chapter  10
Compensation mechanisms and targeted economic growth
Lessons from the history of economic policy
ByErik S. Reinert
Pages 25

The history of economic policy is curiously absent as an economic discipline. Economic history, history of economic thought and Schumpeter’s History of Economic Analysis all touch on policy issues, but longitudinal analyses focusing on policy are scarce. We would claim that this is somewhat of a blind spot in academic economics. The size of this blind spot increases because most history of economic thought today is limited to presenting a genealogy of today’s standard theory. The economic theories that formed the basis for successful economic policy in the past are, at best, treated peripherally. The works of Charles Babbage on the roles of machinery and manufactures (Babbage, 1835) and of science (Babbage, 1830) in economic life, influenced English thinking on economic policy at the time more than did the work of his contemporary David Ricardo. At the time, a member of the US House of Representatives actually made the comment that, like so many other English products, the theories of David Ricardo seemed to be intended for export only. Yet, today’s textbooks in the history of economic thought are filled with Ricardo, but do not refer to Babbage. No doubt the absence of a long term policy perspective is further aggravated because ours is a time when-as Jacob Viner put it-‘economists have succeeded in being as ahistorical as an educated man can perhaps possibly be’. (Viner, 1991 (1957):192)

For most of modern history, economic policy has been based on theories with assumptions fundamentally differing from today’s standard theory. One important difference is that for most of the last 500 years national economic policies have been based on theories where economic activities have been seen as qualitatively different. In other words, economic growth and welfare were seen as activity-specific-as being present in some economic activities rather than in others. Consequently, economic policy was for centuries successfully targeted to activities with certain characteristics. Building the European market economies-with the necessary institutional and financial

scaffolding-took centuries of conscious construction, and the activity-specific nature of economic growth was a crucial aspect of the policies that first built Europe, and then the United States.