With the collapse of the "neoliberal consensus" between both sides of politics, which is reversing politicians' attitudes to intervention in markets, we're in danger of lurching from one extreme to the other.
My Financial Review colleague Alan Mitchell likes to say that one of the econocrats' primary contributions to good government is to "keep the crazy decisions to a minimum". Never was that truer.
The challenge for Treasury, the Productivity Commission and the rest is to be less doctrinal – less true to the one true economic rationalist faith - and more practical in giving advice that satisfies the pollies' ever-present need to "do something" without the something they do causing a lot of harm, maybe even some good.
To put that into econospeak: econocrats should stop proposing first-best solutions and propose more politically palatable second- or even third-best solutions than have been properly thought through.
Why should they compromise? Because if they go on strike, get the sulks or just let themselves be dealt out of the policy decision process, we'll all be lumbered with a lot of decisions that make things worse rather than better.
That's particularly so now ministers' offices are loaded with pushy young punks at the start of their lifetime careers in politics, who think they know a lot about what's good for the minister and the government but, unfortunately, haven't had the time or inclination to learn much about policy: what works and what doesn't.
Leave a policy vacuum and these chancers will happily fill it. They'll fill it with whatever will get a cheer from the all-indignation-and-no-responsibility radio shock jocks and tabloid loudmouths.
Those reptiles will cheer for what's showy and prejudice-satisfying, not for less spectacular policies the experts know are more likely actually to improve things.
The point is that with the populist reaction against what it's now fashionable for the often-uncomprehending left to call "neoliberalism", we're moving from 30 years of presumption against intervention in markets to a new era of presumption in favour of intervention.
That presumption against intervention came from the 1980s shift to a more fundamentalist approach to neo-classical economics, with its confidence that markets are essentially self-correcting, so intervening in them is more likely to derail this process than assist it.
This involved playing down the significance of "market failure" – factors that stop real-world markets from acting in the perfect way economics textbooks predict they will – or arguing that government interventions to correct market failure usually result in "government failure" – they make the problem worse rather than better.
The rationalists were wrong to play down market failure – it's ubiquitous – and wrong to denigrate government rule-setting for markets as "intervention", as though it's some kind of unnatural act. But they were on to far more than they realised in worrying about government failure.
What ended up discrediting their program of "micro-economic reform" was the way so many privatisations and attempts to make the provision of government services "contestable" were utterly stuffed up by governments that didn't know what they were doing, or were swinging one for their business mates.
Though it's true people have traded with each other since primitive times, it's historical ignorance to imagine that markets in the modern economy are anything other than the creation of governments, regulated and policed under laws of private property, contract, bankruptcy, limited liability, accounting standards and a host of other "interventions" and "regulations".
So there isn't and never has been such an animal as a "free market". What's in question is the degree of regulation and the specifics of what's regulated and how. Presuming against regulation (further or existing) was always an arbitrary and extreme position that would end in tears.
The era of deregulation has discredited itself, with inadequately regulated American and European banks causing the pain and destruction of the global financial crisis, declining standards of business behaviour much in evidence among our own banks, and mounting evidence of business lawlessness.
But for politicians to react to all this with a massive increase in ill-considered regulation would hardly be an improvement.
The real point is regulation is neither intrinsically good nor bad. What it is is very, very tricky. Very hard to get right; easy to get wrong. Bedevilled by "unintended consequences".
Why? Because of the terrible power of "market forces" – actually, profit-seeking firms and self-interested consumers.
There are two mistakes you can make when it comes to regulation: one is to believe market forces are infallible, the other is to believe they're of little consequence and incapable of utterly frustrating the regulators' good intentions.
