Letter to Bill Shorten: Part 1


There must be many ardent Labor supporters who would wish to transmit their thoughts to Opposition Leader Bill Shorten about how Labor ought to proceed over the coming months. Ad Astra is one such supporter. Here is a letter he sent to Mr Shorten.

The Hon Bill Shorten, MP Leader of the Federal Opposition

Dear Mr Shorten

I do hope you will find the time to read through this rather lengthy letter from a devoted Labor supporter who embraces the ideals, philosophy, and values of Labor as a progressive political party. I believe it echoes the strongly held views of many Labor supporters. It is written after the disclosure of the findings of the Commission of Audit, but before the Budget.

I believe in fairness and equality for all Australians: equal opportunity in education, universal health, aged and disability care, satisfying employment and income security in a prosperous economy that values environmental sustainability, supported by a safety net for the disadvantaged. I believe in the common good. Thus Labor is my first choice for government.

My background is in family medicine, first as a rural family doctor, then as an educator and administrator. On retirement in 2007, I developed a political website, The Political Sword, www.thepoliticalsword.com which you will see is a pro-Labor site.

It was a great disappointment to me, and to most of the blogsite’s commenters, that Labor lost the 2013 federal election and several State elections before and since. Labor’s recent very poor showing at the re-run of the WA Senate election has enlivened many senior Labor figures, who are now publicly stating that Labor must make radical changes to its organisation and modus operandi if it is to prosper as a political party and offer itself as the alternative government. You have signalled that substantial changes are needed, and specifically you have mentioned loosening ties with the union movement and opening up membership.

Also, Labor must present its message much more credibly, much more coherently, much more convincingly.

With the Abbott Government performing poorly in so many ways, it ought to be possible for Labor to make tactical gains by highlighting the missteps, the lies, the deception, the errors, and the downside to LNP policy decisions and their implementation. Yet, this in itself will not suffice. Labor must present to the public alternative and more appealing policies. So far Labor has failed to do this effectively.

What follows is my assessment of some of the problems that confront Labor, and how they might be addressed.

Membership

There is no disagreement that the Labor Party needs more rank and file members. I was astonished to learn that union membership is a prerequisite for working people to gain membership. As less than one in five workers belong to a union, four in five are excluded by this rule. Part of your efforts to ‘disconnect’ from unions ought to be the removal of that rule. While unions remain important in protecting workers’ rights, to assign to them such authority over party membership is now quite inappropriate.

Moreover, Labor needs to actively encourage everyone who embraces Labor values to join. Some time ago I expressed interest in joining the Party in response to a general invitation. But it led nowhere. After a substantial wait, I received an email suggesting that I should contact the local branch. I do not want to attend local Party meetings, although I acknowledge local activities are important. I want to participate via other mechanisms.

I was delighted to learn recently of your intention to reshape and increase membership.

Recommendation: That urgent steps are taken to remove the requirement that union membership is a pre-requisite for Labor Party membership, that membership be open to anyone who endorses Labor values, policies and programs, and that membership be available other than through branch membership, perhaps through a ‘general membership’ category.

Having contributed to political debate via my blogsite for five years, I would prefer to contribute to Labor via direct communication, emails, the Internet, social media, or its equivalent within the Labor organisation. It ought to be possible for the Party to initiate a series of online forums that address individual policy areas, as well as others that focus on the interaction between policy areas, recognising that policy making is dynamic, complex and interactive. Members would then have a chance to express views about policies, ask questions, highlight potential problems, and make suggestions for improvement. Responses could be restricted to members by way of a ‘sign-in’ process. For some matters, throwing them open to community discussion would be appropriate. While acknowledging the value of face-to-face discussions with the cut and thrust that they involve, soliciting opinion online could be a valuable adjunct. Although I am an ardent Labor supporter, I feel an outsider, isolated from mainstream Labor thinking and debate, unable to contribute in any way.

Organisations such as GetUp come closer to engaging people than Labor has done. Without the intelligence, ideas, questions and solutions that members of the public could offer, Labor has only its inner circle to rely upon. Whilst acknowledging the wisdom and knowledge of the inner circle, it can never be a repository for all the ideas, wisdom and solutions that are possible.

Recommendation: That a series of online forums be set up to address policy areas, and publicised to members and to the general community where appropriate, and that input be vigorously solicited.

Union affiliation

This is a vexed contemporary issue. Since Labor depends heavily on union donations and support, and rightly wishes to continue to associate with those who protect workers’ rights and welfare, disaffiliation seems inappropriate. The optics of this relationship governs the way in which the electorate regards Labor. There seems to be a growing unease, even among Labor supporters, that unions have too much influence, too much control over the parliamentary Party, and that the Party is too reliant on financial support from unions. What seems to be needed is more distance between supportive unions and the parliamentary Labor Party, and less influence of unions at Party conferences. Guy Rundle argues that it is the unions that should ‘divorce’ Labor, since, as he asserts, the Party has become too ‘pro-market’, even neoliberal, thereby distancing itself from the central role of unions – to care for and protect workers.

It is a complex relationship that cannot be easily unravelled, but steadily distancing Labor from unions seems to be in the Party’s best interests. As a past union leader, you have intimate knowledge of the relationship, and a stake in it. You are better placed than most to bring about a new relationship that loosens the Gordian knot. To those of us who stand outside the relationship, this now seems both essential and urgent. It is gratifying that you too are now expressing similar sentiments.

Recommendation: That the Labor Party–union movement relationship be examined without delay, with a view to establishing a symbiotic state of affairs that removes the contemporary dependence and ‘control’ of unions over the parliamentary party, especially at Labor conferences.

Factions

Even casual observers of politics in this country would be aware of the oppressively powerful influence of factions in decision-making. While factions exist in most parties, they are grotesquely obvious in the Labor Party. They result in decisions that reflect power structures and personal ambition, to the detriment of the Party as a whole. There is no more flagrant example than the recent nomination of Joe Bullock to first place on the WA Senate ticket that pushed Louise Pratt, whom many Labor supporters believed was the best candidate, into the second spot. This was a classic example of what has happened far too often in Labor circles. Those well connected to the most dominant factions, the most powerful, the most influential, those with a sense of entitlement to prominent positions, and in this case certain election, have overridden what is best for the Party and the nation, and what is fairest. This episode has inflicted untold damage on Labor in the West and elsewhere.

The membership must have a greater say in the pre-selection of candidates, and the factions less.

Less recently, but burned into the electorate’s memory, is the dismissal of Kevin Rudd as PM, and his reinstatement after the dismissal of PM Julia Gillard. Those events, born of factional infighting, created the image of a party in disarray, torn apart by warring powerbrokers. While rationalists can advance cogent reasons for each event, the public by and large seems to care little about the reasons, noting only the dissent, the chaos and the disharmony, and therefore mark Labor down as being incapable of governing when it seems to be unable to govern itself. And they do this despite the outstanding legislative work done by Labor in the last six years, most notably its world standard response to the GFC.

Recommendations: That Party officials seriously examine the detrimental influence of factionalism on the Party and its electoral prospects, and radically reduce the harmful aspects of factionalism, while retaining the useful.

That the Party membership be given a prominent role in the pre-selection of candidates for the House and Senate.


It is recognised that this will be difficult because of the almost overwhelming tendency for self-interest to trump the common good, but unless some drastic changes are made and publicised widely, the Party will languish and remain a diminished force in Australian politics. The nation needs a progressive party that values fairness, equality and the common weal. Labor is that party.

Corruption

It is unnecessary to underscore the destructive effects of corruption on the Party and its electoral prospects. It is often associated with factionalism. NSW Labor has demonstrated this for all to see. It is unnecessary to labour this reality. Perhaps more than any other in the Party, the highly respected and admired John Faulkner has pointed this out, over and again. He has proposed changes to the rules of the NSW branch of the Labor Party. They seem eminently wise.

Recommendation: That John Faulkner’s proposed amendments to the rules of NSW Labor be fully supported, and that these changes be applied throughout the Labor organisation.

Let me now turn from organisational matters to policy issues.

The economy

It has become almost a mantra that a strong and growing economy is necessary to support the type of Australia in which most wish to live. Whilst there is a powerful element of truth in this, Labor seems to have adopted the mantra as a verity, so much so that now its utterances too often resemble those of neoliberal free-marketeers. This type of talk needs to be tempered, lest the electorate begins to believe that Labor is no more than a pale reflection of conservative belief and action. According to opinion polls, Labor is less competent at economic management than the Coalition, despite a mountain of evidence to the contrary. Unless Labor can distinguish itself from the Coalition by demonstrating that its quest for economic strength is for the purpose of providing jobs, prosperity and support for all Australians, not just the corporate elite, it will be seen simply as just ‘Coalition-lite’. The LNP must not be allowed to assume the mantle of savior of the economy – an economy that it deceptively insists has been wrecked by Labor.

Fairness, equality, concern for the poor, the underprivileged, the disadvantaged and the disabled, must be woven into the push for economic strength. It is this balance that ought to distinguish Labor from the LNP, which since its election has shown its ruthless ‘winners and losers’ and ‘winners take all’ approach, and its ‘survival of the fittest’ and to hell with the rest, method of governing.

Labor must be as prepared as the Coalition to tackle the structural imbalances in the federal budget. It is no more than grotesque political spin to suggest that we have a ‘budget emergency’, but we do have structural problems that date a long way back. Negative gearing is one that must be addressed. The Howard/Costello handouts: tax cuts and middle class welfare when there was a revenue tsunami during the mining boom, must be revisited. Labor’s much needed reforms in education, health and disability care, and its productivity-boosting NBN infrastructure, need a sound and completely developed plan to fund these initiatives in the medium and long term. Payments to pensioners will place an increasing strain on the budget, one that would be ameliorated by improvement to superannuation, a superior solution to the harsh recommendations of the Commission of Audit.

Labor needs also to tackle the revenue side of the budget. It must not retreat from a sensible debate about GST, and certainly should avoid the temptation to make political capital out of any suggested change.

Recommendation: That Labor clarifies its economic policies, shows that growth should be balanced against the pursuit of the common good, that raising increased revenue is essential, and then fashions easily understood, appealing, and memorable messages to inform the electorate.

Global Warming

There is no point in arguing the case supporting the existence and extent of anthropogenic global warming. The facts speak for themselves.

Labor has oscillated between triumph and tragedy on this issue. Triumph when Kevin Rudd labelled it “the greatest moral, economic and social challenge of our time” and commissioned Ross Garnaut to produce a report; triumph when he negotiated an ETS with Malcolm Turnbull; tragedy when Tony Abbott overturned Turnbull and set back that initiative; tragedy when Rudd lost his nerve and retreated from his plan, scared of going to a double dissolution; triumph when Julia Gillard insisted she would put a price on carbon; tragedy when she uttered those fateful words “there will be no carbon tax under a government I lead” and the media persistently failed to acknowledge the rest of her sentence; tragedy when Coalition strategists seized upon the word ‘tax’ and created its ‘Axe the Tax’ mantra, one that Labor seemed incapable of countering. Never did we see Labor punch back with ‘Save the Planet – Stop Pollution - Tax the Polluters’, a slogan that is even more appropriate to use right now. Instead we still see supine acceptance of the Coalition’s framing of this issue. Labor must do better than this. It must hammer home the reason for the price of carbon – to reduce pollution, to slow global warming, to save the planet from its devastating effects.

In this and other issues, Labor has not been able to reframe the debate in its favour. It must do this urgently.

Since placing a price on carbon is now being shown to be effective in reducing pollution as well as in generating revenue, I urge you to stick with Labor’s original intent – a price on carbon leading to an ETS – and to vote against the Coalition’s nonsensical Direct Action Plan that economists and environmentalists ridicule as inept – a sham masquerading as effective action. It would be shameful in the extreme to retreat from Labor’s original proposition that a price on carbon and an ETS is the best way of reducing carbon pollution and slowing global warming.

Recommendation: That Labor reinforce its approach to global warming by returning to its initial plan, and vigorously pursue it in the face of opposition from the LNP and vested interests, whose self-centered and ineffectual approach will bring disaster to us all, and will accelerate the deterioration that threatens the planet.

That Labor’s leaders reinvigorate Labor’s media unit with people who can at least match the Coalition in framing the global warming debate. Unless this occurs, the LNP will continue to call the shots, control the media discourse, and leave Labor wallowing in its wake.


There is more to come. You will be able to read the second part of the letter to Bill Shorten next Sunday.

The wonderful world of economic rationalists

The world of the economic rationalists took hold in politics in the 1980s. Their approach, which was discussed in ‘The rise and fall of a shibboleth’, has moulded the world for the past 30 years. Government decisions regarding national economies have been guided by it. International bodies like the IMF, the World Bank and the OECD have followed its tenets. In Australia the Productivity Commission and the Grants Commission have been influenced by it. 

With that pervasive influence, what has economic rationalism actually achieved?

When it was accepted in the 1980s, it was seen as an answer to ‘stagflation’, which had dominated a large part of the 1970s. ‘Stagflation’ was a period of high inflation despite falling or very slow economic growth; it wasn’t really supposed to happen under the predominant economic models of the time. High inflation was usually thought to be a problem resulting from an economy ‘overheating’ (growing too fast), not from when it wasn’t growing at all.

Economic rationalism may have been the answer to stagflation, but it has not stopped the usual market problems. There was a recession in the late 1980s followed by ‘the jobless recovery’ of the early 1990s; then the ‘tech bubble’ later in the 1990s, which burst in 2000; and there was the GFC in 2007–08. Australia came through the GFC better than most western nations because it briefly abandoned economic rationalism and went back to Keynesian economics, where the government steps in with spending to stimulate the economy when private sector activity has slowed. Franklin D Roosevelt had used the Keynesian approach in America during the Great Depression while, at that time, Australia had followed the Bank of England’s austerity approach. But after surviving the worst of the GFC, Australia has slipped back to economic rationalist approaches, and more so since the election of the Abbott government.

The one success that economic rationalism has had is increasing inequality in the distribution of national income. That ‘success’ has spread around the globe.

On the global scale, Oxfam pointed out before the World Economic Forum (WEF) in January this year that 85 individuals between them had as much wealth as the poorest half (3.5 billion people) of the world’s population. Credit Suisse in its Global Wealth Report for 2011 stated that global wealth had risen from USD 203 trillion in January 2010 to USD 231 trillion in June 2011. It also found that there were then 29.7 million adults with household wealth greater than USD 1 million, making up less than 1% of the global population but owning 38.5% of global wealth.

In the USA, average real income increased 116% between 1945 and 2010. The share of national income going to the top 1% increased from 2.5% in 1945 to 19.8% in 2010 (which was down from 23.5% in 2007, largely as a result of the GFC). In that time, the top 0.1% increased their income by 395%. Between 1979 and 2007, the period of economic rationalism, income increased by 275% percent for the top 1% of households, 65% for the next 19%, just under 40% for the next 60% of households; and in those 28 years the income of the bottom 20% increased by only 18%.

In the UK in 1997, the entire bottom 90% of income earners had an average income of just over £10,500. The top 1% had incomes eighteen times bigger and the top 0.1% sixty times bigger. By 2007 the average income of the bottom 90% was just under £12,500 a year, but the income of the top 0.1% was then ninety-five times larger, averaging well over £1m a year.

In Canada, the real median income has barely moved since the 1980s, although in the 1950s and 1960s it was growing fast enough to double every 20 years. In the same time, the top-earning 1% of Canadians have increased their share of national income from 7.7% to 13.8%. In the 1970s the average CEO was earning about twenty-five times the average worker’s wage and in 2010 that had become almost two hundred and fifty times.

In Australia the top 10% of taxpayers had 34.6% of total national income in 1941 — it has not been as high since, but the top tax rate was also much higher then. It fell to 25% between 1974 and 1985 but has since grown again to 31% in 2010. For the top 1% their share was 10.8% in 1941, fell to about 4.5% between 1976 and 1984 and in 2010 was 9.2% (after reaching a peak of 10.1% in 2006 before the GFC).

Recently the ACTU also commissioned a report using another classical economic means of considering inequality — the difference between the labour and profit shares of national income. In the 1990s there was stability between productivity and wages; both productivity and real wages grew at 2.1% each year:

Wages decoupled from productivity in the 2000s. Between 2000 and 2012, productivity rose by an average 1.3% per year, while real hourly labour income rose by only 0.6% per year on average. This meant that labour’s share of national income fell over the decade, and fell quite sharply. In 2000, the labour share was 65.6% — this had fallen to 59.7% by 2012.

Again, this is a global phenomenon:

In developed countries, the share of labour income declined, falling by 5 percentage points or more between 1980 and 2006-07 — just before the global financial crisis — in Australia, Belgium, Finland, France, the Netherlands, Norway, Sweden, the United Kingdom and the United States, and by 10 points or more in Austria, Germany, Ireland, New Zealand and Portugal.

All these measurements are reinforced by the Gini coefficient which has increased in most developed nations since the 1980s. The OECD suggests that France, Belgium and Hungary have managed to maintain their Gini coefficient at about the same level (no increase or decrease in inequality), Turkey and Greece actually managed to reduce inequality, but in all other OECD countries the coefficient has risen, indicating increased income inequality. Out of the 34 nations in the OECD, on a ranking from least to most unequal, Australia ranked twenty-sixth, Canada twenty-fourth, the UK twenty-eighth, and the USA thirty-first. Slovenia ranked highest with the lowest level of inequality, a Gini coefficient of only 0.24, and Chile the worst with 0.49. The US Gini coefficient has risen from 0.39 in 1968 to 0.48 in 2012.

You will see many different Gini coefficient figures because different researchers use differently defined incomes as their starting point — gross, disposable (gross income less taxes) or final income (disposable income plus government transfers). For example, the Productivity Commission found in Australia that, measured by the Gini coefficient, inequality in household income in 2009–10 was 0.426 for gross income, 0.389 for disposable income, and 0.341 for final income. These figures suggest that tax scales and government transfers in Australia do have some impact on inequality, although not stopping it rising over time.

Whichever figures are used, there is little doubt that inequality has increased due primarily to rapid increases in income for the top 1% and, to a lesser extent, the top 10%. The bottom groups have not missed out completely but have been getting a smaller share of the increasing wealth in most nations.

There are other factors, aside from labour income, that contribute to income inequality. A significant one for the top 10%, and particularly the top 1%, has been a large increase in ‘capital and other’ income. The extent of part-time and casual work also has an influence by providing lower labour income. The OECD has suggested that more balanced policy approaches between temporary and permanent employment is one measure to help address inequality.

Another contributing phenomenon in America (and it would be interesting to see if it applies in Australia), has been the loss of middle-ranking jobs, largely due to the automation of routine tasks, not only for manual labour (classified as routine manual work) but by the computerisation of office, sales and administrative work (classified as routine cognitive work). There has been an increase in the number of jobs for non-routine work, both cognitive and manual. The former (cognitive) requires high levels of education and generally commands higher wages, but the latter (manual) involves work such as cleaning, food services, security services, home help, and so on. This is leading to a polarisation of the workforce in America, with more high-paid jobs, more low-paid jobs, and fewer in the middle.

Why are governments, world-wide, still listening to the economic rationalists when it is clear that rising inequality is their greatest achievement?

Government decisions are critical to what happens regarding inequality.

The decisions governments have made, however, since the 1980s, largely at the behest of the economic rationalists, have actually worsened inequality: for example, decisions taken by many western governments to reduce taxes for the wealthy, the argument being that this stimulates growth for the benefit of all. A paper prepared by the US Congressional Research Service, however, found that since 1945 reductions in the top tax rate (from 90% to 35%) in America ‘appear to be associated with the increasing concentration of income at the top of the income distribution’. The paper found no correlation between lower top marginal tax rates and saving, investment or productivity. (As an interesting sidenote, this report was initially released in September 2012 but was then withdrawn at the insistence of Senate Republicans before being updated and re-released in 2013 with no substantive changes.)

So despite continuing talk about the need for lower tax rates to encourage economic growth, it appears this is, in Australian parlance, ‘a furphy’. It has achieved nothing other than to increase income inequality.

And, Tom Conley of Griffith University suggests that governments have actually abandoned the goal of greater equality:

Governments could still ameliorate the negative impacts of market outcomes but, in recent years, they seem increasingly less willing to do so, often arguing that such efforts will impede the growth process.

A different approach is taken by economist James Kenneth Galbraith, son of the more well-known, John Kenneth Galbraith. In his work Inequality and Instability Galbraith argues that economic and social instability is not a result of inequality but:

… rather, inequality is a symptom of the shaky and, in the end, unsustainable foundations of an economy lurching from crash to crash as it maintains a reliance on credit-fuelled stock or asset bubbles that provide massive rewards to select few …

Galbraith and others have pointed out that the levels of inequality in America before the GFC were near the levels before the Great Depression, reinforcing the idea that inequality is, indeed, a symptom of a poorly functioning economic system (often about to break under the strain, if those two examples hold good).

Galbraith also contends that too much attention is paid to the statistical analysis of inequality and not enough to broader social support mechanisms, such as health services, schooling, higher education, social security payments, housing programs, and so on. As government support for such programs declines, as it has generally since the rise of economic rationalists in the1980s, people feel less well-off and less secure, and inequality has more impact not only on those at the bottom of the socio-economic tree but also on the middle class.

Inequality has usually been offset by progressive taxation scales and government transfers, although the OECD argues that ‘government transfers and taxes alone would be neither effective nor financially sustainable’. But it does suggest the need for greater investment in on-the-job training and formal education over the working life as a means of maximising participation in the workforce, and thereby incomes.

Between the Galbraith approach and the suggestions of the OECD, there does appear a way forward, a way to reverse this trend towards greater inequality, and governments need to address these issues:

  • the broader social mechanisms that support families and households, including social security payments
  • the impact of casual and part-time work on livelihoods, on equality and poverty
  • the reintroduction of genuinely progressive tax scales
  • measures of well-being (as discussed in a previous post, ‘Bringing Gross National Happiness into play’).
If such measures are adopted, there is more likelihood that greater equality in income distribution will follow.

But, based on the evidence, the one really big step governments can take to reverse rising inequality is to abandon economic rationalism.

What do you think?

The rise and fall of a shibboleth


Firstly I must acknowledge that the title of this article was inspired by the words of the 1994 song ‘Shibboleth’ by Melbourne band, The Killjoys.

In this case, the shibboleth I am referring to is ‘economic rationalism’, an expression that distinguishes the Right from the Left of politics. I also use ‘shibboleth’ with one of its more modern meanings: that it signifies something where meaning has been lost, and now serves merely to identify allegiance. I choose this meaning deliberately because I do believe that economic rationalism is on the wane. Its death may take some time, perhaps ten years or so, but I perceive that changes are coming.

In researching this piece, I was surprised to learn that the term ‘economic rationalism’ is mainly used in Australia: overseas the more common terminology is ‘market liberalism’. Whatever its name its essential premise is the same — markets rule! Economic rationalists believe that market forces will always produce better outcomes than government or bureaucratic decisions, that it is the market that should determine what to produce and how to produce it.

Some economic rationalists accept that there is a role for government in providing public goods and in intervening when there is market failure. Others, however, consider market failures as unimportant or self-correcting and that, in any case, ‘the costs of government intervention [are] greater than the costs of the market imperfections government policies [are] supposed to remedy.’

They assume that a free market system has an inherent tendency towards equilibrium in which demand and supply are in balance:

Movement towards equilibrium is brought about by changes in relative prices. (Prices include not just the prices of goods and services but wages and interest rates.) If there is persistent unemployment, then that is believed to be caused primarily by institutions (trade union pressure, minimum wage legislation, and so on) which prevent the price of labour — wages — from moving to a level in which the demand and supply of labour is brought into balance and full employment achieved.

Economic rationalists also consider low inflation is vital for a deregulated financial sector and for business. One cost of maintaining low inflation can be increasing unemployment. In Australia, before economic rationalism, ‘full employment’ was often seen as having an unemployment level of about 2% (which was achieved in the 1960s until the mid-1970s). Since the 1980s, a level of about 5% has become acceptable.

The economic rationalists tend not to be overly concerned about the distribution of income. In 1997 J W Neville explained:

While some economic rationalists argue that unequal income distribution is important to create the right incentives, generally in Australia economic rationalists say little explicitly about income distribution … they tend not to comment on the role of social security or the social wage, and hence on the final pattern of income distribution, except perhaps to leave a vague impression that social security will take care of those whom market forces leave living in poverty.

On the distribution of income, Milton Friedman, one of the founders of economic rationalism, wrote in 1962:

The ethical principle that would directly justify the distribution of income in a free market society is, “to each according to what he and the instruments he owns produces.”

From this, Friedman sees a primary function of the state as maintaining property rights, both physical and intellectual, and leaving the markets to get on with the job of using those property rights.

Another figure in economic rationalism is the late Friederich Hayek, important not only for his economic works, but also for The Road to Serfdom. In that work his basic argument was that government control of our economic lives amounts to totalitarianism. ‘Economic control is not merely control of a sector of human life which can be separated from the rest,’ he wrote, ‘it is the control of the means for all our ends.’

The earlier quote from Milton Friedman comes from his Capitalism and Freedom. It is this emphasis on freedom, as economic rationalists see it, that gives economic rationalism a non-economic dimension. Despite what its proponents may claim, it has profound social, not just economic, implications.

It has developed, and been taken on board politically, not simply as an economic approach but as a whole social philosophy based on old-style libertarianism, opposed to any form of government interference in markets and people’s lives — what it perceives as ‘socialism’.

It has also arisen from a long history in which happiness was removed from economics. A chapter in the World Happiness Report 2013 provides a potted history of this change: from the Greek philosophers and early Christian church’s view that happiness was achieved by being virtuous, to the economic theory of ‘utility’ in which individualism and consumerism prevailed. The early economic theorists brought material goods into the happiness equation, suggesting that people purchased that which brought them pleasure or happiness. In the twentieth century economics came to be dominated by mathematical formulae, and the question of whether market consumption could increase happiness and well-being was no longer a consideration.

Economic rationalism rose to prominence in politics in the 1980s, being adopted by the Thatcher and Reagan governments after the economic problems of the 1970s (as discussed in my earlier posts, ‘Whither the Left’). It was occurring at a time when socialism as a political and economic system was fading: glasnost was introduced in the Soviet Union from 1985; Poland had unrest from the early 1980s and voted in its own government in 1990; the Berlin Wall came down in 1989 and German reunification took place in 1990; and the Soviet Union fell and broke up in 1991. The politico-philosophical basis to question economic rationalism was itself in turmoil and economic rationalism rose with little philosophical opposition. By the early 1990s few socialist governments were left and economic rationalism was entrenched.

So entrenched has it become that markets are now often seen as the answer to social and environmental problems. Many, not just economic rationalists, now argue that protecting the environment requires putting a market value on it, no longer accepting that governments have a duty to respond and, if necessary, work towards changes in behaviour — no, that would distort the markets. Need more child care? — privatise it and allow the market to determine demand, supply and price. Need more jobs? — sorry, any government action will distort the markets but support the markets and the jobs will come (at the market’s price!).

Another sign of the entrenchment of economic rationalism is how the idea of ‘capitals’ has also permeated social thinking. Now people talk about ‘human capital’ and ‘social capital’ as though these are merely commodities that can add to economic production. Its lack of reference to values in the market, as opposed to its libertarian social thinking, may be its undoing. As Jeffrey D Sachs wrote in the World Happiness Report:

A prosperous market economy depends on moral ballast for several fundamental reasons. There must be enough social cooperation to provide public goods. There must be enough honesty to underpin a stable financial system. There must be enough attention paid to future generations to attend responsibly to the natural resource base. There must be enough regard for the poor to meet basic needs and protect social and political stability. [emphasis added]

In my piece, ‘Bringing Gross National Happiness into play’ I discussed alternative economic and social progress measurements to GDP, such as the Fordham Index of Social Health (FISH), the Genuine Progress Indicator (GPI) and the Social Progress Index (SPI). What I found fascinating in researching that piece was that those indexes have flat-lined since the late 1970s. I don’t think that is a coincidence.

The FISH and GPI, and even subjective surveys of ‘life satisfaction’ in the UK, appear to have increased throughout the early 1970s but from the late 1970s/early 1980s have barely moved and, in some cases, have fallen slightly. Applying the Gini coefficient to those times provides a similar result in many countries, particularly developed nations. From World War II to the 1970s there were improvements in wealth distribution (lessening inequality) but this began to reverse from the 1980s.

Guess what happened in the 1980s? No prize really for answering: ‘economic rationalism’.

The economic rationalists argue that ‘trickle down’ economics means that increasing wealth and free markets do improve life for those at the lower end of the socio-economic scale: they earn more money; they have more benefits from new consumer products to make life easier. Yes, that is true if you take WWII or 1850 as your starting point, but it takes no account of the relative benefits that are gained by different segments of the population as national wealth increases. The economic rationalists ignore that at their peril.

As discussed at the World Economic Forum in January 2014, increasing inequality can lead to increasing social unrest and then the economic rationalists’ belief in markets will be meaningless. Who will then seek government intervention to quell social upheavals? Perhaps they should be told the markets can take care of it!

The other aspects I discussed in ‘Bringing Gross National Happiness into play’ are also relevant here and are what gives me optimism that economic rationalism will falter in the coming years.

The fact that social well-being and life satisfaction have not improved since the 1970s, despite rising GPD, is leading to greater pressure for new measurements of progress to be adopted. Some of those are still market-based, in the sense that they take account of the real costs of production, including damage to the environment, but some are based on social well-being and life satisfaction or happiness.

Any move away from GDP as a measure of economic progress will impact the influence of economic rationalists. Improving social well-being is not something that can be solely achieved by the markets, particularly using the value-free models of economics or the libertarian approach. If these other indexes assume growing importance, as I think they will, there will be more pressure on governments to intervene and take active measures.

If governments start responding to social well-being indexes and levels of inequality they will be overriding pure market outcomes. The economic rationalists will argue that some of the problems can be addressed by social security payments but not by progressive taxation scales: that will not hold water, however, when the evidence of the new indicators comes into the public arena. When the costs of damage to the environment and the depletion of natural resources are factored into economic growth, more people will understand that our so-called economic success was not as successful as they had been led to believe and that it has come at a cost for future generations. More and more evidence will be available that questions the outcomes from a pure, market-driven approach and the economic rationalists will be seen for what they are: ideologues who may be ‘rationalists’, but who are not necessarily rational.

Despite what economic rationalists like to think, governments do take account of social values in their decision making — otherwise they would never be elected — and that will flow over into decisions affecting their beloved market. Then, the shibboleth of economic rationalism will be just that, an old expression identifying those few who refused to move with the times.

What do you think?

Red red wine


It’s not news to anyone that Barry O’Farrell resigned as New South Wales Premier after giving ICAC (the New South Wales anti-corruption body) misleading information over a bottle of 1959 Penfolds Grange he received as a gift from Nick Di Girolamo, a person associated with a Sydney Water contractor — Australian Water Holdings (AWH).

There are two current enquiries by ICAC set up to investigate the allegations of corruption as well as solicitation, receiving and concealing payments in relation to public officials in NSW.

Opinions vary on whether O’Farrell did the right thing by resigning and there has been plenty of discussion in other places without repeating it here. Mike Carlton in the SMH was probably one of the best with an offering that commenced with:

Tasting Notes: The 1959 Chateau d'icac.

Celebrated vigneron Nick Di Girolamo has excelled himself with this rare and striking Premier Grand Cru. Selected from old grapes of wrath vines at the Obeid family's Mt Corruption vineyard in NSW and cellared in Rum Corps oak casks, the wine reveals hidden gifts of subtle complexity.

The brown nose offers a concentrated aroma of decaying cattle dung, complexed by persistent spice notes of rotten fish and more than a hint of unsavoury greased palm. An intense palate of bitter fruits displays weak backbone and piss-in-pocket acidity, with a lingering after-palate heightened by a signed "thank you" note of unmistakable provenance.

A wine not to be forgotten.

He then goes on to discuss Barry O’Farrell’s political career and where he went wrong, namely:

O'Farrell's true fault was his failure to keep his promise to root out the endemic corruption of the NSW Liberals. He baulked at bold political reform.

On top of that, a federal government minister has stated to the same enquiry that he didn’t see a problem with working for AWH for somewhere between 25 and 45 hours a year for a salary of $200,000. Senator Arthur Sinodinos, the minister in question, also disclaimed all knowledge of a $75,000 donation to the Liberal Party while he was a director of AWH and also treasurer of the Liberal Party.

Business Review Weekly relates the history of Australian Water Holdings from an inauspicious non-profit holding company to its ‘modernisation’ as a for-profit company — due to a badly written contract between the firm and Sydney Water, it planned to obtain a major contract without having to tender. Direct lobbying of ministers was part of the plan, so as to bypass Sydney Water processes in gaining the contract.

Most accounts of this affair so far suggest that Barry O’Farrell is a decent person and was concerned with the influence of corrupt public officials in NSW. David Marr, writing in The Guardian suggests:

But under O’Farrell Icac showed the deeply ingrained corruption of NSW didn’t begin and end with Labor. His own side was punished. Now the Liberals have taken the biggest hit of all.

There is a larger issue here. Since when is a bottle of wine estimated to cost $3,000 such a ‘routine’ occurrence that one would forget entirely to declare it at the time and completely forget about it when questioned by an anti-corruption body?

Lets face it, $3,000 is a lot of money for most people. While most Australians have heard of Penfolds Grange, very few would routinely go to the local bottle shop and purchase some from the year of their birth, if at all.

When the former assistant treasurer of Australia attempts to make a joke about travelling time when asked if $200,000 is reasonable compensation for 25 to 45 hours work in a year, it demonstrates the lack of understanding Senator Sinodinos has with the concept of living on or under the average Australian wage which is currently $1483.50 per week: that would allow the purchase of a single 1959 Grange bottle every three weeks or so, after allowing for tax and superannuation deductions.

Some might consider Senator Sinodinos to have been underpaid for the ‘influence’ he could muster for his employer. That is the real issue here. These politicians are perceived as being able to influence the actions of government and government entities so that firms are, firstly, comfortable employing them as lobbyists to identify ‘key stakeholders’ so as to influence decisions and, secondly, paying sums that are beyond the comprehension of most Australians to the identified stakeholders.

Barry O’Farrell is not the only one who has ‘fallen on his sword’ in the past 30 or so years for neglecting to declare a gift that could be construed as excessive.

From the Liberals’ Michael MacKellar’s false declaration that a television was a black and white model, rather than a colour model, to save on import duty in 1982, through the ALP’s Mick Young who failed to declare a Paddington Bear in 1984, with a brief detour to Queensland’s ‘moonlight state’ era in the 80’s and 90’s, Australian politicians have a long and infamous history of either believing they have an entitlement greater than that of the ‘mug punter’ who elects them or are so gullible they can’t see the compromises that accepting the gift or excessive salary implies they will make.

The Federal Finance Department publishes the value of ‘entitlements’ given to former politicians on their website. A link to the relevant page is here for the period 1 January 2013 until 30 June 2013. Other periods are also available from the website.

Politicians seem to believe that they have an entitlement greater than you or I. Otherwise why have they allowed themselves to be able to claim travel, communications costs and so on after they leave office? — and in some cases tens of thousands of dollars in a six month period.

According to the listing above, the taxpayer funds travel expenses for politicians who, in some cases, were voted out of office decades ago. In the case of former prime ministers some leeway is understandable as some groups that had dealings with the person while they were in power may need to finish up official business — it is hardly likely to be a requirement of the job even five years later, let alone 30 years. There is also an argument that politicians are ‘on call’ 24 hours a day — well, so are church ministers, doctors and a considerable number of people who work in essential or health care environments. In most other cases, part of the wage that the worker is paid is attributable to the ‘on call’ requirement rather than having the ability to gain some benefit from a former employer decades later.

Another variation, and the final example, of this sense of entitlement is shown in a Bruce Hawker article on The Guardian’s website:

After last week's controversy which led to the resignation of Barry O'Farrell, we started hearing complaints and calls from the Coalition for the corruption watchdog's powers to be reduced. This is not new: it happened very early in Icac's life.

ICAC’s first investigation was in 1990 when a number of Liberal and ALP State Members of Parliament were investigated and found to be creating a ‘climate conducive to corruption’ in relation to some land dealings in the north of the State. The Liberal and National Parties who were in Government at the time —

… launched a broadside against the body they had helped establish just a year before. As chief of staff to then opposition leader Bob Carr, I [Bruce Hawker] watched with a mix of bemusement and amusement as they fulminated, like Dr Frankenstein, against the monster who was meant to destroy Labor, not their own.

It seems the more things change, the more they stay the same. The Brisbane Times reported in October 2012:

The [Queensland] state government has announced a review of the legislation which governs the crime and corruption watchdog claiming it has been used as a ‘‘political football’’.

Attorney-General Jarrod Bleijie said the review — to be headed up by a former High Court judge and university professor — of the Crime and Misconduct Act 2001 would focus on allowing the watchdog to do its job without ‘‘being drawn into political debates’’.

This review is about depoliticising the operation of the CMC

The Queensland state government in October 2012 was led by Campbell Newman who was subject to investigation by the Crime and Misconduct Commission (Queensland’s version of ICAC), at the request of the then ALP government, during the 2012 election campaign. Ironically, Campbell Newman has been named in the current ICAC enquiries as receiving a $5000 donation to meet with people from AWH while in the role of Lord Mayor of Brisbane. His office claims that the money was returned.

In an era when people are being told they will not be able to claim a pension until they are 70, when in Queensland people are being asked to make ‘Strong Choices’ to help the state government set the budget, and the federal government is telling us we all will have to make sacrifices, how can politicians continue to claim they understand how the rest of us live when $3,000 bottles of wine, $5,000 fees for attending meetings or $200,000 salaries for under a week’s work per year are considered acceptable until the anti-corruption commission questions the motives? Are their values so warped or is there another explanation?

What do you think?