Policy Research in Macroeconomics

Looking ahead after COVID: what role for the state?

Joseph Keppler, The Bosses of the Senate, 1889.
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As part of this series celebrating PRIME’s tenth anniversary, we are looking forward to the next ten years. This contribution by Laurie Macfarlane looks at the future role of the state.

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John Maynard Keynes famously wrote: ​“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

For the past 40 years, society has been the slave of a not-yet-defunct set of economic ideas. These ideas have shaped the way that people think about the economy, and had a powerful effect on politics and government policy.

Nowhere is this more apparent than in the role of the state. According to neoclassical theory, goods and services are most efficiently produced by private firms operating in a competitive market, and businesses are the ​‘wealth creators’ that drive innovation and technological progress. Because the state lacks the knowledge and expertise to allocate resources better than the market, it should avoid pursuing policies that try to ​‘pick winners’ or ​‘distort’ market competition.

The global financial crisis laid bare the underlying weaknesses of this approach to economic policy. But without a clear alternative to take its place, the response was to double down on a broken model. Although the state intervened on an unprecedented large scale to bail out the financial sector ­­­– the effect of this intervention was to preserve the status quo. The impact of the crisis, and the austerity policies that followed, have led to series of political shocks in Britain and beyond.

Covid-19 has presented fresh challenges to conventional economic thinking. The pandemic has laid bare the disastrous consequences of decades of privatisation, deregulation and outsourcing in countries like the US and UK, and highlighted the critical importance of strong public services and a capable state bureaucracy. In order to contain the economic fallout from the pandemic, many Western countries have ripped up the neoliberal playbook. Market forces have been shunned in favour of robust state intervention and regulatory controls. Once again however, these interventions have been designed to preserve the status quo rather than usher in radical change.

Political economic paradigms do not last forever, however. In the past century, the UK has experienced two major shifts from one paradigm to another: firstly from laissez-faire to the post-war consensus after the Great Depression of the 1930s, and secondly from the post-war consensus to neoliberalism in the 1980s. Both were born in response to major crises, and both involved radical shifts in the role of the state.

The failures of neoliberalism, and the challenges posed by Covid-19, indicate that the we are on the cusp of another paradigm shift. But those of us who dream about a world beyond neoliberalism should think twice before celebrating its demise. While some may welcome the arrival of policies that, on the surface at least, involve a greater role for the state in the economy, we should be wary of the idea that state action inherently leads to progressive social outcomes. Instead we must ask: in whose interest is the state intervening?

In the UK, the unprecedented levels of state support in the economy has been accompanied by rampant cronyism, corruption and sleaze. At the same time, there are signs that the government intends to use the coronavirus crisis to ramp up intrusive surveillance and roll back democracy. Left unchecked, there is a risk that the UK and other countries emerge from the pandemic embracing a new, more authoritarian version of crony capitalism.

Faced with this bleak prospect, the task for progressives is not to hark back to the pre-Covid ‘business as usual’ but to set out a bold new vision for the economy that tackles the key challenges of the twenty-first century. Among these, none are more urgent than environmental breakdown. If we are to transform our economy on the scale that is required, the powers of the state must be harnessed to rapidly decarbonise patterns of production, distribution and consumption, and bring our environmental footprint within sustainable and just limits. This means reversing the hollowing out of the state that took place under neoliberalism while investing in public sector institutions and – crucially – increasing their capacity to think and act big.

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