Federico Caffè and the theory-policy nexus in a complex environment

The paper aims to assess Federico Caffè’s contribution to economic thought in the light of developments that occurred after he left us. It focuses on economic policy in a complex environment. The first section discusses the dimensions of complexity: synchronic and diachronic complexity, and knowledge, i.e. the attempt to make sense of such forms of complexity. The second section focuses on coordination. Relative prices are the typical coordinating instance in a capitalist market economy but institutions, whether spontaneous or purposively established, are just as important. While conventional economists view institutions as regulators of a predefined set of economic relations – typically, the market – an alternative view, which is more consistent with the above themes, is that institutions provide the framework and the background for the co-existence and co-evolution of sectional and collective interests. In so doing, institutions determine the relation between the economy and society. The final section of the paper deals with the implications that this framework has for a proper understanding of how economic theory and economic policy relate. Any policy perspective must deal with two issues. First, how institutions are expected to frame the operation of relative prices. Second, which – economic and societal - institutions should be maintained and which should be made to change, and over what time range. Only through the interaction between moral value judgments – what we believe should be – and cognitive value judgments - what we believe can be – can we provide a means to adequately deal with complexity. The concluding remarks link the above discussion to Federico Caffè. They point out that his attempt to found a theory of economic policy reflected a view of the economy that is consistent with complexity approaches.