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Edited by Roger W. Garrison and Norman Barry
Chapter 15: Hayek and economic policy (the Austrian road to the third way)
The debate on the scope and moral foundations of economic policy began as soon as economics strived to become something more than just a branch of political philosophy and attempted to acquire its own identity as a social science. By and large, its founding fathers characterized this discipline as being concerned with how individuals behave and interact in order to enhance their well-being. This justified the use of the term ‘political economy’ to emphasize the role of the institutional context within which human action takes place. Toward the end of the eighteenth century, prominent authors went further and suggested that political economists should not be confined to the mere description and explanation of human action. Nor should they refrain from recommending how institutions ought to be designed and modified in order to enhance welfare. Adam Smith was of course a leading and effective supporter of this approach, which actually owed much to Ferdinando Galiani and, to a lesser extent, Francois Quesnay. At the beginning of the nineteenth century, Jean-Baptiste Say forcefully advocated the need for a sharper partition between the realms of political economy and of policy, the former referring to the study of human action under given institutional rules; the latter to the content of the legal rules. He did not exclude the importance of normative economics. Still, this branch was to remain an exercise in simulation, with little or no room for decision-making by the economist.
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