Governments - What For?

Over the last decade, governments have appeared to play less and less of a role in the decision-making of the world economy. Multinational corporations, and in particular the world's major financial houses, seemed to rule the roost. In the wake of the credit crunch, this perception has been shaken up. Only one of the sinking ships, Merill Lynch, got bailed out by a peer; the remaining survivors have been rescued by the American government.

A decade ago, Linda Weiss made the argument in her book "The Myth of the Powerless State" that governments had a crucial role to play in what she refers to as an "internationalising" (as opposed to a "globalising") world economy. She argued that the reason why people believed that the power of governments was disappearing is that they expected the trappings of a powerful goverment to remain immutable. But, she pointed out, a government alive to the evolution of its economy would instead change its tools of trade over time to ensure that it provided what was most needed to nursemaid the economy through its various stages.

The primary examples of powerful government that she singles out are those of Japan and Germany. With an acute eye for detail, she sifts through the twentieth century history of these global powerhouses to show how their instruments for influencing the economy have been altered as their economies grew. Signs that others have mistaken for a weakening state in these two countries, she reinterprets as the evolution of a state alive to the changing needs of the industries it shepherds. And certainly she makes a convincing argument, both for these economies and the other East Asian tigers that have followed in Japan's footsteps.

Weiss contrasts governments which have been, and remain, involved with their economies to those with a hands-off approach, principally Britain and America. After the failure of Keynesianism in the 1970s, these governments have largely favoured the neoclassical approach which allows the economy to tread its own way through international waters. An approach that the last year of turmoil has shown up as being as flawed as in its previous incarnation, prior to the Great Depression.

Weiss also distances the governments of Germany, Japan and the East Asian Tigers from those of the Scandinavian countries. Generally, the Scandanavian countries are also grouped as having strong governments but Weiss draws an important distinction: like the Anglo-American model, the Scandinavian model views the economy as having consumption as its primary aim and fashioning its policies in this light. Germany, Japan and the newly industrialised Asian tigers instead focus on the production side of the economy and in this way have been able to preserve strong government even as the economy strengthens. Thereby undermining what Weiss sees as a false dichotomy between strong government and strong industry.

Weiss' distinction between consumption-based and production-based economies is an interesting one. And certainly one which she backs up and explains in intriguing detail. What is also interesting is her argument that production-based economies tend to have better consumption-outcomes than consumption-based economies.

Throughout, Weiss' arguments are cogently presented and her knowledge of the cases she discusses is exhaustive. She makes a powerful case for the importance of government in the modern global economy and her emphasis on the role that a government can and should take in its economy is certainly one which policy-makers scraping up the latest financial mess would do well to heed.