Many, including Jan Tinbergen himself, believe that Economic policy: principles and design is his best book1. However, Tinbergen is a productive writer, and almost all of his work is interesting, albeit that in such volumes some repetition is inevitable. Therefore it is perhaps better to call Economic policy: principles and design the core piece of his writings. Such a methodological work is not easily completed. Tinbergen can only write it after finishing his specialization in policy and econometrics, and after competing his theoretical framework. Notably, for several years he has directed the Central Planning Agency (CPB), precisely during the period when it was exceptionally authoritative. He acquires valuable policy experiences there. Moreover, in the CPB he assembles the scientific elite of the Netherlands around him. His books benefit from this.
Economic policy: principles and design is not a book for beginners. Your reviewer, yet not ignorant, began less than a year ago, and soon got stuck in the mathematical model descriptions. He had to put the book aside, and first study Mathematical models of economic growth (also by Tinbergen). Only after this effort, he succeeded in completing the study of Economic policy: principles and design. It must be said: in retrospect the explanations in the book do make sense. Tinbergen even does not require much fore-knowledge, although the reader must be somewhat familiar with economics and mathematics. But Tinbergen is not does not excell in didactic talents, and he also dislikes lazy readers. The explanation is always succinct. The understanding increases significantly, when the reader repeats the calculations on scribbling-paper. There is an appendix with a long list of symbols, which the reader must know by heart.
Economic policy: principles and design is mainly a book about model building. Your reviewer suspects, that everybody who has read the book, knows how the CPB operates. Tinbergen is not concerned with the policy contents, because that aspect is ideological and must be filled in by the society and by politicians. Tinbergen just wants to see to it, that the policy satisfies certain scientific quality standards. The goals must be formulated clearly, and appropriate instruments (means) must be chosen in order to realize the policy. This requires in particular, that the goals must not be conflicting. The policy analysis guarantees the quality. Policy formulation is a professional job2. Here Tinbergen prefers the use of mathematical models, because they can present the causal relations of cause and effect in a succinct and schematic manner.
The book contains twenty of such models, elaborated in detail. Moreover, Tinbergen illustrates the application of the models by means of many examples. Although the models are convenient and elegant, they can not include all policies, and the economic reality is actually extremely simplified. The writer mainly wants to present the fundamental methods, so that subsequently the reader can design his own models. In its most general form, the policy tries to optimize the welfare of the population. Then the model makes assumptions about the individual or collective welfare function. Following the present happiness economics, Tinbergen believes that satisfaction can be measured. Often that well-being is made concrete and elaborated, for instance in the demand of full employment, price stability, and a sound balance of payments. There is nothing new here.
The examples always concern policy analyses from practice, and that enlivens the matter. In order to give an impression, a bird's-eye view of the examples will be presented. Tinbergen describes models at both the micro and macro level, and both of closed economies and open systems with foreign trade. Tinbergen expresses most formulas in terms of changes, and not in absolute variables. Thus he can make the formulas linear, which is convenient for computational purposes. And besides, the policy is generally merely interested in dynamics. Policy documents concern yearly trends. Yet your reviewer struggled with this approach, especially because Tinbergen only explains it in an appendix.
Tinbergen spreads his examples over four chapters. Two concern quantitative policy, which aims at controlling. The other two concern a qualitative policy, where the economic structure is reformed. The simplest category of models ignores the foreign trade. These are models in the style of Harrod, Domar and Keynes. The policy goals are transformed into goal variables. Here for instance a model is described, that studies the relation between the wage level and employment. Tinbergen pleads in favour of a wage policy, although according to his model the effect is yet uncertain. Apparently he mainly believes, that it is convenient for increasing the rate of saving (see p.113). In the same category is a model, which shows how the state can acquire his financial means. And a growth model is developed, which reminds of that of Domar.
In the chapter about the open economy, the terms of trade play an essential role. In other words, here Tinbergen models the formation of prices, and the price elasticity of the product demand on the markets. The prices are represented by Cobb-Douglas functions, which is a bold assumption. Perhaps it is allowed, as long as the economic fluctuations are small, but yet it is a pity that here Tinbergen gives no justification. There is an impressive model with no less than four policy goals, which includes the tax system. There is also a model, which illustrates the consequences of the labour productivity on the foreign trade. Here Tinbergen believes that the wage level is a means to further the export (p.139, p.147). Surprising mavericks in this chapter are two models, which describe banking3. In an open economy the policy gains in strength, when an international coordination (order, cooperation) is established.
The chapter about structure policy does barely use any models. For, a change in the structure breaks through the causal relations, and therefore is not susceptible to mathematics. Tinbergen shows that price fluctuations lead to a conjuncture, similar to the dynamic growth models. Public expenditures such as unemployment benefits are are an automatic stabilizer. Tinbergen also models an economic system, which contains monopolies. He shows that these can be hurtful for the size of the production, and therefore also for the employment. Also here, he advocates the coordination at the international level. They are important, among others, for coordinating the budget deficits and for guaranteeing fair exchange rates. Here the reader may again recognize the present problems of globalization.
The fourth chapter discusses reforms, which fundamentally change the system. A typical example of this policy type is social security. It is obvious that in this policy analysis the mathematical models are commonly not of much help. Principles, ideologies and the general image of man are much more important. Yet also here Tinbergen designs a surprising and original model, which describes the needs of the employers and employees on the labour market. Themes such as central planning and participation also fall within this policy category. The qualitative policy must take into account the long-term consequences. The human nature must be judged well, and the mental development of the population must be the starting point. This is complex policy, and feedback is always necessary.
The preceding makes clear that Economic policy: principles and design is not interesting for everybody. The models and their applications are a complex matter, which requires a careful study. The readers can skip those models, and focus his attention on the general parts of the text, but that hurts the understanding. Apparently the design of a sound policy is indeed monkish work, which inevitably leads to puzzles and compromises. This type of analysis is not an activity for normal people, and not even for politicians and managers. Politicians must consult their rank and file, and then formulate global targets. Next they can decide whether they want to pay the price, that the experts attach to them4. However, for those curious persons who yet want to comprehend the strange world of policy analists, Economic policy: principles and design is a valuable and instructive guide.