By carefully unpicking the core, rarely questioned assumptions of neoliberalism, Chang dissects the theoretical and practical limitations of neoliberalism’s discourse on the state and market, providing a far richer and deeper critique than others who have dismissed neoliberalism for its anti-interventionist rhetoric. Chang provides cogent evidence and a compelling argument, which retains a very timely relevance, in its criticisms of neoliberalism’s partial, misleading contribution to discourse about the role of the contemporary state.
Chang, Ha-Joon (2002), ‘Breaking the Mould: an Institutionalist political economy alternative to the neoliberal theory of the market and the state’, Cambridge Journal of Economics, 26(5): 539-60.
Reviewed by Lynne Chester, Curtin University, Australia
Six years after publication, this article ranks as one of the ‘50 most-frequently read articles’ published in the Cambridge Journal of Economics (Oxford Journals, 2008). Its origins are evident in Chang’s earlier publications (1994, 1997) and its content strongly informs much of his subsequent work (2003a, 2003b, 2006). The article’s contribution, however, to debate about the role of the state, and to heterodox economics, goes far deeper.
Chang’s core argument is that the rarely-questioned neoliberal conceptualisations of the market, the state and institutions, and their interrelationships, are seriously flawed and herein lies the central problem of neoliberal discourse about the role of the state, rather than the more ubiquitous criticism of its anti-interventionist policy prescriptions. The inherent logic of neoliberalism – that ‘unholy alliance’ of neoclassical economics and the Austrian-libertarian tradition – prevents any remedying of these flaws which, Chang goes on to argue, can be overcome by an alternative analytical framed which he terms ‘institutionalist political economy’ (or IPE).
His argument progressively unfolds across the three fundamental sections forming the article which are sandwiched between introductory and concluding comments.
The first section sets out a broad (albeit somewhat partial) overview of discourse about the role of the state post World War II. Advocacy for active state intervention to overcome the multitude of market failures - during capitalism’s ‘golden age’ by welfare economics, Keynesianism and early ‘development economics’ - is outlined although the notable absence of a clear theory of the state is acknowledged. The discussion then moves on to the significant shift in the discourse from the 1970s with the ascendancy, and subsequent hegemony, of neoliberalism which argues that the state does not act impartially being ‘captured’ by sectional interests and thus its actions lead to various forms of ‘government failures’ which typically are more costly than market failures. Chang also notes the various rationale used by the neoliberal agenda to justify state intervention such as limited areas of market failure, the different realms of academic and policy discourse, or the real-life difficulties of intervention.
The next section – and, in my view, the jewel in this article’s crown - hones in on four basic concepts underpinning neoliberal doctrine that are rarely discussed namely: (1) the free market, (2) the notion of market failure, (3) the assumption of market primacy, and (4) the interrelationship of market, state and politics.
Chang contends that definition of the free market, and thus state intervention, is fraught with difficulty because:
(a) The participants, and terms of participation, in all markets is determined by some form of state regulation; and
(b) The same action by the state may be considered an intervention by one society but not another, depending on the legitimacy and hierarchy of the underlying rights-obligations structure for market participants.
Definition of market failure is similarly fraught, in Chang’s view, because the notion of failure only makes sense in relation to what is considered to be an ‘ideal’ market. But, as he demonstrates by example, that regarded by one person as failure (e.g. income inequality) may be seen by another as the normal functioning of the market. The issue of market failure, irrespective of definition, is – for all schools of economics - of greatest importance, Chang considers, to the neoclassicists because neoclassical economics is about the market and the market is the economy; “if the market fails, the economy fails” (2002: 545). This is the point at which we start to see Chang develop his IPE when he posits that capitalism is much more than the market, comprising a wide range of formal and informal institutions which include, amongst others, the market, the state, firms, and social convention. Consequently, a focus on the market (and market failure), as does neoclassical economics, results in a partial and inaccurate view of the nature and operation of capitalism.
Market primacy – ‘in the beginning there were markets’ - is the next neoliberal assumption tackled by Chang because it “deeply effects the very way in which we understand the nature and development of the market, as well as its relationship with the state and other institutions” (ibid: 548-49). Drawing on empirical examples, Chang lays out a case to show state intervention as a driver of economic development as well as its ongoing creation and restructuring of markets and, in doing so, he successfully exposes the neoliberal fallacy of the state as a ‘man-made’ institution emerging after failures of ‘naturally’ evolving markets become intolerable.
The final neoliberal assumption discussed by Chang is that concerning the interrelationship of market, state and politics which he considers is flawed in two respects. The earlier mentioned neoliberal view of the state being ‘captured’ by sectional interests reflects the first flaw, the belief that humans are motivated by self-interest. Thus, the neoliberal claim that self-seeking bureaucrats and politicians controlled by interest groups make up the world of politics and their actions impede ‘rational’ workings of the market. Hence, the neoliberal solution is to ‘depoliticise’ the economy by restricting the range and nature of state interventions and policy discretion. Acknowledging the studies which disprove self-seeking as the only human motivation in the public domain and hence a fundamental defect in neoliberalism logic, Chang moves on to pay more attention to a second and rarely discussed flaw – the market as a political construct. Chang is firmly of the view that neoliberal calls for so-called depoliticisation of the economy are self-contradictory and dishonest because:
the ‘market rationality’ that the neoliberals want to rescue from the ‘corrupting’ influences of politics can only be meaningfully defined with reference to the existing institutional structure, which itself is a product of politics (ibid: 550)
Property rights, and the entitlements bestowed on market participants, Chang argues are the result of politics, as are the determination of interest rates and wages which impact on every sector of the economy, along with numerous state actions and regulations intending to ‘protect’ market participants. [The US Treasury’s 2008 bailout plan for the financial sector is just one example of Chang’s point.] To this Chang adds a final nail when pointing out that the neoliberal call for depoliticisation of the economy ‘dresses’ up their view of the boundary between market and state as correct, objective and ‘above politics’ which undermines the notion of democracy.
The third and final, substantive section of the article sets out the central theoretical features of Chang’s ‘institutionalist’ analytical framework designed to counter the inconsistencies and weaknesses he has exposed in neoliberalism’s discourse on the state and market, and to ‘understand them properly’. These features, not unsurprisingly given Chang’s earlier analysis, are:
. An analysis of the market which (a) considers a far wider range of formal and informal institutions (e.g. those which determine and/or regulate market participants, the objects of market exchange, the rights and obligations of market participants, and the process of exchange); and (b) explicitly recognises that markets are defined by a range of institutions, the legitimacy of which is determined by politics;
. An analysis of the state which explicitly recognises that the motivations of individuals (e.g. bureaucrats and politicians) are shaped by institutions and individuals also influence the nature and operation of institutions; and
. An analysis of politics that accepts the political nature of the market, the integral role of politics to the market’s creation, and acknowledges that there is no such thing as a ‘correct’ boundary between market and state because no one set of political beliefs is superior.
As Chang opines, the outline of the theoretical constructs underpinning his IPE is a first step towards the development and application of an alternative analytical framework to overcome the biased and incomplete understanding of the state, the market and their interrelationship created by the flawed concepts underpinning neoliberalism. Nevertheless, his contribution to our understanding of the neoliberal discourse on the role of the state should not be overlooked. By carefully unpicking the core assumptions of neoliberalism – and assumptions so basic, that they are rarely questioned – Chang dissects the theoretical and practical limitations of neoliberalism’s discourse on the state and market, and this provides a far richer and deeper critique than others who have dismissed neoliberalism for its anti-interventionist rhetoric. Chang has provided cogent evidence and a compelling argument, which retains a very timely relevance, in its criticisms of neoliberalism’s partial, misleading contribution to discourse about the role of the contemporary state.
Boyer, Robert, Caillé, Alain and Favereau, Olivier (2008), Towards an institutionalist political economy, Revue de Mauss permanente, Retrieved 19 September 2008 from www.journaldumauss.net/spip.php?article232.
Chang, Ha-Joon (1994), ‘State, institutions and structural change’, Structural Change and Economic Dynamics, Vol.5, No.2, pp293-313.
Chang, Ha-Joon (1997), ‘Markets, madness and many middle ways: some reflections on the institutional diversity of capitalism’, in Arestis, P., Palma, G. and Sawyer, M. (eds), Markets, unemployment and economic policy: Essays in honour of Geoff Harcourt, London: Routledge, pp.30-42.
Chang, Ha-Joon (2003a). Globalisation, economic development and the role of the state. London: Zed Books.
Chang, Ha-Joon (2003b), ‘The market, the state and institutions in economic development’, in Chang, H-J (ed), Rethinking development economics, London: Anthem Press, pp.41-60.
Chang, Ha-Joon (2006), Understanding the relationship between institutions and economic development: some key theoretical issues, UNU-WIDER Discussion paper No. 2006/05, July.
Oxford Journals (2008), The 50 most-frequently read articles in Camb. J. Econ during August 2008, Retrieved 19 September 2008 from cje.oxfordjournals.org/reports/mfr_all_9.dtl.