Home > Economic policy > The end of economic rationalism …

The end of economic rationalism …

July 30th, 2014

… and the new age of entitlement.

That’s what we are getting under the Abbott government. It’s striking how suddenly the elite consensus in favor of free market policies has collapsed now that we have a tribalist pro-business government. Some examples:

* The Institute of Public Affairs, which once treated irrigation projects like the Ord River scheme as the worst kind of boondoggle now lobbies for them, and for special tax breaks, on behalf of their new owner major sponsor, Gina Rinehart

* The Business Council of Australia wants a strategy of “growing those sectors of our economy that can win on a global scale and make the greatest contribution to lifting our national wealth.” Of course, they deny that this involves “picking winners” or “national champions”, but this is just an example of the euphemism cycle at work

* The Financial Review today runs a piece (paywalled) from Danny Price of Frontier Economics, combining absurd alarmism about the supposed cost of a carbon price (already refuted by experience) with advocacy of the nonsensical and dirigiste “Direct Action” policy

* Finance Minister Matthias Cormann has rejected cost-benefit analysis in favor of a “nation building” approach to infrastructure (the subtitle of Michael Pusey’s book on economic rationalism was “A Nation Building State Changes its Mind”

Economic rationalism had both strengths and weaknesses. The crony capitalism emerging under this government has no redeeming features.

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  1. Newtownian
    July 30th, 2014 at 21:35 | #1

    You wouldn’t read about.

    There is one amusing aspect regarding the dams in northern Oz that I chanced to read recently. The government winner pickers have put out a request for expressions of interest with the aim that these damn things will be built with no/minimal investment from the government and solve the water shortage problem just like that – or at least that is how I read it. How they are to do that in the middle of nowhere lacking a coherent infrastructure remains to be seen.

    They (the Canberra policy people) seem, sort of, if you read this document, to want to free up the business so that our brilliant Randian capitalists can show would be subsidisers how to really build the country with no government help.

    Which sort of goes against your Rhinehart comment. So it will be interesting to see if this gets fudged so in the end the needy rich get subsidised.

    A bit like when public dollars overseas were used to prop up the banks in 2008 and start another bubble.

  2. Midrash
    July 30th, 2014 at 22:06 | #2

    It is interesting to see in a quick glance at the Henry Thornton blog that Peter Jonson appears to be applauding the support of national champions. Have I misread him and am I wrong to be surprised? Mind you it is surely possible to make a logical case for building up national champions in a world of very imperfectly free anything, and even picking winners, except for the unfortunate fact that no collection of politicians, public servants and house academics can be trusted to do better in a complex and rapidly changing economy to produce better outcomes than private people risking their own money in an honestly competitive business environment. Copying others who are ahead and doing under cover of protective measures can work for a while – even long enough, given the right culture, for a nation to become as prosperous as Japan, but are there, outside the oil rich states of the Middle East, examples of successful dirigisme in the long run? Singapore’s still going, but are there others?

  3. Michael
    July 30th, 2014 at 22:13 | #3

    @Midrash

    but are there, outside the oil rich states of the Middle East, examples of successful dirigisme in the long run?

    Yes – the United States of America.

  4. Midrash
    July 30th, 2014 at 22:43 | #4

    @Newtownian
    Your remark about propping up the banks prompts the reflection that it’s OK, or at least better than the alternative if the taxpayer does all right put of it over the medium term working out of the propping up and an adequate number of errors are punished. I may be wrong but my impression is that the taxpayer’s investment in propping up banks in both the US and UK has turned out to be modestly profitable. And I think shareholders as of 2008-9 have taken huge haircuts if not No. 1 cuts all round. It is the management which, in many cases, notably Goldman Sachs, hasn’t paid for its sins. In France and Germany my understanding is that the propping up has been even more indulgent especially if one recognises the bail outs of Greece and other PIIGS (though perhaps not Ireland) as really intended to look after German and French banks. And the danger to them is/was so great that one should go beyond wiping out the shareholders. Shouldn’t those sovereign lending banks have been subjected to reconstruction which forced some of their big creditors to take cuts too?

    What a pity that the admirably hard workin and learned Greenspan was so completely bound by theory and lacking in the understanding of the real world that so distinguished the mature Keynes. I presume the repeal of Glass-Steagall was urged on by Greenspan….

  5. Midrash
    July 30th, 2014 at 22:50 | #5

    @Michael
    Amusing but can you give it some serious substance? If so, how far back? I suspect you are thinking of the importance of the “military-industrial complex” fuelled with taxpayers’ and the Fed’s cheap money to keep a high tech economy on the rise starting in 1941. With a similarly broad brush I would point out the overwhelming importance of personal consumption to rising GDP in the US .

  6. Oliver Townshend
    July 30th, 2014 at 22:52 | #6

    Having worked for Lloyds bank in Australia and listened to the ra ra from England I very strongly doubt that government investment it the banks was profitable, probably not even when you take into account zero interest rates that they have.

  7. Pete Moran
    July 31st, 2014 at 00:30 | #7

    Danny Price of Frontier Economics is the man advising Senators Nick Xenophon and John Madigan.

    Remember the name into the future, possibly one of a couple of Australian climate policy villians we will need to record for history.

  8. Graeme Bird
    July 31st, 2014 at 01:58 | #8

    What can I say. Great post. When I was over at Catallaxy I would be trying to get these tribalists interested in a functional form of private investment in infrastructure. I may as well have been trying to wipe out the moon as a high-school science project.

    I could not get these bigots to admit that our version of privatisation was not powerfully good. I could not get them to go further intellectually then the mere taking of sides.

    My hypothesis was that infrastructure was basically PIPES. Or trans-spatial goods. And the only way you could have excellence in private infrastructure, rather then rampant corruption and oligarchy….. was to have a background LAW OF PIPES. A sort of background legal infrastructure involving investment, construction, and property rights laws that allowed a competitive market in these trans-spatial goods, had to exist … Or we free enterprise ideologues had to throw our hands in the air and embrace socialism for infrastructure, or get our acts together.

    I simply could not get a pulse from these people admitting that there was a real problem. In some ways this was simple economics. So I had to conclude that I had been siding with a crowd that was purely tribal.

  9. Brett
    July 31st, 2014 at 03:31 | #9

    Reminder #204324 that being “pro-market” is the opposite of being “pro-business”.

    @Michael

    Yes – the United States of America.

    Not really. The US would sporadically push various programs to incentivize things (like the railroads and tariffs), but we never had a real “industrial policy” push on the order of France, Japan, or what Alexander Hamilton was hoping for.

  10. Ivor
    July 31st, 2014 at 08:12 | #10

    But it was Krugish-Keynesian rationalism that led to over 600 trillion in total global outstanding derivatives and even greater threat of economic catastrophe than in 2007, according to Liam Halligan. He states this is “a jaw-dropping ten times global GDP and back above the pre–Lehman total.”

    http://www.spectator.co.uk/features/9271191/back-to-the-brink/

  11. Ikonoclast
    July 31st, 2014 at 09:32 | #11

    “The crony capitalism emerging under this government has no redeeming features.” – J.Q.

    Is there any capitalism which is not crony capitalism or does not tend back to crony capitalism? All the better features of our society came from democratic and social pressures to reform capitalism. But we now see that capitalism is not reformable. Reforms will always be wound back. Wealth will always tend to accumulate in fewer and fewer hands. These are the natural tendencies of capitalism.

  12. Ikonoclast
    July 31st, 2014 at 09:48 | #12

    @Ivor

    We can sum up the beginning and the end of the next crisis with a couple of truisms.

    1. That which can’t be paid back won’t be paid back.
    2. That which isn’t produced can’t be consumed.

    Firstly, the debt crisis will be solved by massive defaults. (That which can’t be paid back won’t be paid back.) This will mean that portfolios of currency denominated wealth will shrink in denominated value. Share portfolios will collapse. Superannuation portfolios will collapse. People who thought they had a lot of money set aside for a rainy day or retirement will find much or even most of their money has gone: vanished into thin air.

    Production will collapse. The drop in spending will feed through to a drop in production. Factories and businesses will be idle, workers will be laid off. People will be forced to survive (if possible) while consuming much less. (That which isn’t produced can’t be consumed.)

    In addition, the world system has overshot the limits to growth. This system is living on borrowed time.

  13. sunshine
    July 31st, 2014 at 10:41 | #13

    No wonder huge numbers of young people in the West have lost faith in democracy. They have to struggle thru difficult times toward an uncertain future because older folk havent finished stuffing their faces yet.

    @Ikonoclast
    In your vision in the long term should our farming sector prosper especially if international trade doesnt break down too much. ? Maybe we should be preparing for that to be our strength.

  14. Hermit
    July 31st, 2014 at 11:10 | #14

    The new trend to rent-a-thinktank reminds me of a Benny Hill skit. Sweet young thing ‘what do you think I am?’ Benny ‘we know what you are we’re just arguing about the price’.

  15. Peter T
    July 31st, 2014 at 11:35 | #15

    I can think of one redeeming feature: it will be easier to have a conversation about what the structure of the economy should look like, and maybe even for a Labor government to act on the outcomes. You know, the way we used to do it before the neo-liberal groupthink took over. The way we built the railways, ports, phone service, chemical industry, steel industry, car industry, food processing industry…

    The way Britain built the first industrial nation, the way the New Deal operated…Before we knew it couldn’t be done.

  16. NathanA
    July 31st, 2014 at 13:14 | #16

    Well I guess the positive thing is that JQ didn’t mention any plans for this to happen in higher education…….

  17. Calyptorhynchus
    July 31st, 2014 at 13:18 | #17

    I seem to remember the reason the Libs opposed a proper NBN was because they said it hadn’t had a cost benefit analysis, and now we don’t need these.

    Then can we have real NBN back please?

  18. Troy Prideaux
    July 31st, 2014 at 13:24 | #18

    @Peter T
    I think the conversation you’ll continually hear from both sides is “the economy is going through a transition”. It’s a euphemistic explanation for high job turnover numbers within the broad economy and one we’re all too familiar with today. While the MSM appears to broadly accept it (provided the unemployment rate is below OECD averages), the electorate clearly doesn’t.

  19. Ikonoclast
    July 31st, 2014 at 16:44 | #19

    @sunshine

    It’s hard to predict in detail: like predicting a train wreck. It’s a given that lots of things will be broken and scattered all over the place. Then, here and there, there will be collections of parts, sub-systems, that are still intact and maybe can even still function.

  20. Ratee
    July 31st, 2014 at 17:09 | #20

    @iconoclast #12
    “Wealth will always tend to accumulate in fewer and fewer hands. These are the natural tendencies of capitalism.”
    Not just Captialism, Pareto income distribution seems to pop up in most human societies. The question is how social cohesion is maintained in the face of surpluses being concentrated in the hands of a few.
    Some pre-industrial societies developed “community obligations” like potlatch in Pacific NW America or Big Men and pig feasts in PNG and Melanesia. Re-distribution of food in exchange for community prestige.
    Other ways like feudalism, or the priest kingdoms of the ancient middle east, to warlords in China involved forms of coercion or protection from other groups depredations on the poor.
    It’s just a matter of pick your poison.
    Capitalism is just well suited to influence the state apparatus and maintain the heirarchy of moneyed groups in the social order. It also needs societal cohesian to maintain itself and can’t be permanently excessively out of balance.
    Can it last 3,000 years like the Egyptians? Some of these long lasting civilisations ended through impoverishing their environment I suspect that will occur before Capitalism has exhausted every part of the economy.

  21. Ken Fabian
    July 31st, 2014 at 18:20 | #21

    They still have the major parts of mainstream media pretty much on side then. That will allow bad policy to continue without much backlash.

  22. bjb
    July 31st, 2014 at 18:22 | #22

    Calyptorhynchus :
    I seem to remember the reason the Libs opposed a proper NBN was because they said it hadn’t had a cost benefit analysis, and now we don’t need these.

    I can vividly recall Turnbull lashing Labor at every opportunity about the lack of a CBA. What a bunch of hypocrites.

  23. Ikonoclast
    July 31st, 2014 at 19:42 | #23

    @Ratee

    I take your point. In a sense, the Pareto distribution of wealth appears to be just another natural phenomenon. The mere fact that it is a natural phenomenon does not legitimise acceptance of it as a guiding principle for economic organisation as in Laissez-faire.

  24. Peter T
    July 31st, 2014 at 21:14 | #24

    A
    Re distribution:

    Any system that allows claims on income to be exchanged for more claims will end up with a very skewed distribution of wealth. It’s not peculiar to capitalism. But markedly skewed distributions of wealth tend to undermine resilience, cohesion and productive capacity over the long term. So there tends also to be some collective mechanism for correcting this. In the Roman Empire, for instance, wealth was separated from central power (which was concentrated in the military), and wealth-holders had to gamble on the outcomes of periodic contests for power, with the losers’ wealth redistributed downwards. English kings conducted audits which brought lands back to the crown (quo warranto). The Swedish government had a process called a reduktion where all land gained since some date returned to the crown and so on. Some of these corrective mechanisms were rather gruesome – a point the modern one per cent might, but probably won’t – reflect on.

  25. James Wimberley
    July 31st, 2014 at 22:28 | #25

    It stands to reason that if Morocco is building high-speed rail lines, Australia needs some too, drawn with a marker pen on a wall map. I suggest an E/W line from Sydney to Perth and an N/S line from Adelaide to Darwin. Call it the Southern Cross. The tunnel through Ayers Rock will be one of the wonders of the world, drawing millions of tourists.

  26. Andrew Dodds
    July 31st, 2014 at 23:03 | #26

    @Ikonoclast

    I’m not quite sure I follow your argument.

    The western financial system is, basically, numbers in computers. Such a system could be reset, at least in theory, without much impact on day-to-day production and consumption. As an example.. the German hyperinflation didn’t change the economy of Germany that much – it came close to conquering half the world only a few years afterwards.

    If the financial system does cause a wider depression, it is very much through political choice rather than historical inevitability.

  27. Ivor
    July 31st, 2014 at 23:30 | #27

    @Ratee

    Is a income distribution between feudal lord and serf a “pareto income distribution”?

    When a capitalist destroys employment and cuts wages – does this create a “pareto income distribution”?

  28. Ikonoclast
    August 1st, 2014 at 11:41 | #28

    @Andrew Dodds

    “Such a system could be reset, at least in theory, without much impact on day-to-day production and consumption.”

    This is certainly true. Indeed, debt default is one of the re-setting mechanisms. However, re-setting the financial economy following a major debt default and financial collapse and at the general point of a real collapse into a depression requires other macroeconomic and social actions as well. These actions are generally regarded as anathema by the monetarists and neocons currently in charge of our economies. Instead of the indicated government stimulus spending required in such situations they would rather impose further economic austerity. In other words, they will give the patient precisely the wrong medicine.

    On top of this problem, there is the problem of limits to growth. Stimulus will only work while real resources are still abundant. If real resource limits put an exogenous drag on the economy then no amount of good macroeconomic policy can counter the real shortages of materials, foods and energy sources. We have hit and indeed already overshot the limits to growth. We are not living on the real world’s natural interest (sustainable flows of materials and resources). We are living on the real world’s natural capital (stocks), drawing them down and destroying them.

    Historical inevitability in this limits-to-growth scenario is really the inevitability of natural laws asserting themselves. If your civilization depends on cheap energy supplies from fossil fuels and these supplies are being exhausted and/or are wrecking the climate upon being combusted, then there is a natural limit to that process. Continued survival will then depend on the feasibility of alternative energy sources and whether irreversible damage (on any human civilizational timescale) has been done or not done to the climate and other biosphere systems.

  29. August 1st, 2014 at 12:26 | #29

    Is there any capitalism which is not crony capitalism or does not tend back to crony capitalism?

    Makes me laugh. Reminds me that business leaders are always asking for certainty. And nothing can be more certain than crony capitalism.

  30. derrida derider
    August 1st, 2014 at 14:31 | #30

    @James Wimberley
    James, you’re right that the Uluru tunnel (tastefully decorated with Aboriginal motifs of course) will repay the whole cost of the project from the proceeds of the millions of Japanese tourists who will want to visit it every year.

    But you have clearly neglected the interests of the farmers of Central Australia. It is essential that the rail line be accompanied along its whole length by a canal to bring desalinated irrigation water from the coast. If we don’t do that we will never become the food bowl of Asia. And think of the jobs we’d create!

  31. Tim Macknay
    August 1st, 2014 at 14:45 | #31

    @derrida derider

    It is essential that the rail line be accompanied along its whole length by a canal to bring desalinated irrigation water from the coast.

    No, the water will need to come from the wonderful new dams, that will be built on our northern rivers, to bring development to the tropical north of this great nation (at no cost to the tax payer, of course!).

  32. John Quiggin
    August 1st, 2014 at 15:25 | #32

    @Tim Macknay

    As Colin Barnett pointed out when advocating precisely this, you only need to look at the map to realise you have gravity on your side all the way.

  33. MWS
    August 1st, 2014 at 16:15 | #33

    John Quiggin :
    @Tim Macknay
    As Colin Barnett pointed out when advocating precisely this, you only need to look at the map to realise you have gravity on your side all the way.

    That’s why Antarctica is very wet? All the water has flowed there by “gravity”? What happens if the map is turned upside-down – will that make the water flow back the other way? Barnett didn’t understand pipe friction either. Just because a pipe (or canal) is level, doesn’t mean that water put in at one end will flow to the other – especially over 3000km.

  34. August 2nd, 2014 at 14:46 | #34

    In the same week the senate inquiry released a damning report against CBA’s financial advice, the government quietly rolled back some of the FOFA (Future of Financial Advice) consumer protections and now seem ready to block a Royal Commission into CBA. Earlier they announced cutting $120 million from ASIC’s funding, opting for less regulatory oversight of the financial sector. ASIC Chairman Greg Medcraft told a press conference on Friday 27th June that ASIC is drastically understaffed with only 30 people to monitor the roughly 40,000 financial advisers. How Tony Abbott could back the banks in this way defies belief.

  35. Nevil Kingston-Brown
    August 4th, 2014 at 09:56 | #35

    Professional devil’s advocacy compels me to point out the lack of government handouts for Qantas, the car industry, the fruit canning industry, and various others. Not expressing an opinion on whether they were good or bad decisions, but they were certainly “economic rationalist” decisions.

  36. Newtownian
    August 7th, 2014 at 16:46 | #36

    @Midrash
    I agree with your comment about Greenspan who I understand was a Randian acolyte and even lover at one point? (please correct me her if needed)

    And I agree if government hadn’t intervened in 2008 and in the EU we would have seen a massive collapse.

    But I guess it still gall(t)s me in all, the lack of intelligent economic analysis before and after which I guess is the point behind Zombie Economics.

    Greenspan was a problem but for the most part the economics community as a whole seems to have been ra ra up until the crisis and since then has been very revisionist without his help. What seems to be missing is recognition that government/public and business exist in a symbiosis whereby if business kills society there will be no business. But the likes of the IPA don’t seem to get this. A related problem is that if economics whether ‘natural’ or otherwise (like in China) kills the natural world there will be no economy or society worth having. Or if you stop paying people as in the US there will be no one to buy your stuff for better and worse – other than the wealthy who have more stuff than they can sensibly use … which means their motivations must be something else …. insane power hunger? fetish? . And conversely you get something like Detroit in extremis which illustrates destruction is not necessarily creative.

  37. Newtownian
    August 7th, 2014 at 16:51 | #37

    @MWS
    The same daft ideas were floated 10 years ago in WA. The energy costs were realized to be horrendous.

    It is amazing how radio commentators and pundits are so ignorant of basic science that they come up with these howlers.

    @Steve Manning

  38. Newtownian
    August 7th, 2014 at 17:07 | #38

    @Steve Manning

    Your concerns about financial advisors would have worried me more in the past than now. I would have thought most people now realize you cant trust a financial advisor or a bank to advise you and ironically this decision just confirms it so its probably counterproductive. Thus it may even have the reverse effect of further discrediting the finance ‘industry’ by showing firstly we are not protected and secondly leading to more scandals in the near future.

    Also irrespective of individual advisor’s honesty you still have the problem of whether they have a clue what they are doing except watching the Charts and like the vacant Tom from Comsec (he needs a suntan) saying in somnambulant tones, the Market Goes Up or The Market Goes Down.

    My suspicion from my encounters is they don’t. Rather what they know is that to make a buck all they have to do is convince you that they do.

    Which means more people will do the investment themselves for better and likely worse.

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