Where State and Market Lie: Or, how do institutions in a complex modern economy work together for the common good

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Where State and Market Lie: Or, how do institutions in a complex modern economy work together for the common good

This article is part of a series in which OECD experts and thought leaders – from around the world and all parts of society – address the COVID-19 crisis, discussing and developing solutions now and for the future. It aims to foster the fruitful exchange of expertise and perspectives across fields to help us rise to this critical challenge. Opinions expressed do not necessarily represent the views of the OECD.

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In every nation, governments have had to play a central role in responding to the COVID-19 crisis, in terms of their economic rescue packages as well as in their public health measures. It is not surprising, then, that – whether they like the prospect or not – some commentators have concluded that the economic role of the state will be permanently expanded.

The fiscal measures to support businesses and workers will certainly require substantial public borrowing. But why should the aftermath of the pandemic be different from that of the 2008-9 financial crisis, another unwelcome event that many people at the time expected to change the complexion of the economy for good? What has changed?

The scale of the emergency is one key difference. Nobody knows how long or how deep the current recession will be, such is the uncertainty at the moment, but the scale of the drop in activity is staggering. Unemployment is sure to rise substantially, and many businesses may never recover. Governments will have to use fiscal policy to try to limit the damage and support recovery .

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The character of this crisis is relevant too. While the financial crisis was hard for many people to understand in any detail, and climate change still seems remote, a pandemic is a collective action problem with immediate life-or-death consequences. Individuals know they cannot act alone to tackle it. Levels of satisfaction with government have declined as the weeks go by, but there is widespread public expectation that the interventions will continue for a long time.

Above all, the opportunity to reshape the economy during the recovery is widely understood. For example, a majority of Britons think their government should ensure the post-pandemic economy is greener, prioritising investment in tackling climate change in the recovery phase. The enforced reduction in noise and atmospheric pollutants, albeit involving large costs, have crystallised in many people’s minds the environmental price of “normal” activity.

Read the OECD's COVID-19 Policy Responses on Environmental Responses to the COVID-19 Pandemic

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The focus on inequality, already a key issue for some voters, is also likely to become more intense: both the direct impact of the pandemic and the impact of the economic shutdown have amplified existing inequalities. People on low pay with little in savings, younger people just starting out in the labour market, those on temporary contracts, micro-business owners and the self-employed are among those hardest hit in terms of personal finances and employment prospects.

For all these reasons, it is likely that there will be significant government involvement in the economy for some time to come, not just in terms of firefighting but also playing an active role in long-term economic structures. The debate will vary between countries, as each has a different tradition of the relationship between state and market; this is a bigger shift for the Anglo-Saxon economies, which since the 1980s have prioritised – at least in rhetorical terms if not always in reality – the role of the market.

One World: Global solidarity for recovery and resilience, by Sharan Burrow, General Secretary, ITUC

Indeed, that there are differences between national policy approaches underlines that there is no single right answer to the question of where the boundary between state and market lies. In fact, the crisis and its aftermath stress the necessity of thinking with a far richer understanding of how societies tackle collective problems. In addition to business and individual actions, governments have many layers from central to local: there are multiple public agencies, voluntary groups and informal social networks that all play a part in shaping how well our societies and economies function.

So the issue is not really whether the state will play a bigger or smaller role after the crisis; it is how well do all the institutions in a complex modern economy work together for the common good.

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