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The idea of self-regulating markets is overly idealistic and insufficient to navigate the complexities of reality. Understanding the relationship between markets and society is crucial in determining the optimal level of government intervention to ensure economic markets operate efficiently and sustainably.

In order to stabilize growth and prevent crises, a degree of government control over the economy needs to be in place. This is because history has shown that unregulated markets are prone to volatility, which inherently exposes the economy to risks and uncertainties. In The General Theory of Employment, Interest and Money, John Maynard Keynes compares financial markets to a “casino,” as human emotions and instincts favor “spontaneous optimism” over “mathematical expectation.” People hoarding to speculate could ultimately lead to breakdowns such as the 2008 Financial Crisis, disrupting economic stability.

Quality government governance over markets could also rescue markets stuck in downturns. Keynes claims that the state should take great responsibility for directly organizing investment, particularly during downturns, as he doubts the effectiveness of mere monetary policy. Even if markets have self-regulating tendencies, timely rescue of the markets is necessary before we are all dead in the long run; and the government is best suited for this role. In response to the 2008 Financial Crisis, the government developed Troubled Asset Relief Program to bail out failing banks and insurance companies to save the financial system.

Governments also play other critical roles in markets such as setting legal frameworks and incentivizing trade. Historically, 19th-century globalization was shaped by pro-trade policies that relied on imperial powers’ exercise of power instead of pure economic logic. As Dani Rodrick in The Globalization Paradox contends that “markets and states are complements, not substitutes,” more and better markets require more and better governance. Even today, larger states engage in more trade with more institutional support, whereas smaller states face limitations. 

Given historical evidence of government intervention in stabilizing and thriving markets, it is too ideal to claim that markets are self-regulating. The relationship between markets and states is central to understanding any macroeconomic policies. For example, the Bretton Woods system established in 1944, under the influence of Keynesianism, founded key institutions designed to intervene in markets. In particular, the World Bank focused on fiscal policy to invest in reconstruction and development projects that initially centered on Europe but later expanded worldwide. This also helps in crafting more effective policies for the future, since maintaining a perfect split of resources between intervention and free markets is often unrealistic.