Normative economic policy – past, present and future

International workshop

Project managers: Prof. Dr. Rainer Klump and Prof. Dr. Darrel Moellendorf

Project description

The normative foundations of economic policy no longer play a significant role in the mainstream of modern economic research. There are neither outstanding publications and debates on the subject, nor are there any sustained tendencies to (re)include a compulsory subject “economic policy” in the curriculum of basic economics education, which was removed from the compulsory canon as superfluous in the course of the Bologna reforms. One can regret this development because it means that many bridges from economics to the social sciences and humanities remain broken, or because there is a widespread feeling outside economics that the causes of the 2008 financial crisis have not been adequately addressed within the discipline. However, it is also possible to trace and critically discuss the developments inherent in science that have caused or facilitated the disappearance of an independent doctrine of (normative) economic policy in economics.

The project will focus on the latter. It examines how and why all traditional justifications for active economic policy intervention within the economic sciences have been called into question over the last 50 years. It demonstrates how this development has been accompanied by processes of globalization, privatization and deregulation, which ultimately also formed a central cause of the global financial and economic crisis from 2008 onwards. Finally, it develops clues as to what a new theory of (normative) economic policy could look like that provides answers to the challenges of the 21st century such as digitalization or climate change.
The project follows on from the reflections on the conflict between self-interest and common good orientation in economics, which have been a characteristic of market-based capitalist economic systems since the early modern period. While Klump / Pilz (2018) analyzed the emergence of the self-interest orientation in the 16th century and placed it in the context of the history of ideas, Klump / Wörsdorfer (2011) examined the normative foundations of ordoliberalism in the first half of the 20th century. Wörsdörfer (2014) has also dealt with the development of the modern economic curriculum, but did not address the normative foundations of economic policy.

Motivation
In the traditional theory of economic policy, as it was presented and taught until around the beginning of the 1970s, there were three main areas or objectives that motivated and legitimized economic policy interventions. They focused on the creation, use and distribution of overall economic prosperity, as measured by gross domestic product. The distribution objective aimed to achieve a distribution of income and wealth that was perceived as fair. The goal of economic stabilization could be derived from the area of income distribution, which in turn was broken down into the sub-goals of steady economic growth, full employment, price level stability and balance of payments equilibrium. Finally, the goal of achieving allocative efficiency, which was intended to ensure the best possible use of scarce resources and thus implicitly also contained a justification for the protection of the natural environment, was located on the development side. The central economic policy task in this segment was considered to be the correction of so-called market errors, which included the prevention of monopolistic market structures on the one hand and the regulation of markets with externalities, asymmetric information, increasing economies of scale or other deviations from the ideal of the perfect market on the other.

The project will now trace how, from the 1970s at the latest, a process began that led to almost all of the above-mentioned reasons for economic policy interventions becoming less important by the early 2000s. In the end, all that remained was the goal of economic growth, which was interpreted primarily as an expression of allocative efficiency. This development took place gradually and in several stages – from research to teaching and political practice. Initially, there was a growing body of work in economic research that favored the subordination of other goals to the goal of economic growth and placed the efficiency of the (unregulated) market in the foreground. Through changes to economics textbooks and the economics curriculum, the new paradigm, which increasingly narrowed the normative foundations of economic policy, became influential for generations of students over decades. Eventually, it also diffused into political practice, where it favoured the policy of general market liberalization, which motivated both the globalization of goods and capital markets and the privatization and deregulation of individual economic sectors.

Literature
Klump, R. / Pilz, L. (2018), “Durch Eigennnutz zum Gemeinwohl: Individualisierung, Reformation und der “Geist des Kapitalismus”, Working Paper 01/2018, Cluster of Excellence “Die Herausbildung normativer Ordnungen”, Frankfurt am Main.
Wörsdorfer , M. (2011), “On the Affiliation of Phenomenology and Ordoliberalism: Links between Edmund Husserl, Rudolf Eucken and Walter Eucken”, European Journal of the History of Economic Thought, 18, 5521-578.
Wörsdörfer , M. (2014), “Inside the ‘Homo Oeconomicus Brain’: Towards a Reform of the Economics Curriculum?”, Journal of Business Ethics Education, 11, 1-36.

International workshop
July 3, 2019
Normative Economic Policy: Past Experience and Future Challenges

Online event
11. December 2020
Normative Economic Policy