The March of Folly
I'm reading Barbara Tuchman's "The March of Folly" at the moment. The basic point of this book is that nations can be as irrational and dysfunctional at a policy level as individuals are in managing their own affairs. To this end she cites the Trojans (in their war with Greece, and particularly in bringing the horse into their city against the dictates of caution and prophecy), the Renaissance popes, England's handling of her American colonies, and US involvement in Vietnam. The book was written in the context of the arms race with the Soviet Union just prior to Perestroika (I hope I spelled that correctly), with the hardly tacit implication that this was the Great Folly of that time.
Tuchman's definition of Folly is very precise. It's much more specific than simply "a really stupid thing to do".
To qualify as folly for this inquiry, the policy adopted must meet three criteria: it must have been perceived as counter-productive in its own time, not merely by hindsight. ... Secondly a feasible alternative course of action must have been available. ... third ... the policy in question should be that of a group, not an individual leader.
These are quite exacting criteria. The first means that there must have been a reasoned outcry against the policy at the time. The second that reasonable alternatives were put forward. And the last that the whims of individual fools are discounted.
It's easy to look at government policies in today's world of which one might disapprove (I'm sure you can think of several) and, on the assumption that they will fail, mark them as follies, but it seems to me that in any reasonably free or democratic society, there will always be arguments that a policy is "counter-productive", and many "feasible alternatives" (such as doing nothing) tabled. As such, almost any failed policy of a modern democracy will qualify as folly by Tuchman's definition.
For democracies, it seems that to qualify as folly a policy should have nearly overwhelming public support (rather than merely being pursued by a group) at least at its inception. Sadly, the examples I'm thinking of easily meet this criterion as well.