Overview of the Development of the Discipline

Adam Smith first suggested a theory of institutions and a role for the state, claiming that the action of individuals ^[1] motivated by self-interest would ensure, as led by an ‘invi­sible hand', some kind of social benefit, thus limiting govern­ment action to a few essential actions (Smith 1776).

Over the years, the night-watchman position became an exception, as most classical and marginalist economists tended to state a number of specific or general cases, in addition to those claimed by Smith and supporters of the night-watchman argument, where government intervention was in order. All the same, until the 1930s, there were only some ‘general’ principles, stated mainly by Pigou, justifying microeconomic government intervention in a market econ­omy, due to divergences between the marginal private and social net product. However, in most cases, only a set of practical rules was stated, aiming at asserting technical pro­cedures of government intervention in the realm of micro­economics (in particular, customs policy, price controls and taxation) and banking and monetary theory. Theoretical con­tributions on the theory of international trade and the balance-of-payments adjustment were considered as specific parts of the economic discipline. In Italy, the analyses of Pareto’s ‘Manual’ (1906) and Barone (1908) had left only limited (but significant, as we will see) seeds on the side of mathematical economics.

A more general setting for market failures and government intervention had to wait for a number of innovations. These were (1) the foundations of macroeconomic government intervention introduced by Michal Kalecki, Ragnar Frisch and John Maynard Keynes (pertaining to the logic of eco­nomic policy),^[2] (2) a number of other developments in the 1930s, and more importantly and (3) the statement in the 1950s of the principles for coordinated and consistent policy action (the so-called theory of economic policy developed by Jan Tinbergen).

Until the 1950s, public finance had a higher status than economic policy worldwide, as it had developed a theory of public goods and a conception of the role of the state, with important contributions by Italian and Scandinavian scho­lars (Pantaleoni 1883; De Viti De Marco 1888; Mazzola 1890; Wicksell 1896; Lindahl 1919). According to Einaudi (1934), Italian economists’ contributions made it possible for public finance to acquire a scientific status. A similar appreciation came later by Musgrave and Peacock (1958) and Buchanan (1960). Scandinavian contributions were well known in other countries, as Lindahl (1919) was originally published in German and soon reviewed in an English-speaking journal (Peck 1921).

A subject such as macroeconomic analysis and policy barely existed, as these only started with Kalecki’s (1933)³ and Keynes’ (1936) contributions, which, however, were not easily accepted in Italy and some other European countries. In the 1930s and following decades, further essential theore­tical seeds were added, partly following the emergence of new pressing practical requirements. On the side of the logic for government intervention in market economies, a debate began involving some leading economists of the time. This concerned the principles of government intervention, the

An exception was interventions of the Bank of England reacting to deficits of the UK balance of payments.

³ Kalecki’s contributions remained practically unknown in Western coun­tries, at least until 1935, when they appeared in Econometrica and Revue d'Economie Politique (see Kalecki 1935a, 1935b). role of distributive considerations vis-a-vis those of effi­ciency, the need for effective or potential compensation and the possibility of taking both efficiency and distribu­tional aspects into consideration in order to maximise a society's economic welfare starting from individual prefer­ences.

These advances made it possible for an autonomous dis­cipline to finally sprout in Scandinavian countries and the Netherlands in the 1950s. The geographical location of the fathers of the discipline was the product of a number of circumstances: not only the political trends and social substrate prevailing in those countries but also their full participation in - or even anticipation of - the wave of the­oretical innovations that had produced the slow but steady developments of the essential seeds of the discipline. Italy had been rather isolated from such developments - at least those in which we are interested - during the Fascist phase, but in the 1950s it was ready to import theoretical advances from abroad as a result of the concurrence of specific circum­stances rather different, however, from those operating in Scandinavian countries and the Netherlands. Starting late did not prevent theorists in this country from soon borrowing the new discipline in the early 1960s. Moreover, they offered - in the years after 2005, together with other theorists well trained in the original, classical theory - possibly decisive advances for its re-emergence, after a long decline starting in the 1970s, as an effect of what seemed to be a fatal critique of part of its core, i.e. the theory of economic policy.

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