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The irredeemable in pursuit of the insatiable

By Nicholas Gruen - posted Monday, 3 September 2018

In 1943, back working where he'd been during the first world war, the now-famous economist John Maynard Keynes wrote to a friend: "Here I am back… in the Treasury like a recurring decimal - but with one great difference. In 1918 most people's only idea was to get back to pre-1914. No one today feels like that about 1939. That will make an enormous difference when we get down to it."

And so it did.

And here we are like Keynes's contemporaries in 1918. Keen to return to the set-up we know got us into this mess. In the midst of the financial services royal commission, scandals stretch as far as the eye can see. They are rife in finance, of course, but are also evident in the way professionals - from the commanding heights of academia to policy-makers and opinion leaders - have failed to move beyond a vision of reform that was already stale at its zenith in the 1980s and 90s. After the global financial crisis, that vision stands today bereft and becalmed, increasingly irrelevant in today's financialised, professionalised, digitised world.


Trauma, intellectual growth and reform

The postwar reforms were profound, giving us a generation of unmatched prosperity. But there's also a more recent time when we turned our back on the bad old days. In response to the recessions of 1975 and 1982, and after prime minister Malcolm Fraser's feints towards economic liberalisation, the Hawke and Keating governments turned "economic rationalism" - as it was then called - into a comprehensive program to refurbish our economic institutions.

In each case reform was built on new understandings that had originated in the academy. Where the Keynesian revolution had underpinned postwar reform, post-1960s reform was founded on a cluster of ideas. They included George Stigler's critique of "regulatory capture," Milton Friedman's popularising of proposals for unbundling of delivery from the financing of government services (using vouchers and income-contingent loans, for instance), and Ronald Coase's idea of reassigning property rights to achieve specific objectives (think pollution permits and spectrum auctions).

All these men were University of Chicago economists favouring greater reliance on markets. But they thought of these ideas as technocratic rather than ideological. Many of them - like income-contingent student loans and the liberalisation of airlines, tariffs and agricultural subsidies - had egalitarian implications and were supported by many from the centre left to the centre right.

The institutional refurbishment following the second world war lasted twenty-five-odd years. But it was only a few years before the Hawke-era reforms atrophied into a reductive formula under which change that looked more rather than less "market-based" was preferred on principle. This might reflect the lobbying power of business even with centre-left governments. But it was also the product of faltering intellectual progress in the academy and the political class's wider failure of imagination and empathy for the people for whom they ostensibly govern.

Market-oriented reform


Supporting greater "market orientation" worked well when it involved dismantling the detritus of eight decades of policy-making by deal-doing. Tariffs, agricultural subsidies and regulated shopping hours were slashed and government-sanctioned cartels in the airline industry broken up.

Reform also inspired some well-conceived new policies that could be achieved with the stroke of the pen, as when we more tightly targeted family payments around need. (Not all notable Australian policy successes followed this formula, and they showed Australian policy-makers at their best. They included programs to divert people from residential aged care - via Home and Community Care - and more sophisticated ways of partnering with communities through such initiatives as the AIDS strategy and Landcare.)

But relying on a summary aesthetic of greater "market orientation" was no way to reform sectors - utilities and finance, for instance - in which market failure is pervasive. There, as Mark Twain once put it, it's not what you don't know that does the damage. It's what you know for sure that just ain't so. Looking back, the landscape is strewn with disasters.

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This article was first published by Inside Story.

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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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