Kevin Rudd’s essay on the global financial crisis

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 hereAgree 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.

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Sir Ian Crisp

7/02/2009Wikipedia up against the new kid on the block: Ruddipedia. Mr Rudd might be the champion of neologisms but in falling back on tradition he had better understand it. The traditional role of an economic conservative might be defined as non-progressive, lacking a reformist agenda and keeping the budget in surplus. Mr Rudd has come up with a new definition. The ALP as a market regulator: what would level playing field Hawke and Keating have to say about that? If Mr Rudd truly believes in Labor’s traditional central role of government in the regulation of markets and the provision of public goods he might like to explain why it is that Australian manufactured products have to compete with products made in prisons in places like China where the wage is a bowl of rice and a boot up the date. Or he might like to explain why products from countries where child labour is used end up in Australia (Google®™© is your friend). Do people like Mr Rudd actually believe what they write?


8/02/2009Ad astra, you are right that few will actually read Rudd's essay and many will simply rely on the analysis of those in tune with their own political bias. The pity of it is that taking on board a biased analysis without actually reading the words in the context they are written in order to understand the thinking of the writer, is a recipe for remaining uninformed and ignorant. This is, of course, why bias and prejudice flourish in our political system. Do you believe what YOU write, Sir Ian Crisp? Have you ever taken the time to analyse your own views and beliefs and find reasons why you might utter such statements about China? Could it be even remotely possible that 'a bowl of rice and kick up the date' would do you a bit of good and make you trouble yourself to try and understand a different culture?

Ad astra reply

10/02/2009Sir Ian, it would help us understand what you write if we had a handle on the economic theory or theories to which you subscribe, and those you eschew. Please let us know. Your China comments sound like protectionism, but one can’t be sure. It’s not helpful to critique Rudd’s writings using your own definitions, as for example you did with the term ‘economic conservative’, as if such definitions were universally agreed upon by the community of economists. Coming from a scientific background where agreed-upon definitions are considered critical to logical discourse, I find it disconcerting that definitions in the field of economics seem so prone to fuzziness and disagreement. How can one discuss any subject when the discussants are using different definitions for the same objects or concepts? Moreover, I find it disturbing that so many commentators, both economists and journalists, bring their preferred theories to their writings in a way that distorts their opinions, and their assessment of the views of others. The dogmatic way they dismiss views other than their own, and confidently assert the correctness of their own, make dialogue difficult and probably fruitless. To do so in such an inexact ‘science’ is not just arrogant, but anti-scientific. They usually decline to advance soundly-documented evidence and logically argued conclusions to support their positions. That economists, often holding academic positions, can argue with equal stridency positions that are diametrically opposed, shows how inexact economics is as a discipline, and more worryingly, how lacking in objectivity advocates of competing theories often are. The opinions proffered to the current Senate enquiry by economists is a case in point. Today in [i]Crikey[/i] Richard Farmer writes: [quote]If it wasn't serious it would be funny. The certainty with which economists and politicians here and elsewhere proclaim on the merits and demerits of plans to stimulate recessionary economies would be quite amusing if the subject was not so serious. A day does not pass without one expert saying a planned spending package is too large while another equally well credentialed denounces it as not being enough. And these are the very same people who, almost without exception, failed to see the world financial crisis coming.[/quote] There was a piece today in [i]The Australian[/i] by Dennis Glover, a speechwriter and fellow of the progressive think tank, [i]Per Capita[/i], titled [i]PM's pitch to the intelligentsia[/i]. You may care to read it.,25197,25031388-5013479,00.html I thought it was a balanced appraisal. Then read the comments. You will see there the diversity of opinion about Rudd’s essay, flavoured by the inbuilt beliefs, values and biases of the bloggers. You’re right janice, bias and prejudice does flourish in our political system. How can we ordinary folk ever uncover ‘the truth’? It is my hope that dialogue on [i]The Political Sword[/i] will make this easier.

Sir Ian Crisp

10/02/2009Ad Astra and Janice, for heaven’s sake it’s only an opinion. Ad Astra, I was trying to avoid a prolix style but you want an explanation about my reference to China so here it is: A worker in Australia reports for work at 7am. He has to record his presence on a time card. He wears compulsory enclosed footwear with a hard toe for foot protection. He must wear non-flammable socks and trousers and for safety reasons the trousers are not allowed to have a metal zipper. He must wear a non-flammable shirt which only buttons to the mid-riff and also must have long sleeves which must remain fastened. He must wear a leather apron and leather gauntlets. He must also wear eye protection and ear protection. He operates a press where he turns out widgets. The machine must be fitted with a gate that prevents it from operating while any part of the hand is manipulating the widget in the process of being stamped. He must be trained and retrained every 6 months. He must also attend first aid classes and other compulsory in-house training. His wage is $18:95 per hour. His widgets are costed at $4:75 each. His Chinese counterpart is a prison inmate. He is on the job at 7am in thongs and prison pyjamas with none of the safety clothing that might help prevent him suffering an injury. He also receives no first aid or other training. His widgets are costed at 30 cents. Juxtapose the above with Mr Rudd’s bold and sweeping statement about the ALP’s central role: ““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 means he must involve himself in the minutiae of unfair advantages in manufacturing and other facets of free trade. Forcing the Australian manufacturer to drop the price will send that company broke; forcing the Chinese import to pay a penalty tax will see Mr Rudd accused of being anti-free trade and protectionist; and if he does nothing he will be seen as being impuissant and anti-Australian. I think Mr Rudd has painted himself into a corner. Ad Astra, cast your mind back to the mid-90s when ALP demiurges Hawke and Keating were applying their daedal skills to the level playing field. That was supposed to deliver Nirvana. Now Captain Rudd is intending to do a complete volte-face. I’m starting to get giddy. Excuse me if I don’t offer encomiums.

Ad astra reply

11/02/2009Thank you Sir Ian for your comprehensive response. I followed your reasoning until you concluded that Rudd’s statement [quote]...the social-democratic state offers the best guarantee of preserving productive capacity of properly regulated competitive markets, while ensuring that government is the regulator... means he must involve himself in the minutiae of unfair advantages in manufacturing and other facets of free trade. Forcing the Australian manufacturer to drop the price will send that company broke; forcing the Chinese import to pay a penalty tax will see Mr Rudd accused of being anti-free trade and protectionist...[/quote] That does not seem to me to be an inevitable extrapolation from his statement. So we’re both suffering from lack of specificity about the meaning of the words Rudd is using. This is why I said in the piece and my reply that definitions, the meaning being attributed to words, are so important. So Rudd will have painted himself into a corner only if he has given his words the same meaning as you have, and drawn the same the conclusion from them that you have. We are now experiencing the uncertainty of supposition, which makes further debate on this matter problematic.

Calcolo Prestito

1/06/2009Thankyou for taking the time to respond to my blog entry. I agree with you that we should not revert to a total socialist or communist economic order. This is highly detrimental since it eradicates all forms of human rights and freedom of speech. However I am more in support of a healthy balance of the free market with government intervention. You will notice for instance that the main cause of the present economic crisis was caused by the greed of private bankers which infiltrated Wall Street and hence the whole of the world. This was caused by giving out home mortgages which were unsecured and could not be repaid. These mortgages were then bundled up then sold on to other financiers for huge profits. This was due to the private greed of these bankers. These then became hedge funds to be traded throughout Wall Street and interconnected to banks all over the world. The true nature of these deals were concealed by forms and contracts which could not be understood by ordinary people except the traders themselves. This is why this volatile bubble grew so big and escaped the detection of the general public and the government. These private financiers were putting their whole country and the rest of the world at risk for the sake of their own greed. This root cause of the economic crisis did not emanate from the government in any way.


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