The ‘optimisation paradigm’ gives a distorted picture of economic policymaking as a rational technocratic process and represents a serious obstacle to effective communication between economists and policymakers. The adoption of the austerity strategy as a means of dealing with the debt and deficit problems in the euro area presents an interesting case study of how an artificial conflict between technocracy and democracy might be created. Far from providing technocratic solutions to debt and deficit problems, neoliberal economics offers a justification for the imposition of policies that benefit powerful political and economic elites. The optimisation paradigm needs to be replaced by an alternative model which views economists participating in the policymaking process as ‘political economists’ rather than ‘technocrats’. A possible way forward is to apply Keynes’s concept of ‘animal spirits’ not only in relation to investment decision making under uncertainty but also to political decision making.

The ability of sovereign and democratic governments to formulate debt and deficit policies has always been limited and constrained by the requirement to take into account the views of the country’s creditors. The new element in this relationship is the idea that there is a ‘technocratic’ solution to debt and deficit problems from which democratically elected governments must not deviate. The paper re-examines the concepts of ‘technocracy’ and ‘democratic’ policymaking and concludes that the future of debt and deficit policy must rest on a revised policymaking paradigm.

Crucial in the development of this revised policymaking paradigm is the re-examination of the concept of ‘technocratic policymaking’ which assumed a special significance in the area of debt and deficit policymaking. In November 2011 the democratically elected prime ministers of Italy and Greece, Silvio Berlusconi and George Papandreou, were forced out of office and replaced by unelected ‘technocrats’. After this introduction, section 1.2 considers these recent episodes of ‘technocratic’ intervention in democratic politics and notes the lack of clarity about the meaning of the term ‘technocracy’. Section 1.3 looks at the way economists² view their role in the policymaking process and then reviews briefly the development of the concept of ‘technocracy’ and examines the philosophical questions raised by the relationship between expert knowledge and political power. Section 1.4 will compare the economists’ view of the policymaking process with the prevailing views in political science. Section 1.5 argues that there are some additional problems with the economists’ policymaking paradigm, based on accounts provided by economists that have actively participated in public policymaking as advisors. Section 1.6 presents the case for revising the established policymaking paradigm in economics and discusses some ideas about how such a revision might be attempted. In section 1.7, debt and deficit policies are examined in relation to the preceding discussion of democracy, technocracy and public policymaking. The final section summarises and concludes.

The usual response to such questioning of the democratic legitimacy of the change of government in Italy and Greece was to emphasise the ‘technocratic’ character of the new governments. At this point the precise meaning of the term ‘technocratic government’ had not been either clearly articulated or seriously debated. There was, however, a strong implication that somehow the absence of democratic credentials among the new political leadership was more than compensated and offset by their ‘technocratic’ qualities which were, presumably, indispensable in dealing with the critical economic policy issues facing Italy and Greece in November 2011. The most critical economic policy issue that the ‘technocratic’ prime ministers had to deal with was then – and still remains – that normal ‘democratic’ rule has been restored in both countries, the problem of debt and deficits which is, of course, the central theme of this book.

This response to the question concerning the democratic credentials of unelected prime ministers imposing ‘technocratic’ policies on heavily indebted economies opens a ‘Pandora’s Box’ of further questions. Is the ‘technocratic’ solution only appropriate for policies dealing with debt and deficits or can it be applied across a wide range of policy issues? Is a ‘technocratic government’ needed in only certain countries, such as Italy and Greece, or can it also be usefully employed in other countries such as, for example, Germany or the Netherlands? If there are universal ‘technocratic’ solutions to policy problems, why not apply them universally for all public policymaking everywhere? In other words, were the governments of Mario Monti and Lucas Papademos expected to design their own policies based on their ‘technocratic’ credentials or merely to rubber stamp and faithfully implement ‘preordained’ policies? If their role was simply to ensure the implementation of the so-called ‘Troika model’ of dealing with the debt crisis in the euro area by a combination of savage austerity and ‘structural reform’, a strong case can be made that these governments were neither ‘technocratic’ nor ‘democratic’.

A more recent episode that raises slightly different but equally important questions about democratic policymaking was the decision of the euro group on 16 March 2013 to provide a ‘rescue’ package for Cyprus. The central and unprecedented (at least in Europe) proposal of the package was the compulsory ‘haircut’ of deposits in Cyprus’s banking system, a proposal that the country’s government initially rejected but eventually had to accept following the intervention of Mario Draghi. The president of the European Central Bank (ECB) and an unelected ‘technocrat’, Draghi issued an ultimatum to the president of Cyprus that unless he signed the agreement all Emergency Liquidity Assistance (ELA) from the ECB to the banking system of Cyprus would cease immediately. It is debatable whether or not the president of the ECB was acting in accordance with his mandate.³ What is not in dispute, however, is that 2013 was an election year in both Cyprus and Germany. The interesting question with regard to the Cyprus crisis is what happens when the electorate in the two countries, which are members of a monetary union, make diametrically opposing demands on their politicians? During the negotiations for a Cyprus ‘bail-out’ there were persistent political noises emerging from Germany, effectively claiming that the German electorate was fed up having to hand over money to the Southern European periphery. In addition to the usual charges of corruption, deception, laziness, imprudence and inefficiency, two new reasons were added to the long list why the heavily indebted southern periphery of Europe was morally ‘undeserving’ of financial help: reckless ‘gambling’ and money-laundering⁴ Why, it was asked, should the hard-working and prudent, mostly German, taxpayers rescue an overblown banking sector in Cyprus, which was acting as a ‘tax haven’ for wealthy non-Europeans, including a number of dubious Russian ‘oligarchs’? The answer was that instead of a ‘bail-out’ Cyprus should be offered a partial ‘bail-in’. At the same time during the election campaign in Cyprus all three presidential candidates flatly rejected the so-called ‘bail-in’ idea, including Nicos Anastasiades, who ultimately won the elections in February 2013.

The German politicians rejected the ‘bail-out’ request by Cyprus, fearing the electoral consequences of acceding to yet another hand-out to a peripheral euro area country, while the Cypriot president objected to the ‘haircut’ of bank deposits, having recently been elected on a no ‘bail-in’ mandate. Needless to say that the German point of view, with powerful support from the IMF and the ECB, prevailed and in the early hours of 16 March 2013 the euro group decided to provide Cyprus not with a ‘bail-out’ but with a ‘bail-in’ ‘rescue’ plan, worked out by the ‘technocrats’ in the ‘Troika’ consisting of the EC, the ECB and the IMF. The Cyprus ‘bail-in’ had been agreed by all 17 members of the euro group and therefore it can be claimed that, in theory, this was an example of democratic policymaking. On the other hand, the way that Cyprus was forced to deal with its debt and deficit problems can justifiably be considered as an example of bullying of the small and weak by the big and powerful. Clearly, before there can be any further meaningful discussion of these issues, it would be useful to give some definition of the terms involved. Despite the recent frequent use of the term ‘technocratic government’ the concept itself remains opaque; it lacks clarity and it means different things to different people. Sometimes it means that a person or an institution is above party politics. Frequently, it implies that what is being proposed has the sanction and authority of expert knowledge and scientific understanding of the problem in hand. Yet at other times it refers to the ability to recommend what is ‘correct’ and ‘necessary’ as opposed to what is ‘popular’. What in fact is ‘technocracy’ and is it compatible with ‘democracy’ at least in its current widely practiced form of ‘representative democracy’? Should public policymaking be both technocratic and democratic? At this point it may be asked whether these are appropriate questions to be discussed by economists. These are indeed relevant questions, especially for a discipline that was originally known as political economy.

It is particularly important to discuss these issues in a volume such as the present one which has as one of its principal aims the encouragement of new thinking in economics. The main argument of this paper is that a new way of thinking is desperately needed not only about economics but also in relation to both economic policymaking and the role of economists in the policymaking process. Although the main point of reference will be on debt and deficit policies, most of what this study has to say is more general in nature. An interdisciplinary approach will be adopted which acknowledges and utilises knowledge, analysis and insights from other disciplines, and in particular the two disciplines that have historically been closest to political economy: political science and political philosophy.

Although, as already mentioned, a detailed examination of these questions, strictly speaking, falls outside the scope of the discipline of economics, nevertheless it would be fair to say that most economists would give the following response to these questions, most probably in the following way: public policymaking is, and if it is not it ought to be, a rational process in which economists should play only an ‘instrumental’ role. There is, in other words, an implied model in the discipline of economics both about the nature of public policymaking and also about the perceived role of economists in policy formulation. Most policy debates in economics take place within this implied model. Peacock (1992) refers to it as the ‘optimisation paradigm’ of policymaking according to which ‘the government’, which is assumed to be a unitary entity, defines the objectives of policy and specifies the weights to be attached to various policy ‘trade-offs’. The definition of policy objectives requires value judgements and consequently economists as objective, dispassionate scientists have no role to play at this stage of the policy process. They can, however, play a significant role in the selection of instruments of policy. If governments wish to maximise their objectives they must select the best instruments. Economists develop models, which attempt to explain the workings of the economy. On the basis of knowledge and evidence produced by these models they can offer advice. This would be based either on the best means of achieving predetermined ends or on the consequences of pursuing alternative objectives; or, still, on the effects on the economy of changes in policy variables, which are under the control of governments (taxes, expenditure, regulation and so on). There is no distinction in principle between solicited and unsolicited policy advice or between economists working in academia and those working fully or partly in government.