Chapter 2 - The Role of the State in Economic Growth

Summary

Abstract

This paper attempts to trace and describe the role played by the government sector – the state – in promoting economic growth in Western societies since the Renaissance. One important conclusion is that the antagonism between state and market, which has characterised the twentieth century, is a relatively new phenomenon. Since the Renaissance one very important task of the state has been to create well-functioning markets by providing a legal framework, standards, credit, physical infrastructure and – if necessary – to function temporarily as an entrepreneur of last resort. Early economists were acutely aware that national markets did not occur spontaneously, and they used ‘‘modern’’ ideas like synergies, increasing returns, and innovation theory when arguing for the right kind of government policy. In fact, mercantilist economics saw it as a main task to extend the synergetic economic effects observed within cities to the territory of a nation-state. The paper argues that the classical Anglo-Saxon tradition in economics – fundamentally focused on barter and distribution, rather than on production and knowledge – systematically fails to grasp these wider issues in economic development, and it brings in and discusses the role played by the state in alternative traditions of non-equilibrium economics.

Keywords: Economic growth, Central government, Economic systems

Without the Utopians of other times, men would still live in caves, miserable and naked. It was the Utopians who traced the lines of the first city … Out of generous dreams come beneficial realities. Utopia is the principle of all progress, and the essay into a better future (Anatole France (cited in Fuz, 1952)).

Introduction: ‘‘The Renaissance State’’ vs ‘‘Natural Harmony’’

In 1338 Ambrogio Lorenzetti finished his frescoes Allegory of Good and Bad Government in the Town Hall of Siena. The fresco symbolising good government shows thriving shops, fine buildings and dancing citizens enjoying their leisure. Bad government is shown as ruin, rape, robbery and murder. The Allegory of Good and Bad Government represents the optimistic Renaissance view of Man's untapped potential to improve his own situation. Theirs was a view of history being a continuous optimisation process where ‘‘Man's wit and will’’, applied to harnessing the forces of Nature, held enormous potential for improving his lot: ‘‘the never ending frontier of knowledge.’’