Introduction

In Chapter 3 we saw that the ‘impossibility objection’ was addressed in a satisfactory way and has been largely overcome by a literature that is now developing in new and interesting branches of the discipline, such as the ‘implementation theory’, which involves the use of a strategic setting.

However, when the vital Lucas critique referring to the effectiveness of policy action defied the other pillar of the core of the discipline (i.e. the theory of economic policy), there was no possibility of maintaining the discipline as it had been originally designed. This critique was not addressed for a long time, which contributes to explaining the decline of economic policy as an autonomous discipline. As said, to some extent, the very practical application of eco­nomic policy in its heyday could have distracted its followers from further research and innovation, as was certainly the case for the Stockholm school (Siven 1985) and possibly also for the Oslo school (Eriksen, Hanisch and Sffither 2007).

The theoretical advances of the last two decades described in Chapter 3 laid down some premises for a restatement of the second pillar of economic policy, asserting the effective­ness of economic policy and the possibility for policy action to lead the economic system towards goals set by governments. The final obstacle - really, the major one - was defying the Lucas critique. In fact, there would have been no or scarce use of new knowledge involving a higher value of multipliers or of the higher optimal inflation rate in the case that discretionary economic policy could not be used as an effect of the impend­ing Lucas critique.

One thus could hope that the discipline could gain momen­tum and challenge mainstream thought, which assigns a very limited role to it. This would avoid confining policy discus­sions to a few considerations following very abstract - and sometimes unfounded - theoretical reasoning that often neglects any institutional and historical elements and lacks the theoretical background deriving from the logic and theory of economic policy. We are conscious, however, that this needs to overcome the power of some hysteresis in the devel­opment of economic thought that delays the dissemination of new ideas (Galbraith 1987), which is not an easy task, at least in the short run.

This chapter is organised as follows: Section 4.2 establishes the equivalence of a strategic game to the rational expecta­tions assumption used by Lucas. The equivalence defines a strategic environment as the one that can deal with his cri­tique. This is a proper context for investigating situations of possible conflict and the ways they can be resolved. The link between this environment and the content of the literature of the 1970s and 1980s and the implications of this new environment in terms of conflicts and their resolution are investigated in Section 4.3. Sections 4.4. and 4.5. constitute the core of this chapter: they state the conditions for controll­ability in a strategic setting for any number of players in a static and a dynamic setting. Section 4.6 summarises the contents of the chapter as well as theoretical progress in terms of restatement in a new setting of economic policy as a discipline. Moreover, it hints at open issues still to be dealt with further, in particular, with respect to coalitions, announcements and other possibilities of conflict resolution.

4.2