Institutions for Building a Well-Functioning Society
There are two main ingredients in the choice of institutions that are strictly interconnected. One is offered by the suggestions deriving from the theory of social choice and the theory of justice, as well as the theory of macroeconomic market failures together with the analysis of political economy and the effectiveness of policy action.
The former can indicate the shortcomings of markets - and of different market forms - in terms of some social-choice criterion taken as a yardstick. This ingredient alone cannot be sufficient for substituting the government to the market, as this requires the supposed shortcoming of markets to be weighed against the possibility for governments to ensure an efficient action or, by contrast, to show failures similar to those of markets. Thus, the other ingredient is the idea that the community has in terms of the different abilities of the basic institutional forms of government to cope with a number of economic (as well as non-economic) issues that arise.[140] This requires knowledge deriving from both the normative and the positive theories of economic policy.Considering both the ingredients, philosophical and economic ideas are required whose reciprocal influences can vary according to a number of circumstances. These ideas lie at the root of the constitution of a country. With reference to a mixed economy, which is common to all developed countries, the choice involves public intervention in different fields to correct for distortions in the markets. This can be either discretionary and/or derived from rules that impose differing degrees of constraints on public action and shape its organisation. In any case, the role and effectiveness of public action must be ensured, having in mind the need for solving problems of conflicts and problems of equilibrium in the system, which is certainly not a likely result of market functioning.
Before ending this section, we must also take note of the fact that in addition to the issue of searching a proper and effective way to regulate markets by public action, another issue to discuss is how to find a solution for conflicts not only between different sections of the population but also between different public bodies.[141] The nature and depth of the conflicts that might arise are illustrated by the possibility that endogenous governments may arise from the populist preferences of a public resentful of the establishment of an independent and conservative central bank. This would likely lead to conflicts between government and monetary authorities and to the ineffectiveness of both monetary and fiscal policy (Demertzis, Hughes Hallett and Viegi 2004). In general, the action of different public institutions should be coordinated.
To fulfil all these requirements, the degree of centralisation of public choices must be carefully designed. It should take account of the need to find an acceptable (partly) decentralised equilibrium and the need to control the economy and avoid short- or long-run instability and multiple equilibria while ensuring transparency, information and accountability for both the effectiveness of public action and the exercise of democratic control. We deal with both sets of issues in the next section.
7.6
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