Preconditions for the Existence of an Economic Discipline: The Core of Economic Policy under Attack

Any analytical discipline cannot be conceived if some mini­mal conditions are not satisfied, in particular, as far as the abstract preconditions for its existence are absent, insuffi­cient or defective.

No theoretical or practical objections were raised against the existence of market failures, even if their term of comparison - the maximand that the market could not reach - was unclear or could not be derived from people’s preferences. Indeed, Akerlof (1970) added to these failures by introducing asymmetric information.

It is true that Coase’s propositions (Coase 1960) had tended to rehabilitate markets or at least part of their failures, but his arguments came up against fundamental theoretical difficul­ties noticed already in the 1970s, such as the existence of fundamental non-convexities, which makes it impossible for an equilibrium in the pollution permits to exist (see Acocella 1994:104-6 English trans.). This notwithstanding, over time the idea of market primacy spread through the academic community, was enriched by other arguments, gained momentum and dominated the prevailing theories, transmit­ting also to the countries where the discipline of economic policy was born.

From this last point of view, Ksrgard, Sandelin and Ssther (2008) cite the influence of K. H. Borch, who was recruited to the Norwegian School of Economics and Business Administration as a professor of insurance from 1963 and urged his students to pursue doctoral studies in North America, thus weakening the influence of the Oslo school in Norwegian economics and politics.

Other factors leading to the decline of the Oslo school are given by Eriksen, Hanisch and Ssther (2007) and replicated in Ssther and Eriksen (2014a), on which, however, see the highly critical comments by Bjerkholt (2014), partially accepted by Ssther and Eriksen (2014b). Dixit, Honkapohja and Solow (1992) explain the disappearance of the tracts of the Swedish school due to the globalisation of economic analysis along lines dictated by the Chicago school. Asymmetric openness turned into the importation of a standardised commodity into a ‘small’ country.

Dealing specifically with Sweden but with implicit refer­ence also to other countries, Jonung (2013) points out the attractions and constraints of the younger generation of Swedish economists that led them to publish in English, pre­fer occupations in North American universities and disregard policy issues and applications of theoretical thought. Jonung’s analysis applies to Italy and to other countries as well. To be fair, Siven (1985: 592) explains the end of the Stockholm school as due in particular to its methodology (‘disinterest for equilibrium analysis, a preference for casuistic analysis, and lack of instruments for analysing the questions posed by the School itself’). It is natural that the homogeneity of the Chicago school had been reached at the cost of taking national specificities out of the realm of analysis. It is not so natural that policy applications to solve specific issues in a given context follow analysis with scarce reference to history and institutions, which is also due to uncritical understanding of the respective contents of economic analysis and policy. ‘Economic policy' is not even listed as a subject in the Journal of Economic Literature (JEL) classification system, and only ‘macroeconomic policy' appears as a subcategory.

These developments were favoured - indeed strength­ened - by the multiple objections to the possibility that demo­cratic policy action could effectively amend market failures, as indicated by the discipline of economic policy born in Scandinavian countries.

Minor critiques - most of them of a ‘political economy' kind, when such critiques are not so extremely articulated as to involve the self-regulating ability of all human actions - can enrich the discipline and be easily incorporated into it. I deal with them in Section 2.3.

Vital critiques have left the logic of economic policy untouched insofar as the existence of market failures is con­cerned, thus setting, from this point of view, the stage for government intervention to cure such failures. Vital objec­tions have been directed instead mainly at the existence of ‘critical' government failures. They refer first to the impossi­bility of taking people's preferences as a reference for public action, stated by Arrow (1951). In addition, there are the ‘radical' objections to the effectiveness of public action of the kind raised by Lucas (1976), based on the introduction of rational expectations (REs) into the analysis, together with other assumptions.

Differently from minor critiques, these critiques could not be incorporated into the discipline. They were really a barrier opposing its very existence, because, on the one hand, they limited the very possibility of fixing market fail­ures in a democratic society starting directly from individuals’ preferences. Definition of the society’s goal had to be dele­gated to politicians through the political process. On the other hand, the effectiveness of discretionary economic policy was put in question, thus severely limiting the range of public action, which was confined to the definition of rules. Only when these critiques were overcome did the very possibility of founding economic policy as a discipline come to exist.

2.3