Institutions and Economic Policy

The chapter contends that different views of economic policy depend less on technicalities than on the overall outlook of the economy. Closed systems approaches focus on market performance, either as a goal or as a constraint. Open systems ones stress the interdependence between the economy and society, thereby acknowledging that policy may involve a broader variety both of goals, ranging from growth to freedom and happiness, and of constraints, whether allocative, social or cultural. The open system perspective implies that changes in the structure of the economy eventually feed back both on how people conceive of the economy and social welfare and on how the economy itself functions. This explains why, although most people suffered the detrimental consequences of neoliberal policies, they still support them. The paper suggests that alternative policy perspectives are possible that focus on the quality of life and institutional change rather than on prices-measured aggregates alone.