Global Optimization of Economic and Social Policy

Global Optimization of Economic and Social Policy

Sten A. Thore (IC2 Institute (Innovation, Creativity, Capital), University of Texas at Austin, USA)
Copyright: © 2014 |Pages: 10
DOI: 10.4018/978-1-4666-5202-6.ch099
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Background

The U.N and its various agencies have during the last decades been heavily involved in the formulation of goals of economic and social policy (such as the millennium goals, see the UN, 2000) and the design of policy aiming at realizing such goals. In order to meet them, many countries are adjusting their energy policy, educational policy, and environmental policy.

There was a time when economists thought that global optimization of economic and social policy could be accomplished by the stratagem of maximizing some over-arching global “utility function.” This was the approach of Jan Tinbergen, who wrote a classical treatise on the subject in the 1950s. Fortunately, our understanding of economic and social policy has advanced considerably since then. International organizations do no longer insist on the assumptions of economic equilibrium that hampered Tinbergen´s efforts. Indeed, the International Labor Organization (an arm of the United Nations head-quartered in Geneva) explicitly recognizes that the goals of “decent work” that the ILO itself has formulated are certainly not always attained. Instead, ILO has called for the calculation of the shortcomings of the various countries from this (equilibrium) ideal (see ILO, 2001).

The present paper draws attention to a recent extension of data envelopment analysis that permits the presence of a convex social welfare function of all outputs (all policy goals), see Cooper, Thore, and Tarverdyan (2010). The new approach seems to meet the call by Jan Tinbergen for the construction of a model of economic policy that is empirically implementable, and that delivers a numerical assessment of the success of policy. Starting out from Tinbergen´s work, the paper gives a mathematical account of the new model. While neoclassical equilibrium is still possible, the new idea is to allow for the possibility of non-achievement of the equilibrium ideal. Neoclassical equilibrium is viewed as a matter that needs to be tested. In the case of optimum failure, the deviation from equilibrium will be computed.

Key Terms in this Chapter

Millennium Declaration: and Millennium Goals: As listed by the United Nations (see UN, 2001).

Data Envelopment Analysis (DEA): Mathematical programming method tracing the convex hull (the envelope) of a scatter of observations, invented by Charnes, Cooper, Rhodes in 1978.

Effectiveness Rating of Economic and Social Policy of a Nation: Ratio between social preference or social welfare attained by goals achieved, and social cost of policy instruments employed.

Fair Globalization: Term used by the United Nations to denote globalized conditions of trade and finance tempered by reasonable standards of protection of labor (see UN, 2004).

Cobb Douglas Function: Mathematical relationship between the amounts of two or more inputs and the output (such as between goals and social welfare, or between policy instruments and social cost).

Causal Tree: Pictorial representation of hierarchical causal structure.

Decent Work: Term originally suggested by the International Labor Organization to denote working conditions conforming with reasonable standards of safety and human dignity (see ILO, 2005).

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