Instrument-Targeting or Context-Making? A New Look at the Theory of Economic Policy

By Matzner, Egon | Journal of Economic Issues, June 1994 | Go to article overview
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Instrument-Targeting or Context-Making? A New Look at the Theory of Economic Policy

Matzner, Egon, Journal of Economic Issues

To be invited to give the C.E. Ayres lecture is a great honor. For an European economist, it is at the same time a great gift. It is an occasion (or invitation?) to indulge in American institutional thought. Given the riches of this tradition, it is difficult to present an idea that is novel. Reading Ayres Theory of Economic Progress [1944] certainly left me with this impression. How then can I draw your attention? My first line of defense would be to say that scientific and intellectual progress (as understood by Ayres) is always endangered by bad memory or insufficient study by following generations. Therefore, it is necessary to rediscover old truths at the same time as new discoveries continue to nurture progress. To give an example: Says Law has been disclaimed time and again, but this has not prevented its continuing reappearance. That then leads to its recurrent rejection. There is, however, a second case for the repetition of ideas already common to American institutionalists. There may accrue a net gain in understanding economic processes by rearranging ideas already known. I am hopeful that this may result from my lecture.

My topic is the theory of economic policy. While economic and social policy have been an important concern for institutional economists, second only to their effort of interpreting social and economic evolution, it is not unfair to say that they have not presented a theory of economic policy. Since I have not come across any explanation of this strange phenomenon, nor an epistemological proof of its impossibility, I venture an approach to the missing theory of economic policy that gives due account also to institutions. My effort to do this began more than 20 years ago. It was--how else could it be--motivated by my discomfort with the "laissez-faire" ideology, as well as with the "means-ends model" (in short hand: MEM), of economic policy.

My discomfort had begun in the years I spent as a fellow at Gunnar Myrdal's Stockholm Institute for International Economic Studies during the 1960s. It is fair to say that the MEM has fundamentally influenced the ideas that have been developed to analyse and influence social and economic processes up to these days.

The Means-Ends Model: The Organizer of Thought and Action

The means-ends model (MEM) is based on an underlying assumption of simple cause and effect relations. The assumption of these relationships is eminently useful for organizing thought and action, with applications to virtually any area of social life that individuals or organizations may consider in need of action. Moreover, the assumption finds powerful support in legal positivism. Basic to both MEM and legal positivism is a conception of causal chains that from the rise of modern natural science on have been central to all scientific activities and, based on many individual experiences, to common sense and every day life.

In the social sciences, Max Weber popularized the MEM with his theory of bureaucracy. In economics, Gunnar Myrdal similarly contributed to the diffusion of this mode of thinking, even though in his later works he increasingly distanced himself from it. The modern and most influential version of the MEM in economics was formulated by Jan Tinbergen in his Economic Policy: Principles and Design [1956]. For this, as well as for his pathbreaking econometric work for the League of Nations, he received (together with Ragnar Frisch) the first Nobel Prize in economics. The influence of Tinbergen's formulation of the MEM is reflected in numerous econometric models and quantitative analyses of economic policy. It continues to function as a reference model for analyses of the effects of economic policy, for prescriptive and predictive applications, and for social science analyses [Land 1975]. It also forms the foundation of cybernetic extensions, or what the social sciences refer to as control or steering theory.

In Holland, the MEM was the intellectual basis for an extensive planning bureau whose first director was Tinbergen himself.

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Instrument-Targeting or Context-Making? A New Look at the Theory of Economic Policy


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