Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

The irredeemable in pursuit of the insatiable

By Nicholas Gruen - posted Monday, 3 September 2018


In infrastructure and utilities, monopoly problems abound, so regulation remains inevitable and new rent-seeking pathologies lie in wait for those unpicking the old ones. Here, our reform efforts brought forth overpriced tollways, energy, desalination plants, airports and airport carparks, and governments selling buildings they owned only to rent them back at vastly higher ongoing cost. And that was just the opening salvo of a lurch towards crony capitalism, as the insiders who engineered the changes parachuted into careers lobbying their successors on behalf of the beneficiaries of their reforms. In the process, we've seen massive overinvestment in electricity transmission and, until recently, underinvestment in other infrastructure.

That's before we even get to finance.

Here's a marvellous passage in which the Financial Times's Martin Wolf introduces finance as "a jungle inhabited by wild beasts":

Advertisement

[T]he purchasers of promises will know that the sellers normally know much more than they do about their prospects. The name for this is "asymmetric information." They will also know that those who have no intention of keeping their word will always make more attractive promises than those who do. This is "adverse selection." They will know that even those who are inclined to be honest may be tempted… not to keep their promises. The source of this is "moral hazard." The answer to adverse selection and moral hazard… is to collect more information. But this too has a drawback: "free-riding"… [T]hose who have made no investment in collecting [information] can benefit from the costly efforts of those who have… That will, in turn, reduce the incentive to invest in such information, thereby making markets subject to the vagaries of "rational ignorance." If the ignorant follow those they deem to be better informed, there will be "herding." Finally, where uncertainty is pervasive and inescapable - who, for example, knows the chances of nuclear terrorism or the economic impact of the internet? - the herds are likely both to blow and ultimately to burst "bubbles."

Are you feeling lucky?

And that's before allowing for the special status of the public–private partnership that is banking. Here, commercial banks resell basic banking services they access exclusively from the government-provided central bank that, as lender of last resort, effectively guarantees their liquidity. Oh, and if that isn't enough, governments first guarantee them, as the Rudd government did over one panicked weekend in 2008, or, failing that, simply hand over money to keep the show on the road.

Bank of England governor Mervyn King describes this diabolically bad set-up as the worst "of all the alternatives." We've duct-taped it back together: a little more capital adequacy here, tighter prudential standards there. Global debt is now $164 trillion, or 225 per cent of global gross domestic product, 12 per cent higher than its last peak in 2009. The banking system, both nationally and internationally, remains structurally unstable, just as it was before the crisis, amplifies the economic cycle, just as it did before the crisis, and will blow up again, drawing taxpayers back into its maw.

The road not taken

All this is a microcosm of a wider and longstanding intellectual complacency. In the sixty years since they were first articulated, there's been little replenishment of the first generation of reform ideas I quoted above. And so our policy-makers and opinion leaders wing it against a backdrop in which two caricatured abstractions - "free markets" and "government intervention" - fight it out. This dichotomy feels compelling. It gets our ideological juices going and can fuel a thousand Twitter storms. But it makes little sense.

Advertisement

The standard view among economists, and more informally among the public, is this. Markets provide private goods like cookies, cars and cameras, while governments provide public goods shared by all, like roads, rubbish removal and regulation. That's a good start, but it's a lousy conclusion. It ignores how profoundly individual and collective endeavour are enmeshed.

And that's before considering something that economists have largely ignored since Adam Smith founded his whole view of society on it - the dialectic of individual endeavour within the collective bonds of culture. The very language in which I'm addressing you is a public good that is owned - to the extent the term makes any sense - collectively. So are any number of other aspects of its transmission to you, from the open-source software powering so much of the internet and its epiphenomena to the internet itself.

In areas like education, health, aged care, finance, research, legal services and cultural industries like the arts, and in networks like media, transport, energy, telecommunications and other infrastructure, and in city planning, output is better thought of as the joint product of competitive and collective (collaborative and regulatory) activity. Each sector requires the evolution of quite different institutions in which public and private, competitive and collaborative considerations concatenate at every level from high policy down to workplaces.

  1. Pages:
  2. 1
  3. Page 2
  4. 3
  5. 4
  6. 5
  7. All

This article was first published by Inside Story.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

15 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

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.

Other articles by this Author

All articles by Nicholas Gruen

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Nicholas Gruen
Article Tools
Comment 15 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy