Market and the Government

The conflicting ideologies in Economics have more or less revolved around mainly two institutions- Markets and Governments. The Capitalists believe ‘Markets’ to be the panacea for all economic problems, while the Socialists replace the ‘market’ with the ‘government’.

On Markets

Market is the institutional framework within which the act of exchange takes place or the institutional milieu which is the context of the relationship of exchange between the parties. [Kurien 1993] Thus market is an institution which allows for exchange. This exchange is only possible if one of the parties have adequate purchasing power.

Markets exclude people as consumers or buyers of goods and services if they do not have any incomes, or sifficient incomes, which can be transalated into purchasing power. People experience such exclusion if they do not have assets, physical of financial, which can be used (or sold) to yield an income in the form of rent interest or profits. [Nayyar 2002]

So, relying on markets alone will exclude a large chunk of the populace of a nation. Those with relatively higher purchasing power will benefit over those will less purchasing power. And for the former, the world will become a flatter place, as Thomas L Friedman says.

On Government

A government is a body that has the authority to make and the power to enforce rules and laws within a civil, corporate, religious, academic, or other organization or group. In its broadest sense, “to govern” means to administer or supervise, whether over a state, a set group of people, or a collection of assets. [Wikipedia]

In our formal analysis of exchange and producation, the role of social norms ( Smith proposed that market exchange is sustained by the underlying social ‘norms’ resulting frm sympathy, for example, trust in exchange, respect for contracts etc.) are left out and we tend to exaggerate on one hand, the efficiency of an abstract market mechanism based on an invented ‘auctioneer’. On the other, we tend to neglect the roles which the state could play in either reinforcing or destroying these norms which are essential for the functioning of the market economy. [Bhaduri 2002]

On Globalization

Globalization is predominantly a ‘market’ centric process.

Globalization, both then and now, has been associated with an exclusion of countries and of people from its world of economic opportunities. [Nayyar 2002]

Economic globalization challenges the political authority, which the nation state had attained by undermining gradually many of the norms of the traditional civil society.[ Bhaduri 2002]

Globalization has resulted in high growth only in a selected few sectors. [Thomas 2007]


Relying solely on the Government to undertake the functions of the market will lead to social unrest and will result in economic inefficiency. And government regulations are a check on the markets so that a market failure does not occur.

Can markets and governments exist peacefully’ Can market and governnment produced goods and services reach an equilibrium’ Will this result in a state, where those excluded from the market will be included by the government machinery’ Is this sustainable in the long run’


1)Deepak Nayyar (edited), Towards Global Governance, Governing Globalization, 2002.
2)Amit Bhaduri, Nationalism and Economic Policy in the Era of Globalization, Governing Globalization, 2002.
3)C. T. Kurien, On Markets in economic Theory and Policy, 1993.

Author: Alex M Thomas

A passionate student of economics!

8 thoughts on “Market and the Government”

  1. current debate on this issue is a lot more complicated than the old capitalism vs socialism debate. the debate surrounds around what functions should the state have, and from which it should withdraw, ie extends from ur conclusion.

  2. Doesnt your conclusion sound too much like putting your leg in two boats ..what if u end up with the negatives of both sides instead of the positives ( This i think has largely happened in India )

  3. Seema,

    The conclusions are questions which need to be answered.

    Like you mentioned, if only the negatives of both are seen, the situation is bad. But again, i do not think one can generalise and say that ‘the negatives’ has happened in India. Some sectors are there and some are working well too.

  4. Usually, it is said that Gov’t should only intervene when the market outcome is not the socially optimal outcome (ie externalities..etc).
    However, as you have mentioned, an outcome that arises from the market system is income inequality. Left untreated, income inequality can be destabilizing and in the long run may affect the efficiency of the market system. Therefore, govt should be redistributors of wealth to insure the viability of the market in the long run.
    Given this, the question is how much intervention is optimal (i.e taxation)?

  5. And moreover Govt Intervention over the years has not led to equitable distribution of wealth …largely because of corruption ….

  6. Adherents to the neo-classical approach excessively concentarte on ‘government failure’ while refusing to examine the issue of ‘market failure’. One important issue in this regard was raised by Cypher and Dietz [ James M. Cypher, James L. Dietz Routledge, “State as a Potential Agent of Transformation” ] who say that ‘government failure’ can in effect be a result of ‘market failure’. This may happen when in a less than competitve market, vested interests gain abnormal power by manipulating the markets and use such power to control economic policy making.

    The above argument puts a serious dent on the observation of the neo-classical school who blame all development problems on government failure, when in reality, such a government failure may actually be a result of a failure in the market.

  7. Ravi,

    Your comment gave me an insight which i had not earlier pondered on. The connection between ‘market failure’ and ‘government failure’ appears strong. And both blame each other for the ‘failure’. In the process, the people loose out.

  8. Considering that agriculture is biggest sector in the Indian economy, what’s happenned to that?

    Also, given the experience of neoliberal reforms around the world (primarily in Latin America and Russia), what does the future hold for India?

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