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Fundamental principles of state- market relation
10/1/2020 13:36' Send Print
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Objective foundations of the state- market relation

Firstly, state - market relation originates from the inherent functions of the state.

In essence, the state has quite a few functions including economic and social ones. In other words, in the process of socio – economic development, the state in the role of the most important social institution, representing the interest of the ruling class has intervened in the socio-economic activities with a view to promoting the socio- economic development in the direction of serving the interests of its class. Although the economy operates in accordance with the objective rules, the government’s intervention also influences its development, not to say orientates the socio- economic development.

As a social entity in superstructure, the state exercises the role of governing the economy. However, this role varies according to certain steps of economic development and certain economic models. Especially, with the coming into being of market and the development of market economy, the state intervention has become more diversified and flexible.

Market is not only the place for buying and selling, but given the relation with the state there exist market models, market factors and market entities. Therefore, the state - market relation, in essence, is the relation of the state in the role of manager and the process of formation and development of market models, market factors and market entities.

In terms of economic function, the state plays the role of not only the manager, the promulgator of laws, regulations and game rules on the market but also the actor of manufacturing activities (particularly, of goods and public services), the seller and buyer of goods and services on markets. Hence, now the state - market relation is reflected in the form of the relation between manufacturing entities on the market, between the buyer and seller of goods and services, which is subject to the interaction and binding of the economic rules on the market and the administration of the state through a system of laws, regulations and management tools.

In terms of exercising functions, no matter what objectives of the state-market relation, it is the one of self- interest. This is the interest of the state and the entities on the market. State exercises its governance role to ensure that market develops effectively. The growth of the market is the economic foundation for the growth of the state. Therefore, when it comes to state- market relation, it is necessary to harmonize the interest of all entities on the market.

In reality, the aim of the interaction between the state and the market is to increase the interest and create common growth for all entities on the market. This is the convergence of the state and the market, prompting the state and the market to cooperate and interact with each other. In essence, this is a symbiotic system, interdependent on each other for common growth and interest. However, in the process of interaction, there appears a competition for role and interest. If the role is appropriate to the level of development and resolving power, interest will be satisfied. On the contrary, if the role is inappropriate, (i.e. the state dominates the market or the market overwhelms the state) the state governance will be ineffective and the market itself will not allocate resources effectively. This is the conflict in the state- market relation.

Secondly, from market failure

The market functions and grows under objective laws. However, market itself is not a supernatural force. In fact, market economy is not an optimal one, but it contains inherent weaknesses and unexpected failures. A market failure happens when market is unable to allocate resources effectively, nor can it produce goods and services needed by society. It is the market failure that calls for government’s intervention.

Market failure is clearly defined by the economists and can be summarized in some cases as follows: (I) Lack of competition: a fundamental factor for the market to create economic lever is fair competition. However, historical factors or political mechanism may give rise to monopolistic enterprises dominating the market. Due to lack of competition, the supply of goods is normally ineffective for an economy. In this case the government intervention is crucial to create necessary competition. (II) Peripheral effects: in many cases, individuals or enterprises may produce positive or negative effects on other individuals or enterprises without being made up for cost (in case of positive effect) or making compensation for damage (in case of negative effect). If the state cannot exercise strong intervention, harmful effects will increase while positive effects will be on the decline, resulting in failure to achieve social efficiency. (III) Imperfect information may make it impossible for market transactions to be implemented such as weather forecast or information on environment and health. In these cases, market needs to be provided further information and it is the state that does the job. (IV) Imperfect markets: In reality, some markets due to difficulties and risks in collecting information and management cannot have enough goods and services to meet the social demand. In this case, government intervention is needed to promote and maintain creativeness of the economy. (V) Providing public services: In general, public services such as firefighting, social security, parks cannot be privatized. Therefore, it is impossible for market to provide private suppliers who can supply these services effectively and often the state must play the key role in providing public services. (VI) The development of market economy inevitably leads to rich- poor gap or income disparity. This is the attribute of market mechanism. In this case, with its functions, the state must intervene in the process of opportunity access and redistribution as well as providing social security services, reducing the gap between the rich and the poor. (VII) The movement of a market economy, from a macro perspective, under certain cycles creates macro instability. The fluctuated output, in the long term, still reveals a certain trend or growth potential. The economy at times suffers from a high inflation rate or falls into recession with a high unemployment rate, which poses uncertainty and risks to the lives of numerous people in society. That macro instability is also one of the market's shortcomings, which the market itself cannot overcome.

To overcome these shortcomings, the state's role is indispensable. The state must intervene in the market to create opportunities and environment for the normal operation of the market to meet social requirements. In other words, it is impossible to have a pure free market. In order to have a market functioning effectively, state intervention is a must. The state intervenes and cooperates with the market to correct and overcome defects of markets, not to replace the market.

It is also important to note that, in modern society, state intervention in the process of a market economy development, resolving socio-economic crises and expanding democracy is also to meet the requirements of socio-economic development. Especially the state in a democracy is a tool that can reduce most of the negative impact of the market system, while maintaining ownership and freedom. In other words, it is the democratic political system that can contribute most to the operation of a market economy. Also, even though the state has an important and indispensable role in developing the economy, it does not mean that the state can justify and replace all market activities. The state should only focus on the areas which are impossible for the market to cover, or the level of achievement by the market cannot compare to that by state intervention. Excessive state intervention, in many cases, is detrimental to the state itself.

Thirdly, from the failure of the state to perform socio-economic functions.

The state's intervention in socio-economic activities is indispensable to create development. However, in many cases, state intervention does not achieve the desired result. We have witnessed the "struggle" in theory as well as in practice as to the state’s intervening role in the economy. After the 1929 - 1933 world economic crisis and the outbreak of World War II, the view on the role of the state changed from in favour of less state intervention to a bigger role of the state. Until the 1960s, the state was really involved in every aspect of the economy, managing prices and increasingly adjusting labor, exchange and financial markets.

It is too deep the state intervention in market operations that distorts market relations. The 1973 oil price crisis and the debt crisis of the 80s were evidence of the inefficiency of the state's deep intervention in the economy. In other words, this reflects the failure of excessive government intervention policies in market activities.

The crisis and the collapse of the socialist model in the Soviet Union and Eastern European countries in the late 80s and early 90s also serve as clear evidence for the state's failure in governing and operating the economy. It is the development based on centralized and bureaucratic centrally planned subsidy and the failure to accept the role of the market that led to an irrational allocation of resources, waste, losses, and murder of growth motivation.

The failure of the state has many reasons, including the reasons associated with the operation of the state. First, the state itself cannot be as sensible as the market but often lacks information. Also, the state can only take limited control of private reactions as well as of administrative bureaucracy. Besides, there are the restrictions imposed by political system.

The history of development shows that excessive intervention as well as market elimination cannot bring about fruitful results for socio-economic development. Western countries have had to adjust their strategies and implement the development of a mixed economy in which both the state and the market are attached to equal importance. The countries that used to develop under the model of the centrally planned and subsidized economy have also transformed to mixed economies, restoring and developing markets, and returning their inherent functions. The failure of the state in the case of excessive intervention or the elimination of the market role shows that it is impossible to develop without the state's intervention, nor to develop without the market. In order to develop the state and the market are required to interact, support each other and resolve defects. Thus, it can be seen that the relationship between the state and the market stems from the needs of the state and the market themselves. This is an indispensable and interdependent relationship.

The result demonstration of the interaction between the state and the market is the socio-economic development of each country. The handling of this relationship is manifested in the developed institutional system. The bottom line is that the formation of principles, regulations and laws to create a mechanism for the operation of this relationship must be appropriate to each development stage and to the capacity of each party. A developed market economy is the one that has a synchronously developed institutional system, which opens up opportunities and ways for the state and the market to develop their capacity and effectively overcome their shortcomings. Therefore, the crux of the relationship between the state and the market is to institutionalize the status and the role of the state and the market as well as the relationship between the state and the market.

When it comes to the relationship between the state and the market, it is necessary to identify and distinguish roles between them in the process of the relationship movement. The state and the market have their own functions, but these functions change with the socio-economic development and business environment. It is necessary to depend on the state’s capacity and market development as well as each country’s viewpoint of development, thus appropriately differentiating their roles. The appropriacy is measured by efficiency and unlimited growth.

Therefore, the state, as the subject of the relationship, should assign an appropriate role, basing on the economic growth objectives, from the current status of the economy, and the level of market development.

Principles to handle the relationship between the state and the market

Firstly, dealing with the relationship between the state and the market must be based on the national interests, as the top priority, and ensure the efficiency of socio-economic growth.

The relationship between the state and the market is one of the great ones. Proper addressing of this relationship will promote socio-economic development. Therefore, the requirement in dealing with this relationship is how to exploit the synergy of all resources, namely state resources, market resources and internal and external resources. It is necessary to create a collective force from resources for development.

During the process of handling, it is inevitable that there will be conflicts of interest in order to maintain the harmony of interests between the state and the market. However, in many special cases, the national interest, principally, should be put at the top priority. As national interest is of optimal importance, the state should make full use of the market mechanism, relying on agreed social conditions to reach a defined goal.

The benefits of our nation are: ‘for national independence, freedom, and sacred territorial integrity of the Fatherland, socialist regime, the power and prosperity of our nation, and the freedom and happiness of the people’ (2) When addressing the relationship between the state and the market, this goal must be realized. The state must raise its management effectiveness to a new level, becoming a state of integrity, acting, and serving for the sake of the people. The market must be stable, effectively exploiting, and allocating resources so as to achieve these goals. It is necessary that in dealing with the relationship between the state and the market, biases and local interests be abolished.

Tracing back to history of market economy development, it is evident that the choice between the state or the market is decided by growth efficiency. There have existed failures due to the inclination towards the state or the market. In recent years, researchers have no longer focused on whether the state role outweighs that of the market or vice versa. Instead, their preference has shifted towards which between the market and the state will be more effective. And it has been seen during the real process of operating the economy and dealing with this relationship, the effect of economic growth is what determines the choice between the state and the market.

The current perspective adopted on the development is towards sustainable development, meaning that not only are high growth rates prioritized, but the social and environmental issues should be addressed. Therefore, dealing with the relationship between the state and the market is not merely oriented towards economic growth, rather it must ensure a stable society, development, and improvement in living standards, in which people are living in a healthy, non-polluted environment.

Second, the state does not intervene when the market is operating effectively. Moreover, it is the task of the state to deal with cases which are beyond the reach of the market or when the market proves ineffective.

The market economy operates under objective laws. The market mechanism is what mobilizes and exploits resources effectively; therefore, when the market is operating effectively, the state should not intervene, depressing the market.

In practical terms, it can be seen that any non-market economy run by the state has ended in failure or that when deeply controlled by the state, the market will surely lose its dynamics, and effectiveness in production and business activities.

The principle of operation of the market is to ensure an increase in profits. However, within the economy, there are sectors (e.g., public goods or some risky business areas) or times in which economic activities do not generate average profits or attract participation from the private economic institutions. Nevertheless, it is these sectors that facilitate conditions for production activities, as well as ensure social security. For this reason, the state is forced to involve itself in these sectors or adopt mechanisms and policies to adjust and create favourable conditions for the market to operate.

Nonetheless, the state intervention must be based on the governance capacity and economic potential of the state. For those with low governance capacity and state economic potential, it is necessary that the state should first focus on the basic functions and the pure public goods provision, such as property rights, macroeconomic stability, disease control, roads, running water and, welfare for the poor. Once the capacity of the state is improved, interventions can be directed at intermediary functions, such as the management of foreign effects, monopoly regulation, and social insurance, etc. For those with great capacity, they can perform broader functions, more proactively and actively coordinating with markets, nurturing market development, opening up opportunities for the market to infiltrate into other fields of social and economic life.

Third, handling the relationship between state and market must be suitable for each phase of economic development.

During the process of developing a market economy, the relationship between the state and the market is indispensable. However, due to the fact that historical, cultural, and political elements do not experience a corresponding development, their relationship is an asymmetric supporting interaction.

Their respective roles and functions, along with the development of the economy, also have undergone development and adjustment. Therefore, determining the specific role and position of the components in different market economies is not completely the same, nor is it in the different development phases of the same economy. Good resolution of this relationship requires flexibility and dynamics:

1- If the markets are still underdeveloped, the state needs to intervene, through mechanisms and policies creating favourable conditions for the market development and "spare gound" for the market to flourish. Therefore, along with the process of building and developing a socialist-oriented market economy, the State, relying on the common criterion – development effectiveness, needs to adjust the level of intervention.

2- Handling the relationship between the state and the market needs to be comprehensive and synchronous, associating with the situation of each development step of the social production force, focusing on not only the ownership aspect in order to promote the capacity of all economic sectors, but also the distribution, exchange and consumption. In trading, prices must be based on the market. In distribution, the market principle must be ensured in the first - distribution stage, and there is state intervention in the redistribution stage to guarantee fairness and equality, thus minimizing the rich-poor gap.

3- It is significant to raise the effectiveness and efficiency of the state, including both central and local levels. This relationship cannot be handled properly without a dynamic and constructive government. Building the government of action, integrity, and service is to create effective governance institutions, a robust government, and a professional, compact, transparent, and civil service. This is the foundation for the efficient management of the economy in general, and the proper handling of the relationship between the state and the market in particular.

Therefore, this relationship should be handled in correspondence with the development level in each stage, conforming to the actual capacity and existing level of the market. When the development of the two elements, the state and the market, is incompatible with each other or still limited, it is inadvisable to highlight the role of the state and devalue the role of the market, or vice versa.

Fourth, when dealing with the relationship between the state and the market, it is vital to harmonize interests among the state, enterprises, and people.

It can be seen from the cases of developed market economies that there often exists a tripartite relationship between enterprises, people and the state. Each element in this relationship has its own functions, aims with different interests.

For enterprises: with the function of manufacturing and providing goods and services to meet the needs of the society, enterprises, in their production process, always put priority on economic efficiency and profit; as a result, their desire is to generate profit and increase the added value.

The state, as a powerful institution, takes advantage of its power to guide socio-economic development. Therefore, the desire of every state is an increasingly civilized and modern society under its guidance and management.

People are both workers and providers of important inputs for the market, and consumers, so their goal is to earn more income to ensure a better life.

In order for society to develop in the market orientation, it is necessary to harmonize interests of the above-mentioned elements. As a matter of fact, if the market is prioritized, this will shape a profit-seeking society which ignores the human value. On the other hand, overemphasis put on the role of the state will certainly lead to the government overload; the state, consequently, is supposed ‘pay for’ it. Similarly, in the case that the interests of the people are much accentuated, the society will not be adequate affluent to meet the increasing consumption demands of people because consumption cannot exceed the existing capacity.

Thus, the relationship of interest between the state, enterprises, and people dominates the handling of the relationship between the state and the market, and vice versa. As a consequence, the strict adherence to the principle of ensuring the interest of the state, enterprises, and people is of the utmost importance.

Fifth, when dealing with the relationship between the state and the market, it is necessary to put it in the multi-dimensional relationship among the state, the market, and the society.

It can be said that the relationship between the state, the market, and the society is the overarching relationship in the market economy. In terms of economic theories, there exist different points of view, ranging from emphasizing the role of the market, to emphasizing the role of the state or emphasizing the need of both the state and the market in a mixed economy. Besides, it can be seen in developed market economies that the role of society is also increasingly drawn attention when complementing and monitoring both the market and the state. Even after the failure of the "Washington consensus", a number of economies decided to reduce the market and promote the society.

The relationship between the state and the market exists in a certain social environment, so it is undoubtedly affected by the social environmental factors. Besides the state and the market, social factors and social organizations always have effect on both the state and the market as well as the relationship between the state and the market.

It is undeniable that when the social production develops into a larger scale, the state is unable to cover neither all aspects of socio-economic life nor every object in society. As a result, when needed, it is social organizations that are to engage themselves in addressing or influencing the state to find appropriate solutions. In relation to the state, the social components, as social organizations, is supposed to involve in the policy-making process, implementing and monitoring the policy implementation. Therefore, it is extremely necessary that favorable conditions be created for social organizations to fulfill their role in supporting and supervising the state.

In relation with the market, social organizations are an indispensable component of the political system, protecting the rights of the people against negative market impacts. In fact, the development of the market has promoted the development of social organizations, facilitating the role of the social components in building and developing the economy. Problems in market-to-society relations arise when the social benefits are overwhelmed by the free development of the market. As a norm, the state, based on its function, will intervene and solve arising problems; however, it is impossible for the state to address all issues promptly. Normally, it is the society that first gets the sense of the deviation caused by the market such as environmental pollution, food hygiene and safety, etc.

In order to address the relationship between the society and the market, the following resolutions should be taken:

1-To solve the relationship between social organizations and enterprises, with the aim of nurturing favorable environment for economic growth, ensuring the benefits not only for business but also for the society. The mechanism to resolve this relationship is carried out through the movements and opinions of the people and social organizations, forcing businesses to adjust their behavior both in production, exchange, distribution, and consumption.

2-To indirectly influence the state to formulate regulations governing business operation, monitoring the operation process, and reviewing the development strategies and programs of enterprises.

3-To bridge networks within the society, exchange information, exploit resources for self-governance, support unions, protect disadvantaged groups ...

4-To establish social enterprises which will provide non-profit social services, thereby, contributing to the socio-economic development.

5-To perform the supporting role for the state and market in dealing with the interaction between the state and the market (such as accessing market information, reporting into the state to handle, or supporting the state to regulate the market). With that role, the social components are always influential in handling the relationship between the state and the market.

Thus, in order to develop the economy, it is required that the relationship between the state and the market should be resolved, but the multidimensional relationship between the state, the market, and the society also needs to be handled. In this sense, the society is to perform the role of supervising both the market and the state when fulfilling its functions and duties.


Source: Communist Review (No 924, August 2019)
Vu Van HaCommunist Review