The New Generation (Late Neoclassical) Theories in Economics, the Transformation of the State and the Reflection to the Development Paradigm

Abstract

The current global economic crisis has led to a growing dissatisfaction with the neo-liberal economic paradigm that became more widely known as the Washington Consensus. Washington Consensus which is as a type of free market capitalism is neoclassical economics greatly influenced by neo-liberalism, particularly in its anti-state attitudes, as with deregulation, privatization and liberalization. While the paradigm itself evolved from the late 1990s, in a more nuanced approach under the guise of a post-Washington Consensus, began to recognize a role for the state in correcting for market (largely informational) failures, neo-liberalism largely superseded by the new mainstream economics or late neoclassical economics – namely the new institutional economics, new growth theory, new economic geography and so on. Unlike the mainstream neoclassical economic paradigm the late neoclassical economics is based on the idea that markets are imperfect. Theoretically the late neoclassical economics, upon which the post-Washington Consensus draws, explain both market and non-market outcomes as the rational response to market imperfections. There is now widespread recognition, in some quarters, at least, that the state should engage in a more active role in guiding industrial development, primarily to negate market failure and to overcome the negative conditions of global economic crisis. This paper is largely focused on the paradigm shift of neo-liberalism, primarily from the market fundamentalism to negate market failure, government transformation in the light of late neoclassical theories in economics, and also seeks to demonstrate that policies based on this new paradigm, governments shifted slightly to a revised neoliberal model that approved different version of (market-friendly) state intervention.