Why the twenty-first century forces us to rethink the relationship between markets and the State
During negotiations among the Allied powers at the end of the Second World War, Winston Churchill is traditionally said to have suggested that the opinion of the Pope should also be taken into account. Joseph Stalin allegedly replied with a question that has become part of political folklore: “How many divisions does the Pope have?”
Whether the exchange actually took place matters less than the idea it conveys. For Stalin, power was ultimately measured in military strength. Armies shaped history; everything else was secondary.
History, however, has repeatedly challenged that assumption.
The oil crises of the 1970s demonstrated that energy could become a geopolitical weapon almost as powerful as armies. The COVID-19 pandemic has exposed the fragility of global supply chains. Russia’s invasion of Ukraine transformed natural gas, fertilizers and grain into strategic assets. More recently, competition for semiconductors, artificial intelligence and critical raw materials has revealed that economic interdependence is no longer merely an economic issue, but has become a question of national security.
Military power has not disappeared. Economic resilience, however, has become one of the essential foundations of states sovereignty.
This article expands on a line of reasoning developed in an earlier contribution on the geopolitics of critical raw materials. The argument advanced there, that markets do not necessarily invest where strategic resilience most requires it, appears increasingly relevant well beyond the mining sector. From public health to energy security, from artificial intelligence to food systems, the same tension between private incentives and collective interests is reshaping the relationship between markets and public institutions.
Since the late 1970s, economic debate has focused on a recurring question: how much government and how much market? Entire political traditions have shaped their foundations and divergences on this dichotomy, often presenting public intervention and free enterprise as alternative models competing for legitimacy.
Today, this debate appears increasingly inadequate.
The real question is no longer whether markets or governments are inherently superior. Rather, it is whether the challenges of the twenty-first century can still be addressed solely through market mechanisms.
I would argue that they cannot.
Not because markets have failed. Quite the opposite.
Markets remain the most effective mechanism for allocating resources, coordinating decentralized decisions and rewarding innovation. Their contribution to global prosperity is undeniable, and no realistic alternative has proven more effective.
The problem lies elsewhere.
The public opinion and governments expect the markets to be able to solve problems for which they were never created.
Their purpose is to allocate resources efficiently according to price signals and private incentives. They reward profitability, competition and innovation. They do not exist to maximize resilience, ensure national security, or pursue long-term collective goals whose benefits cannot be fully realized by individual economic actors.
This distinction has become crucial.
The 2008 financial crisis exposed systemic vulnerabilities that no single market participant had sufficient incentives to prevent. The 2020 pandemic demonstrated that years of optimization had created extraordinarily efficient but also remarkably fragile supply chains. Energy markets efficiently minimized costs until geopolitical conflicts highlighted the risks of overdependence on a limited number of suppliers.
None of these developments represented a failure of capitalism.
They revealed something different: they highlighted the divergence between what is rational for individual firms and what is desirable for society as a whole.
A company has every interest in reducing inventories, minimizing costs, and concentrating production where efficiency is highest. Society, however, may require strategic reserves, diversified suppliers and production capacity that remains idle most of the time but becomes indispensable during times of crisis.
Efficiency and resilience do not always follow the same path.
This may be one of the most significant economic paradoxes of our time.
For decades, we considered efficiency as the ultimate goal of economic organization. Today, resilience has emerged as an equally important public good.
The implications extend far beyond emergency management.
Consider critical minerals: the global transition to clean energy depends on lithium, cobalt, rare earth elements, and other strategic resources. Markets can undoubtedly stimulate investment in extraction and processing, but they cannot ensure diversified supply chains, geopolitical security or social legitimacy. If left entirely to market forces, production naturally concentrates where costs are lowest, even though such concentration creates strategic dependencies that may later prove economically or politically unsustainable.
The same logic applies to semiconductors, pharmaceuticals, food systems, and digital infrastructure.
These sectors are not simply markets.
They are strategic ecosystems whose stability affects the functioning of entire societies.
This helps explain why governments across the political spectrum are reconsidering their economic role.
The United States has adopted ambitious industrial policies in the semiconductors and clean technologies sectors. The European Union has introduced initiatives to strengthen strategic autonomy and ensure the security of critical supply chains. Asian economies continue to combine market competition with long-term government coordination.
Some might believe these policies are evidence of a return to state intervention.
This interpretation misses the point.
The state is not replacing markets.
It is increasingly performing functions that markets cannot perform alone.
This is not a return to the state-owned industries of the twentieth century, nor is it an argument for centralized planning. History offers abundant evidence of the inefficiencies associated with excessive government control over production.
Rather, we are witnessing the emergence of a different model: the Strategic State.
Its role is not to replace entrepreneurs, but to coordinate long-term interests that private actors cannot fully address. It defines strategic priorities, reduces systemic vulnerabilities, invests in public goods, ensures regulatory certainty, and creates the institutional conditions for markets to continue generating prosperity.
Markets need institutions.
Many economists have long emphasized this necessity. Economic freedom depends on legal certainty, enforceable contracts, credible regulation, and public trust. Markets do not function in an institutional vacuum. This is a well-known fact.
The current global scenario, however, has changed the scale of the challenges that those institutions must now tackle.
Climate change, geopolitical fragmentation, technological sovereignty, cybersecurity and food security are not isolated political issues. They are interconnected systemic risks that transcend the decision-making horizon of individual firms.
None of this implies that governments are inherently better than markets at making decisions.
Government intervention can be inefficient, protectionist, or influenced by political interests. Regulation can distort competition just as easily as market failures can undermine social welfare.
The solution, therefore, is a more capable State.
A capable State does not seek to outperform entrepreneurs.
It enables entrepreneurs to operate within an economic system that remains resilient in the face of increasingly complex risks.
Industrial policy, understood in this sense, is not about picking winners. Rather, it is about reducing vulnerabilities that markets alone have little interest in or are unable to address.
Turning to historic examples, perhaps this is where Churchill’s famous remark on democracy offers a useful parallel. He argued that democracy is the worst form of government, except for all the others that have been tried.
A similar reasoning may apply to markets.
They remain the most effective mechanism ever developed for allocating resources and organizing economic activity, as long as societies do not expect them to solve problems that go beyond their intrinsic characteristics.
The twenty-first century requires that every state be able to make markets and governments work together.
Because the greatest challenge facing modern economies is no longer the creation of wealth.
It is about ensuring that prosperity, security and resilience reinforce each other in a world where markets remain indispensable, but are no longer sufficient.
