Economics and policy-making: From art and craft to welfare optimization and evidence-based policies

Economics and Policy Making: From Art and Craft to Welfare Optimization and Evidence Based Policies

As observed by A.C. Pigou in the opening pages of Economics of Welfare, the object of any inquiry “may be either light or fruit”. According to Pigou, economics belongs to those sciences where the latter is bound to play a major role: “If it were not for the hope that a scientific study of social actions may lead, not necessarily directly or immediately, but at some time and in some way, to practical results in social improvement, not a few students of these actions would regard the time devoted to their study as time misspent. That is true of all social sciences, but especially true of economics.”

This may appear obvious. However, since Adam Smith’s more qualified than assertive Science of the legislator, the development of economic thought and scientific economics was accompanied by changing mental models regarding the transfer from theory to politics and to practical policy making. Donald Winch summarized post-Smithian vicissitudes as follows: “Much of Smith’s science of the legislator died with him, and any account of the branch of it that constitutes political economy must take account of that fact”.

The 19th century saw developments in classical economics that Alfred Marshall later criticized as “dogmatic”, including the tendency to “suppress even such conditioning and qualifying clauses as they had in their own mind”. National traditions such as the German Historical School developed a particular style of organizing scientific foundations for politics in the form of the Verein für Socialpolitik. John Stuart Mill re-invigorated an approach closer to Adam Smith’s carefully qualified conclusions and policy recommendations, based on his conception of tendency laws, operating “in a certain manner unless counteracted; but we can never be assured to what extent or amount it will so operate, or affirm with certainty that it will not be counteracted; because we can seldom know even approximately, all the agencies which may co-exist with it, and still less calculate the collective result of so many combined elements”.

An important tradition in the wake of such reasoning understood economic policy as the “art and craft” of combining scientific tendency laws with complementary knowledge of the scope and power of “counteracting, co-existing agencies”. In contrast, 20th century developments of normative economics (“Social Welfare Functions”) as well as improvements of empirical tools were and are (claimed to be) conducive to a “more scientific” and rigorous approach to policy making, conceiving of economic policy as applied economics, envisaging welfare maximization, “evidence-based policies”, and sometimes even “policies with no alternative”.

While there are good reasons for highlighting problems of such developments (as suggested by David Colander and Craig Freedman), historians of economic thought are in a position to deal with pertinent questions at various levels, including

  • National traditions in policy advising
  • Paradigms in economics and their implications for the style of policy advice
  • Economic education as a means of knowledge transfer
  • Economic research institutes and policy-oriented thinktanks
  • Institutionalization of policy advice
  • Expert economists in specific fields such as monetary policy or social policy
  • Evolution of the theoretical background conceptualizing science-politics interfaces
  • Case studies on the role of economic advice in specific reform processes or in the design and implementation of anti-depression policies