Essay on Economic Policy: Translating Theory into Practice

Historical experience shows that the theory is transformed into practice through politics. If the policy is based on objectively existing laws, subject to a variety of public interest and provides for multi-variant decision and freedom of choice, it becomes the driving force behind the development of the society and a person. This policy is science-based. Consequently, it should be based on scientific theory. But, if the policy is based on the distorted theory, which ignores the objective laws and the totality of the interests of society, subordinates the interests of one another, it is not scientific. Such a policy leads society to the crisis, and even to its regression. The same is true relating to economic policy.

Translating economic theory into practice is not an easy process because the normative theory of economic policy has been studying the issues how governments should operate. The first step in this area was made by a Dutch economist Jan Tinbergen, who outlined the major steps involved in the development of economic policy. Firstly, it is important to define the objectives of economic policy, usually in the form of social welfare functions, which the state authorities are trying to maximize. On this basis, the researcher defined targets. Secondly, it is necessary to allocate available political instruments, while thirdly, politicians should have a model of future economic development in their use, and this model should link the tools and target determinants to define optimal value of the instruments used by a policy.

It is a widely recognized fact that a set of macroeconomic targets includes full employment and zero inflation. Tools available in a broad sense, are monetary policy and fiscal policy. According to Gerston (1997), Tinbergen studied the theory of economic policy in a simple linear approach. If there are two targets and two instruments, policies can achieve the desired values of target variables only when the effects of the influence of instruments for the purposes of linearly independent. More generally, politicians will have many targets and many tools. If there are N targets, they can only be achieved when there are at least N linearly independent instruments.

In practice, various politic instruments can be controlled by various governmental agencies. For example, monetary policy can be controlled by the central bank, fiscal policy – by the executive and legislative authorities. If governments do not coordinate their actions in ways suggested by Tinbergen, the optimal set of policy measures can achieve decentralized manner. Atkinson (1996) stated that the solution is to assign each target to a particular instrument (and, consequently, the government body), which has the greatest relative impact on a specific goal. This approach, developed by Robert Mundell, is known as an effective market classification.

There is also a positive theory of economic policy, which studies the ways how government authorities act in practice. Quite often, the government significantly deviates from the policy proposed by the normative theory in its actions. In order to understand this discrepancy, we must proceed from an awareness of the fact that the development and implementation of policy is usually not carried out any single state structure. Government actions are the result of many decisions made at different and often competing levels (central, regional and local governments, decentralized agencies, state enterprises, the central bank).

In conclusion, the positive theory of economic policy shed light on the overall trend, which is quite obvious to follow the government overly expansionary fiscal policy. It has been shown several possible causes for this trend of non-compatibility issues in time. Firstly, it is possible that there is a political business cycle, i.e. a situation where the administration is in power, conducting an expansionist policy immediately before the election, in order to influence their results. Secondly, the coalition governments formed by several parties; it may be difficult to take unpopular, though necessary, measures aimed at strict economy. Thirdly, the necessary stabilization may be delayed due to fighting between different factions of society over the distribution of the burden of costs as a result of the stabilization programs.

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