As the nation's economists gird their loins for a year of furious
debate over economic management and reform, there's a soul-searching
question they need to face.
This year's policy agenda will be dominated by economic
issues. First is what's to be done about what wasn't done last year: the
failure to get the budget on a credible course towards eliminating the
structural deficit.
What can be done to reduce wastefulness in health spending
that makes more sense than GP co-payments? Is it really a smart idea to
partially deregulate government-owned and highly bureaucratic
universities with their high degree of pricing power?
Apart from the government's response to last year's review of
the financial system, there's the various inquiries being conducted
this year: the review of the tax system, review of federal-state
responsibilities and review of industrial relations.
In these things the government's big-business backers have
very strong views about which reforms it should take for ratification at
next year's federal election.
But while the economists are willing the politicians to "show
leadership" there's a tough question they should be asking themselves:
is conventional economics in reality just a rationalisation of the
interests of business? Are economists spin doctors seeking to advance
the greed of the rich and powerful?
That's certainly not what economics is supposed to be about.
Its stated ethic is that the interests of consumers should always trump
those of producers. Adam Smith's Wealth of Nations carries a powerful condemnation of business people's propensity to engage in rent-seeking.
But that's just the theory. In practice these days, it's hard
to find many economists pushing such a line in the public debate. One
honourable exception is Professor Ross Garnaut, who has pointed to the
way the push for economic reform has degenerated into rival interest
groups striving for nothing more than sectional advantage.
Why are so few of his colleagues joining him in this cause?
Why do so many economists stay silent while business interests distort
the principles of economics to disguise their self-seeking? And, indeed,
many economic consultants make their living by crafting such
distortions - often through modelling - for whoever can afford their
services.
One reason for the economists' silence is that most are
employed by bosses who don't want them criticising business. The
business economists may speak endlessly on whether or not the Reserve
Bank will cut interest rates, but on little of lasting importance.
Econocrats aren't supposed to express personal opinions and, in any
case, their masters - of either colour - wouldn't want them offending
business.
Even the academic economists enjoy less freedom to critique
business behaviour in an era where the backdoor privatisation of
universities has made them more dependent on business donors and where
individuals are too busy publishing or perishing in journals with zero
interest in Australian issues.
But the full explanation goes far deeper. Biases hidden in
the neo-classical model of how markets work have caused "the economists'
way of thinking" to be deeply suspicious of government intervention in
markets and unthinkingly supportive of business behaviour.
One bias is the assumption that economic agents always behave
rationally in pursuit of their self-interest. So individuals always
know better than governments and any strange behaviour by businesses can
be explained only by their rational response to distortions caused by
interfering politicians.
Another bias arises from the model's unit of analysis: the
individual firm or consumer. This leaves no room in the model for any
kind of benefit from collective action. Rather, the market's "invisible
hand" transforms agents' rational self-interest into the public good.
So economists keep mum while governments assume the budget
can be returned to surplus only by reducing government spending, not by
increasing taxation, and that all government spending is dubious, but
distorting "tax expenditures" (which, purely by chance, heavily favour
business and high income-earners) aren't a problem.
Even so, many economists are inclined to agree with business
lobbies that the one exception to the fatwa against higher taxes could
be an increase in the goods and services tax - provided the extra
revenue is used to reduce the tax on companies or high income-earners.
As for industrial relations, conventional economic theory's
primitive analysis of the labour market - which largely assumes away
differences in the quality of labour, as well as assuming units of
labour are no different from units of any commodity - leaves many
economists happy to accept that the more bargaining power employers
enjoy the better off all of us will be.
Many of these ingrained prejudices are being challenged by
empirical research, but "evidence-based policy" that doesn't fit with
business's perceived interests is being studiously ignored by most
economists.
