Thrainn Eggertsson Version #3, October 1996 THE OLD THEORY OF ECONOMIC POLICY AND THE NEW INSTITUTIONALISM* 1. Introduction 2. The old theory of economic policy 3. New perspectives and the old theory (a) requirements of structural policy (b) policy with endogenous politicians (c) policy under information scarcity 4. The design of control in a world of limited information and knowledge (a) the problem of informal institutions (b) incomplete data and the problem of control (c) incomplete policy models 5. Degrees of freedom in institutional change: the determinacy dilemma 6. Final thoughts on problems in the theory of structural policy (a) a general theory of structural change? (b) policy implications of the control problem (c) policy models as intermediate policy targets (d) pathological path dependence Hoover Institution Stanford University, Stanford, CA 94305 Tel. (415) 723 2672 Email:
[email protected] *OriginaIly prepared for a Workshop on Economic Transformation, Institutional Change, Property Rights, and Corruption. National Academy of Sciences/National Research Council, Commission on Behavioral and Social Sciences and Education, Washington, D.C., March 7-8, 1996. Submitted to World Development. 1 THE OLD THEORY OF ECONOMIC POLICY AND THE NEW INSTITUTIONALISM I. Introduction In 1956 the Dutch economist Jan Tinbergen, who shared the first Nobel Prize for Economics, published his classic study Economic Policy: Theory and Design, which deeply affected and reinforced the way economists thought about the policy implications of their work. The volume, and related work, did not propose new economic theories or explicitly evaluate the state of economic science, but made a contribution at a different level.