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Nicola Acocella, Rediscovering Economic Policy as a Discipline

Malcolm Sawyer
p. 613-618
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Nicola Acocella, Rediscovering Economic Policy as a Discipline, Cambridge: Cambridge University Press, 2018, 424 pages, ISBN 978-110845491-9

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Crédits : Cambridge University Press

1The economic policy of the title of the book is that of macroeconomic policy rather than microeconomic or mesoeconomic (e.g. industrial) policy. The use of “rediscovering” in the title serves to indicate that the book covers the development of the targets and instruments perspective in the 1940s through 1960s. In Chapter 1, the “classical theory of economic policy with fixed and flexible targets” is formalised and set in a macroeconomic framework. The author presents the subsequent undermining of that perspective in the 1980s onwards by the rational expectations school, and then what the book views as a revival of theory of economic policy in the past two decades. There is a consideration of some of the factors which brought the discipline into decline—“destructive critique of part of its core—and some theoretical advances that could or should contribute to its resurgence” (3). At a number of points in the book, the opportunity is taken to relate some general points being made to the experiences of the Economic and Monetary Union and the euro.

2The discipline of economic policy is here viewed as “to some extent autonomous from economic analysis” (3). It is viewed as emerging in the Scandinavian countries and the Netherlands. The discipline is taken to build on two pillars. One pillar is the “logic” of economic policy justifying on democratic grounds the actions of the government in a market economy, and the other a “theory” of economic policy, “to be applied to real situations of specific countries or regions according to their historical and institutional backgrounds” (3). There is an overview of how a discipline of economic policy developed which went well beyond “the nightwatchman view” of the State. There is an explanation of why the theory of economic policy flourished in Continental Europe but not elsewhere. In particular, Acocella seeks to explain (section 2.1) why the discipline did not pass to other countries that were different from those where it was born as well as why it did not survive there.

3Acocella argues that “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 failure.” (20) The focus of economic policy is then to be viewed in terms of the correction of market failures. The discussion illustrates the ways in which the formulation of economic policies is complicated by the difficulties of starting from individual values to define goal choices of the social welfare function.

4In effect, Chapter 2 covers the evolution of the debates on economic policy in the 1970s onwards, and the shifts away from the ideas on economic policy discussed in the previous chapter. Amongst the major ideas promoting the shifts described are the general idea of “government failure” and the inability of government to evaluate and rectify market failures. In the realm of macroeconomics, the Lucas critiquethat the prediction of effects of change in economic policy based on historical relationships would be unreliable when the policy adopted and expectations on policy outcomes change the parameters of the economic modelundermined the targets and instruments approach. The notion of rational expectations applied to a competitive view of the world was seen to generate market clearing outcomes, including in the labour market full employment. The scope of market failures which were to be addressed by economic policy becomes rather limited.

5In this chapter, there is extensive elaboration of the challenges posed by the policy ineffectiveness perspective. There is also much consideration of the development of rules and constraints to govern macroeconomic policies (for example, independent and conservative central banks) to limit discretionary policy actions.

6The major theme of Chapters 3 and 4 is the re-establishment of economic policy, undertaken in terms of the two pillars identified above. The difficulties of constructing a social ordering are fleshed out along the line of Arrow’s impossibility theorem. It is though argued that “political institutions … can be arranged in such a way as to reduce or even eliminate these difficulties by skirting the conditions under which they arise” (67). The possibilities of a democratic social-welfare ordering and the need for a theory of justice are discussed at length. The various attempts to circumvent Arrow’s impossibility result are evaluated, and Sen’s capability approach also brought into the picture. But for me there were no clear propositions on how to proceed in the analysis of economic policy. There is also a strong sense that a social ordering is determined by the technocratic experts rather than somehow through a democratic process and/or the formulation of a social ordering.

7The purpose of Section 3.2 is to provide rebuttals of the propositions which supported the ineffectiveness of (macro-) economic policies. In each case there is a long and comprehensive discussion. Several factors are identified as underpinning the policy ineffectiveness propositions which have been central to new classical macroeconomics and the new consensus in macroeconomics. The factors involved include (i) the idea that it is only policy “surprises” which affect economic outcomes; (ii) the idea that the long-run Phillips curve was vertical and thereby the economy was destined to operate at the “natural rate of unemployment”; (iii) that low rate of inflation should be the key target of policy; (iv) the promotion of the political independence of central banks; and (v) the argument that “conservative” and inflation averse central banks should be drawn upon for counter-inflation policy, and (vi) the arguments for low or zero values of fiscal multipliers and the diminished role of fiscal policy.

8Chapter 4 is entitled “Re-evaluation of the classical approach to economic policy”, with the sub-title “re-establishing the second pillar”. In effect, the purpose is to address the Lucas critique through some formal analysis. For example, it is shown that “rational expectations do not impair policy controllability if certain conditions are met: even with rational expectations static controllability is guaranteed if the number of instruments equals that of targets” (261). This chapter reviews the ways in which macroeconomic policy has been formally modelled where that policy is used in some form to guide economic activity.

9Part 2 is entitled “Economic Policy in our Time” and includes three somewhat contrasting chapters. Chapter 5 is entitled “challenges of the financial crisis, rising inequality, secular stagnation and globalisation”, though no mention is made to environmental and ecological issues nor the threats of climate change. The crisis in question is the global financial crisis of 2007/2009 though there is no recognition of the many other financial crises of the past four decades. There is a focus on the limits imposed on fiscal and monetary policies and the development of new policy instruments in response to the global financial crisis. Acocella then discusses the development of new rules for fiscal policy on deficit and debt limits, though how far they can be seen as new is debatable. Various sections then consider policies addressing rising inequality, stagnation and globalisation, though little by way of concrete proposals emerges. Indeed, many policies to address inequality and secular stagnation would not fall under the heading of macroeconomic policies. There is rather little by way of discussion of the underlying causes of the global financial crisis, and how those causes relate to the theory of economic policy. The occurrence of financial crises, of which the global financial crisis can be seen as having more widespread effects than most crises, raises questions about the suitability of the equilibrium framework that underlines the formal analysis in this book and elsewhere of the theory of economic policy. The roles of the financial liberalisation and de-regulation as well as financialisation more generally in the generation of the global financial crisis are largely ignored.

10Chapter 6 is entitled “One step forward towards realism in theories relevant to effective and accountable policy making”. It seeks policy solutions which are “necessary to ensure proper working of a capitalist system” (253) and takes a closer look at issues to tackle for building a democratic society. The chapter states that it is concerned with two basic issues. The first is about how “information, in terms of signals [is] built into market institutions or as offered by the policy makers” (253) and moral hazard and adverse selection. The second is the “incentives for both private agents and policymakers to engage in opportunistic behaviour deriving from self-interest.” (253)

11Communication between policy makers and the public (or what could be termed the government and the governed) features heavily in this chapter. The difficulties of the private sector “in discerning signals” is acknowledged (256), though the implications of that are not explored, and there appears to be no consideration of how the private sector “signals” to the government. The discussion rather emphasises the government communicating “in a clear and effective manner, the intent and purpose of their policies and how exactly those policies can be expected to produce the desired result.” (268)

12In order to illustrate the arguments in this chapter a formal model is presented and described in the following terms. “In a game between the two sectors of the economy, where the reaction function of private agents is expressed in terms of Res [rational expectations] whereas that of government may be the object of forward guidance, the model of the economy can be as follows” (279). There are many features of the model (and the general approach) which, in my view, limit the insights gained from its application. The model is a linear one and hence is not examined for cyclical behaviour or instabilities. It is not path dependent, and hence does not examine the longer-term impacts of policy on the path of the economy. And, as with the discussion throughout the book, there is no considerations of fundamental uncertainty.

13In Section 6.4 three ingredients which are deemed essential to “enrich economic policy as a discipline along the lines indicated” (281) are discussed. There is first the reliability of analytical propositions. There is mention of “expansionary austerity” as a policy prescription derived from very “heroic” and specific theoretical assumptions and not backed by the data. However, this does raise the significant question of who decides whether the theory being drawn upon for policy formulation has realistic assumptions and empirical support.

14Second, there is “welfare and social-choice theory, as well as the normative theory of economic policy, which can both be enriched by incorporating political economic concepts”. In this respect, Acocella recognizes that political economy takes on different meanings. He states that a major issue explored by political economists is the explanation of socio-political relations and interests, preferences of voters and the results of elections “as well as divergences between real policy actions and the social optimum deriving from specific incentive-constraints of policymakers” (281). Although there is discussion of in effect “buying” votes, there is very little mention of the exercise of power by corporate and financial interests and others.

15The third ingredient relates to “realistic possibilities to devise democratic institutions” (289). This is then divided into the issue of “the logical (and procedural) possibility of finding a government’s maximand representing the citizen’s—usually conflicting—preferences” (289). The other issue is “the possibility that in practice the various interests in the society and the government are composed in a non-conflicting way, enabling us to reach that maximand or to get close to it. Democracy should ensure this.” (289)

16The final Chapter 7 is entitled “Why economic policy can be a useful discipline?” In seeking to address that question, it ranges over a number of issues. It starts with the stance claim that “Institutions as the ring connecting the three parts of economic policy” (295). It then moves on to the roles of social choice and institutions for building a fair society. Further, it assesses “whether democracy as an institution can implement social choice and ensure some kind of equality” (304). It puts out a call for the central role of education for democracy, and thinks about the institutions for building a well-functioning society. It concludes with “a restatement of the need for a unitary discipline of economic policy” for a “democratic, fair and efficient society” (324). Each of the subjects covered is dealt with a length which is not possible to summarise here. The concluding chapter is not closely related to the preceding chapters. It seems more like an exposition of the approaches to economic and social policy in a democratic society which the author would favour, than the continuation of the presentation of the theory of economic policy.

17To sum up, Acocella’s book provides a “theory of economic policy” à la Tinbergen in part 1. The applicability of such an approach appears to require a good knowledge of the “true” model of the economy, and to formulate the appropriate targets of policy. The struggles to formulate a social welfare function (or similar) are well illustrated. The general dependency on a “market failure” approach to underpin the theory of economic policy also becomes evident. The counterpoising of “government failure” to “market failure” was one of the forces pushing against the theory of economic policy. There were, as indicated, other sources of “push-back” including different perceptions of the “true” model of the economy. The decline of the theory of economic policy is treated in terms of the theoretical challenges to it, and there is little consideration of the political and ideological forces which may lie behind those theoretical challenges. The strengths of Part 1 are the thorough exposition of the theory of economic policy along with the detailed setting out of the challenges to that theory which developed in the 1980s onwards. Part 2 is rather wide ranging, which makes any form of summary difficult. It ranges over policies addressing inequality, secular stagnation and globalisation though without providing any concrete proposals or offering any analyses of the causes of inequality, secular stagnation and globalisation and the policy dilemmas which they present. The book strives to introduce democracy into economic policy-making, though with little discussion on participation in decision-making or on voting systems.

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Malcolm Sawyer, « Nicola Acocella, Rediscovering Economic Policy as a Discipline »Œconomia, 9-3 | 2019, 613-618.

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Malcolm Sawyer, « Nicola Acocella, Rediscovering Economic Policy as a Discipline »Œconomia [En ligne], 9-3 | 2019, mis en ligne le 01 septembre 2019, consulté le 18 avril 2024. URL : http://journals.openedition.org/oeconomia/6460 ; DOI : https://doi.org/10.4000/oeconomia.6460

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Malcolm Sawyer

Emeritus Professor of Economics, University of Leeds, UK. m.c.sawyer@lubs.leeds.ac.uk

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