Some forty years ago, there were rather simple and commonly accepted justifications for government intervention in the economy.

Market failures at both the microeconomic and the macroeconomic level were considered so widespread and deep as to justify programmed action by government. In the late 1940s authors such as R. Frisch, J. Tinbergen, H. Theil and others began to develop the so-called ‘theory of economic policy’. On the basis of fixed targets or a social preference function, as well as an analytical model of the economy and the assumption of rational policymakers, consistent levels of policy instruments were derived for static and dynamic settings.

This theory had to face two main challenges. The first was advanced on theoretical grounds by economists such as Coase, Friedman, Lucas and adherents of the theory of ‘public choice’, who tended to reaffirm the virtues of the ‘invisible hand’ while underscoring numerous ‘non-market failures’. This challenge was largely met by the theory of economic policy, which, on the one hand, recognised the possible existence of government failures and, on the other, was reformulated in a way to overcome charges of inconsistency.

The second challenge to the theory of economic policy has come more recently from the evolution of reality, with the globalisation of markets and production. Globalisation has induced major changes in society, the economy and economic policy.