State and Economy Essay

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How Does Capitalism Affect Democratic States?

Pluralists argue that a wide variety of economic actors, including representatives from business, labor, consumers, and others, struggle to influence the policy making process. Policymakers tend to respond most favorably to those groups who have the most resources, organizational skills, and access to policymakers.

Other scholars maintain that the business community has a significant advantage in this political competition. It has more resources than other groups in society and so is generally able to capture, dominate, or otherwise influence the policy making process to its advantage. Furthermore, policymakers have little choice but to promote continued business investment and economic growth or else they will be voted out of office, tax revenues will dry up, and the state will suffer political and fiscal crises.

Still other researchers suggest that states enjoy far more autonomy over economic policy making than these other perspectives acknowledge because politicians and state bureaucrats have interests of their own that they use the state to pursue. Some go so far as to suggest that states are predatory in the sense that their rulers are driven to maximize the revenue their states extract from the economy in order to increase their own power.

How Do Democratic States Affect Capitalism?

The state always influences the economy. First, governments provide and allocate resources to business through direct subsidies, infrastructure investment, and procurement, which create incentives for firms to engage in many kinds of behavior. Second, states establish and enforce property rights and regulate firms in ways that affect their behavior and organization. Antitrust law, for instance, influences whether firms merge or not. Third, the structure of the state affects business. For example, decentralized states provide different opportunities for firms to relocate their operations within national borders than do centralized states. Finally, nation-states engage other nation-states in geopolitics. Such international activity often impacts national economies. Notably, when war breaks out, economies can be devastated or revitalized, as occurred in Western Europe and the United States, respectively, during World War II.

How Are State-Economy Relations Organized?

Scholars often recognize three types of state-economy relationships in capitalist countries. First is the liberal model (e.g., USA, Britain) where the state tends to maintain an arms length relationship from the economy, grants much freedom to markets, pursues relatively vigorous antitrust policy, and relies heavily on broad macro-economic and monetary policies to smooth out business cycles, and tries not to interfere directly in the activities of individual firms. Second is the statist model (e.g., France, Japan) where the state is much more involved in the economy and exercises much greater influence over individual firms, such as by providing finance and credit directly to them. Third is the corporatist model (e.g., Germany) where the state promotes bargaining and negotiation among well organized social partners, notably business associations and labor unions, in order to promulgate economic and social policies that benefit all groups in society.

In sum, government can be an arm’s-length regulator, a strong economic player, or a facilitator of bargained agreements. But the state and economy are always connected in important ways in capitalist democracies. And this has always been true – even in the most laissez faire examples of the nineteenth century when states prevented capitalist self-interest from getting out of hand to the point where it hurt workers, consumers, and the environment so much that it would have undermined capitalism itself (Polanyi 1944).


  1. Katzenstein, P. J. (ed.) (1978) Between Power and Plenty. University of Wisconsin Press, Madison, WI.
  2. Polanyi, K. (1944) The Great Transformation. Beacon Press, Boston, MA.
  3. Lindberg, L. N. & Campbell, J. L. (1991) The state and the organization of economic activity. In: Campbell, J. L., Hollingsworth, J. R., & Lindberg, L. N. (eds.), Governance of the American Economy. Cambridge University Press, New York, pp. 356—95.

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