There's a paradox at the heart of modern capitalist economies: if they
really worked the way economists think they work, they wouldn't work for
long, they'd seize up. And as the Yanks have been busy demonstrating,
it's a similar story for modern democracies.
Economists believe the
motivating force driving market economies is self-interest: businesses
and consumers do what they do purely for their own benefit. But the
"invisible hand" of market forces transforms all this selfishness into a
system by which everyone benefits.
Although most economists
prefer the euphemism "self-interest", Professor Paul Frijters, of
Queensland University, prefers to call it "greed" in his path-breaking
book written with Dr Gigi Foster, of the University of NSW, An Economic
Theory of Greed, Love, Groups and Networks.
Frijters argues that a
variety of "institutions" is required to ensure individuals' greed
doesn't prevent the operation of free markets. If people will do
anything to increase their material wealth, as implied by the Homo
Economicus view of humanity, why would they simply pay the prices
traders wanted to charge? Frijters asks.
"Why would they not, for
example, steal products or production technology, kill competitors, or
in some other way seek a market advantage through dishonest or immoral
behaviour?" he asks.
Because of the existence of formal and
informal institutions. Formal institutions include parliaments that pass
laws prohibiting certain behaviour and police and courts that enforce
those laws.
But ask yourself this: is your knowledge that it's
illegal and that you risk being punished the only reason you don't steal
from shops, your employer or your neighbours? Do you adhere to
contracts only to avoid having to defend your behaviour in a court case
with the other side?
Of course not. Even where we're confident of
not getting caught, almost all of us refrain from doing those things
because we don't believe they're the right thing to do. And there is any
number of perfectly legal things we could do, but choose not to. So our
behaviour in the marketplace - or in politics - is also constrained by a
host of informal institutions, such as notions of fairness,
conventions, customs, rules we've internalised and other norms of
socially acceptable behaviour.
"Formal and informal institutions
in combination are important in the running of societies, as together
they form the rules of the game to which people adhere. They constrain
the possibilities for opportunistic behaviour in human interactions,"
Frijters says.
This isn't the first time the US Congress has
refused to pass the budget and thus shut down the US government, but
it's rare. The Financial Times' Martin Wolf, doyen of the world's
economics editors, observes that if President Obama's political
opponents are prepared to inflict such damage on their own country, "the
restraint that makes democracy work has gone".
Dr Chris Caton, of BT Financial Group adds: "Thank god that couldn't ever happen in Australia!" Not half.
Just
as we need social norms to restrain our instinctive selfishness and so
keep the economy functioning smoothly, we need restraint among the
players in the political game to ensure we don't descend into impasse
and policy impotence. But as the Americans' appalling predicament
reminds us, restraint isn't a given, and can't be taken for granted. Our
selfishness does propel the economy onward and upward, but when
voluntary restraint breaks down - almost always egged on by competition -
we can end up with greedy bankers causing the devastation of the global
financial crisis.
Similarly, we need our adversarial two-party
system of democracy to keep a check on the corruption and incompetence
of governments, but when personal ambition and party rivalry become
unrestrained, government suffers.
The sweeping economic reforms of
the Hawke-Keating era were made possible by John Howard's principled
restraint in providing bipartisan support. But bipartisanship in the
interests of good government ended with Labor's opportunistic scare
campaign against Howard's GST.
Tony Abbott returned the favour
with his ruthlessly dishonest scare campaigns against the carbon tax and
the mining tax. Now how do you think Labor will react should Abbott
propose a controversial reform in this term or the next?
The
self-seeking, short-sighted, rivalry-fanned lapse in restraint by both
sides makes further major economic reform highly unlikely until, by some
hard to imagine means, the former norms of acceptable political
behaviour are restored.
But don't blame it all on the politicians.
That's too easy. As Professor Ross Garnaut observed in May, the past
dozen years have seen "interest groups" - I'd say industry lobby groups -
become less inhibited in pursuing private interests at the expense of
the wider public interest, ferociously resistant to reform proposals
involving private costs to them, and willing to pursue their private
interests by costly ad campaigns and party donations.
Less restraint, less reform.
