THE STATE PLAYS a central role in economic life. It creates the rules in which markets operate and produces some goods and services directly. The state also facilitates private sector production and service provision through financial support. It redistributes income, both directly through taxes and transfer payments and indirectly through regulating wages and industry. It also performs many functions that help reproduce the economy, such as establishing education and health systems and governing the use of the environment. In all of these ways the state is a key economic institution of market societies.

This chapter is concerned with the interrelated economic and political developments of the capitalist state. Having arisen from the uncertainties of medieval conquest and war, the state has been shaped by challenges to its legitimacy arising from the periodic economic crises and conflicts discussed in Chapters 3 and 4. There remain diverse attitudes towards the state and different understandings of what the state is which have, in turn, influenced what states do. We look at how states differ across time and between countries and the recent effects of neoliberalism.