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This article provides information about the role of state in a liberal economy:
The role of the state in a liberal economy assumed a new dimension after the wide circulation of the influential writings of the English economist John Maynard Keynes. Keynes critiqued the liberal idea on the ground that an unregulated economy would tend to move towards full employment and thus would ensure social equilibrium or stability.
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Shifting from the laissez-faire argument of “zero role for state”, Keynes argued that equilibrium could be established before reaching that point, i.e., a society can achieve full employment by stimulating aggregate demand with active state intervention.
In case full employment results in inflation, the state should act to reduce aggregate demand. Government intervention, in both cases, should be in terms of controlling tax (fiscal) policy, government expenditure, and monetary policy (changes in interest rates and the supply of credit). The great depression of the 1930s ravaged the capitalist world and in a desperate attempt to come out of depression it searched for new ways of how state powers could be conceived and deployed. Keynesian economics assigned an important role to the state of managing demand and securing the conditions of mass consumption.
The “new conception” was put into practice by new welfare states. The establishment of these welfare states depended upon the achievement, that followed years of struggle, for balance of power between the large- scale corporate sector, organised labour and the state. Keynesianism dominated liberal economic thought and economic policies at least for three decades after the Second World War.
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The economic policies of most western states were guided by an urge to generate employment and to meet the basic needs of education, health, housing, civic amenities and others by adhering to a disciplined tax regime. Development policies stemming from Keynesianism helped in the consolidation of western capitalism both internally and externally.
Internally, the economically weaker sections of society were integrated to the liberal social, economic and political arrangement while externally, the western capitalist world succeeded in consolidating its position vis-a-vis the socialist block. In the second half of the twentieth century, thus, the role of the state in meeting the welfare needs of the common people in advanced industrial societies was increased as a well-worked out policy of social stability.