Preface
In the process to specialisation of the unitary economic science that had developed since Adam Smith's Wealth of Nations (1776), at least three economic disciplines have arisen over time, each with some degree of autonomy, albeit linked one to the other.
Adam Smith's analysis contained the seeds for all future developments. First, it was economic analysis, which progressively proceeded towards a highly abstract set of principles, after other economic disciplines had developed. Then, public finance emerged as a necessary step for designing the main task of a modern state, i.e. to levy taxes to meet public expenditures. This discipline arose by the end of the nineteenth century, but some bricks were laid well before. Economic policy - which had a limited role for Adam Smith and other classical writers - arose only later, as we will see.What differentiates the various disciplines is their different degree of abstraction or remoteness from reality, economic analysis being the most theoretical one, followed by economic policy, encompassing the action of government in all economic areas and, then, public finance, confined to the action of government for taxes and expenditures.
The seeds of economic policy were laid from the end of the nineteenth century to World War II, but the discipline can be said to have been ‘officially' established only by the end of the 1950s. Market failures were first identified through a microeconomic lens only, by what is now termed ‘social choice and welfare theory', and then, by Kalecki, Frisch, Keynes and others, also in macroeconomic terms. As I will say, market failures represent the ‘logic of economic policy', which justifies the existence of government action in many areas to correct or substitute the market for its failures. It constitutes what I call the ‘first pillar' of the discipline.
Facing the numerous government tasks arising from market failures - and thus the rise of multiple targets - requires a number of effective policy tools as well as a coordination of their use to guarantee the attainment of goals.
This is done in the ‘theory of economic policy', which constitutes my ‘second pillar' of the discipline of economic policy.Economic policy has also a third branch, applying the concepts of its two pillars to given historical and institutional contexts. I call it ‘applied economic policy'.
This book is organised as follows: Chapter 1 traces the development of economic policy as a discipline, which concluded in the 1950s. Chapter 2 deals with the progressive dismantling and the demise of this conception of economic policy for a long time. Specifically, the discipline as sketched in Chapter 1 became obsolete as a result of many critiques addressed to it. Some of these critiques were ‘minor', as they could rather easily be incorporated in the realm of the classical version of economic policy.
‘Vital' critiques, instead, referred to the central aspects of the two pillars and threatened their foundations and, thus, their validity. If they are unaddressed, the whole discipline - or at least a part of it - collapses. The first such vital critique was advanced by Arrow in 1950-51 and concerned the impossibility of defining social targets starting from individuals' preferences (Arrow's critique). This critique threatened the possibility of tying government goals to the preferences of the citizens and, thus, the possibility of their democratic derivation.
The second vital critique referred to the ineffectiveness of macroeconomic policy action and derived from the introduction of ‘rational expectations’ in the 1970s. Rational expectations implied that any government action could be foreseen and neutralised by the private sector. This deprived government action of a set of relevant macroeconomic policies, even if it retained some degree of acceptance of microeconomic policy intervention as a way to influence the structure of the economy.
These critiques were not addressed for too long, which led to the demise of the discipline. Chapter 3 investigates the long process of rehabilitation of economic policy as a discipline.
After a couple of decades, the first critique was overcome, which required an appeal to the need for a theory of justice. The rehabilitation of the second pillar needed even longer. It passed through a silent and slow revolution, laying down various pieces that contributed to clarifying the rationale - and conditions - for the effectiveness of public policy. Around a decade ago, this finally led to a statement of the theory of economic policy in a strategic setting, rather than in a parametric context, as in the classical theory.Chapter 4 describes the content and methodology of the theory of economic policy in a strategic context. It indicates static and dynamic conditions for the controllability and stabilisability of an economy that go back to the well- known Tinbergen rule of the existence of at least so many instruments as targets. The theory also states the conditions for the existence of an equilibrium or multiple equilibria when more than one agent satisfies the rule. It can therefore be depicted as a theory of conflicts among agents having competing targets or target values and their resolution - thus a ‘theory of conflicts’ and a ‘theory of consent’. It is thus useful for model and institution building, i.e. it can help both researchers - in devising suitable models - and policymakers - in successfully coping with real problems, which imply total or partial convergence of interests and/or conflicts. It also deals with announcements that can help in finding one equilibrium out of many.
Chapters 5 and 6 apply the tools developed by the theory of economic policy in a strategic context. Chapter 5 provides several practical examples on how the theory works. It applies the theory of economic policy to a number of fields, in particular, to the main current problems, the economic crisis, inequality, stagnation and globalisation. Chapter 6 reveals the helpfulness of the new theory of economic policy in laying down signals that provide sufficient information for pointing out economic conditions in general and imbalances in particular that can be useful for preventing crises. The chapter also discusses the realistic assumptions and the political economy concepts that should be incorporated into economic policy for effective policy action.
Finally, Chapter 7 explains the crucial role of institutions when conceiving economic policy as an autonomous discipline. In fact, institutions underlie and link together the two pillars of economic policy, as well as the third part of the discipline, applied economic policy. Institutions thus constitute the glue of the three parts of economic policy, the logic of economic policy (notably social choice and welfare theory), the theory of economic policy and the applications of these two pillars to a given situation.