Economic Policy Formulation Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

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In the Western democracies, following World War II (1939– 1945), there emerged rather rapidly a consensus among most governments that the general reliance on market forces, which historically had dominated processes of economic policy formulation, would need to be replaced by approaches to economic governance that would incorporate much more active and systematic state economic intervention. This shift in policy orientation was for the most part driven by the desire to avoid a return to the kinds of economic conditions that prevailed during the Great Depression of the 1930s— conditions that for many could be attributed in large part to prevailing laissez-faire policy orientations. Widespread citizen support for more government economic intervention was notably revealed by the dramatic increase in electoral support enjoyed by parties of the left in many countries in the immediate postwar period. Of note here was the impressive victory in Britain by the Labour Party in the general election of 1945. For Labour—and other like-minded parties in the capitalist democracies—the adoption of new strategies for stage-managed capitalism seemed to have become both appropriate economically and viable politically. At issue of course was the question of which specific types of policy strategies would be adopted given the new state commitment to economic interventionism. It is here that the theoretical work of the great British economist John Maynard Keynes would prove critical.

The Keynesian Consensus

The policies advocated by Keynes proved quite popular for the working-class parties in the 1950s and 1960s. As a system of economic governance, Keynesianism, when implemented, seemed to address effectively free market capitalism’s per iodic recessionary tendencies (which for Keynes generated unnecessary individual economic hardship and instability) while leaving largely intact the central values of entrepreneurial capitalism, most notably its reliance on private ownership of the means of production. For Keynes, governments could manage capitalism and promote continuous economic growth through the effective, systematic utilization of a variety of fiscal and monetary policy instruments. Particularly crucial here was Keynes’s suggestion that governments could counter the initial stages of downward cycles by using public funds on socially beneficial projects. Such spending would stimulate private-sector economic activity such that high levels of aggregate effective demand and hence full employment could be rapidly reconstituted.

Politically, Keynesianism would effectively legitimize permanent, systematic state management of the capitalist economy. This left many analysts to conclude that Keynesianism represented a new form of democratic capitalism through which democratically elected governments could use Keynesian demand-management policies to promote increased economic prosperity for all societal classes.

The economic prosperity associated with the three decades following World War II throughout the industrial democracies is attributed by many to the widespread and successful implementation of Keynesian policies. The massive growth allowed for the creation of generous social welfare systems in many countries as well as an unprecedented level of employment security for middle and working-class constituencies. Meanwhile, capitalists were placated by the maintenance of economic conditions that were conducive to consistent profitability and low inflation.

This general contentment is reflected in the political science and economics literature of the era. Authors such as Harold Wilensky, Anthony Crosland, and Andrew Shonfield shared the view that a Keynesian consensus—one characterized by a widespread acceptance as legitimate of Keynesian economics and welfare statism—had emerged and that the social conflict characteristic of prewar capitalist societies was rapidly declining. In short, most scholars, by the early 1970s, were of the assumption that a process of convergence in economic and social policy formulation was well under way.

This convergence theory and widespread optimism concerning the future of advanced capitalism was of course short-lived, as the oil shocks of the 1970s created a sustained period of economic stagnation coupled with relatively high rates of inflation. This stagflation proved difficult to counter with traditional Keynesian policies. Indeed, by the end of the decade it seemed clear to governments and scholars alike that Keynesianism, at least on its own, was no longer viable as a system of economic governance. The 1980s, then, witnessed widespread and significant shifts in state economic policy strategies. Of note here was the distinct lack of consensus concerning what the most appropriate post-Keynesian policy solutions might be. This period of general economic decline, and the divergent state policy responses to it, generated an unprecedented level of interest among political scientists in issues related to economic policy formulation in both industrial societies and developing nations.

Policy And Theoretical Divergence

In the current post-Keynesian era, government economic policy strategies have tended to be guided by one of three general economic management theories: monetarism, supply-side economics, and industrial policy. Monetarism focuses on containing inflation through tight monetary policies and strict controls on government spending. It is believed that by keeping inflation intact, governments can create an economic environment most suitable for long-term, sustained, market-led growth.

Supply-side theory, meanwhile, advances the notion that by lowering tax rates, particularly for wealthy individuals and corporations, governments can encourage increased private sector investment in such things as plants and equipment and stimulate higher levels of consumer spending. Another key component of the supply-side doctrine is governmental deregulation. By reducing regulatory burdens on business, governments can act to promote still further investment.

Unlike the distinctly market-based orientations of monetarism and supply-side economics, industrial policy advocates using a myriad of government policy instruments—tax credits, low-interest loans, subsidies, direct grants, administrative assistance, indicative economic planning—to achieve state-established economic policy objectives. While sharing with Keynesianism the notion that governments have a legitimate role in managing capitalism, industrial policy is notably microeconomic in focus. Whereas Keynes believed that individual economic actors would act in accordance with macroeconomic stimulus policies, industrial policy is geared toward developing specific objectives and using specific policy instruments for individual firms or industries depending on their unique needs or circumstances.

Political scientists, as suggested, became increasingly interested in the issue of economic policy formulation as governments scrambled to implement policies associated with one or more of the above economic management theories following the collapse of the Keynesian consensus. Much of this interest has been reflected in the theoretical work produced to explain the specific policy options that individual governments have eventually chosen. This literature has tended to focus on those variables that have been most influential in shaping these eventual choices. Some scholars, such as Francis Castles, have focused on the significance of political parties, noting, as an example, that the political ascendance of business parties in such countries as Britain and the United States during the 1980s allowed for the adoption of monetarist and supply-side strategies, respectively. Meanwhile, where left parties retained political power, Keynesian policies were more likely to be augmented with industrial policy instruments.

Other political scientists have focused on what is said to be a critical relationship between interest group structures and economic policy choices. Among others, Peter Katzenstein’s work has been seminal in this regard. Katzenstein has shown how the corporatist policy-making systems (which are characterized by the direct, formal participation by labor unions and business associations in economic policy making) of Western Europe’s smaller democracies allowed these states to develop successful industrial policy solutions in response to the economic consequences of globalization and economic transformation. More broadly, some scholars have noted how the political institutional frameworks of governments in general are crucially linked to policy choices. Japan’s comprehensive and successful industrial policy system, for instance, is seen by many to be a consequence of the unique set of relationships that the state’s bureaucracy has with members of Parliament as well as key actors in the business community. Here, the work of such state-centered authors as Peter Evans and Theda Skocpol has been important in getting political scientists to understand the significant relationship between political institutions and public policy outcomes.

Finally, recent scholarship has paid close attention to the relative power position of trade unions and the working class in general vis-à-vis capital and the state. Here, the emphasis has been on identifying the level of political leverage and economic influence enjoyed by national labor organizations. Alexander Hicks, for example, has shown that trade union strength has clearly had an impact on the ability of governments to alter economic and social policy orientations in many industrial societies.

Bibliography:

Castles, Francis G., ed. The Impact of Parties: Politics and Policies in Democratic Capitalist States. London: Sage, 1982.
Crosland, Anthony. The Future of Socialism. London: Cape, 1956.
Evans, Peter,Theda Skocpol, and Dietrich Rueschemeyer, eds. Bringing the State Back In. Cambridge: Cambridge University Press, 1985.
Freeman, John. Democracy and Markets. Ithaca, N.Y.: Cornell University Press, 1989.
Hall, Peter. Governing the Economy:The Politics of State Intervention in Britain and France. New York: Oxford University Press, 1986.
Heidenheimer, Arnold, Hugh Heclo, and Carolyn Teich Adams. Comparative Public Policy:The Politics of Social Choice in America, Europe, and Japan. New York: St. Martin’s, 1983.
Katzenstein, Peter. Small States in World Markets. Ithaca, N.Y.: Cornell University Press, 1999.
Keynes, John Maynard. The General Theory of Employment, Interest, and Money. New York: Harcourt, Brace and World, 1936.
Shonfield, Andrew. Modern Capitalism: The Changing Balance of Public and Private Power. New York: Oxford University Press, 1965.
Wilensky, Harold. The Welfare State and Equality. Berkeley: University of California Press, 1975.