Theoretical Discourse on the Liminal Space
Sunando Roy March 2001
“In every great monarchy in Europe the scale of crown lands would produce a very large sum of money, which, if applied to the payment of public debts, would deliver from mortgage, a much greater revenue than any which those lands have ever afforded to the crown … when the crown lands would become private property, they would, in the course of a few years, become well improved and well cultivated”. Adam Smith, Wealth of Nation, 1776
Thresholds, boundaries and neat structures are essential for the preservation of structural orders and shifts and blurs in liminal spaces often signify changes in discourse as well as the economic journey of nations. A popular yet controversial debate concerning such liminality in economic policy relates to the respective roles of State and market in the context of economic development. Discourse on the subject was alive since the beginning of the nineteenth century initially in Britain and over time emerged as a worldwide debate. Since the 1980s, there has been a recent resurgence of this old deliberation. This is perhaps a logical outcome of the huge expectations created by the State since the end of the Second World War in a large number of countries in the world and the consequent disillusionment at the failure of the State to live up to the elevated expectations.It is therefore no wonder to spot a lively debate on the issue in India and a rethinking on the role of the State in economic development in policy circles. The debate is thankfully not a binary one in terms of either the State or the market. The central issue behind this growing disenchantment with pervasive State intervention is the question of ‘altering’ the boundaries between the State and market in the economy consistent with the new emerging realities. The argument is thus to determine the boundaries of State and Market, a debate focused on the liminal space.
As a matter of fact, evolution in the global economic order in the last five decades has visibly demonstrated both the benefits and the limitations of State action in its quest of economic development. While Governments facilitated delivery of a variety of public goods and services leading to substantial improvements in many segments, government interventions have also contributed towards poor outcomes both in domestic policy interventions as also in their alignment with an emerging globalized world order. In the 1970s, discontent with the State’s performance was expressed across the world in no uncertain terms by the workers and civil society and as a consequence, since the 1980s, rethinking as well as policy action over the role of state and markets in economy began, yet again. The coin has flipped yet again.
In the 1930s, it was the rise of Keynesian economics and a call for increased State intervention. In the 1980s, clarion calls were heard across the globe for a retreat of the State from the economy. The contours between the State and markets were shifting. The dissent against the State amplified due to a wide range of events of great geopolitical significance. To begin, the collapse of command-and-control economies in the former Soviet Union and Central and Eastern Europe resulted in growing doubts over the efficacy of the pervasive state planning . Second, a large number of countries ( most notably the US and the UK but also developing economies like India) with significant Government intervention in the economy experienced a persistent fiscal and balance of payments crisis. Thirdly, in the advanced world, the unsustainable cost of extensive social safety nets for its citizens led to the review of the embedded inefficiencies in delivery mechanisms.. This apart, several States were showing signs of institutional crisis leading to explosion in humanitarian emergencies in several parts of the world. The spectrum of State ineptitude, ranging from fiscal trouble to failed States necessitated a rethinking of State’s role in economic development. In this blog, I review the available range of theories on the State. I expect to follow up with country experiences and policy perspectives in my future blogs. For now, sitting in the Debt Management Wing of the Reserve Bank of India and trying hard to manage the country’s growing public debt and fiscal deficit, this is the plan.
If we time travel to the mid-20th century, we unmistakably discover a burgeoning role of State Governance in the face of imminent need to rebuild the economy from the back breaking cost of World War II, the continuing economic and social costs of the Great Depression of the 1930s. In response, while the advanced economies adopted policies to nationalize critical industries and expanded the welfare state with taxpayer money, the cash starved developing world adopted the process of planned economic development premised upon a predominant role of the State. The Nehruvian Planning process was India’s answer to the quest for self sufficiency and economic strengthening. All the above resulted in unbridled expansion in the size and reach of government worldwide. During the period from 1940s to the late 1970s, the State enjoyed its commanding heights, and engaged i in a host of activities including welfare, public provision of infrastructure, investment in strategic sectors and production of essential commodities. Since the 1980s, however, the citizens began to castigate the State as a ineffective behemoth Global economic integration and spread of democracy opened up spaces for dissent and narrowed the scope for a overarching State. Effective participation in the world economy necessitated harmonization of taxes, investment rules, and economic policies with the parameters of an integrated world economy. Technological change has opened new opportunities and have paved the way for a larger role for markets. In the emerging economies trapped in fiscal stress with an oversized welfare state and high subsidy burden, multilateral support extended by the International Monetary Fund came with the condition that the Government sheds weight and stays healthy. In India, the retreat of the State thus entered the centrestage of economic thinking and policy in early 1990s. When I first entered the Reserve Bank of India in May 1993 as Officer responsible for money supply and inflation, I found that textbook knowledge no longer applied to the policy initiatives underway. The boundaries were shifting fast and a re-look at the role of the State became an imminent necessity.
A Historical Perspective on the Role of State
Hobbes in ‘Leviathan’ demonstrated deep understanding of institutions when he termed the State ‘a system of dominance and coercion’. The notion was further expanded by Locke and Rousseau as a “barter of freedom”. They felt that State’s ascent was an outcome of a social contract between the Government and the people, by which citizens agreed to restrict their freedom of action in exchange for collective security and collective good.
Then there was Adam Smith , the champion of “the invisible hand” of free market. Smith felt that self-interested people are driven by the invisible hand to further the social good. Though a champion of free markets, Smith did observe the complementarity between the state and the market. While Smith passionately favored competition, he also presented justification for protectionist measures (a) in the case of infant industries and (b) in retaliation against foreign tariffs. To Smih, self-interest and competition improves social welfare only under definite institutional arrangements. The State, as an institution, has three major tasks to perform ; (a) provision of military security (b) the administration of justice and (c) provision of public utilities. The ‘Laissez Faire ‘ creates only a presumption of maximum social welfare, not a complete programme of its achievement. ( Mark Blaug, Economic Theory in Retrospect, 1996 edition, p.50.).
Another economist from the Classical era, John Stuart Mill, also favoured a ‘Laissez Faire’ State as a general practice, and any departure from it needs to be justified by some greater social good. Mill sees a role of State in welfare, in particular education, in promoting peoples’ interest by introducing appropriate rules and regulations. Mill’s belief was firmly embedded in a stationary state. He believed in the idea of life held out by those who think that the normal state of human beings is that of struggling to get on. Similar to J.K. Galbraith, who stated in ‘The Affluent Society’, it is only in the backward countries of the world that increased production is still an important object, in those most advanced, what is economically needed is better distribution. Mill dismissed protectionism as an overarching concept while allowing for infant industry argument. ‘Laissez Faire’ in short, should be the general practice, every departure from it, unless required by greater good, is a certain evil.
John Maynard Keynes, The famous British economist who profoundly impacted modern economic thought, particularly regarding the role of the state in the economy. In his seminal work, “The General Theory of Employment, Interest, and Money” (1936). Keynes challenged the classical economic notion that markets are always self-correcting and advocated for a more active role of the state in managing economic cycles. Keynes argued that during periods of economic downturns, private sector demand tends to fall, leading to unemployment and underutilized resources. He believed that the State should step in to increase public spending and reduce taxes to stimulate demand and pull the economy out of recession. Conversely, in times of economic boom, the State should reduce spending and increase taxes to cool down inflationary pressures.
Keynes also advocated for public investment in infrastructure and other projects to create jobs and boost economic activity. This type of spending not only provides immediate employment but also lays the foundation for future economic growth by improving the overall infrastructure of the economy. He famously stated that even digging holes and filling them up can be an economic activity which can take an economy out of recession. Moreover, Keynes supported the idea of a social safety net, including unemployment benefits and social insurance programs, to protect individuals from the harshest effects of economic fluctuations. These measures also help to stabilize demand by ensuring that even during downturns, people have a minimum level of income to spend. Keynes believed that certain sectors of the economy, particularly those prone to monopolistic practices or significant externalities, required regulation or direct control by the state. This includes financial markets, where he advocated for measures to curb speculative activities that could destabilize the economy. He supported the idea of long-term economic planning by the state to address structural issues in the economy and ensure sustainable development. This could involve industrial policies, education and training programs, and other initiatives aimed at boosting the economy’s productive capacity. Keynes’s advocacy for state intervention marked a significant shift from the laissez-faire principles that dominated economic thought before his time.
Neo classical economists of the second half of the twentieth century were firm believers in the market mechanism, overwhelmingly adopting a minimalist view of State intervention in the economy. In the neo-classical world, market reigns supreme, without any external interference. State intervention is rendered obsolete in economic spaces while performing largely extra-economic duties of preserving the nation.
The ‘Austrian School’ must find a mention for its engagement in “ Methodenstreit” or methodological debates on individualism versus collective action. While the chronology of the School of thought dates back to the 1870s, when it was popularized by Carl Menger, its rise to prominence may be associated with Friedrich Hayek and the 1974 Nobel Prize he shared with Gunnar Myrdal.. The school received intellectual acclaim with the works of Hayek and Ludwig Von Mises in the 1950s and 1960s. The Austrian School advocated an alternative economic paradigm that lays greater stress on entrepreneurs as the driving force on capitalism and on markets as dynamic processes that facilitated innovation and discovery. To Mises, entrepreneurs always work in an uncertain world and markets are dynamic processes and there is no ‘equilibrium’ condition. The real economy is a disequilibrium process and there is no ‘market failure”. The ‘Austrian School’ postulated that government interventions are inherently inefficient, because, as Hayek pointed out, information with the entrepreneurs are far greater that information in the hands of any central authority. A market economy provides for more information to the entrepreneurs and higher incentives to attain greater profit. Government does not have the information in the first place and even when they have that they lack the incentives to implement the conditions. In this context, the principal task of the Government is to eliminate frictions that prevent markets from operating smoothly. The Austrians thus regard free entry and competition as the necessary conditions for market efficiency. Government regulation beyond eliminations of obstacles will tend to stifle innovation that leads to higher growth. In fact, in the 1930s at the peak of Keynesian economics , Mises and Hayek in arguing that the central planning will not work.
Institutional Economics
Institutional economics contrasts with traditional neoclassical economics, arguing that institutions—such as laws, regulations, social norms, and cultural practices—are crucial in shaping economic outcomes. They influence the incentives and behavior of individuals and organizations, thereby affecting the performance of the economy. This field draws on insights from various disciplines, including sociology, political science, and anthropology, to better understand the complex interplay between economic activity and social institutions. Key figures in the development of institutional economics include Thorstein Veblen, who introduced the concept of conspicuous consumption and criticized the social and cultural impacts of capitalism; John R. Commons, who emphasized the role of collective action and the legal foundations of capitalism; and Douglass North, who integrated institutional analysis with economic history and emphasized the importance of property rights and transaction costs. Institutional economics has important implications for policy-making. It suggests that effective policies must consider the institutional context and aim at reforming institutions to achieve desired economic outcomes.
Business-like State
Osborne & Gabler (1992) pointed out the characteristics of a business -like state. According to them, Government should perform the following major roles.
Government Role
(1) Catalyst of various social & economic activities
(2) Government should empower communities
(3) Promote Competition in Public Services through . privatisation of Government activity
(4) The State should try to move away from Rules Driven approach to Mission Driven approach. In other words, it should be result oriented, stressing and funding outcomes rather than inputs.
(5) State should be Customer-driven and not bureaucracy driven
(6) The State should try to generate surplus like a business entity
(7) It should concentrate on prevention rather than cure
(8) Decentralisation of authority
(9) Build up incentive structure try to promote active market
Multilateral Organizations such as the IMF and World Bank also offers insights on the role of the State:
‘An Effective State is vital for the provision of the goods and services – and the rules and institutions – that allow markets to flourish and people to lead healthier happier lives. Without it, sustainable development, both economic and social is impossible …. The state is central to economic and social development, not as a direct provider of growth, but as a partner, catalyst and facilitator”.
The World Bank rules out the need for comprehensive planning in a centralised manner. The World Bank strategy depends on the twin pillars of Privatisation and Participatory Development.
The Redefining Priorities of the State according to the World Bank’s view are :
(1) Law and order
(2) Macro stability (low inflation, BoP)
(3) Investment in basic social services
(4) Protection of vulnerable segment
(5) Protecting environment
The State should try to
As far as possible, promote private sector participation in infrastructure
Introduce regulation to devise competitive spirit in the market
Frame Industrial Policy based on discussions of state with industry
Encourage Public participation in state efforts and
Attempt devolution of Authority from central to regional/local government
Thus, we can find a whole range of theories that give contrasting yet compelling arguments about the boundaries of the State and Markets in an economy. This Liminality continues to haunt debates of economic policy and the art of economic policymaking. A decade in the Reserve Bank of India has given me an opportunity to contribute towards the new economic policy of the Indian State. As a foot soldier of economic liberalization, I found that economic policymaking is never a binary decision . Rather it is a gradual shift at the thresholds and thankfully , a result of debates among policymakers , academia and public representatives.
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