In this chapter we first discuss some policy solutions neces­sary to ensure proper working of a capitalist system.

We also have a closer look at the issues to tackle for building a democratic society. In particular, we are concerned with two basic issues: (1) information, in terms of the signals built into market institutions or as offered by the policymakers, together with the possibility of moral hazard or adverse selection arising in the system, and (2) incentives for both private agents and policymakers to engage in opportunistic behaviour deriving from self-interest.

The issue of proper incentives of private agents being necessary to ensure policy effectiveness is self-evident. As to policymakers, if they have an incentive to behave as announced or promised, private agents too will have an incentive to accept the signal, which will then be effective. However, announcements and promises will also ensure the accountability of policymakers, the more so the clearer the signals are. This latter aspect of signals involves extensive analysis of a political economy nature. The first section of this chapter deals with the signals issued by markets. This section also introduces the question of the relationship between signals and incentives for private agents. The signals issued by policymakers about their actions and how to make policymakers accountable are the objects of Section 6.2. Section 6.3 investigates a related aspect of the relations between private and public agents, the asymmetry of information between private agents and policymakers about the workings of the economy. Section 6.4 discusses how our discipline can be enriched by incorporating some political economics and other more realistic features of pol­icy action. The final section deals with various ways to refine the abstract theory of policymaking developed in previous chapters.

6.1