1.7 Linking the Two Pillars
The second step in the process of formulating economic policy as an autonomous discipline is associating the theory of economic policy with the existence of market failures. As underlined earlier, a set of microeconomic failures had already been indicated around 1900.
After World War II, they were investigated in a systematic manner and codified (e.g. by Kapp 1950 and Bator 1958). Asymmetric information as a cause of market failures came much later (Akerlof 1970),even though the great Italian probabilist Bruno de Finetti had anticipated this concept in an article in a little known Italian journal (de Finetti 1938). However, more relevant from the point of view of computation and the definition of policy programmes were the macroeconomic failures introduced since the 1930s. Market failures as the logic of economic policy, together with the theory of economic policy as a tool for ensuring consistency and effectiveness of policy actions, thus became the ingredients of the core of the discipline.
A difficulty soon emerged (Arrow 1950, 1951) due to the impossibility of starting from individual values to define goal choices of the SWF. In order to bridge the gap between individual preferences and policy goals, Frisch devised the expedient of referring the SWF to politicians’ preferences, thus adopting the perspective offered by Bergson’s (1938) formulation of the SWF, to which Paul Samuelson (1947) also had added. From a practical point of view, this was enough. SWFs should be derived from official documents and statements or interviews with policymakers (Frisch 1957, 1970 and van Eijk and Sandee 1959 contain a specific example of how this might be done in practice using revealed-preference techniques). The democratic process would ensure consistency between the government’s preferences and those of the constituency. In his Nobel lecture, Frisch stated some of the rules to be followed for deriving such a function - as a first stage in the process of cooperation between experts and politicians - and added that he had a number of tests in favour of their practical effectiveness.
Zeuthen (1958), whose book had a large diffusion in Scandinavian countries and was translated into Italian in 1961, was the first (and successful) author to offer a systematic and consistent summary of developments in both welfare economics and the theory of economic policy as cornerstones of economic policy as an autonomous discipline. The discipline entered the curricula of master degrees in Scandinavian universities in the 1960s and 1970s via textbooks by Tinbergen (1956), Zeuthen (1958), Johansen (1977, 1978) and others.
The meaning of the term ‘autonomous discipline' must be clarified at this point. We conceive it along a tradition starting with Frank Knight (1952: 48) and passing through Gustavo Del Vecchio and Federico Caffe. According to Knight, the ultimate aims of economic disciplines (as any social science) are twofold: ‘first, to understand or explain some set of phenomena; and second, to use knowledge for the guidance of action'. Accordingly, economic disciplines develop at different levels of abstraction: economic policy as the second step in the progression of economic discipline from more abstraction towards more realism: general economics, economic policy, public finance.
1.7