Market Failure and Government Failure

Abstract

For several decades a debate has been raging in development economics on the relative virtues of the free market as opposed to state intervention, with neither side convincing the other. While this sterile debate continues, experiences accumulated from research and action in the real world during the last 40 years have led to important new thinking on the roles of market and nonmarket institutions in the process of economic growth. The planned economies of the socialist world have learned that market institutions are not exclusive to the capitalist mode of production, and that the threat of entry and the fear of exit remain irreplaceable stimuli for cost and quality consciousness in production. Researchers in market economies have learned that price quotations on marketed commodities do not always carry sufficient information for economic decisions, and that institutions matter. This paper pieces together some lessons from the development experiences of the last four decades to enrich our understanding of the role of the state in the process of economic development.