Economies malfunction when we can't trust our leaders

With the federal, NSW and Victorian governments all mired in questionable conduct but refusing to accept responsibility for their actions, a reminder of the value of ethical behaviour to the good governance of the nation is timely.

A report, The Ethical Advantage, by John O’Mahony, of Deloitte Access Economics, and commissioned by Dr Simon Longstaff’s Ethics Centre, reminds us that while ethical behaviour and trust are different things, a long record of ethical behaviour builds trust, which can be quickly destroyed by unethical behaviour.

To be successful, business leaders need the trust of their customers, employees and suppliers. The less people trust them, the harder they must work – and the more they must spend on marketing and security – to remain profitable.

It’s true you can go for a fair while abusing the trust of others, but when eventually they wake up, they tend to be pretty dirty about it. For years our banks took advantage of their customers’ trusting inattention by, for instance, failing to advise loyal customers of the better deals they were offering new customers. Now they wonder why their customers hate and distrust them.

Years of declining standards of behaviour on both sides of politics, and refusal to accept responsibility when things go wrong, have led to declining levels of trust in our politicians, and lowering respect for our leaders.

The imminent threat posed by the pandemic prompted our federal and state leaders to stop bickering and pull together, with oppositions anxious to be co-operative. The result was a marked increase in public confidence in the Prime Minister and premiers – a bonus Queensland’s Annastacia Palaszczuk banked on Saturday.

But no sooner had the threat eased – but not passed – than we were back to politics as usual. Our leaders don’t lead, they try to score points off their opponents. Great way to kill their newfound popularity.

Unsurprisingly, the report finds that there remains significant scope for us to raise our levels of ethical behaviour and trust. The Governance Institute of Australia’s ethics index, based on an annual survey of Australians’ perceptions of the level of ethical behaviour in society, gave us a “somewhat ethical” score of plus 37 on a scale of minus 100 to plus 100.

This was for last year, before the pandemic, and down from plus 41 in 2017. Across industries, healthcare was seen as the most ethical, with a score of plus 67. Then came education, charities and not-for-profits, and agriculture. Banking, finance and insurance was seen as the least ethical industry, with a score of minus 18.

According to the 2020 Edelman Trust Barometer, just 47 per cent of Australians trust business, government, media and our non-government organisations to do the right thing. Worse, none was seen as strongly competent or ethical – with government being seen as the least competent and ethical out of all our institutions.

Remembering the “steady stream of state and federal political scandals”, the report says, this weak ethical performance is no surprise. Royal commissions have uncovered unconscionable behaviour in religious and other institutions, widespread misconduct in the banking, superannuation and financial services industry, and alarming lapses in aged care quality and safety.

Behaving ethically requires us think a lot about what’s right and wrong in the things we do, the way we treat people and the choices we make. For some action to be legal doesn’t make it ethical. Grant Hehir, Commonwealth Auditor General, says “we care not only about whether an entity is following the legal rules, but also whether it is acting within the intent of the law and community expectations”.

Nor is an action ethical because “it’s what everyone does”. Professor Ian Harper, of Melbourne University Business School, says “we all have values and moral convictions – ethics is about having the courage to apply these in the real world”.

The report says that, apart from the pandemic, we’re facing big challenges to our future, including from climate change, an increasingly risky geo-political environment, new technology and the future of work, and reconciliation with Indigenous Australians.

The actions needed to cope with these challenges “will require leadership of a quality that enables society to cohere in the face of external and internal pressures that would otherwise cause divisions.

“In these circumstances, trust will be at a premium – especially for key institutions. In turn, this will depend on the quality of ethical decision-making by individuals, groups and organisations,” the report concludes.

When the unethical behaviour of business and politicians causes them to lose the public’s trust, governments lose the ability to make tough “reforms”. As the pandemic demonstrates, only when politicians can clearly be seen as acting in the whole public’s best interests will they be safe at the polls.

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How economists got it wrong for so long

Most economists are great believers in the need for "reform" – for other people, not themselves. Over the past 30 or 40 years, no profession has had more influence over the policies governments have pursued, but the results have hardly been flash.

Even the lightning speed at which an epidemic in part of China became a pandemic reaching every corner of the globe can be blamed in large part on the globalisation that economists long championed.

After the unmitigated disaster of the global financial crisis of 2008 – which the economists not only failed to foresee, but did much to help bring about by their advocacy of deregulated financial markets – many people assumed this would force the economists, shamefaced, back to the drawing board.

It didn't happen. But the poor performance of economies in the decade following the Great Recession hasn't allowed the more intellectually honest among the world's economists to delude themselves that all's well with their theories and policy prescriptions.

At present, politicians and policymakers are preoccupied with suppressing the virus and countering the coronacession this effort has led to. Economists are worried about the depth of this recession, and are warning politicians that they'll need to spend (and borrow) unprecedented sums to bring about a sustainable recovery.

A big part of the economists' concern arises from their knowledge that deep, structural problems had caused the rich economies to be in a weak state before the arrival of the virus. This suggests that, without an extraordinary effort by governments, the recovery is likely to be slow, with unemployment staying high.

Worse, the "normal" to which we return after the virus has been fully vanquished isn't likely to be nearly as good as the normal we remember. Not only will material living standards be improving at a glacial pace, but there'll be continuing, maybe worsening, social conflict (not to mention a worsening climate).

The good news, however, is that leading thinkers among the world's economists are still grappling with the embarrassing question of why their profession's advice over many decades seems to have made our lives worse rather than better.

I'm just back from a couple of weeks catching up on my reading. I noticed several books by well-known economists coming to similar conclusions about how the ideas of "neoliberalism", which dominated economic advice to governments for so long, led us astray.

In their book Greed is Dead, two leading British economics professors, Paul Collier and John Kay, both from Oxford, argue that the problem with what they (and I) prefer to call "market fundamentalism" – which oversimplifies and takes too literally the basic model of how markets work – is its overemphasis on the role of competition between self-interested individuals in generating economic progress.

By sanctifying selfishness, it has undermined community-mindedness and the role of co-operation in advancing our mutual interests. Voting has become a simple matter of "what's in it for me and mine", while businesses and industries have been licensed to lobby for preferment at the expense of everyone else.

"In recent decades the balance between these instincts [of competition and co-operation] has become dangerously skewed: mutuality has been undermined by an extreme individualism which has weakened co-operation and polarised our politics," they say.

In his book, The Third Pillar, Raghuram Rajan – a US-based Indian economist who did foresee the global financial crisis, but was told by his elders and betters not to be so stupid – argues that society is supported by two obvious pillars, the state and markets, but also by a neglected third pillar: the community. That is, the social aspects of society.

"Many of the economic and political concerns today across the world, including the rise of populist nationalism and radical movements of the Left, can be traced to the diminution of the community," he says.

"The state and markets have expanded their powers and reach in tandem, and left the community relatively powerless to face the full and uneven brunt of technological change. Importantly, the solutions to many of our problems are to be found in bringing dysfunctional communities back to health."

In his book, The Common Good, Robert Reich defines his subject as "our shared values about what we owe one another as citizens who are bound together in the same society – the norms we voluntarily abide by, and the ideals we seek to achieve".

Since the late 1970s, however, Americans have talked less about the common good and more about self-aggrandisement; less "we're all in it together" and more "you're on your own". There's been "growing cynicism and distrust toward all the basic institutions of American society – governments, the media, corporations" and more.

But the last, more hopeful words go to Collier and Kay: "We see no inherent tension between community and market: markets can function effectively only when embedded in a network of social relations.

"Humans are not selfish, maximising individuals, pursuing their conception of happiness; they seek fulfilment which arises largely from their interaction with others – in families, in streets and villages, at work."

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Material success is coming at a social price

While there's been much worry of late that the economy isn't growing fast enough to get unemployment down, it remains true that our economic performance since the global financial crisis has been the envy of most other rich countries.

But it's old news that, while economic growth matters for employment – especially with our immigration-fuelled population growth – gross domestic product is a quite inadequate measure of the nation's wellbeing.

No doubt it was such criticism that, in 2002, prompted the Bureau of Statistics to introduce a four-yearly "general social survey" of about 13,000 households to give us more information on how Australians are faring from a personal and social perspective.

The bureau has now released the results of its fourth survey, for 2014. So what is this more humanistic second guess telling us about whether we're making progress?

On the face of it, we're doing fine. Look deeper, however, and cracks are apparent.

The survey measured our "subjective wellbeing" by asking people to assess their overall satisfaction with life – not how they feel at the moment, or how they feel about particular aspects of their life – on a scale of nought to 10.

Our average answer was 7.6, which is significantly higher than the average of 6.6 for all the countries in the Organisation for Economic Co-operation and Development. It was also up on what we said four years ago.

But the most useful thing to note is the categories of people whose ratings were well below the nationwide average: people with a disability (7.2), one-parent families with children (7.0), the unemployed (6.8) and people with a mental health problem, 6.6. Governments wanting to raise the nation's wellbeing now know where to start.

And when the bureau delved deeper, areas of slippage became apparent. One important factor affecting us that's ignored in the calculation of GDP – and in the thinking of most economists, politicians and business people – has been dubbed "social capital".

Social capital is seen as a resource available to both individuals and communities, arising from such things as networks of mutual support, reciprocity and trust. You can break it down into more measurable components, such as community support, social participation, trust and trustworthiness, the size of people's networks and people's ability to have some control over issues important to them.

There's plenty of research showing these things are strongly linked to the wellbeing of individuals and communities. But the survey reveals all is not well with various aspects of our social capital.

One indicator of how much we support each other is the amount of voluntary work we do for organisations. This has declined for the first time since the bureau began measuring it in 1995.

By 2010, the proportion of people aged over 18 who were volunteering had reached 36 per cent. But by last year it had fallen back to 31 per cent. There's also been a decline in the proportion of people providing informal help to neighbours and the like.

Voluntary work not only helps the people who are helped, of course, it also helps increase the wellbeing of the helpers. Not a good sign.

On social participation, the survey shows people are now less likely to be involved in social groups such as sport or physical recreation, arts or heritage groups and religious groups.

Civic participation – involvement in a union, professional association, political party, environmental or animal welfare group, human or civil rights group, or even a body corporate or tenants' association – is also down.

Of course, as the bureau notes, the way people meet and interact is changing. Some people suggest that young people in particular prefer to engage in politics by means of online activism – joining online advocacy groups or using social media to collect and disseminate information.

Other ways people support each other have been stable. In 2014, the proportion of people caring for someone with a disability, illness or old age was 19 per cent, little changed from previous years.

The proportion of people providing support to relatives living outside the carer's home, 31 per cent, was also little changed. This is likely to reflect the ageing of the population.

Last year nearly everyone – 95 per cent – felt able to get support from outside their home in a time of crisis, unchanged from earlier years. Similarly, weekly electronic contact with family and friends by telephone, text message or video link remained high at 92 per cent.

By contrast, face-to-face contact fell from 79 per cent to 76 per cent.

And people were less likely than they were in 2010 to feel able to have a say within their community all or most of the time – 25 per cent compared with 29 per cent.

There's been no change in the proportion of people agreeing that most people can be trusted – 54 per cent – but, to me, that seems a lot lower than it should be.

On the question of work-life balance, Australians are feeling time-poor, with 45 per cent of women and 36 per cent of men saying they were always or often pressed for time. This is higher than for other rich countries.

We may be doing better in the GDP stakes than most other advanced countries are, but we seem to be paying a high social price for our greater material success.

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