Can theory help explain the role of the government in the economy of Singapore? In the early literature of economic development, economists viewed the state as a benevolent and unitary actor, behaving solely in the societal interest. The government was seen as able to obtain needed information, and then equipped with that knowledge and the available policy instruments, could intervene in an optimal way to correct any market failure and promote rapid development.

That view was dissipated by the reality of governmental interventions (both in developed and developing countries) that often did more harm than good. Indeed, government failures proved more damaging than market failures. Government bureaucrats were often forced to make business decisions with even less information than was available to the private sector. Politicians and bureaucrats turned out to be motivated by personal ambition and desires that did not necessarily lead to the improvement of the public good. And government power was manipulated by private agents to benefit particular groups, often at the expense of the general welfare.

In response to this reality, economists using traditional neoclassical tools developed theories of government in the economy, but none of them provide much insight into the essential nature and far-reaching role of the government in the Singapore economy. However, some insight can be obtained from the work of economic historians such as Douglas C. North (North 1981). These economic historians define the optimal or neutral state as one that takes actions that would emerge with perfect markets, which if accomplished by the private sector, would require intense competition.

Since Singapore is a small country, the law of large numbers cannot operate. Therefore, perfect competition in private markets is precluded, and the role of the government must necessarily be relatively large in order to counter market failures. While international trade allows individual factories to reach economies of scale, trade does not relieve the constraint of size limiting the total number of factories and their product and industry diversification.