ABSTRACT
States are back, hesitatingly, even unwillingly, but it is widely accepted that they have no option but to rescue the market from itself. The financial rescue packages announced in many countries in late 2008 and early 2009 indicated some of the largest expansion in the role of the state as financier, owner and regulator in half a century. While some commentators are describing it as a sudden shift of the pendulum towards the state (Gills 2008), some scholars have observed this trend for some years now (Warner and Hefetz 2007). Regardless of when the trend started, this is certainly an opportune time for analyzing it and understanding its implications. The debate on the extent and form of the government’s role is, of course, not new, as scholars and thinkers at least as far back as Adam Smith [1759] have pondered over the issue (Sen 2009). While Smith was known for his explanation and defense of the workings of the market through his book The Wealth of Nations (1776) – popularized by the reference to the self-interested butcher, baker and brewer – little was known about his views on the role of the state. However, a close reading of his first book, The Theory of Moral Sentiments (1759) shows that Smith was also a defender of the role of the state in situations where the market fails to do so. In fact, Smith was deeply concerned with the failings of markets and the associated problems of illiteracy, poverty and relative deprivation. He expressed concern for universal education and poverty alleviation. He was concerned with institutional diversity and motivational variety and not monolithic markets and singular dominance of the profit motive. Smith argued the need for institutional solutions that fit the problems that arise rather than for institutions to serve some fixed formula or a dogma. These ideas, unfortunately, were not as attention-grabbing as reference to the butcher, baker and brewer. Some 250 years since Smith’s Theory of Moral Sentiments, the debate on the extent and form of the government’s role is again on center stage. The current debate is new only insofar as the immediate past when it was common to deride governments as largely unnecessary and frequently incompetent. With markets collapsing and looking to governments for a lifeline, there is a danger that governments will turn to blunt interventions of the 1950s, overlooking the lessons of the last several decades suggesting more nuanced intervention in market processes.
