Contents

List of Figures page xi

List of Tables xiii

Preface xv

Acknowledgements xix

Part I Economic Policy As a Discipline 1

1 Introduction 3

1.1 The Core of Economic Policy and Its Two Pillars:

The ‘Logic’ and the ‘Theory’ of Economic Policy 3

1.2 OverviewoftheDevelopmentoftheDiscipline 4

1.3 The ‘Invisible Hand’ and the ‘Night-Watchman’

State 8

1.4 The Seeds for the Birth of the Logic of Economic

Policy 11

1.5 The Theory of Economic Policy and the Link

between the Two Pillars 17

1.6 The Classical Theory of Economic Policy with

Fixed and Flexible Targets 24

1.7 Linking the Two Pillars 33

1.8 Why Did Economic Policy As a Discipline First

Develop in Scandinavia and the Netherlands -

And How Did It Develop Elsewhere? 35

1.9 Economic Policy in Italy since the 1960s 45

1.10 Conclusions 48

2 Progressive Dismantling and Demise of the Classical

Theory of Economic Policy 55

2.1 Why Economic Policy Did Not Pass Over to Other

Countries or Survive 55

2.2 Preconditions for the Existence of an Economic

Discipline: The Core of Economic Policy under

Attack 57

2.3 Minor Failures: The Identity of Policymakers 60

2.4 Vital Failures and the First Pillar: The Impossibility

of a Democratic Social Welfare 62

2.5 Vital Failures and the Second Pillar: The

Ineffectiveness of Policy Action 68

2.6 The Need for Rules and Constraints: Independent

(and Conservative) Central Banks and Authorities to Limit Discretionary Policy Action 80

2.7 Waiting for a Revaluation of Policy Effectiveness 82

3 Re-establishing the First Pillar and a Silent Revolution

for the Effectiveness of Policy Action 83

3.1 Possibilities of a Democratic Social-Welfare

Ordering: The Need for a ‘Theory of Justice' 83

3.2 Rip van Winkle and the Rebuttal of the

Theoretical Convictions of the 1970s and 1980s on the Ineffectiveness of Economic Policy 90

3.3 TheSurpriseEffect 92

3.4 The Non-Vertical Long-Run Phillips Curve 93

3.5 The Optimal Inflation Rate 97

3.6 PoliticalIndependenceofCentralBanks 102

3.7 Conservative Central Banks and Alternative

Ways of Governing Inflation 108

3.8 The Changing Value of Multipliers and Fiscal

Policy 111

3.9 An Application of Values of Multipliers:

Inconsistency of the EMU Institutions 119

3.10 WhatHaveWeLearnedfromtheCrisis? 123

4 Revaluation of the Classical Approach to Economic

Policy: Re-establishing the Second Pillar 125

4.1 Introduction 125

4.2 Equivalence of Rational Expectations to a Strategic

Game 127

4.3 An Example of Conflicts Rather Than Passive

Subordination and the Need for a Theory of Conflicts 133

4.4 Conditions for Controllability in a Static Strategic

Setting with Two or Multiple Players 135

4.5 Notions and Conditions of Controllability in a

Dynamic Strategic Setting 152

4.6 Summary and Open Issues 164

PartII EconomicpolicyinthePresentTense 167

5 The Challenges of the Financial Crisis, Rising Inequality, Secular Stagnation and Globalisation: Economic Policy

As a Lame Duck? 169

5.1 The ‘Bad News': New Economic and Social Issues -

TheGreatRecession 170

5.2 The Crisis As a Pivot: The Limits to Fiscal and

Monetary Policy and the Need to Devise New

Policy Tools 176

5.3 The ‘Good News': New Monetary Policies and

Macro-Prudential Instruments for Dealing with

Crises 178

5.4 Searching for New Rules of Fiscal Policy 191

5.5 Coordinating Macroeconomic Policies: Down

in the Trenches or Clearing Clouds for the Future? 202

5.6 FightingInequalities 208

5.7 Dealing with Secular Stagnation 226

5.8 Finding an International Equilibrium in Times

of Globalisation and Redesign of International

Institutions 235

6 One Step Forward towards Realism in Theories Relevant

to Effective and Accountable Policymaking 253

6.1 Searching for the Right Signals in a Market Economy

to Prevent Crises and to Manage Them 254

6.2 Signals, Transparency and Forward Guidance 262

6.3 The Issue of Knowledge Sharing of Models and

Policy Effectiveness 278

6.4 How to Enrich the Classical Conception of Economic

Policy As a Discipline 281

6.5 Complementing and Refining the Abstract Theory

of Policymaking 293

7 Why Can Economic Policy Be a Useful Discipline? 295

7.1 Institutions As the Ring Connecting the Three Parts

of Economic Policy 295

7.2 Social Choice and Institutions for Building a Fair

Society 298

7.3 ConflictsandCoordinationinaDemocraticSociety 304

7.4 The Central Role of Education for Democracy 309

7.5 Institutions for Building a Well-Functioning Society 313

7.6 The Many Reasons Why the Theory of Economic

Policy Has an Impact on Institutions 315

7.7 For a Democratic, Fair and Efficient Society: A Restatement of the Need for a Unitary Discipline

of Economic Policy 324

References 326

AuthorIndex 391

SubjectIndex 398

Figures

1.1 Fixed-target approach page 30

1.2 Flexible-target approach 31

3.1 Optimal inflation rates with and without fiscal

transfers 100

4.1 Atimelinefordynamicpolicyproblems 154

5.1 Evolution of the unemployment rate in OECD

countries, 2008-2018 174

5.2 NEETs in major OECD countries, 2007-2014 175

5.3 International and global inequality, 1952-2011 213

5.4 Top 1 per cent income shares in Anglo-Saxon

countries, 1910-2010 215

5.5 Top 1 per cent income shares in Continental Europe

and Japan, 1910-2010 216

5.6 Top 1 per cent income shares in emerging countries,

1910-2010 217

5.7 Real income growth by percentile of global income

distribution, 1988-2008 218

5.8 Wage shares as a per cent of GDP, various countries,

1980, 1990, 2010 219

5.9 Adjusted share of labour income in GDP in selected

G20 countries, 1991-2013 219

5.10 Financialisation. Average value of market

capitalisation in the stock exchange (per cent of GDP)

in thirty-four OECD countries, 1990-2013 222

5.11 Rate of return versus growth rate at the world level,

from antiquity until 2100 224

xii List of Figures

5.12 Components of growth in per-capita real GDP, 1987-2007

5.13 Stock and flows of inward foreign direct investment as a share of global output by country group (per cent), 1970-2014

5.14 Global current account surpluses and deficits as a share of world output (per cent), 1980-2014

232

238

242

Tables

3.1 Public consumption, other public expenditures and

total revenues, selected OECD countries (1998-2008) page 99

5.1 Recent and projected growth rates for real GDP,

2007-17 172

5.2 Recent and projected growth rates for employment,

2007-17 173

5.3 Marginal income tax rates, selected countries

(1900-2013) 220

5.4 Globalisation waves in the nineteenth and twentieth

centuries 237

5.5 Growth of real GDP per capita at purchasing power

parity, selected regions and economies, 1951-2015 240