Institutions As the Ring Connecting the Three Parts of Economic Policy
Until now we have used the term ‘institution’ in a rather loose sense, generally as long-term rules set by the government but also as an organisation, public or private. At this point, the precise meaning of the term needs some clarification.
The term has indeed been given a variety of meanings in social sciences. However, these can be reduced essentially to the following two, which offer a more formal definition of the concept. First, the term may indicate a set of ‘rules’ that regulate in a lasting manner economic and social relationships within a group of agents; in this sense, for example, marriage, private property and the market are all institutions.[126] A second meaning extends the previous definition to include the organised agents involved in implementing the rules and allocating the resources necessary to do so; in this second sense, the firm, the government, the family and the Mafia are all institutions. Henceforth, we will use the term in both senses.Institutions are largely inherited from history (Iversen 2006), and there are institutional complementarities. Both these features make it difficult to reform institutions, starting anew, and sometimes even to partially reform them. There are, however, ways to change them partially. Policymakers should take account of some of the existing rules and organisations as constraints while planning to reform others over time, gradually.
The role of institutions is relevant to our discussion from many points of view. They permeate the whole discipline of economic policy,[127] [128] being of the utmost relevance when identifying - or weighing - the goals that should direct public policy according to citizens' preferences or because they affect the general nature of the performance of the system and condition current policies and their effects (Acocella 1994: 1-2, English edn).3 Institutions are a necessary ingredient for all three parts of economic policy as a discipline. In fact, they are behind both its pillars and the logic and theory of economic policy, as well as their practical implementation, applied economic policy, which can be defined only in a given historical and institutional context. Thus, institutions hold together the discipline and characterise it with respect to other branches of the economic science, economic analysis - which largely but not completely neglects them - and public finance, which focuses on certain specific rules and activities of public bodies. To be true, institutions play a role in both economic analysis and policy, but in the former their range is much more limited, and they are not often explicitly discussed or compared as such. However, one should consider that this statement strictly holds true only for highly theoretical analysis. In real life, institutions are ‘embedded’ in economic relations, as they influence the action of rational men (Granovetter 1985, who develops and corrects Polanyi’s (1957) position). The purpose of the following sections is to show in greater detail why institutions are the glue that holds together the two pillars of economic policy and the whole discipline. Concisely, the line of our argument is as follows: we are convinced that any social discipline is value laden.[129] Then, values are behind any discipline, in particular, social sciences. In the realm of economic policy, values are behind its pillars, as they determine social choice and welfare and direct the goals of policymakers and other social institutions (as well as their interactions). Institutions are, in some sense, the reverse side of value judgments. In fact, on the one hand, they define the procedures - which reflect values - needed for both ensuring the possibility of devising social choices out of individuals’ preferences and determining any desired goal (Sections 7.2. to 7.4). On the other hand, they set the frame within which these goals are implemented through policy action, taking account also of the historical setting of each country. Institutions are then needed for ensuring the effectiveness of policy action directed at social goals (Sections 7.5 and 7.6). Section 7.7 concludes by underlining the central role of institutions as the glue connecting the two pillars of economic policy (and, indeed, the three parts of economic policy) and restating its role as a unitary discipline.