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Candidate number: JFHD5
Prompt: Within the Neoclassical Economic paradigm, market failures (e.g., public goods, negative externalities, etc.) are the only rationale for government intervention. With reference to a specific policy area of your choice, describe the type of government interventions which would be supported by a market failure rationale and contrast those interventions with those which would be supported by a market shaping rationale.
Understanding the essay question
Focusing on the green job economy and the policies that have been influenced by the UK's 'Green Industrial Revolution' and subsequent net-zero ambitions, this essay will connect economic theory to real-life policy scenarios to clearly describe, synthesise, and then contrast government interventions that are supported by the neoclassical paradigm of market-fixing and those that are supported by a new economic thinking approach to market-shaping.
This essay will explore how the market-failure theory of neoclassical economics negatively casts the role of the state as market fixer, intervenor, enforcer or redistributor (Sekera, 2020) through government interventions in the form of public goods, regulations, and market-based mechanisms to correct externalities and achieve an ever romanticised 'equilibrium'. This essay will then contrast the neoclassical paradigm of market-fixing to a new economic theory of market-shaping – an approach to policy-making that emphasises the role of the state as one that co-produces value, collaborates across public and private sectors, and facilitates the direction of markets over the long-term.
By identifying, describing, and contrasting real-life policy scenarios that reflect either a market-fixing or market-shaping approach, this essay will argue, using data where necessary, how each is supported by the appropriate rationale and demonstrate the wide-reaching impacts each has on policy-making within the green job economy.
Understanding the topic
Neoclassical economics can be characterised by its romanticised obsession with markets, an unwavering emphasis on the rationality of individuals and their maximisation of utility, and the outright neglect of any kind of historical or social context (Dequech, 2007; Institute for New Economic Thinking, 2017). At its core, neoclassical economics is built on the premise that the ideal market is equated with the optimal allocation of resources and that any deviation from a ‘Pareto-efficient’ market is defined as a failure. Put simply, if any of the three conditions set out by the First Fundamental Theorem of welfare economics for 'perfect markets' are not met - prices are incorrect, individual actors fail to behave rationally, or equilibrium is not achieved - then the market is deemed as failing. It is this theory of market failure in which Arrow's General Equilibrium model suggests that government intervention is only required to fix markets that fail to efficiently allocate resources (Arrow, 1951).
Marianna Mazzucato and Joshua Ryan-Collins argue that because policymakers have interpreted and utilised this concept of market failure as a justification for public policy intervention, it has limited the role of the state to one that is seen as “fixing”, or at best “facilitating” (2016, 2022). Positive externalities must be created by “public goods” because, being ‘non-rivalrous’ and ‘non-excludable’, they are not amenable to market production (Sekera, 2022). And, in the case of negative externalities, the state must devise market mechanisms to internalise external costs (Mazzucato, Ryan-Collins, 2022). The central problem with this approach is that while it aims to create optimal market conditions, it often leads to suboptimal societal outcomes (Lundvall, 1992). Fundamentally, the neoclassical paradigm of economics forces the state into a role that prevents it from shaping or directing markets in new ways. It’s a “dead end” (Mazucatto, Perez 2022).
Market-shaping, on the other hand, is an approach to policy-making that looks to collectively generate public value. Built on Karl Polanyi’s (1957) perspective that markets should be considered as outcomes of the interactions of individuals, firms and the state, it depicts government interventions, not as simple corrections to market failures but as objectives in and of themselves (Mazzucato, Ryan-Collins, 2022). Market-shaping interventions can best be characterised as policies that actively set a direction of change to foster a more dynamic, absorptive, and symbiotic policy-making process. This approach enables the state to think creatively about how to allow the public sector's vision, risk-taking, and investment to lead change (Mazzucato, 2016, 2017).
To guide the research for this essay, two research questions have been defined: