This Wednesday past the February issue of The Monthly reached the newsstands. The lead article, Kevin Rudd’s The Global Financial Crisis, is informative. Few will read it; those interested in economics and the current crisis should if they want insight into Rudd’s thinking.
I read it unburdened by a profound knowledge of economics, and unfettered by a predetermined ideological position on macroeconomics. So this is an ordinary man’s view.
First, I was impressed with what seemed to me to be Rudd’s grasp of macroeconomics, his knowledge of its history, and his understanding of the financial crisis. For our PM to be so literate in these matters is encouraging, even if surprising. He seems to be a fast learner. To put his views in writing for all to see is laudable. No commentator on his essay that I have read has questioned the quality of his narrative, even when they disagree with his position.
The essay is about the ideologies that underpin thinking and reasoning in the field of economics. Crikey editorializes that the public don’t care about ideologies or any of the historic figures who adorn economics texts. Of course they don’t. But does that absolve our politicians from adopting an ideological position upon which their actions are based, and telling us about it. Of course it doesn’t. If a leader or a party has an ill defined position, how can logical decisions be made? And just as importantly, how can outcomes be measured validly if the criteria for success are based on ill-defined positions. So whether one agrees or disagrees with any position, it is essential that the different ideologies be acknowledged, their history understood, evidence to support or refute them be carefully documented and examined, and above all the context in which the ideologies were born, and flourished or withered, be described.
It is noticeable that some who comment on the conflicting ideologies seem to be already trapped by their own positions, and contaminate their writings with their inbuilt biases. Thus some who have commented on the Rudd essay expend their energies agreeing or disagreeing with Rudd’s position. Few give a balanced appraisal.
Rudd’s thesis is that the current crisis is the outcome of what he terms ‘neo-liberalism’, which he describes as a “particular brand of free market fundamentalism, extreme capitalism and excessive greed.” He goes onto say that neo-liberalism’s foreign policy cousin is neo-conservatism. Neo-liberalism believes in free markets and that they are self-regulating. External regulation is considered unnecessary, and governmental interference in markets anathema. Rudd proposes other terms for neo-liberalism: economic liberalism, economic fundamentalism, Thatcherism, or the Washington Consensus.
Any debate about the appropriateness and meaning of the term ‘neo-liberalism’, or for that matter ‘social democracy’, which he uses to label his position, is pointless since there is no firm agreement on their meaning. As Wikipedia puts it: “The term [neo-liberal] is most often applied by critics of the doctrine, to the point where one commentator remarked ‘the concept itself has become an imprecise exhortation in much of the literature, often describing any tendency deemed to be undesirable’. The central principle of neoliberal policy is untrammelled free markets and free trade.” Wikipedia has this to say about social democracy: “Social democracy is a political philosophy of the left or centre-left that emerged in the late 19th century from the socialist movement and continues to exert influence worldwide. The concept of social democracy has changed throughout the decades since its inception.” As Humpty Dumpty said in Lewis Carroll’s Through the Looking Glass. 'When I use a word it means just what I choose it to mean, neither more nor less.' So since Rudd has defined what he means by the terms, they are indeed meaning what he means them to mean. So let’s accept his meanings.
Rudd asserts that the global financial crisis has become “one of the greatest assaults on global economic stability in three-quarters of a century, a crisis facing the world’s largest private financial institutions, credit markets, debt markets, derivative markets, property markets and equity markets, that is causing not just an economic crisis but an employment crisis and a social crisis” with long-term geo-political implications. In support of his argument he quotes Alan Greenspan’s recent mea culpa that his neo-liberal ideology, upon which he based his advice to government as chairman of US Federal Reserve for a decade, was flawed.
Rudd sees social democracy as saving capitalism from ‘cannibalizing’ itself, while recognizing the great strength of open competitive markets. He believes “the social-democratic state offers the best guarantee of preserving productive capacity of properly regulated competitive markets, while ensuring that government is the regulator, that government is the funder or provider of public goods, and that government offsets the inevitable inequities of the market with a commitment to fairness to all.” He continues “Social democracy’s continuing philosophical claim to political legitimacy is its capacity to balance the private and the public, profit and wages, the market and the state.” He insists that if it fails “there is the danger that the new political voices of the extreme Left and the nationalistic Right will begin to achieve legitimacy hitherto denied them.”
He urges a frank analysis of neo-liberalism in the underlying causes of the current economic crisis, and a robust analysis of the social democratic approach to properly regulated markets and the proper role of the state.
Rudd’s stance is aligned with the Keynesian tradition, whereas neo-liberalism is more aligned with Hayek and von Mises.
The essay expands on the contrasts between opposing economic theories, and comes down strongly against neo-liberalism and in favour of social democracy as its counter.
The essay is not just an ideological treatise; it is a political statement that aims to label the Liberal Party as neo-liberal, with all its drawbacks. Yet only one paragraph is pointedly devoted to this. It begins “The political home of neo-liberalism in Australia is, of course, the Liberal Party itself. Over the past decade the Howard government reduced investment in key public goods, including education and health. It also refused to invest in national economic infrastructure, notwithstanding multiple warnings from the Reserve Bank of the impact of long-standing capacity constraints on economic growth. The Liberals in government set about the comprehensive deregulation of the labour market – based on the argument that human labour was no different to any other commodity....” And on it goes. He does not mention Malcolm Turnbull.
He then contrasts the Liberal approach with Labor’s competing political traditions: “Labor, in the international tradition of social democracy, consistently argues for a central role of government in the regulation of markets and the provision of public goods”
Those commenting on Rudd’s article, such as the Herald Sun’s Andrew Bolt in Where did our economic conservative go? of 1 February, can’t reconcile Rudd’s claim to be an economic conservative and his advocacy of social democracy. Rudd defines being an economic conservative as being committed to balancing the budget over the economic cycle, respecting the independence of the Reserve Bank and keeping interest rates low. The latter two are extant and balancing the budget is still Rudd’s intention notwithstanding a temporary deficit. So where’s the incompatibility between being an economic conservative and Rudd’s basis for advancing the Government’s economic stimulus package? Bolt should confine his remarks to what he understands. But he never lets accuracy of facts or understanding of the issues get in the road of a good story that will appeal to his reader demographic.
So if you get the chance to read Kevin Rudd’s essay, you will likely find it worthwhile, and at least you will become appraised of his views and the basis for his behaviour, words and actions in the financial crisis. To whet your appetite, the first 1500 words are free online here. Agree with him or not, he leaves the reader in no doubt where he stands. If he were capable, it would be helpful if Malcolm Turnbull would similarly inform us in the same detail of what ideology and economic theory drives his thinking and actions. Then we might understand what he says and does, instead of having to speculate, as is the case with most journalists who attempt to comprehend his response to the complex financial crisis in which the world is entrapped.
The truth is that nobody, but nobody fully understands what has happened and why, and still less is sure of what to do about it. Everyone is flying somewhat blind. Let journalists, and economists, acknowledge that and desist from being too smart by half, too dogmatic about what to do, too critical of the efforts our politicians are making to reverse the frightening trends we see day after day. Rudd may not be right, even he admits that, but at least his essay shows us the ideological base from which he’s doing what he’s doing. Time, not smart-alec journalists burdened with a paltry understanding of economics, will be the judge.