At the crossroads of liberalism and government intervention

Policymakers are reluctant to talk about creativity. They would rather talk about markets or plans than acknowledge that innovation is necessarily a creative process with uncertain outcomes

By Yuen Yuen Ang

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Published: Thu 20 Apr 2023, 10:43 PM

To intervene or not to intervene. That has been a central debate about the state’s role in the economy at least since the eighteenth century. Over the past 40 years, the United States and other Western liberal democracies have championed free markets, free trade, and a limited role for government – a stance known as neoliberalism or “market fundamentalism.” To some commentators, the recent passage of the CHIPS and Science Act and the Inflation Reduction Act, US President Joe Biden’s two signature industrial policies, marks the end of neoliberalism and the re-emergence of interventionism as the dominant paradigm.

But this is a false dichotomy. Governments are not limited to a binary choice between laissez-faire and top-down planning. A third option, long-neglected by policymakers and economists, is for governments to direct bottom-up processes of improvisation and creativity, akin to the role of an orchestra conductor. One can find plenty of examples of this in China and the US.

Neoliberalism emerged as the dominant policymaking paradigm in the West in the 1980s. Under President Ronald Reagan, the US pursued deregulation, cut taxes, and slashed welfare programs. Government intervention, the thinking went, inevitably leads to policy distortions, dependence on state handouts, and corruption. As Reagan famously put it in his first inaugural address, “government is not the solution to our problem; government is the problem.”

Soon after, neoliberalism turned global. Under the Washington Consensus, a term coined by the economist John Williamson in 1989, the US-dominated International Monetary Fund and World Bank pressured developing countries to embrace deregulation, privatization, and free trade. One policy prescription favored by policymakers and economists was “secure property rights,” which spawned a cottage industry of studies showing the link between such rights and economic growth. The implication was that all it took for countries to prosper was to leave markets to private entrepreneurs. State intervention was unnecessary, if not downright harmful.

But not all developing countries went along. In defiance of Western prescriptions, Japan and the four “Asian tigers” – Hong Kong, Singapore, South Korea, and Taiwan – opted for massive government intervention. By crafting long-term plans, investing in public infrastructure, and selecting and promoting potentially successful industries with favorable policies, all of them achieved extraordinary economic growth between the 1960s and the 1990s. Proponents of the model underlying the “East Asian Miracle” criticized the Washington Consensus for ignoring the indispensable role of governments in late-developing economies.

The ideological pendulum has swung back and forth ever since. Neoliberals briefly had the upper hand following the 1997 Asian financial crisis, which was widely blamed on state intervention. But the tide began to turn after the 2008 financial crisis. In the face of rising inequality, the COVID-19 pandemic, and competition from China, a growing number of politicians and advisers argue that the West should follow in Asia’s footsteps and enact industrial policies.

What is missing from the debate is the third path, which I call “directed improvisation.” As I chronicle in my book How China Escaped the Poverty Trap, China’s economic reforms between the 1980s and 2012 illustrate this hybrid role. Directing involves coordinating and motivating a decentralized network of creative actors, discovering but not predetermining successful outcomes, and making ample use of experimentation and bottom-up feedback.

China’s economic boom is often credited to top-down planning by a strong government. But if authoritarianism and central planning were the answer, China would have prospered under Mao Zedong. When Deng Xiaoping succeeded Mao in 1978, he quietly revolutionized China. The central government switched from dictator to director, articulating clear national goals and establishing appropriate incentives and rules, but also empowering subnational governments to improvise development strategies according to local conditions and needs.

Reflecting Deng’s pragmatism, the Chinese system was a mélange of multiple (sometimes contradictory) elements, including Asian-style developmentalism and Western-style liberalization. The underlying order was the seemingly paradoxical combination of direction and improvisation. As a Chinese saying puts it, the central government sets the stage and local governments perform the play.

The result has been a diversity of regional “China models” operating simultaneously within the larger Chinese system. For example, while the Zhejiang and Jiangsu provinces are both industrial powerhouses, the private sector plays a stronger role in Zhejiang’s economy, whereas Jiangsu relies on a more interventionist model.

The US government’s role in supporting innovation, which sociologists Fred Block and Matthew Keller called “coordinated decentralization,” is another example of directed improvisation. In the mid-twentieth century, the US fostered a decentralized network of inventors, companies, universities, and labs engaged in cutting-edge scientific research. It neither left them to their own devices nor told them what to do. Instead, it coordinated knowledge sharing, helped identify opportunities to commercialize discoveries, and provided seed funding, all of which created the conditions for what we now know as the information and communication technology revolution. But this success is barely known to the public, because, as Block and Keller explained, it “does not fit with the claims of market fundamentalism.”

Governments’ ability to direct creative processes is more critical at the innovation-driven stages of development than at the early stages of mass industrialization. As an economy becomes more complex and technologically advanced, it becomes harder – perhaps even impossible – for governments to pick winners. Innovation, after all, is inherently uncertain. Back in the 1990s, for example, few would have thought that an online bookseller would one day become the dominant global retailer.

Policymakers are reluctant to talk about creativity. They would rather talk about markets or plans than acknowledge that innovation is necessarily a creative process with uncertain outcomes. But while governments cannot control this process, they can direct and influence it. To do so, policymakers must first abandon the false dichotomy of neoliberalism-versus-interventionism.

- Yuen Yuen Ang is Chair of Political Economy at Johns Hopkins University.

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