and as inherently contextual and political.

The state should actively shape markets, Chang argues, because despite claims to the contrary, the state already does and always will. And there is always an alternative – it’s just a matter of the political will to do something different, which Chang hopes will emerge Europe.

It’s time for a new economics, and Mazzucato and Chang are working to re-envision the role of the state in changing our economic future. As Institute President Rob Johnson has said, economics should serve society – not the other way around. 

Check back this week for an interview with Mazzucato on the economics of innovation and check out her new book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, out now!