The question of how best to organize an economy has also led to discussions about the appropriate role of the state (government). Historically, there have been three main views on the state's role:
Regulator: The state sets economic rules, policies, enforces them, and punishes those who don't comply. This regulatory role is generally accepted across different economic systems.
Producer/Supplier of Private Goods and Services: The state produces and sells goods and services that are also available in the market, like a private business, aiming to make a profit.
Producer/Supplier of Public Goods/Social Goods: The state provides essential goods and services that promote social justice and well-being, such as education, healthcare, sanitation, and social security. These are often provided free or at subsidized prices, funded by taxpayers.
Different economies choose different combinations of these roles, leading to various economic systems.
How does this relate to different economic systems?
State Economies (Socialist/Communist): The state takes on all three roles, including producing both private and public goods. In communist economies, the state even controlled labor. Markets are minimal or non-existent.
Capitalist Economies: The state primarily acts as a regulator. The production and supply of both private and public goods are left to the private sector.
Mixed Economies: The state takes on the role of providing public goods. In some mixed economies, the state also produces some private goods, sometimes with subsidies.
What did the World Bank say about the state's role?
The World Development Report (1999) argued that the state's role should be flexible and adapt to a country's specific socio-economic and political needs.
What did Keynes say about the role of the state?
Keynes believed the political challenge was to combine:
Economic efficiency
Social justice
Individual liberty
He argued that neither complete state control nor complete market freedom could achieve all three goals. A balance between the state and the market is necessary. This balance should be adjusted based on a country's current situation and future goals. This balancing act is often what is referred to as "economic reforms" in the post-WTO world.
What are the essential roles of the state in an economy?
Regulation: The state must regulate the economy. If regulation is left to private businesses, they will prioritize their own profits over the public good. Democratic systems are better suited for this as they (ideally) represent the interests of the majority.
Production/Supply of Private Goods: This can be handled by the private sector, as it's a profit-making area. The state doesn't need to be involved unless the private sector is underdeveloped. Some countries, like India, initially took on this role but later shifted it to the private sector as it matured. Countries like Indonesia, Malaysia, Thailand, and South Korea did this earlier, leading to faster development.
Production/Supply of Public Goods: This cannot be left to the private sector, as it is generally not profitable. The state must play a key role here.
When the private sector becomes capable of handling private goods and services, the state can free up resources to focus on providing public goods.
What about the East Asian economies?
The World Bank's "East Asian Miracle" study (1993) recognized that Malaysia, Thailand, and South Korea successfully shifted from a more state-heavy mixed economy to a more market-oriented one starting in the mid-1960s. This shift allowed for faster economic growth. Experts believe India's similar shift (starting in 1991-92) was delayed and became necessary due to economic pressures rather than a proactive choice.
In simple terms: The debate about the best way to organize an economy also involves deciding what role the government should play. The government can act as a regulator, a producer of goods and services like a business, or a provider of essential services like education and healthcare. Different economic systems give the government different levels of involvement in these areas. Mixed economies try to find a balance between government involvement and free markets, and this balance can change over time depending on a country's needs. The World Bank suggests that there is no single best approach, and each country must find its own ideal mix.