ECONOMICS:Markets succeed and fail. Government interventions succeed and fail. The trick is to learn lessons from both, writes DAN O'BRIEN

IN ECONOMIC affairs, what role for the market and what role for the state? This question has always excited ideologues. Since the financial crisis triggered the deepest recession in decades, more practical souls are posing it too.

The last two inflection points in the modern economic history of the western world took place in the 1930s and 1970s. In both cases failure heralded change. In the 1930s, the Great Depression was blamed on too much market and not enough state. In the following decades, government expanded its role in economic affairs: to nationalise and regulate, to tax and spend.

In the 1970s, stagflation (economic stagnation accompanied by inflation) was attributed to too much state and not enough market. Privatisation and deregulation became all the rage.

The recent Great Recession is as serious a failure as the Great Inflation of the late 1960s and 1970s, if not the Great Depression. Casino finance has, among other things, plunged the developed world into an age of austerity. Only for massive government intervention – in the form of bank bailouts and fiscal-monetary stimulus – things would almost certainly be much worse than they are now.

Does the ongoing state-led rescue of capitalism herald a new era of big government? Will Brian Lenihan reach ever deeper into our pockets, not only to balance the books, but to launch a new era of State activism? Will Mary Harney change her free market ways and nationalise the health service? Will Europe row back on its single market experiment? Will the world make trade among its nations less free?

The answer to all of these questions is no.

One reason for this is ideas, or their absence. In this respect, the current era is very different from the 1930s and 1970s.

In the early 1930s, not only had market liberalism yet to deliver mass prosperity, it faced a gamut of seemingly coherent alternatives, including two that were already fully operational and apparently successful – Soviet collectivism and Italian statism.

In the 1970s, the critics of post-1930s government interventionism, who had quietly been honing their arguments in universities and think tanks, seized the moment. Their ideas about both macro and microeconomics were alluringly elegant. Their supply-side manifesto was adopted eagerly by politicians who instinctively leant towards individualism and who were often viscerally hostile to statism.

Today, there is no Keynes or Friedman, and however attractive Asian authoritarianism may appear to some, nobody seriously suggests it as a model for the developed world.

The absence of serious ideas about what an expanded state would or could do is one reason why economic management is not about to undergo a major change.

Another reason that the Great Recession will not herald a big swing towards big government is that big government never went away in the first place. While there has been deregulation in some fields, there has been new regulation in others, particularly related to the environment and health and safety.

Public spending in real terms has actually risen across the developed world since the 1970s. The growth has been in line with economic expansion, leaving public expenditure as a percentage of gross domestic product broadly unchanged over three decades in most countries.

In many countries it reached new peaks in 2009 as a result of the recession. The effect it has had on public finances is a third reason why any significant expansion of government involvement in economic activity will not happen: it simply cannot be afforded.

With the exception of finance, which must be vigorously reregulated, the balance between state and market should continue its ebb and flow, changing gradually, influenced mostly by what works and what does not work.

The state does many things well, and not only where the market might not provide, in areas such as health and education. Well thought-out enterprise policies, for instance, can help economies to grow.

Ireland’s industrial policy has been a notable success. For decades IDA bureaucrats have been choosing which companies to target. They have picked more winners than losers. In Europe, the government-led creation of Airbus has improved the functioning of the global civil aviation market. A huge number of innovations, from Teflon to the internet, have come about because of government innovation efforts. Indeed, it is hard to think of any rich jurisdiction, with the possible exception of Hong Kong, that has grown rich without active government.

Governments also do their fair share of damage, because of incompetence and corruption. It has been notable during the financial crisis that state-influenced banks on average performed even worse than their privately owned counterparts.

In the US, the government-backed mortgage issuers Fannie Mae and Freddie Mac were at the very heart of the crisis. In Germany and Spain, where regional governments are unusually powerful, the banks they own – respectively, Landesbanken and Cajas – have made most losses.

Markets succeed and fail. Government interventions succeed and fail. The trick is to learn the lessons and take the best of both. That has been happening for decades. The same gradualist, learning approach to economic affairs is likely to continue in the future.