Return of the State: A Fashion or a New Paradigm? A Comprehensive Forum Report

For more than three decades, economic and social policy was strongly oriented toward market liberal principles. Since the 2008 financial crisis, this guiding principle has lost much of its appeal, leaving a dangerous paradigmatic vacuum that populists are trying to fill.

The failure of earlier guiding principles has also led to many seemingly ad hoc state interventions to solve current crises – from Corona aid, to the gas price cap, climate packages, energy flat rates and citizen’s income, to the Inflation Reduction Act in the U.S. and the EU Next Generation Fund.

Is this comeback of the state a kind of social fad with no systematic economic basis? Or does it reflect the emergence of a new paradigm that is crucial to finding more sophisticated responses to the new grand challenges left behind by the market liberal era, from climate change and severe inequalities to the crisis of globalization and the instability of financial markets?

In our recently published study, Mapping the State of a Shifting Paradigm, we sought to assess whether recent developments in research and policy reflect the beginnings of such a new paradigm. The study also assesses what stage this renewal has reached relative to previous paradigm shifts in history. What are the new research strands and schools of thought? Which organizations and researchers are working on a new paradigm? Are there signs of paradigm shifts in crucial international institutions? And what about German economic and financial policy?

Over the past decade and a half, an extensive body of academic work has developed in a variety of fields. The report identifies at least a dozen important new currents of thought, each represented by prominent international thinkers-from Dani Rodrik on redefining globalization and Thomas Piketty on reducing inequality to Mariana Mazzucato’s work on an innovative state. For Germany, such new currents of thought are represented by innovative researchers such as Moritz Schularick, Jens Südekum, and Isabella Weber. This largely uncoordinated work has the potential to be seen in retrospect as the intellectual core of a new paradigm, just as the work of monetarists and supply-siders was in the past for the market liberal paradigm.

Our systematic comparison over time confirms that since the heyday of market liberalism, there has also been a clear paradigm shift in the positions of the leading international institutions. The OECD, which advocated flexible labor markets in the 1990s, now supports minimum wages and better jobs. The IMF has abandoned its formerly unconditional support for the free movement of capital. Institutions such as the IMF and the EU Commission also now advocate more flexible fiscal policies rather than harsh austerity measures. The same is true for individual governments such as the traffic light coalition formed in Germany in 2021, which has since increased the national minimum wage, adopted large credit-financed public climate investment packages, or introduced new notions of prosperity and complementary indicators to GDP in the government’s annual economic report.

Comparing current changes with earlier historical examples, it is evident that change is taking place. However, it is also clear that important elements for a comprehensive paradigm shift are missing. Answers have yet to be found to major challenges, such as how to reduce socially critical wealth inequalities that seem to be entrenched through inheritance. The changes that are being felt in major institutions remain mostly incremental, and there are few examples of important new approaches, such as the new wealth budget in New Zealand. A broader societal paradigm shift also requires a broad consensus across party lines on the need for renewal-with social democratic as well as liberal and conservative interpretations of such a new shared understanding.

The observation that the emerging paradigm shift is far from complete does not necessarily mean that it will not occur. As the market liberal precedent has shown, such shifts are complex processes that develop over time, with moments of crisis often acting as catalysts. Given its obvious shortcomings and the development of alternative ideas, it seems very unlikely that the market liberal paradigm will see its renaissance in the coming years.

The drama of our time is that, after decades of the failure of an overwhelming dogma, time is needed to reframe the roles of markets and states – and to effectively address the great challenges of our time, from climate change to the redefinition of globalization. In these times of rising populism and a profound crisis of confidence that is shaking liberal democracies, there is nothing more urgent than building and realizing a new and better paradigm.

As Italian philosopher Antonio Gramsci noted in 1937: