T he global financial crisis has brought the state roaring back, with large stimulus packages and overhaul of regulatory systems. It is to be welcomed – but only up to a point. Today, we need a smarter, more active state, not necessarily a bigger one.
In the decade before the crisis, the role of government was under attack almost everywhere. Alan Greenspan, the former chairman of the US Federal Reserve, expected the markets to self-regulate in their own interests. International institutions pushed for open capital accounts. Privatisation was promoted as the answer to the problems of the developing world.
The assault came after almost a century of expansion. On the eve of the first world war, the average size of the state in the developed world was around 10 per cent of gross domestic product. By 1920, it had risen to 18 per cent. With the Great Depression it expanded again to 22 per cent of GDP, hitting 28 per cent by the end of the second world war.