Economic policy as policy action

This book has been designed to give a novel and rather unconventional account of the evolution and changes in macroeconomic stabilization policies and institutions in the world's economies since World War II. It is unconventional because it presents the analysis of the policies and underlying theories in an informal way, so that the reader can easily grasp the main story line, implications, and reasoning behind policies, eschewing formal solution techniques that can be found elsewhere.

The understanding of macroeconomic policy and institutions designed to achieve desirable economic, political, or social goals has greatly changed over time, oscillating between state intervention and a free-market approach. We focus on the tension between these two positions, which is driven by conflicts between the desired goals of economic policy and what is feasible or manageable according to our understanding of the economic system.

Macroeconomics and macroeconomic policies began with J. M. Keynes in the 1930s – although the terms appeared in scientific journals only later, in the 1940s. Before Keynes, the main typical state interventions involved the use of taxes (including tariffs), provision of essential public goods, and money regulation. In some cases, as with antitrust laws, it aimed only at avoiding the limits to competition introduced by firms with excess market power.

After Keynes, policy action started to include interventions of a more traditional macroeconomic type, targeted at aggregate variables such as employment, national income, inflation, and growth. The Great Depression that began in 1929 can be considered as a watershed in the evolution of state intervention in general, and particularly so from the standpoint of macroeconomic policy. The main issue of the 1930s was unemployment. Policies enacted just before and just after World War II targeted that problem directly. Further policies designed to deal with other macroeconomic problems followed in the postwar period: policies for balanced trade, investment flows, productivity, income distribution, inflation, exchange rate movements, and financial policy.The climax of Keynesian macroeconomic policy action was reached at the end of the 1970s. After the second oil crisis of 1979–1980, and to some extent after the first crisis in 1973–1974, the focus shifted from unemployment to inflation. Policies had then to react to the emergence of inflation on a scale that had never before been experienced collectively by developed economies.