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Comparative Economic

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2014s3C300_TMA1a by Dawud Abdirahman


Dawud Abdirahman

Student Reference Number: 130002288



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Do you think Ha-­‐Joon Chang’s idea of ‘Institutionalist Political Economy’ (IPE) provides a better explanation for government intervention than the concept of market failure?

In this essay, the author discusses, if Ha-­‐Joon Chang’s idea of ‘Instituionalist Political Economy (IPE)’ provides a better explanation for government intervention than the concept of market failure. The essay – which is part of a course module assignment in Public Policy and Management Studies at the School of Oriental and African Studies – discusses both theories, and articulates their merits and constraints as per the author’s views. Various examples have been employed to support these views. Market failure is a concept within economic theory describing when the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better off without making someone else worse-­‐off. (The outcome is not Pareto optimal.) Market failures can be viewed as scenarios where individuals' pursuit of pure self-­‐ interest leads to results that are not efficient – that can be improved upon from the societal point-­‐of-­‐view (Ledyard 2008, Krugman and Wells 2006). The first known use of the term by economists was in 1958 (Bator, 1958), but the concept has been traced back to the Victorian philosopher Henry Sidgwick (Medema, 2007). Market failures are often associated with time-­‐inconsistent preferences, information asymmetries, public goods, non-­‐competitive markets, externalities, or principal-­‐ agent problems.

Government intervention in a particular market often arises due to the existence of a market failure. Micro-­‐economists, are often concerned with the causes of market failure and possible means of correction. This plays an important role in many types of public policy decisions and studies.

However, policy interventions, such as taxes, subsidies, bailouts, wage controls, and regulations, including attempts to correct market failure, may also lead to an inefficient allocation of resources, also referred to as government failure (Weimer and Vining, 2004).

Often than not, a choice between imperfect outcomes, i.e. imperfect market outcomes with or without government interventions provided. In any case, once a market failure exists the outcome is not Pareto efficient. Mainstream neoclassical and Keynesian economists believe, it may be possible for a government to improve the inefficient market outcome, while several heterodox schools of thought disagree with this.

The question of the proper role of government in the marketplace is an old and fundamental one. Throughout the world, Public Officials deal with this issue, a task made more urgent by recent efforts to privatize public responsibilities and "reinvent" government. Looking for objective standards by which such decisions can be made, public officials increasingly have turned to the concept of market failure. Use of the market failure concept is widespread, both in teaching curricula in practicing government circles and in legal analysis.

The shortcomings of the market failure concept have been known for some time, but with little consequence, since its use continues to be widespread. Yet alternative economic approaches, which provide a better-­‐grounded conceptual framework for understanding issues of government intervention, do exist.

Originally used only as a normative concept to define applicable situations for government intervention in markets, the concept of market failure took on additional characteristics as it matured. Transformed into a diagnostic tool used by policymakers to objectively determine the scope and magnitude of the intervention. Here, policy analysts will most likely apply least intrusive interventions to allow the market to correct itself i.e. Tax expenditure vis-­‐à-­‐vis Creation of a government monopoly. Although the concept does provide a means for diagnosing and essentially treating “the disease” affecting the market, it does not really provide analysts and other decision makers with the desired or for that matter complete explanations for government interventions.

On the other hand, the Institutionalist Political Economy (IPE), an alternative theoretical framework suggested by Ha-­‐Joon Chang to overcome the limitations of the market failure concept, provides solutions.

By carefully undoing the core, rarely questioned assumptions of neoliberalism, Chang dissects the theoretical and practical limitations of neoliberalism’s discourse on the state and market. He provides a far richer and deeper critique than others who have dismissed neoliberalism for its anti-­‐interventionist rhetoric. A compelling argument and strong evidence is provided, which retains a very timely relevance, in its criticisms of neoliberalism’s partial, misleading contribution about the role of the government. The four main points raised in Chang’s Breaking the Mould; the definition of the free market; the definition and the implications of market failure; the market primacy assumption (namely the view that the market is logically and temporally prior to other institutions, including the state); and the analysis of politics, clearly elaborate serious flaws in how the Market failure concept is implemented (Chang, 2002).

In conclusion, admittedly, the IPE provides goes further in putting emphasis on key issues. For example, it puts emphasis on the role of political factors in determining state policy and the fundamentally political nature of the market and applies the political economy logic to the analysis of the market, and not just to the analysis of the state as in the Market failure concept. The roles of institutions in affecting human actions, including those within and surrounding the state are also clearly understated. For the stated reasons, I believe Ha-­‐Joon Chang’s idea of ‘Institutionalist Political Economy’ (IPE) provides a better explanation for government intervention than the concept of market failure

Bibliography John O. Ledyard (2008). "Market failure," The New Palgrave Dictionary of Economics, 2nd Ed. Abstract. Paul Krugman and Robin Wells (2006). Economics, New York, Worth Publishers Francis M. Bator (1958). "The Anatomy of Market Failure," Quarterly Journal of Economics, 72(3) pp. 351–379 Steven G. Medema (2007). "The Hesitant Hand: Mill, Sidgwick, and the Evolution of the Theory of Market Failure," History of Political Economy, 39(3), p p. 331-­‐358. 2004 Online Working Paper. Mankiw, Gregory; Ronald Kneebone, Kenneth McKenzie, Nicholas Row (2002). Principles of Microeconomics: Second Canadian Edition. United States: Thomson-­‐Nelson. pp. 157–158 Weimer, David; Aidan R. Vining (2004). Policy Analysis: Concepts and Practice. Prentice Hall. Douglass C. North and Robert P. Thomas. The Rise of the Western World: A New Economic History. Cambridge, U.K.: Cambridge University Press, 1973 H-­‐ J Chang (2002) ‘’ Breaking the Mould: an institutionalist Political Economy’’ alternative to neoliberal theory of Market and state Rod Hague and Martin Harrop (Comparative Government and Politics) Palgrave, Macmillan. 9th Edition

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