Economic rationalism has little left to offer

This week marks exactly 20 years since Margaret Thatcher memorably claimed "there is no such thing as society". Fairly or not, this remark came to embody the essence of the neoliberal agenda, known in Australia as economic rationalism.

Economic rationalism dominated worldwide economic thought throughout the 1980s and 1990s. It was characterised by a faith in the power of markets and competition to deliver prosperity through the "trickle down" effect of economic growth. Implicit in this line of reasoning was that any form of cooperation, collaboration or government intervention is harmful as it inhibits competition.

With the passage of time, it is clear the basic premise of Thatcher and her adherents was wrong. Successful capitalist economies are built as much on effective cooperation as they are on competition.

In 2007, economic rationalism has very little to say on the policy challenges facing Australia.

Nowhere is this more apparent than in the policies that Kevin Rudd and John Howard are taking to the election, but economic rationalism has been becoming increasing irrelevant for some time.

Neoliberalism gained traction during the 1980s with conservative governments in the United States, Britain and New Zealand.

In Australia, under the banner of economic rationalism, the Hawke-Keating Labor government carried out reforms such as reducing tariffs and floating the dollar. The Kennett government in Victoria took on the agenda with enthusiasm, privatising almost anything it could.

The obvious criticism of economic rationalism is that it has exacerbated inequality in society, and across regions.

Disquiet with this outcome is probably behind the popular rejection of economic rationalism.

However, the core economic rationalist premise that competition alone will lead to prosperity has been subject to repeated challenge, often by analysts on the conservative side of politics.

Conservative philosopher Francis Fukuyama points out that capitalism is fundamentally built upon trust, because to take part in a market we must believe that others will adhere to the "rules" we play by.

Political theorist Robert Putnam has shown that "social capital" underpins the effective functioning of democracy, which in turn supports the effective functioning of markets.

Trust and social capital are phenomena that have a collective quality. They cannot be fostered by individuals acting alone or in competition.

In contemporary Australia, the fundamental limit of economic rationalism is that because it is principally focused on the efficiency of markets and the minimisation of costs, it has very little to say on innovation or competitive advantage some of the core challenges facing the nation.

In a global economy, competitive advantage increasingly derives not from low costs, but from the development of unique niches in the marketplace, often located in particular places.

Thus, Silicon Valley specialises in computer technology and Hollywood specialises in movies.

In this context, the things that matter are the education levels of its people, linkages between firms, and lifestyle.

Rather than an activity undertaken by individuals or firms acting alone, current research shows that innovation is more commonly found where there are dense networks of individuals, firms and institutions cooperating as well as competing.

For example, recent research in Victoria has shown that all things being equal, there is more innovation in communities with stronger local networks.

Some aspects of economic rationalism have clearly become normalised, such as budget surpluses and competitive exchange rates.

However, for the most part, other pillars of economic rationalism such as free trade, privatisation, deregulation, union busting, an insistence on individual responsibility and cutting welfare have been put on hold, abandoned or reversed.

There is nearly consensus among the major parties that the key economic challenges facing Australia are about human capital, innovation, liveability and sustainability. Economic rationalism has nothing to contribute to any of these issues.

Although it proposes tax cuts, Labor's economic agenda focuses on investing in education, skills and infrastructure, along with water security, action on climate change and fostering innovation.

The Liberal Party's policies emphasise "a highly progressive tax-welfare system" and propose investment in education, skills and infrastructure. Like Labor's, they articulate strategies to deal with climate change, energy and water security.

Although the Liberals may perhaps support economic rationalist policies in principal, the prevailing policy and political climate does contain a space for them, and they are noticeably absent from Liberal Party plans for the next term.

Thus far in the campaign, the major parties have not planned a single privatisation, cuts to welfare haven't featured, and notions of the public good and "community" feature strongly in both parties' policies.

In Australia at least, economic rationalism is looking increasingly irrelevant.