ESSAYS IN ECONOMIC THEORY AND POLICY IN HONOR OF PROFESSOR STELLA KARAGIANNI | iii

Dimitrios Hristu-Varsakelis Maria Pempetzoglou

(Editor) (Editor)

ESSAYS IN ECONOMIC THEORY AND

POLICY IN HONOR OF PROFESSOR
STELLA KARAGIANNI

Thessaloniki, 2022
GUTENBERG
 The adventures of Economic Policy within
Mainstream Economics
Stavros Mavroudeas
1
Professor of Political Economy, Panteion University
Department of Social Policy
s.mavroudeas@panteion.gr

Abstract

Economic Policy covers the aims and the instruments of state economic
interven-tionism. As a broad problematique it existed from the very birth of
the science of the economy. However, as a special subject-area it was
inaugurated in the interwar era and formalized by the beginning of the post-
World War II era. Since then, Economic Policy faced serious ups and lows
within economic analysis and poli-cymaking. Particularly within Mainstream
Economics (the nowadays dominant tradition within the science of the
economy), Economic Policy – and especially its ‘hard’ versions of active
fiscal policy, discreet industrial policy and planifica-tion – moved from the
initial highs of the interwar and Keynesian era to the lows of the Neoliberal
period. During the latter Economic Policy was dehydrated from crucial tools
and downgraded as a subject because it was castigated as prone to labour
demands and popular concessions that suppressed capital’s profitability. Since
the beginning of the 21st century – and as a result of the blatant failures of the
Neoliberal deregulationist movement – a return of active Economic Policy is
on the cards. However, this return within Mainstream Economics is both
belated and very problematic. The contemporary orthodoxy of New
Keynesianism at-tempts rather ineffectively to marry an activist economic
policy with its neo-con-servative insulation from popular pressures for better
wages and working condi-tions. This paper analyses the adventures of
Economic Policy within Mainstream Economics from the standpoint of
Marxist Political Economy.

Keywords: economic policy, schools of economic thought, Marxist Political

Economy

JEL classification: P1, H00, E6, B00.

1 Introduction

Economic Policy, as a distinct subject area of the science of the economy, studies the
role, the aims and the instruments of state’s intervention in the economy. As it can
easily be deduced, this is a particularly important issue in almost all socio-economic
226 | Stavros Mavroudeas

systems, insofar as they have a state (i.e., a distinct mechanism that directs and regu-
lates the system). In all these cases the state has a - more or less - crucial role in the
economy. Even in cases where its role was supposed to be limited (something that has
often been referred to in the literature as ‘the state as a nightwatchman’), state inter-
vention in the economy is present and, usually, not negligible. This, for example, was
the case in historical periods (e.g., Classical Liberalism in the 19 th century, Neoliber-
alism in the last quarter of the 20th century) when ideological perceptions prevailed
that proclaimed the limitation (or even the complete withdrawal) of state economic
intervention (Hunt (2003)). In this sense, Polanyi’s (1944) argument that a self-regu-
lating market system was an exceptional moment in the history of mankind is rather
correct.
Given this permanent paramount role of the state in the economy, the science of
the economy from its very birth studied the role of state economic intervention. The
forefathers of this science engaged necessarily with this because the state played a
crucial role in the transition from feudalism to capitalism. Hence, both the Mercantil-
ists and the French Physiocrats addressed the role of state intervention in the economy.
The early Mercantilists focuses primarily on public finances as a sign of a robust econ-
omy. On the contrary, both the later Mercantilists and the French Physiocrats reversed
the order of causation and argued – from different perspectives – that it is a robust
economy that will lead to strong and healthy public finances.
With the advent of Classical Political Economy – and the formal inauguration of
the science of the economy – the ideas of Classical Liberalism predominated. The
latter instructed a minimal state economic interventionism focusing only in securing
property rights and the rule of law, external security, the credibility of the currency.
However, insofar as Classical Political Economists considered the access to certain
goods and services (like education and health) as natural rights of the people, they
envisaged their public provision. Hence, in theory at least the economic role of the
state was downgraded. However, in practice the state remained active in economic
affairs. Its intervention was rather ad hoc and, essentially, in opposition to the prevail-
ing economic theory. Thus, economic policy existed in practice but not in theory; let
alone as a special subject of economic analysis.
With the dethronement of Classical Political Economy – as the mainstream ap-
proach to economic analysis – by the Neoclassical Economics, the argument of Clas-
sical Liberalism for a minimal state economic intervention continued to reign. This
time it was bolstered by a microeconomic analysis and, of course, social classes and
class struggle (that existed within Classical Political Economy’s framework) were
purged. But again, in practice and contrary to theoretical doctrine, the state continued
intervening in the economy in an ad hoc manner.
The high time for state’s economic role in the economy and the formal construction
of economic policy as a special subject-area in economic thought came during the
interwar and post-WWII era. From there on economic policy has a distinct presence
both in theory and in policymaking. However, its role, its character and the importance
attributed to it varied wildly during the subsequent decades. Within Mainstream Eco-
nomics (Neoclassical and Keynesian) the role of economic policy moved from highs
to lows and back several times.
On the other hand, in the ‘underworld’ of Marxist and Radical Political Economy
economic policy never lose its significance and prominence. For Marxist Political
 The adventures of Economic Policy within Mainstream Economics | 227

Economy the capitalist economy is inherently unstable in the long-run. Thus, the
state’s economic intervention is required to smoothen its sometimes-wild economic
fluctuations. Notwithstanding, for Marxist economic analysis state economic inter-
ventionism may smoothen but it cannot eradicate economic fluctuations and crises.
The crux of its argument is that state economic interventionism may affect but cannot
determine capitalist profitability and its inherent tendency to fall in the long-run (as
the law of the tendential fall of the profit rate takes precedence over its countertend-
encies). Thus, for Marxist Political Economy state economic interventionism may
smoothen economic fluctuations in the short-run (depending on the concrete condi-
tions of capital accumulation) but it cannot eradicate both economic fluctuations and
crises in the long-run. Conversely, Radical Political Economy (comprising mainly of
post-Keynesian and Marxo-Keynesian currents) recognizes the necessity of state eco-
nomic interventionism as a means for stabilizing and reforming the capitalist econ-
omy. Following the traditional Keynesian inspirations, it tends to believe that at least
in the mid-run a pro-labour state economic intervention can obliterate crises and
smoothen radically economic fluctuations by managing effective demand. Some cur-
rents extend this view to the long-run and hence propose some version of state-organ-
ised capitalism that is free from crises.
Τhis paper surveys critically the ‘adventures’ of economic policy within Main-
stream Economics from the standpoint of Marxist Political Economy. It argues that
economic policy – and especially its ‘hard’ versions of active fiscal policy, discreet
industrial policy and planification – moved from the initial highs of the interwar and
Keynesian era to the lows of the Neoliberal period. During the latter economic policy
was dehydrated from crucial tools and downgraded as a subject because it was casti-
gated as prone to labour demands and popular concessions that suppressed capital’s
profitability. Since the beginning of the 21 st century – and as a result of the blatant
failures of the Neoliberal deregulationist movement – a return of active economic pol-
icy is on the cards. However, this return within Mainstream Economics is both belated
and very problematic. The contemporary orthodoxy of New Keynesianism attempts
to marry an activist economic policy with its neo-conservative insulation from popular
pressures for better wages and working conditions. The end result is both analytically
weak and practically problematic.
The paper is structured as follows. The next section presents the long march for the
formal construction of economic policy as a special scientific subject-area. The third
section evaluates the Neoliberal assault on economic policy. The fourth section criti-
cizes the contemporary New Keynesian return of economic policy. Finally, the last
section concludes.

2 The construction of the subject-area of Economic Policy

As already argued, economic policy as a structured and distinct field of economic

analysis was formed essentially in the interwar period. The historical moment is not
accidental and corresponds to special socio-economic conditions and circumstances
that marked this period. It was preceded by the first global capitalist crisis (in the mid-
1870s) which led to a prolonged and severe economic and political instability of the
228 | Stavros Mavroudeas

world capitalist system. In the sphere of the economy, there was a prolonged period
of ‘lean cows’ (that is low rates of economic growth) and wild economic fluctuations
that led, during the interwar period, in the second major global capitalist crisis (that
of 1929-30). This economic turmoil was naturally accompanied with the escalation of
the class struggle within each country and threatened seriously the very existence of
the capitalist system (a leading example being the Russian October 1917 revolution).
Concurrently, the economic turmoil led to the proliferation and intensification of in-
ternational imperialist economic and political rivalries that increasingly took the form
of war conflicts.
In this general climate, the hitherto dominant Neoclassical Economics and its as-
sociated mantra for a limited economic role for the state was called into question.
This challenge came from many different directions. It had already become appar-
ent in the capitalist world that in times of deep economic crisis, hoping for a way out
based on the private initiative (the market forces) was ineffective. The latter either
cannot cope and/or is desperately slow to perform any of its roles1 Therefore, the eco-
nomic intervention of the state is necessary to lead the way out of the crisis in a real-
istic time horizon and avoiding the risk of social explosions and revolutions. These
practical necessities were crystalised in the American New Deal which even without
an explicit economic theory (as its convergence with Keynesianism came afterwards)
followed the path of an energetic and discreet state intervention in the economy. An-
other practical reason that contributed to this return of state intervention in the inter-
war period was the frequent and acute political-military conflicts. As in a modern war
the mobilization of economic resources for military purposes is as important as mili-
tary victories on the battlefields, a centralized and planned management of the econ-
omy becomes essential. And, of course, the state is the mechanism that assumes this
role.
On the other hand, the then-fledged transition to socialism launched by the Russian
October Revolution had already begun to build a state-run economy. The elaboration
of theories and tools for the overall planning of the economy, the implementation of
the first Soviet five-year plans and their impressive economic results (especially com-
pared to the contemporaneous low performance of the Western world) impressed both
friends and foes. These achievements bolstered the credibility and the audience of
Marxist Political Economy even within mainstream circles.
Through these combined but at the same time different influences, economic pol-
icy was inaugurated as an independent field of economics in the interwar period.
In the Western world its formation was influenced by the new orthodoxy of
Keynesianism which dethroned the previous one of Neoclassicism. In this spirit Jan
Tinbergen2 – even before his path-breaking work Theory of Economic Policy (Tinber-
gen (1952)) - produced two macroeconomic policy models in the 1930s ((Magnus &

1 This belated and therefore ineffective role of the private sector was pointed out by Keynes’s
well-known dictum that ‘in th long-run we are all dead’.
2 Jan Tinbergen (1903 - 1994) was a Dutch economist. He has taught at several Dutch univer-
sities as well as at Harvard University. Of particular importance was his work at the Dutch
Central Planbureau (CPB), where he created the first Western macroeconomic model aimed
at the applied analysis of an economy and the consequent implementation of economic pol-
icies.
 The adventures of Economic Policy within Mainstream Economics | 229

Morgan (1987)). The first was in 1936, at the request from the Dutch Economic As-
sociation. The second is his 1939 model that was commissioned by the League of
Nations. In a similar vein, was the work of Ragnar Frisch.
Of course, the Marxist Political Economy had already preceded in this path. The
young Soviet Union, from its very beginning in the 1920s, had searched for theoretical
tools and policy instruments for constructing a socialist planned economy. Beginning
with the electrification project and moving to the 5-years plans, the planification effort
gained speed and depth. It was underpinned by rigorous discussions and original prop-
ositions for theoretical models, policy instruments and technical tools for the macro-
modeling of the whole economy and its planned direction towards specific policy tar-
gets. Therefore, models for the overall macro-modeling and planning of the economy,
such as that of G.Feldman3, have been proposed long before any similar move in the
West. Moreover, innovative quantitative techniques were used (e.g., input- output ta-
bles) to support them.
Of course, there were significant differences between these approaches, as the for-
mer referred to the capitalist economy and the latter to the socialist one. But there was
a similar emphasis on creating applied macroeconomic models for the economy as a
whole and on standardizing economic policy instruments and tools. Thus, in the in-
terwar period, economic policy was inaugurated as a special subject-area of economic
analysis. Economic policy’s launch followed two intertwined axes.
The first axis was the formal identification of the main tools of economic policy
(fiscal policy, monetary policy, external economic policy, industrial policies etc.),
their classification and explorations about their interconnections. In the West, the ris-
ing Keynesian tradition was pivotal in modeling fiscal and monetary policy. Moreo-
ver, it emphasized that the former is more effective than the latter. But the Keynesian
influence spill over to the other economic policies as well. Thus, discreet industrial
policies (e.g., import substitution industrialization) were devised. And employment
and social policies as means of macroeconomic management were also soon formal-
ized.
The second axis along which economic policy was developed was the construction
of macroeconomic models applicable to policymaking and the planification of the
economy. As already mentioned, Tinbergen - and less formally R.Frisch – was instru-
mental in this vein. What has been rather simplistically named his golden rule4 offered
the first Western guide for economic policy macro-modeling. Its subsequent refine-
ment by Henri Theil solved several issues that had been left unresolved in the Tinber-
gen theory. This emphasis on macro-modeling aimed at policymaking was strongly

3 Grigory Alexandrovich Feldman (1844 - 1958) was a Soviet mathematician and economist
who worked on the State Planning Committee (GOSPLAN). In the course of his work in
1928 he formed an important model of economic growth, based on Marxist Political Econ-
omy, for the analysis and implementation of economic planning in the Soviet Union (Feld-
man (1928)). A similar model was formed by Mahalanobis (1953) and provided the theoret-
ical basis for the initial Indian five-year plans.
4 Tinbergen’s golden rule is essentially a rule of thumb which states that policymakers trying
to achieve multiple economic targets need to have control over at least one policy tool for
each policy target. The rationale behind this thesis is that the achievement of certain eco-
nomic targets precludes the achievement of others.
230 | Stavros Mavroudeas

inclined towards some idea of a planned economy. As even Durbin (1949, p. 41) – an
influential British non-Marxist economic policy theorist - wrote ‘we are all planners
now’. In a similar manner, Alvin Hansen (1947, p. 14), pronounced the death of indi-
vidualism in his textbook on economic policy. Of course, this inclination towards eco-
nomic planification was proposing mainly indicative versions of planning (as distinct
from Soviet command planning)5.
Whereas economic policy was essentially born in the interwar years, it was for-
malized in textbooks and academic curricula mainly after the 2nd World War. This
formalization benefited from the accumulation of studies and theories during the in-
terwar era. But these do not suffice for this. Theories and analyses cannot live and
expand unless socio-political conditions permit and motivate them. In the case of eco-
nomic policy, many reasons contributed to this. In the countries of the Soviet bloc and
in China, their centrally planned economies with the decisive economic role of the
state were obviously based on the theory and tools of economic policy. In the West,
the then-prevailing Keynesian Orthodoxy emphasized the crucial role of state eco-
nomic intervention and, hence, that of economic policy. In both cases economic plan-
ning played a decisive role, although there were significant differences in its type and
use. In the West the economic planning was basically indicative and also usually par-
tial. In contrast, in the countries of the Soviet bloc and in China, economic planning
was imperative and universal. In addition, as the last remnants of European colonial
empires collapsed, several of the new independent countries (e.g., India) have system-
atically resorted to economic policy and its tools - and especially economic planning
– in order to break the suffocating ties with their old colonial master-economies and
build their independent national economies.
There were additional reasons for this continuing popularity of activist economic
policy. In the West, after the end of the 2nd World War, there was a vibrant labour
movement that demanded better wages, working conditions and social benefits. The
state undertook to partially accommodate these demands as individual capitals shied
away from undertaking this burden. Hence, the state – as a representative of collective
capitalist interests – shouldered the accommodation of these demands. The general
conditions of capitalist accumulation permitted these largesses as the war had solved
problems of overaccumulation and capitalist profitability was at a high level. Conse-
quently, an interventionist (and to a great extent planifying) state undertook both the
pacification of class struggles and the reconstruction of capitalist economies during
an era of vibrant capitalist accumulation.
On top of that, there were two additional problems that required coherent macro-
economic engineering that could not be left to the market forces. First, there was the
problem of reconstructing the damaged from the war economies by regulating eco-
nomic and financial flows. Thus, a series of plans (e.g., Marshall plan) and institu-
tional agreements (e.g., Bretton Woods) were formed. A special aspect of this was the
problem of finding employment for the demobilized soldiers in order to avoid social
tensions and conflicts like those that followed the end of the 1st World War. Second,

5 It is characteristic Tinbergen’s attempt (even given his initial socialist sympathies) to pro-
pose policy-oriented macro-modeling as axiomatically value-free (see Magnus & Morgan
(1987)).
 The adventures of Economic Policy within Mainstream Economics | 231

the eruption of the Cold War required a degree of centralized management of re-
sources and policies in order to be able to confront the Soviet bloc.

3 The Neoliberal assault on economic policy

The third global capitalist crisis of 1973-74 - that ended the post-war golden era and
ushered a long period of weak capital accumulation – marked the end of the rise of
economic policy and the beginning of its fall. Keynesianism was disputed as the main-
stream doctrine by Neoliberal economics. The latter instigated an unrelentless cam-
paign against labour’s conquests. An essential part of this campaign was the call for
the curtailment of the public sector and its interventionist policies as it was this sector
that was used in the previous era in order to accommodate labour demands.
By the 1990s Keynesianism was dethroned by Neoliberalism and various streams
of the latter (Monetarism, New Classicals etc.) occupied centre stage of mainstream
Economics. Around the same time, the Soviet bloc collapsed and the old and new
countries that populated its space adopted Neoliberal policies. This neoconservative
wave in the West and the East took in its stride and the great majority of less developed
and developing countries. The latter abandoned developmentalist policies based on
state economic interventionism and planification and adopted – willingly or unwill-
ingly – the mantras of the neoconservative Washington Consensus with its open mar-
ket policies.
These developments affected profoundly the status but also the internal character
of economic policy. It began to decline and shrink as an independent scientific field.
Key parts of it were either completely renounced by Neoliberal Orthodoxy (e.g., in-
dustrial policy) or drastically downgraded (e.g., fiscal policy). Within universities,
economic policy began to disappear from the curricula and, at best, was limited to a
branch of macroeconomics (as macroeconomic policy). The latter is usually limited
to the study of the correlation between fiscal and monetary policy and excludes com-
pletely several other economic policies (e.g., economic planning, industrial policy).
Exceptions to this trend were found mainly countries of the Far East (e.g., Japan)
where the particular characteristics of their capitalist system (strong state intervention
in combination with large multi-sector conglomerates) are reflected in the model of
the developmental state. In these cases, economic policy (and even its sub-areas under
persecution in the West, such as the industrial policy) remain always key fields of
academic curricula.
Neoliberalism attacked all aspects of economic policy. Fiscal policy was declared
ineffective. Monetary Policy was considered effective only in the short-run; although
New Classicals denied even this. Industrial policy was deemed an aberration6. At the
best, is considered only horizontal industrial policy but not vertical. Of course, this is
the actual negation of industrial policy as the essential aim of the latter is to intervene
in the structure of an economy, and this requires discreet (and not horizontal)
measures. Social policy was downgraded as income redistribution was declared an
obstacle in the free and proper operation of market forces and was considered only in

6 Indicatively, Becker (1985) - reiterating a dictum pronounced by many neoconservatives –

declared that ‘the best industrial policy is none at all’.
232 | Stavros Mavroudeas

the exceptional cases of market failures7. Planification was purged completely and
even indicative planning was rejected. However, within the dominant circles of polit-
ical-economic power macroeconomic engineering was always present. But it was in-
oculated from democratic accountability and popular demands, especially through its
relegation to supposedly independent technocratic authorities (independent authori-
ties).
The Neoliberal assault on economic policy did not touch only its tools but strived
to deform its very essence.
The classical theory of economic policy a-la-Tinbergen became the object of fierce
Neoliberal criticisms from a number of points of view. The first Neoliberal current –
Monetarism – mainly confined to a critique of the Keynesian primacy of fiscal policy
by declaring the latter as ineffective (Friedman (1968)). The subsequent New Classi-
cal generalised the policy ineffectiveness proposition. By introducing rational expec-
tations, they argued that monetary policy is also ineffective (Barro (1974)). But this
generalised policy ineffectiveness proposition was extended by Lucas (1976) to the
rejection of the Tinbergen-type decision models as they are inconsistent with the as-
sumption of rational expectations. He maintained that under rational expectations
agents would predict the consequences of an announced economic policy and adjust
their expectations accordingly and thus eliminate the effect of the policy. Essentially,
the Lucas’ critique denied Tinbergen’s assumption that the policymaker controls the
system.
Nevertheless, the Neoliberal policy ineffectiveness proposition was obviously
good only for academic disputes and preaching. In reality economic policy has still
been practiced. And Neoliberal dogmas had little to offer in terms of practical guid-
ance to policymaking apart from its obsession with privatisations and pro-market re-
forms that often proved to be catastrophic. Thus, even the Neoliberals attempted to
find some space for active economic policy in the cloud-cuckoo-land of rational ex-
pectations. This attempt took the form of a search for exceptions to the rule of the
policy ineffectiveness proposition. But these exceptions never dispute the rule as they
are considered short-runa cases and the rule rules in the long-run. In this vein eco-
nomic policy was deemed effective in the short-run if there exist general uncertainties
(Roggof (1985)), uncertainty in the form of imperfect information and misperceptions
by policymakers and/or private agents (Sargent (1999)) etc.
Another extension of this quest for exceptions-not-denying-the-rule was the blend-
ing of economic policy with game theory. This was pioneered by Barro and Gordon
(1983)8, that proposed introducing policy games in the analysis of economic policy.
Its basic idea is to model the behaviour of different players by considering separate but

7 Interestingly – and contrary to the mainstream love of universal economic measures – social
policy was stripped from its universal provision and directed towards discreet and targeted
support to specific groups. Moreover, its almost complete commodification was decreed by
increasing the role of the private sector and by restructuring the public welfare agencies to
operate on the basis of private enterprise principles.
8 Barro and Gordon (1983) constructed a Stackelberg game. Policy-makers should follow
fixed rules and avoid cheating and surprises because they will lose reputation and subse-
quently they won’t be able to cheat again because the private sector will not trust them.
 The adventures of Economic Policy within Mainstream Economics | 233

not independent optimisation problems. Thus, the effectiveness (or not) of economic
policy depends upon the particular settings of the game.
Apart from this hide-and-seek between rule and exceptions, Neoliberalism at-
tempted to change the very essence of economic policy.
A notorious problem of Economics (both Neoclassical and Keynesian) – as op-
posed to Marxist Political Economy – is that they lack a theory of the state and its
relationship to society and social conflicts. Traditionally, all variants of Economics
modeled the state as a socially neutral agent (that is as beyond conflicts and antago-
nisms, social or otherwise) that acts benevolently for the common good. Thus, the
state is an institution; not a market. Hence, it is not pervasive even to market antago-
nisms and, instead, it is an honest arbiter and – if needed - regulator of them. This was
usually coupled with a Weberian understanding of the state bureaucracy as a body of
impartial public servants which is characterized by a corresponding esprit-de-corps
and secured by hierarchical mechanisms of control. In this spirit, the Tinbergen con-
ception of economic policy maintains that this benevolent agent can through objective
means discover the best solution for society’s economic problems and has an uncon-
strained ability to impose them. In a nutshell, the Weberian state has full economic
control in applying its economic policy.
This traditional conception of the state and its economic policies has obvious prob-
lems. It cannot explain social and political struggles and different political-economic
programmes and policies. In contrast, Marxism offers an elaborate and explanatory-
superior theoretical framework where class struggle (at the primary level) and intra-
class antagonisms (at a secondary level) shape the state and its policies and where the
economic basis is the primum movens that interacts with the political and cultural
superstructure. Marxism’s explanatory advantage derives from his very architecture
as a theory of a conflictual (instead of a harmonious) world that is geared towards
change (instead of stability) generated by its internal conflicts and contradictions. In
the turbulent contemporary capitalism this perspective has obvious merits.
The previously mentioned steps of the Neoliberal assault were not able to cope
with this challenge. They remained constrained within the non-social ‘world’ of Eco-
nomics and simply focused on the internal differences within Keynesianism and Ne-
oliberalism. They began by adding government failure to market (Monetarism). And
then to prioritise and magnify the former and completely minimize the latter (New
Classicals). The next step was to reconstruct the very notion of government and of
politics. The aim can be easily discerned. By rejecting the notion of the benevolent
state, they bolster further the policy ineffectiveness proposition. And by limiting the
state’s control and introducing conflict in the ‘game’ they attempt to fend off the
Marxist critique of not theorizing struggle 9.
This next step was undertaken by the Public Choice theory pioneered by Buchanan
(1987). This new perspective was also branded as ‘new political economy’ as it at-
tempted to marry Neoclassical economics with an analysis of the politics. Public

9 It is interesting that Buchanan himself said that during his youth he almost became a com-
munist (Horn (2011), p.94-5). Moreover, during Public Choice’s period of gestation there
was a concerted effort by influential think-tanks of the US establishment (e.g., RAND) to
devise a theory of conflict and collective action as a means in struggle against the communist
threat. The Public Choice theory was nurtured by these centres.
234 | Stavros Mavroudeas

Choice began by identifying itself as the science of political failure (Buchanan

(1988)). It begun by suggesting that Neoclassical microeconomics can be applied to
politics (and the government). Thus, the state and politics can be theorised as a market
(or at least and implicit or quasi-market) and not as a Weberian hierarchical system.
Public Choice maintains that the same rules that apply to economic goods apply also
to ‘political goods’. In goods markets, individuals exchange commodities; in politics,
individuals exchange agreed-on shares in contributions toward the cost of that which
is commonly desired. In both markets the homo economicus (a selfish utility-maxim-
izing and cost-minimising individual) and its individualistic rational choice reigns.
This applies to voters, politicians and public servants. Hence, the political process is
essentially a market exchange between (a) voters that sell their votes to politicians in
return for public economic benefits and (b) politicians and public bureaucrats that
exchange acquiescence to the formers’ wishes with economic benefits for the latter10.
Thus, a ‘de-romantised’ notion of politics is created - void of any ideology, com-
mon good and selfishness - where ‘rascals’ compete and compromise and where out-
comes depend upon the initial settings of this ‘game’. In this manner, conflict is in-
troduced in the picture. But this conflict is individualistic competition and not class
struggle. Contrary to traditional microeconomics, agents can create social groups
based on the commonality of their preferences and endowments. But these social
groups are at the best lobbies (special interest groups). That is, they have a short-lived
horizon and they do not derive from deep and long-run structural characteristics of the
capitalist system (because if this happened, they would constitute some form of social
class). Instead of assuming ‘big players’ (social classes such as capital and labour) as
the primary agents of politics, Public Choice focuses on how individual incentives
affect the capacity of different groups to organise and hence to wield power over oth-
ers. It recognizes that, for example, business interests may be powerful. But not be-
cause this is structurally inscribed in a capitalist society but because, under certain
circumstances (e.g., oligopolistic markets) may find it easier to overcome collective
action/free-rider problems than other groups such as taxpayers and consumers (for
whom it may be more difficult to form a cohesive political force). In different condi-
tions, business interests may be weaker than trade unions or public bureaucrats. Con-
sequently, there is no such thing as capital and labour per se. Rather, there are different
types of business and labour interests which compete within the political sphere. The
outcome of this competition depends on the specific incentives and organisational as-
pects facing the agents concerned. In a nutshell, Marxist class politics are substituted
by lobby politics.
In this game of lobbies economic policy can be effective in the special circum-
stances that there is significant uncertainty. In these cases, fiscal transfers, for exam-
ple, may be efficient. But, on the other hand, state interventionism is prone to rent-

10 Regarding the tricky issue of the state’s monopoly of violence the Public Choice theory by-
passes it by arguing that individuals may acquiesce in the coercion of the state only if the
ultimate constitutional ‘exchange’ furthers their interests. As constitutional exchange (or
politics) it defines the constitutional contract, which governs the whole process of law and
policymaking. Individual instances of policy (or policies) take place within the constitution.
The constitution sets the general expectations of action by the regime within which interest
groups can work. It also sets limits within which individual policies can be prescribed.
 The adventures of Economic Policy within Mainstream Economics | 235

seeking. Public bureaucrats sell (or rent) their capabilities to politicians and the latter
benefit from the implementation by the former of policies that benefit them elec-
torally. This essentially results in the capture and reallocation of benefit. The latter is
not being put to productive use but instead it is wasted because the politicians attempt-
ing to acquire the benefit will spend up to or more than the benefit accrued, resulting
in a zero-sum gain, or a negative sum gain.
This modelling of political behaviour on the basis of the absurd basis of methodo-
logical individualism gives rise to puzzling difficulties in explaining the structure of
politics and the motivation of collective action. Are political parties or nation-states
simply the sums of persons? Is social choice simply a function of self-interest? What
about the role of the public interest or ideology? Can short-lived elites and lobbies
explain long-lasting conflicts over pay, working conditions, political benefits and
even civil wars? Obviously not. Public Choice theory’s of social conflict as one be-
tween elites and lobbies cannot face up to the problems posed by both historical reality
and Marxist Political Economy. In contrast, the latter has a sophisticated theory of
how struggle between (structurally defined) classes shapes the political process and at
the same time how second-rate conflicts (special groups and intra-class antagonisms)
are situated within the former. For example, Marxist theory recognizes that special
groups can have specific interests within the state. Nevertheless, these interests are
constrained and subordinate to the general character of the capitalist state as an organ
of the capitalist system.
Concluding, during the era of Neoliberal dominance, economic policy was dehy-
drated from crucial tools and downgraded as a subject because it was castigated as
prone to labour demands and popular concessions that suppressed capital’s profitabil-
ity. Its efficacy was reduced to continuously shrinking cases and only as an exception
to the general rule of the efficient market.

4 The New Keynesian return of Economic Policy and its

contradictions

From the beginning of the 21st century there are signs of a new reversal leading to the
de-marginalization of economic policy. The regional economic crises of the 1990s
(e.g., Thailand, Mexico, Russia) severely damaged the credibility of Neoliberal ortho-
doxy. In many of these cases, the use of powerful state intervention tools and policies
was required, in stark contrast to the Neoliberal mantras. The beginning of the 21st
century dealt an even stronger blow to Neoliberalism with the outbreak of the global
capitalist crisis of 2008. To overcome it all the major economies in the world resorted
to state interventionist policies and some even explicitly denounced as ineffective by
Neoliberalism (with prominent for example fiscal policy). This trend was further ex-
acerbated by the outbreak of the dual crisis (health-cum-economic) triggered by the
COVID-19 pandemic in 2020. In order to confront this dual crisis an enormous
amount of fiscal support was provided. This was coupled with a forceful monetary
stimulus that exhausted the limits of conventional monetary policy and used also non-
conventional monetary policies (e.g., quantitative easing). Moreover, even policies
236 | Stavros Mavroudeas

completely denounced by Neoliberalism (such as the industrial policy) were explicitly

activated.
These events made obvious the failure of the Neoliberal currents to solve the deep
structural contradictions of the capitalist economy and also their inability at least
guide effectively policymaking in combating economic crises. In economic policy,
Neoliberalism’s belief in the self-equilibrating ability of the market is self-equilibrat-
ing and its infatuation with the withdrawal of state economic interventionism has de-
commissioned crucial and necessary means of economic policy. Its anti-labour mania
has increased the degree of labour exploitation (by suppressing wages and intensify-
ing work). But it has failed to devalorise the overaccumulated capitals. The combined
result was that capitalist profitability could not recover significantly. The latest trick
of resorting to fictitious capital operations supported by credit and monetary policies
produced only limited economic booms and much more economic busts. On top of all
these, its dogmatic view that economic crises are exogenous made Neoliberalism par-
ticularly incapable of formulating economic policies for battling crises.
Consequently, from the beginning of the 21st century started a process that led to
the silent in the beginning and explicit nowadays dethronement of Neoliberalism by
a new orthodoxy. The latter is formed on the basis of New Keynesianism and its New
Macroeconomic Consensus. The latter accepts the Neoclassical microeconomic foun-
dations and the rational expectations. Thus, in the long-run the economy is supposed
to work along the New Classicals’ lines: market forces will produce general equilib-
rium. However, in the short-run a number of rigidities cause disequilibria and, thus,
Keynesian activist economic policies are required. In a nutshell, the New Macroeco-
nomic Consensus is a blend of mild Neoliberalism with a shy Keynesianism. In toto,
it ascribes to some notion of social market that is akin to the old tradition of social-
liberalism (of which Walras himself was a member).
Regarding economic policy, the New Keynesian orthodoxy signifies a return from
academic and policy exile. New Keynesianism recognizes a much broader and more
active role for state economic intervention.
Nevertheless, this return from exile is qualified. In the beginning, New Keynesian-
ism resembled a lot to Monetarism. It considered as effective only the monetary policy
and shared with Neoliberalism its abhorrence for fiscal policy. However, as after the
2008 global crisis the monetary policy was almost exhausted and unconventional
monetary policies employed, there was a forced reconsideration of the efficiency of
fiscal policy. The practical necessities of the COVID-19 double crisis pushed further
the acceptance of fiscal policy as efficient.
In analytical terms, New Keynesianism picks up and refines Rogoff’s (1985) per-
spective (see previous section). It introduces nominal rigidities and, thus, argues that
uncertainty derives from the forward-looking behavior of the private sector. It even
proposes a new theory of economic policy that profess an explicit return to the Tinber-
gen-Theil perspective (e.g., Clarida et al. (1999)). At the same time, it awkwardly
couples this with the assumption of rational expectations making the overall mix
highly contradictory. Big chunks of Public Choice theory and the policy games and
conflicts between special interest groups are also part of this new theory of economic
policy.
In essence, the contemporary orthodoxy of New Keynesianism attempts to marry an
activist economic policy with its neo-conservative insulation from popular pressures for
 The adventures of Economic Policy within Mainstream Economics | 237

better wages and working conditions. The end result is both analytically weak and prac-
tically problematic. It is weak because it cannot comprehend the long-term instability
off the capitalist system and – contrary even to traditional Keynesianism – it ascribes to
a Neoclassical utopia. It is practically problematic because it oscillates constantly be-
tween its short-run horizon (where market fails) and its long-run horizon (where market
is efficient). The current controversies on economic policy are revealing. There is a
heated debate on whether there is a danger of fiscal dominance (meaning an excessive
fiscal policy) or a premature withdrawal of fiscal support would throw the economy into
another double dip. And, on the other hand, there is a corelated debate about the with-
drawal or not of accommodating (conventional and unconventional) monetary policies.
Neither of these correlated debates considers realistically the conditions of real accumu-
lation and capitalist profitability. Consequently, they cannot relate and gauge credibly
the effects of these policies on the economy.

5 In place of conclusions

Mainstream Economics have an uneasy relationship with economic policy. In the be-
ginning it was forced upon them by necessity: capitalism needed state economic in-
tervention – and not only night watchman duties – because of its inherently anarchic
and crisis-prone nature. Subsequently, Mainstream Economics’ attitude towards eco-
nomic policy resembles a pendulum: moving from the absolute faith to economic pol-
icy to its complete rejection. These oscillations of Mainstream Economics reflect
deeper contradictions of the capitalist system and of the historical course of capitalist
economies. Thus, in certain historical conjunctures expansive state economic inter-
ventionism is beneficial to capitalist accumulation. Whereas in different historical cir-
cumstances – and especially depending on the equilibrium between investing in pro-
ductive and unproductive labour – expansive state economic interventionism might
be harmful to capitalist accumulation.
However, Mainstream Economics are unable to comprehend this dynamic and con-
tradictory relationship. This inability stems from their foundational principles. They
cannot situate the state and its policies within society and class conflicts. At the best,
in the case of the Public Choice theory, they theorise only the ‘small game’ of special
interest groups and not the ‘big game’ of social classes. And even the former is done
from within the deeply flawed perspective of methodological individualism. Moreo-
ver, because Economics are essentially a circulation discourse (theorizing only market
exchange and unable to analyse production as the determining sphere of the economy)
they cannot assess realistic and accurately the impact of the various economic policies
on the economy.
Because of these deficiencies, Mainstream economics cannot understand the ebbs
and lows of the efficiency of economic policy. Consequently, they become part of
these tidal waves. During periods when capital accumulation requires strong state in-
tervention the corresponding theoretical currents assume primacy. During periods
when state interventionism is considered an obstacle the anti-interventionist currents
gain the upper hand.
238 | Stavros Mavroudeas

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