Towards a Political Economy of the Theory of Economic Policy

The theory of economic policy, in its mathematical modes, may be said to have had two incarnations, identified in terms of pre-Lucasian and ultra-Lucasian on a time-scale, whose origin can be traced to the Scandinavian works of the 1920s and early 1930s, beginning with Lindahl (1924, 1929), Frisch (1933), Myrdal (1933) and Hammarskjöld (1933). The end - mercifully (meant perversely) - of the ultra-Lucasian period, in Frances Fukuyama senses, might well have been the date of Prescott's Nobel Prize Lecture (Prescott, 2004). The codification of what may be called the `classical' theory of economic policy was initiated in the pioneering formalisations by Frisch (1949, a, b), and Tinbergen (1952), elegantly summarised in Bent Hansen's early, advanced, text book (Hansen, 1955). The launching pads for the ultra-Lucasian period were the Lucas Critique (Lucas, 1975), the elementary saddle-point dynamics based policy ineffectiveness `theorem' in a Rational Expectations context by Sargent and Wallace (1976) and the Dynamic Programming based Time-Invariance proposition in Kydland and Prescott (1977)•. In this essay I try, first of all, to trace a path of the mathematisation of the theory of economic policy, from this specific origin to the stated culminating point. Secondly, an attempt is made to expose the nature of the Emperor's New (Mathematical) Clothes in which the mathematisation of the theory of economic policy was attired. Finally, it is shown that the obfuscation by the mathematics of efficiency, equilibrium and the fundamental theorems of welfare economics can be dispelled by an enlightened, alternative, mathematisation that makes it possible to resurrect the poetic tradition in economics and ‘connect the prose in us with the passion’ for policy in the manner in which Geoff Harcourt has ‘connected’ them.