Market versus State - Beyond the Old Dichotomy

Wendy Carlin, Paul de Grauwe, Xavier Ragot and Henning Vöpel on the new balance between state and market and the signs for a paradigmatic shift.




31. MAY 2022



After decades of market liberalization the primordial confidence in the market’s healing power has waned, making way for more frequent state intervention. But how can we define when exactly state action is economically justifiable necessary – and when it is not? What could a new balance between state and market look like? And is the antagonism state versus market still purposeful? This was the topic of the introductory session at our X New Paradigm Workshop with Wendy Carlin, Paul de Grauwe, Xavier Ragot and Henning Vöpel. While all discussant agreed for the need to reform the existing market driven system, the precise extent and design of a new paradigm was subject of debate.

Wendy Carlin started the session by emphasizing the need to overcome the state versus market dichotomy in light of the experiences from the Covid-19 pandemic. While the current crises make it clear that the state will have to accept a more active role, according to Carlin this new policy paradigm will only succeed if it is based on strong normative footing, which is aligned with an economic model, emblematic policies, and empirical reality. While the current neoliberal paradigm shielded the private government of the firm from democratic critique, a new paradigm will have to integrate egalitarian and democratic norms, with civil society functioning as a third pole between government and market.

Paul de Grauwe argued that rather than creating a new paradigm with a new normative foundation, the recognition of existing market failures in and of itself serves as a legitimization for stronger government action within the existing system.

“Without interventions, the market system will increasingly lack social consensus. We need this external agent outside the market system to sustain the system in times of crises, without it, the market system cannot survive.”

While the market failures according to Grauwe are well known (e.g. externalities; public goods, inequalities, market concentrations, and a tendency for instability), the government cannot be considered a deus ex machina capable of identifying objective corrections to them, as governments are bound to society from which the economic system derives. In this sense, a new paradigm need not create a new market system, but a new political economy that can guide political authorities to do the right thing, promoting the public good without provoking a compromising reaction of private interests.

Xavier Ragot emphasized that we are already faced with a new reality, as the state is presently allocating massive amounts of resources. In contrast, economic theory and political economy are lagging behind. In order to successfully problem solve and manage the new direction of the state and the economy a deep understanding of the theory of capitalism and its geopolitical dimension is required. The current critique of neoliberalism, according to Ragot, is too naïve and lacking a deep theory of what democracy is about.

“We need a new paradigm to increase the space between political cooperation and geopolitical analysis and the economy. This frontier will create new tools, policies, and institutions.”

Henning Vöpel added that neither state nor market per se are good or evil. Both have different tasks. While the most important function for a state, according to Vöpel, is to give people a voice, the market should give them a choice. Ultimately, argues Vöpel, solving the current crises is a matter of an optimal interaction between state and market. While the market needs to be strengthened in its capability to develop new solutions, the state needs to be strengthened in its capability to legitimate power, and become more responsive, more resilient, and more transformative. In this sense, “a new paradigm is a new view on something that we have had before, a more evolutionary approach.”

The whole session is available as re-live here:



For decades, there was a consensus that reducing the role of the state and cutting public debt would generate wealth. This contributed to a chronic underinvestment in education and public infrastructure. New research focuses on establishing when and how governments need to intervene to better contribute to long-term prosperity and to stabilize rather than aggravate economic fluctuations.