The end of economic rationalism …

… 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.

38 thoughts on “The end of economic rationalism …

  1. @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.

  2. @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”?

  3. @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.

  4. 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.

  5. @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!

  6. @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!).

  7. @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.

  8. 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.

  9. 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.

  10. 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.

  11. @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.

  12. @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

  13. @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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