Sources of Growth? Markets and States

Summary

This book is about material life. In explaining how that functioned and changed, references to institutions cannot be omitted. For individual agents their existence can be just as ‘constraining’ or ‘enabling’ as material circumstances. The focus here will be on two major institutions, the market and the state and on how they may have promoted or hampered growth. In all probability there is no subject that has been more widely discussed in economics than the role of markets. Their potentially positive effects - and that is what we will focus on in our analysis here - in principle are fairly obvious.

They facilitate division of labour and specialisation, which in turn can lead to higher productivity. The competition that characterises market economies promotes efficiency and sanctions inefficiency. The role of the state, too, is a widely discussed subject in economics. When it comes to its role in promoting or hampering economic development and growth opinions are much more divided. Even fierce defenders of laissez-faire - a policy of maximum non-intervention - are willing to admit that the state can play a positive role by taking care of defence, law and order, and of so-called public goods. So-called institutionalist economists emphasise the positive role the state can play in economic life by describing and protecting property rights and by directly or indirectly smoothening the functioning of markets. Then, finally, there are economists who claim that the state, as a so-called developmental state, can play a very important part in economic life as an actual active promoter of development and growth. All these different aspects of the role of the state will, where relevant, be touched upon.

Specialisation and market extension

Even with rather stable technology economies can grow, as Adam Smith famously emphasised, by setting out on a course of further specialisation and by extending the markets in which economic agents operate. Specialisation and market extension are closely interrelated. Increasing specialisation presupposes an extending market. In the end, the extension of the market determines how far labour can be divided. Specialisation in turn has a major impact on efficiency. The larger and more integrated markets are, the more efficient a division of labour can become.