At the end of the period of reconstruction of the national economies shattered by the war, income redistribution and discretionary macroeconomic management emerged as the top policy priorities of most Western European governments. The market was relegated to the ancillary role of providing the resources to pay for this government largess, and any evidence of market failures was deemed sufficient to justify state intervention, often in the intrusive forms of centralized capital allocation and the nationalization of key sectors of the economy. Indeed, centralized management and unfettered policy discretion came to be regarded as prerequisites of effective governance.

This social democratic consensus about the relative roles of state and market in the managed economy began to crumble during the 1970s. The combination of rising unemployment and rising rates of inflation could not be explained within the Keynesian models of the day, while discretionary public expenditure and the centralized welfare state were increasingly seen as part of the problem rather than the solution. It is at this point that we witness the appearance of the notion of government—or public sector—failure with public-choice theorists identifying various types of government failure, just as previous generations of economists had produced an ever-lengthening list of market failures. Nationalization policies seemed to provide striking empirical evidence of public sector failure—in one country after another, publicly owned firms came under fire for failing to achieve not only their economic, but also their social, objectives.

That such criticisms were not always fair or objectively justified is immaterial—the fact is that an increasing number of voters were convinced by them, and were willing to support a new model which included privatization of many parts of the public sector, more competition throughout the economy and greater emphasis on efficiency and decentralization in the provision of social services. The failure of the socialist experiment of President Mitterand in 1981/2 was seen as conclusive proof that redistributive Keynesianism was no longer possible for countries which, like France, were closely integrated in the European and global economy.

In addition to privatization, market liberalization and welfare reform, the

-1-