For much of the 20th century, governments adopted discretionary policies like demand management designed to correct the business cycle.
However, discretionary policy can be subject to dynamic inconsistency: a government may say it intends to raise interest rates indefinitely to bring inflation under control, but then relax its stance later.
The first economic problem was how to gain the resources it needed to be able to perform the functions of an early government: the military, roads and other projects like building the Pyramids.
Early governments generally relied on tax in kind and forced labor for their economic resources.
Some early civilizations, such as Ptolemaic Egypt adopted a closed currency policy whereby foreign merchants had to exchange their coin for local money.
With the accumulation of private capital in the Renaissance, states developed methods of financing deficits without debasing their coin.
The development of capital markets meant that a government could borrow money to finance war or expansion while causing less economic hardship.
The business cycle became a predominant issue in the 19th century, as it became clear that industrial output, employment, and profit behaved in a cyclical manner.
After the dominance of monetarism[2] and neoclassical thought that advised limiting the role of government in the economy in the second half of the twentieth century, the interventionist view has once more dominated the economic policy debate in response to the 2007-2008 financial crisis,[3] A recent trend originating from medicine is to justify economic policy decisions with best available evidence.
The work of Banerjee, Duflo, and Kremer, the 2019 Nobel Prize laureates[5] exemplifies the gold type of evidence.
In contrast to this idealized view of evidence-based policy movement, economic policymaking is a broader term that includes also institutional reforms and actions that do not require causal claims to be neutral under interventions.