Breaking the Mould: An Institutionalist Political Economy Alternative to the Neoliberal Theory of the Market and the State

In this paper, Ha-Joon Chang critically examines the neoliberal discourse that currently informs the dominant view on the role of the state, and suggests an alternative theoretical framework, institutionalist political economy (IPE), to overcome its limitations.

After the introduction (section 1), the author traces the evolution of the debate on the role of the state during the postwar period that has led to the current dominance of neoliberalism (section 2). He suggests that neoliberalism was born out of an “unholy alliance” between neoclassical economics and the Austrian-Libertarian political philosophy; and he argues that, despite its pretence of intellectual coherence and clear-cut messages, this unholy alliance cannot escape some serious internal tensions and therefore can be sustained only through a certain degree of intellectual contortion and political compromise.

In the following section (section 3), the author examines some of the basic assumptions underlying the neoliberal discourse on the role of the state. He points out that this discourse has some fundamental limitations that stem, first of all, from the very way it conceptualizes the market, the state and institutions, and, second, from the way it theorizes their interrelationships. Four main aspects of the neoliberal framework are addressed: the definition of “free market”; the definition and implications of “market failure”; the assumption of “market primacy” (the view that the market is logically and temporally prior to other institutions, including the state); and the analysis of politics.

In the last section of the paper (section 4), the author sketches out how these limitations can (and, in his view, must) be overcome by a theoretical framework that takes the role of politics and institutions seriously: institutionalist political economy. He discusses three issues in particular: analysis of the market, analysis of the state, and analysis of politics.

The author claims that neoliberal markets are institutionally very under-specified, and that a fuller institutional specification is required. Emphasizing the institutional nature of the market, he argues, requires bringing politics explicitly into the analysis of the market (and not just into the analysis of the state). This is because markets are in the end political constructs, in the sense that they are defined by a range of formal and informal institutions that embody certain rights and obligations, whose legitimacy (and therefore whose contestability) is ultimately determined in the realm of politics.

In relation to the analysis of the state, the author argues against the assumption that individuals have pre-formed motivations that are selfish, and for the view that human motivations are varied and interact with each other in complex ways. Moreover, he states, individual motivations are fundamentally formed by institutions. Especially in the public sphere of the state, where non-selfish values are institutionally emphasized and actors thus internalize many such values, it is important to recognize the limits to self-seeking behaviour and the influence of institutions on the formation of preferences.

In relation to the analysis of politics, the author questions the neoliberal claim that politics inevitably corrupts the market. Not only are markets themselves political constructs, he argues, but the neoliberal notion of the “uncorrupted” market is based on a particular set of political beliefs that cannot claim superiority over other sets of political beliefs. According to the author, politics should be seen as an institutionally structured process. This is not only because (as neoliberals recognize) institutions shape people’s political actions given their motivations and perceptions, but because they influence people’s perceptions of their own interests, of the legitimate boundary of politics, and of the appropriate standards of behaviour in politics.