Just where are all the jobs and growth in the budget?

As you may have heard Scott Morrison mention a time or two this week, this isn't an ordinary budget, it's an economic plan for "jobs and growth". Sorry, Scott, that's what they all say.

Jobs and growth – without worsening inflation – are the objective of what economists call "macro-economic management".

And, along with monetary policy (the manipulation of interest rates), budgets (fiscal policy) are the instruments they use.

The obvious and quickest way a budget can attempt to boost growth and jobs is to use increased government spending or cuts in taxes to "stimulate" the economy and make it grow faster.

Is that what Morrison has done? No, not really. The short-cut way the econocrats assess a budget's likely effect on the economy is to examine the direction and size of the expected change in the budget balance.

This shows the net effect of the government's spending (which puts money into the economy) and its revenue-raising (which takes money out).

Morrison is expecting a budget deficit of $40 billion in the present financial year, which should fall to $37 billion in the coming year, 2016-17.

That expected fall in the deficit of just under $3 billion may sound big, but relative to the value of the nation's expected production of goods and services – nominal gross domestic product – of $1.7 trillion, it's equivalent to less than 0.2 per cent.

So, though the expected fall in the deficit suggests the budget will be working to inhibit the economy from growing and creating extra jobs, the effect is so tiny it doesn't count.

An alternative, more textbook Keynesian way of making that assessment is to focus only on the policy changes announced in the budget and the combined effect they are likely to have on the economy's growth and job creation.

The budget papers reveal that, in the coming financial year, the measures announced should reduce budget revenue by $1.7 billion and increase government spending by $1.4 billion.

So, judging it this way implies the budget will stimulate growth rather than work against it – that is, have a "contractionary" effect. But, again, the size of the net effect – $3.1 billion – is too tiny to matter.

Thus, at the macro – economy-wide – level, there's no evidence to support Morrison's claim that the budget will do great things for growth and jobs.

This conclusion is supported by the budget's forecasts that the economy (real GDP) will grow no faster in the coming financial year than it's expected to grow this year – by a below-potential 2.5 per cent a year – and improve just a little to 3 per cent in 2017-18.

But that's not the end of the story. What can we say about the budget if we switch from examining its likely effects at the short-term, macro level to viewing it as an exercise in using longer-term, micro measures to foster growth and jobs?

"Micro-economic reform" is about making changes to the way the government intervenes in particular markets, or is affecting people's incentives, with the objective of improving the economy's ability to grow (and create more jobs in the process).

Morrison offered a list of things the government has been doing to encourage growth.

But his chief exhibit is his new "10-year enterprise plan" to support growth and jobs. The plan involves cutting the rate of company tax from 30 per cent to 25 per cent over the 10 years to 2026-27, biasing the phase-in towards small and medium-size businesses, so big business's tax rate doesn't start to phase down until 2023-24, as well as widening access to accelerated depreciation by about 90,000 medium-size companies.

These reforms, Morrison assures us, will boost business investment and make Australia more competitive as a destination for foreign investment, thereby leading to "more job opportunities, more secure jobs and higher real wages".

And get this: Morrison has Treasury modelling to prove it. Delivering tax cuts for companies is expected to "permanently expand the economy by just over 1 per cent over the long term".

Impressed? Don't be. The Treasury modelling has been summarised and separately released. First, it's not an annual increase in real GDP of 1 per cent. It's saying that, by the end of the long term, the level of real GDP would be 1 per cent higher than otherwise.

In econospeak, "long term" means about 20 years. Divide 1 per cent by 20 and you get an annual increase too small to see.

Second, Treasury didn't actually model the government's complicated 10-year phase-down with priority to smaller companies. Econometric models are far too simplified to measure real-world policy changes.

It modelled a simple cut in the rate from 30 per cent to 25 per cent. So it could take even longer than 20 years for the full benefits to flow through.

Third, Treasury has accepted that, particularly because much of the benefit from a cut in company tax would go to foreign shareholders in Aussie companies and much of the new investment would be funded by foreigners, for Australians the change in real GDP exaggerates the benefits of the move.

A better measure is the change in real gross national income, which reduces the expected long-term level increase from 1.1 per cent to 0.7 per cent.

The modelling says much of this benefit would show up as an ultimate long-term increase in the level of real, after-tax wages of 0.8 per cent.

But note this: the ultimate long-term increase in the level of employment would be 0.2 per cent. So, even on the government's own modelling, the increase in growth would be small and the increase in jobs would be trivial.

To be fair, many economists believe that cutting the rate of company tax is the biggest and most obvious thing to do to improve our economic performance.

Sorry, but I can't see it.

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Budget more about politics than jobs and growth

You get the feeling this budget was pulled together with the use of a checklist. "We've got to have something on super, bracket creep, women, company tax, cities, multinationals, infrastructure . . ."

It involves a lot of imminent-election tidying up of loose ends from projects the government has supposedly been working on for three years, plus much squaring away of key interest groups.

What it's not is any kind of carefully considered "plan" for the economy, whatever Scott Morrison's claims.

It is, of course, a plan to get Malcolm Turnbull re-elected. Its measures are much more easily explained in political terms than justified as doing wonders for "jobs and growth".

Coming from the man in whom we held so much hope, it's uninspired and uninspiring. It's neither agile nor innovative, with not a spark of greatness.

That doesn't make it a bad budget, however. It's competent. It will play its part in ensuring the economy keeps chugging on for another year.

It contains all the Coalition biases you'd expect in a Coalition budget.

It's a cautious budget, with little to which many people will take great exception. Most voters' pockets won't be greatly affected one way or the other - certainly not in the near future - which, of course, is the reason for the caution.

If you believe the government should be pressing on with reducing debt and deficit - as it repeatedly promised it would - the budget is a great disappointment.

Turnbull and Morrison have achieved little more than their Coalition predecessors did. They inherited from Labor an expected budget deficit for 2013-14 of $30 billion (or 1.9 per cent as a proportion of gross domestic product).

Now Turnbull and Morrison are expecting a deficit of $40 billion (or 2.4 per cent of GDP) in the present financial year, falling only to $37 billion (2.2 per cent) in the coming year.

They expect government spending to grow by 4.7 per cent and tax revenue by 5 per cent.

Morrison boasts that the budget "outlines a path back to surplus", but that's true of every previous budget, back to the one Julia Gillard took to the 2010 election. The path first supposed to end in 2012-13, now stretches to 2020-21 - if you can believe it.

Up to now, the slow progress is explained partly by continuing falls in export prices. Much of what progress the Coalition has made is explained by it keeping the proceeds of bracket creep.

The truth is Turnbull and Morrison have abandoned any attempt to cut the deficit. Their best effort is to avoid doing anything that adds to it, while they wait for nature - "growth" - to take its course.

But while this lack of enthusiasm for the axe will disappoint those who've been convinced our debt is perilously high, I'm not among them. Morrison is right to say the "transitioning" economy is still too "fragile" to cope with public sector slashing and burning.

To that extent the budget wins high points for its steady contribution to the management of the macro economy.

It doesn't win many points for fairness, however. We now know what more than three years' big talk about tax reform adds up to: not a lot.

Low to middle income-earners have been saved from an increase in the goods and services tax, but gain nothing.

For years we've been told bracket creep is a terrible thing, hitting people on low taxable incomes harder than those on high incomes.

So what's the remedy? A tiny tax cut which, because it starts with people on more than $80,000 a year, will benefit only about the top quarter of taxpayers.

Thus the government gets to keep all the bracket creep to date and most of the bracket creep to come. But remember, only Labor stands for higher taxes.

What else do high earners get? No reneging on ending the 2 per cent temporary deficit levy. No change to negative gearing schemes, to the 50 per cent discount on capital gains tax, to family trusts or to deductions for professional development courses in Hawaii.

Big business missed out on its longed for increase in the GST and on a cut in the top rate of income tax but, even so, did get the promise of a company tax rate falling by 5 percentage points to 25 per cent, starting in the early 2020s and continuing until 2026-27 - if you can believe it will happen.

The big exception to this, however, are the changes to superannuation tax concessions, which will be less generous to high earners and less mean to women and low earners.

In other key areas of reform - particularly improved effectiveness in healthcare, education and infrastructure - after three years the government has hardly scratched the surface, with little further progress in the budget.

"Jobs and growth" is a slogan, not a plan. Its purpose is to create the illusion of a busy, striving government and divert attention from the lack of progress in achieving the much-promised return to budget surplus.

Name the budget - or the government - that hasn't claimed to have jobs and growth as its overriding goal.

To claim that a tiny tax cut and a "glidepath" cut in company tax will have any significant effect on jobs and growth is an exercise in over-optimism and exaggeration.

The tax cuts for small business, and their extension to a relative handful of medium businesses, is more about politics than jobs and growth. Small businesses have votes; big business has most of the jobs.

This is not the budget we were entitled to expect when Turnbull ousted Tony Abbott last September.

It's probably better than Abbott and Joe Hockey would have delivered, but only by a bit.

This is the last of three budgets from a government seeking re-election on the basis that only the Coalition is any good at managing budgets and running the economy.

That was a lot easier to believe at the last election than it is today.

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What not be believe in the budget

Like every budget, Tuesday's will be a combination of measures and arguments, each with political and economic dimensions and motivations.  Distinguishing the politics from the economics will be the hard part.

It promises to be a budget in which the government does a lot of crying poor. That's partly because Malcolm Turnbull is likely to call an election within a week of the budget, but is prevented mainly for political reasons from making many big spending promises.

Politically, this government made so much fuss about debt and deficit while on its way to power that, though it's made little progress in reducing the budget deficit and halting the growth in debt, it dare not be seen consciously adding to it.

Economically, returning to surplus isn't urgent, and increased borrowing for worthwhile infrastructure would make much sense.

As part of the crying poor, when state politicians hit the feds for more money, federal ministers reply that they can't help because, though the states are running surpluses, the Commonwealth is still in deficit.

Don't believe it. When the states say they're in surplus, they're referring to their "operating" balance, which is their revenue less their recurrent spending. When the feds say they're in deficit, they're subtracting from revenue not just their recurrent spending, but also their infrastructure spending.

Add the states' infrastructure spending to their operating surpluses and you find that – measuring it the way the feds do – they're still in heavy deficit. (Which is as it should be. If anything, they should be investing more.)

Or, to put it a better way, by insisting on their antiquated practice of including capital spending in their measure of the deficit, the feds are exaggerating the size of their deficit problem.

This financial year's budget papers forecast a deficit of $35 billion (since revised to $37 billion), which included capital spending of about $21 billion.

Further capital spending of $17 billion (including on the National Broadband Network) is hidden in the "headline" deficit, meaning capital spending accounted for 8 per cent of headline spending. Last year it was 9 per cent.

Another thing we'll hear a lot of on Tuesday night is that the government is "living beyond its means" and must mend its ways and live within its means, just as households do.

This is nonsense. It's Scott Morrison doing his best Joe Hockey impression. If you measure them the way Morrison does for the government – that is, by including borrowing for investment in with day-to-day expenses – our households are living way beyond their means.

Indeed, Australia's households have one of the highest debt ratios in the developed world.

Do you think it's a crazy, irresponsible thing for so many households to borrow many multiples of their annual income to buy the home they live in?

Of course not. For most it makes lots of sense. Is a government – state or federal – that borrows to build public infrastructure that will serve the community for decades, adding to our productivity, living beyond its means? Of course not.

National governments may be said to be living beyond their means when their recurrent spending exceeds their revenue, but even that is too simplistic.

Why? Because governments aren't the same as households and it's ignorant to pretend they are. Governments have responsibilities households don't have and also have powers households don't have – such as the ability to impose taxes and even, for national governments, to print money.

One highly relevant government responsibility is to help limit economic slowdowns by running operating deficits – by allowing their recurrent spending to exceed their revenue – while spending by the private sector is weak.

Does that sound too Keynesian for a Coalition government? Too Keynesian for Turnbull who, while opposition leader in 2008, vigorously attacked Kevin Rudd's fiscal stimulus?

Don't believe it. It's clear we'll hear a lot of the argument that Turnbull and Morrison can't cut government spending much at present because the economy is "in transition" and so not yet growing strongly.

That's a Keynesian argument, the antithesis of an austerity policy – though both men would die before uttering the K-word. And it's a sound argument – which is why we've been hearing it since Labor was in power. It was just excuse-making then, but it's true now, apparently.

Of course, it's also true that no politician wants to cut spending just weeks before an election.

Economically, there's no problem with continuing recurrent budget deficits. A better question to ask on Tuesday night is whether the spending that makes up the deficit is going on good programs or poor ones.

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The prospect for workers is brighter than many think

A lot of people are convinced it's just going to get worse and worse for workers in coming years. A lot of oldies think that and, unfortunately, too many youngsters believe them.

Many older people worry that, with the decline of manufacturing in Australia, and the end of the mining boom as well, they just can't see where the jobs will come from.

Young people, on the other hand, believe jobs are getting ever harder to find and, when you do find one, it's likely to be pretty scrappy: casual, part-time, short-term.

What's true is that young people have borne the brunt of the weak economic and hence employment growth since the financial crisis in 2008.

It's taking them longer to find entry-level full-time jobs than it used to and, in the meantime, they've had to get by with casual jobs. More employers have been willing to exploit them by asking them to do unpaid internships.

What's not true is that there's been continuing growth in insecure forms of employment. The proportions of such jobs haven't been increasing.

At a time of "transition" and uncertainty, it's always easy to err on the gloomy side. When you do, be sure the media will broadcast your bad vibes to the world.

But it's not hard to see plausible reasons why things could get better for workers, not worse. And when the ANZ Bank's chief economist unit and the Australian Institute for Business and Economics, at the University of Queensland, peered into the future and ran their best guesses through a model of the economy, that's just what they found.

Everyone loves to dwell on the decline in manufacturing, and the pathetic number of lasting jobs in mining, but few people get excited by the truth that almost all the additional jobs we've created in the past 40 years have been in the services sector.

Nor that most of these jobs have been cleaner, safer, more highly skilled and more rewarding – intellectually as well as monetarily – than most of the jobs no longer being created in manufacturing, farming and mining.

The study makes the highly plausible assumption that this longstanding trend will continue. "Declining material intensity has been observed in all [developed] countries, in part because wealthier consumers buy 'experiences' once their primary material needs are met," it says.

The ageing of the population is almost invariably portrayed as a bad thing, but the study points to a widely ignored way in which it's good news for the younger generation.

With a higher proportion of the population retired (and thus adding to the demand for labour but not to its supply) but low fertility meaning a lower rate of young people entering the workforce from education, demand for the services of young workers will increase.

Here's a tip: employers are chancers​. If they think they can get away with screwing workers (because there are more than enough available) they will. That's what's been happening lately.

But if they don't think they can get away with it (because workers have plenty of other bosses who'd like their services), they don't. And if it gets to the point where bosses have to start sucking up to workers to attract them and hold them, they will.

The study puts it more politely. By their nature, service industries rely less on machines and more on people, particularly highly-skilled workers. So if the services sector's share of the economy continues to grow "this could prove challenging for Australian businesses given our ageing population and changing workforce composition".

A third factor the gloom-mongers neglect is that our continuing move to the "knowledge economy" requires a better-educated, more highly-qualified workforce.

Today, more than half the population has completed the last year of schooling and gained at least a post-school certificate. That's more than twice what it was in 1981.

Since the oldest Australians have the lowest levels of educational attainment, the proportion of people with post-school qualifications could exceed 70 per cent by 2030.

Even so, the study predicts that "the fight to retain skilled workers will intensify", implying that, though the supply of qualified workers will grow, the demand for their services will grow faster.

In such circumstances, employers will be trying to bind their skilled workers to them, not cast them adrift with insecure employment contracts.

If we foresee further growth in the share of the economy accounted for by labour-intensive service industries, employing better qualified and higher-paid workers – over whose bodies employers are fighting – labour's share of national income should rise.

If so, "some of the consequences of a falling labour share, such as growing income inequality, may begin to unwind as well", the study says.

A final factor to remember is that our exports of services are likely to keep growing as Asia's middle class gets bigger and more prosperous.

At present, the goods sector of the economy (agriculture, mining, manufacturing and construction) accounts for 28 per cent of total employment, while the services sector accounts for 72 per cent. The study predicts that, over the next 15 years, the services share will increase by 5 percentage points.

It finds that the industries with the most intensive demand for labour are also those with the strongest growth prospects.

The strongest growing service industries are likely to be healthcare (fed by demand for new medical technologies as well as ageing), education (growing demand for qualifications) and professional services.

These industries are projected to grow by at least 5 per cent a year, on average, over the next 15 years. Demand for labour across the economy is projected to grow by an average of a solid 1.6 per cent a year.

No one – certainly, no economist – knows what the future holds. But don't be led into assuming the only things that could happen are bad.

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An independent assessment on negative gearing

Labor claims its "reforms" to "negative gearing" would do wonders to make home ownership more affordable for our kids. But Malcolm Turnbull says vote for high-taxing Labor and the value of your home will crash, while rents soar.

Many voters have strong views for or against negative gearing. But when rival politicians fall to arguing about their policies, most of us find we don't know enough to decide who's right.

We need someone we can trust to act as a kind of umpire, pronouncing on who has the better case. So we're fortunate to have John Daley and Danielle Wood, of the independent Grattan Institute, issuing a report on the topic.

For defenders of negative gearing, it's bad news. The pair explain that there's a good case for acting against the practice, dismissing alarmist claims it would disrupt the property market.

For opponents of negative gearing, however, the news isn't as good as it seems. Since the resulting reduction in house prices isn't likely to be great, acting against the practice wouldn't do much to make home ownership more affordable.

Investment in a rental property is negatively geared when so much of the cost of the property has been borrowed that the interest bill and other expenses exceed the earnings from rent.

Why would anyone deliberately structure an investment to run at a loss? Partly because they can deduct that loss from their income from other sources, thus reducing their tax.

But that means they're still out of pocket for the remaining half or more of the loss. Why do that? Because they're hoping eventually to sell the place at a big capital gain, which should more than make up for the after-tax losses they've incurred.

That's been more likely since 1999, when the Howard government introduced a 50 per cent discount on the rate of tax on capital gains.

Daley and Wood disprove the dishonest claims that negative gearing is used by many people on modest incomes to get ahead. There may be a few of them, but the statistics show high income earners claim the lion's share of the benefits.

The authors say there's no point of principle that supports our longstanding practice of allowing losses on property investments to be charged against wage income for tax purposes.

Very few other countries do this. It makes the housing market more volatile and reduces home ownership. It diverts capital from more productive investments while doing little to increase the supply of homes.

They propose allowing losses on property investments to be deducted only against income from other investments, not against wages. This would save the budget $2 billion a year in the short term, falling to $1.6 billion a year as behaviour changes.

But much of the attraction of negative gearing comes from its connection with the 50 per cent discount on the taxing of capital gains.

They say there is a case for taxing capital gains more lightly than other income – mainly because much of the seeming gain comes just from the effect of inflation, which makes it illusory – but this doesn't justify a discount as great as 50 per cent.

Allowing such a high discount (as well as allowing rental losses to be deducted against wage income) greatly reduces the government's tax collections, meaning it has to rely more heavily on other taxes. Those other taxes often do more to distort economic behaviour than taxing saving does.

In any case, empirical evidence shows people on high incomes save almost as much regardless of the tax rate. Measures intended to encourage saving mainly influence the vehicle through which wealthy people save – superannuation or property or a bank account, for instance.

As well, the high discount on capital gains tax creates opportunities for artificial transactions to reduce tax and encourages investors to focus too much on speculative investment – sit back and wait for capital gains to accrue – rather than investment that earns annual income by producing goods and services.

Daley and Wood propose halving the capital gains discount to 25 per cent. This would save the budget about $3.7 billion a year.

These policy proposals may sound the same as Labor's, but there are important differences. Labor promises that, for new investments undertaken from July 1 next year, deduction of losses against wage income will be permitted only for investments in newly built homes.

Investments made before then will be unaffected, while losses on new investments in shares or existing properties may still be deducted against other investment income.

Labor promises to cut the capital gains discount to 25 per cent for all assets bought after July 1, 2017. All investments made before then will be unaffected.

Daley and Wood criticise both proposals. Retaining existing negative gearing rules for prospective investments in newly built homes adds a new distortion that would, they believe, do little to increase the supply of homes.

And they criticise Labor's plan to "grandfather" existing investments – for both negative gearing and the capital gains discount – leaving them unaffected by the change.

A better way to minimise disruption to the market and to the expectations of existing investors would be to apply the changes to everyone, but phase them in equally over 10 years.

If only making up our mind on the other election issues we'll face could be so easy.

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Is the world ruled by ideas or by interests?

Most economists believe John Maynard Keynes (rhymes with "brains" not "beans") was the greatest economist of the 20th century. But his most famous quote is one I've never been sure I agree with.

He claimed that "the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.

"Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

"Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back."

One man who definitely agrees is Barry Schwartz, a professor of psychology at Swarthmore College in Pennsylvania. He writes in his book Why We Work that, where once our ideas about human nature may have come from our parents, our community leaders and our religious texts, these days they come mostly from social science.

"In addition to creating things, science creates concepts, ways of understanding the world and our place in it, that have an enormous effect on how we think and act," Schwartz says.

"If we understand birth defects as acts of God, we pray. If we understand them as acts of chance, we grit our teeth and roll the dice. If we understand them as the product of prenatal neglect, we take better care of pregnant women."

Schwartz says that because ideas aren't objects, to be seen, purchased and touched, they can suffuse through the culture and have profound effects on people before they are even noticed.

And ideas, unlike things, can have profound effects on people even if those ideas are false.

I don't doubt that, in this, both Schwartz and Keynes are right. The social world is far too complex for any of us to really understand how it works. So we observe what's happening and then come up with theories - "models" - about how it works.

Those theories inevitably influence the way we think about the world, the way we react to it and the way we try to get some control over it.

But the world is so complex that we can have lots of different theories about it, or different aspects of it. Many of those theories will have an element of truth and an element of error.

We probably should have a toolbox full of theories, choosing to use the one that best fits the particular issue we're focusing on.

But human nature - our limited cognitive processing power - leads us to simplify things, settling on the one that seems to work best and apply to most circumstances. We remember it, and forget the others.

Often, of course, we don't do a lot of thinking about which theory is best, we just go along with the one most of the people around us seem to believe.

It's also true that the theories and models we rely on, consciously or unconsciously, become, as the sociologists say, "performative" - if enough people believe the world works in certain way and act on that belief, to some extent the world does start to work that way.

There are limits to this, of course. For a few decades economists allowed their dominant model - their group's way of thinking - to convince them the deregulation of the banks had brought us to the era of Great Moderation, of low inflation and unemployment with ever rising prosperity.

Their model blinded them to the global financial crisis that was coming and the years of economic malfunction that would follow.

There could be no more costly demonstration of the inadequacy of their theory about how the world worked.

So no argument: ideas have a huge effect on the world - for good or ill. But does that mean "the world is ruled by little else"?

I doubt it. The main rival for that title is the thing economists exalt above all else: self-interest. What happened to the rich and powerful, don't they have any influence on how the world is ruled?

The more I observe our politics, the more I see it as an unending battle between powerful interest groups. The political parties, contending for their own share of power, negotiate their way around the most powerful of the various interest groups.

The problem is the power democracy still gives to ordinary punters. Should I try to win votes by promising a royal commission, or should I keep in with the banks - and their generous donations to election funds - by promising to bash them with a feather?

So, do ideas really trump vested interests? Surely we're ruled by some combination of the two.

But the more I understand the weaknesses in the economists' dominant ideas about how the economy works and should work, the more I see what a bad predictor their model is, the more I wonder how such a flawed theory remains so dominant, largely impervious even to stuff-ups as monumental as the Great Recession.

Then a terrible thought strikes: maybe their ideas remain so influential in politics and the community because they happen to suit the interests of the rich and powerful.

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How behavioural economics got started

One night in 1975, Richard Thaler invited a bunch of his graduate economics student mates over for dinner. While they waited for the cooking to finish he put out a bowl of cashews.

But noticing everyone was getting stuck in, he decided he'd better take them away. His mates thanked him for doing it. It was a lightbulb moment for the young economist.

Why? Because the assumptions of the conventional economics they were studying said such a thing couldn't happen.

Each of us is assumed to have complete control over our appetites and urges. We eat no more cashews than we know is good for us.

We certainly don't need some agent of the Nanny State to limit our freedom by stepping in and taking the bowl away.

Were such a thing to happen, we wouldn't be pleased. We certainly wouldn't thank the perpetrator of this intervention.

So why did it happen? Because, contrary to the conventional model, all of us have problems stopping ourselves from doing things we know we'll regret. In one part of our lives or another, we have a problem with self-control.

And we're grateful rather than resentful when someone steps in to help us with our problem.

From then on the young Thaler – obviously a bit of a rebel and troublemaker – began compiling a list of what he came to call "anomalies" – things people actually did that the conventional model assumed they didn't.

Thaler tells the story of those cashews in his latest book, Misbehaving. It's an apt title because the book charts the development of a new school of economic thought known as "behavioural economics".

Behavioural economics studies the differences between the way people in the economy actually behave and the way the model assumes they do.

In deference to academic economists' obsession with mathematics – a preoccupation that began only after World War II, led by men such as Sir John Hicks, Kenneth Arrow and Paul Samuelson – younger behavioural economists search for ways to make more realistic the assumptions on which mathematical models of the economy are built.

Thaler says behavioural economics has three essential elements: bounded rationality (see below), bounded willpower (see above) and bounded self-interest – we can be more generous to others than the model assumes.

So what are the origins of "BE"? In their book, Animal Spirits, George Akerlof and Robert Shiller argue that John Maynard Keynes was the first behavioural economist.

Thaler says Keynes was "a true forerunner of behavioural finance". (Behavioural finance is the part of behavioural economics that focuses on behaviour in financial markets.)

Keynes argued that individuals' "animal spirits" – his word for their emotional responses – played an important role in their decision making. At times this could discourage business from investing, thus strengthening the case for governments to use their budgets to stimulate the economy.

Keynes wrote his magnum opus in 1936. But Thaler takes BE's origins back to the founder of economics, Adam Smith, and the less famous of his two books, The Theory of Moral Sentiments, published in 1759.

Smith was "an early pioneer of behavioural economics" because of his detailed description of problems of self-control.

A more obvious forerunner is the American academic Herb Simon who, in 1957, coined the term "bounded rationality" and was later awarded the Nobel prize in economics for his trouble.

Bounded rationality is the idea that people's ability to make "rational" – coolly calculating – decisions is limited by the information available to them, the trickiness of the decision, the brain's inadequate processing power and the time available for thinking about it.

Many people probably assume, however, that the true originator of BE is the Princeton psychologist Daniel Kahneman who, with his late partner, Amos Tversky, began in the early 1970s identifying the many "heuristics" (mental shortcuts) and biases that cause humans' decision making to be less than rational.

Behavioural economics has long been about incorporating the insights of psychology into economics. So it was no great surprise when the psychologist Kahneman was given the economics Nobel in 2002.

Thaler moved to California in 1977 to work with Kahneman and Tversky for a year, but that was because he'd already done a lot of thinking about "anomalies". His book leaves me in little doubt that he's the economist who should get most credit for establishing BE as a respectable subject for economists to study.

Thaler began writing a column about "anomalies" from the first issue of the American Economic Association's new Journal of Economic Perspectives in 1987.

In 1991 he teamed up with Shiller (who in 2013 got the Nobel for his work in behavioural finance) to organise a semi-annual workshop on behavioural finance under the auspices of the National Bureau of Economic Research.

One breakthrough in BE came when it was demonstrated that people's mental biases were systematic – that we were, in the title of Dan Ariely's book, Predictably Irrational.

If non-rational behaviour is predictable, it can and should be incorporated into economists' models.

And if people make predictable mistakes when buying shares and so forth, there ought to be scope for other investors to make a buck by betting against them.

Little wonder behavioural finance quickly gained a following in financial circles.

In economics, however, it's said that new ideas gain ascendancy "one funeral at a time". Oldies have a vested interest in preserving the received wisdom, but young academics are attracted to new and interesting ideas that seem to better explain the world.

Thaler's best-selling book with Cass Sunstein, Nudge, showing how governments can nudge people towards making more sensible decisions, led to the setting up of Britain's Behavioural Insights Team and copycat outfits in many countries, including Oz.

These days, BE is offered in most undergraduate university courses. So behavioural economics is now firmly rooted and can only grow in its influence on economists' thinking.

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Herald's move to explanatory journalism is its future

How has the Herald changed in 185 years? How should I know – I've been working for it for less than a quarter of that time. But I dare to claim that, of all the change since 1831, most of it has occurred since I started in 1974.

A few years back, at a staff function to celebrate those of us who'd hung around longer than could reasonably be expected, someone had the idea of presenting us not with a pen or a watch – I'd already had one of each – but with a framed copy of the front page of the paper on the day we started.

Sorry, but it was an uninspiring present that showed how far we've had to travel. It was grey in every sense. That was long before the Herald moved to colour printing, but not before our subeditors had abandoned their sacred duty to drain the colour out of every story before allowing it to be seen by the public.

The Herald stuck to "objective" reporting of the facts – "just the facts, ma'am" – and anything that remotely resembled an opinion – it was a beautiful sunny day, the prime minister seemed distracted, the accident was horrific – was verboten.

It was years before journalists attended university journalism courses, to be reminded that at its core the journalistic task involves subjective judgments: which events get reported and which don't; which facts get used and which don't; which stories get run and which "hit the spike"; which are reported at length and which in brief; which lead the front page and which go up the back somewhere.

It was because journalism was mere description of facts that readers didn't need to know the journalist's byline. They needed to be told only that a story had been written "by a Staff Correspondent" – that is, he (and occasionally she) had been trained by the Herald, and so could be trusted to get everything right.

Nothing of any great interest had happened the day before my first day on the job. The front page was nonetheless terribly busy, as editors crammed in as many stories as they could fit. To modern eyes the page was messy and uninviting.

That was only a few years before the Herald abandoned the unachievable struggle to be a "paper of record". Much better to focus on a smaller number of more interesting or important events – preferably ones other media didn't have – and do justice to them, illustrating them and laying them out on the page in a visually attractive way.

One thing that issue of the paper did have going for it, however: its price was 8 cents. Of course, in those days it didn't have lift-out sections on TV programs, food and restaurants, travel, health and fitness, and gig guides.

Apart from Column 8, still signed by Granny, there were few opinion columns in the paper of the mid-1970s. Comments or analysis sitting beside news reports were rare to non-existent. There were a few bylined feature articles, but for the most part opinion was restricted to unsigned editorials – or "leaders" – written on behalf of the editor.

It was only a little over two years before I was moved from economic reporting to opinion writing. At first my job was to write a leader a day, but by 1980 I was writing three columns a week. I'm still writing those columns, on the same days and the same parts of the paper.

Having checked with the Herald's historian, Gavin Souter, I think I'm safe in claiming to be the longest-serving columnist in the paper's 185 years.

This may tell you something about me, but mainly it says something about how the paper and the world in which it exists have changed. In relatively recent years the Herald – on paper and online –has become chock full of all manner of columns, comments and analyses.

Why? Partly because our marketplace has become ever more competitive. Journalists tend to focus hardest on competition from rival newspapers, but more intense competition has come from the electronic media, radio and television.

This competition started from the moment in the 1930s that radio networks began reporting their own news stories rather than reading out stories from the papers. Eventually radio began delivering news bulletins on the hour, but not before television channels made their nightly news bulletins the chief means by which Australians caught up with the news.

With so many of our readers already having heard the bare bones of so many of our news stories, is it any wonder newspapers had to change their news offering? We tried harder to find our own exclusive stories, provided greater detail and more background information, asked "the next question" – what happens now? how will the authorities react? – as well as adding more commentary and analysis, including the pure opinions of columnists and in-house experts.

For much of the past 185 years there were two things you could do after you got home from work, had dinner and wanted to relax: sing songs round the piano or read the paper. Then came radio and its serials and then the all engrossing idiot box.

On a wider level, therefore, newspapers have long faced greater competition from an ever-expanding array of ways to spend your leisure time. More reason to change our product.

The advent of the internet has added greatly to that array, as well as multiplying rival digital sources of news – not just from other cities and states, but from English-speaking news providers around the world.

By contrast, it's allowed the Herald and other papers to use their websites to get back into "breaking news" – news within minutes of it happening – for the first time since the 1930s.

These days, however, digital sources of breaking news are so plentiful and so freely available –literally – as to greatly diminish the commercial value of ordinary news. How are we to pay the wages of our journalists?

Online advertising is far cheaper than it is in newspapers and free-to-air television. What's more, online advertising is dominated by Google and Facebook, not the traditional news sources.

We need something more than ordinary news, some way of adding value to a product we can ask readers to pay for, preferably by subscription.

The material standard of living of people in the developed economies has risen many times since the Industrial Revolution. This remarkable achievement has been the result of two main factors: technological advance and ever-growing specialisation within occupations.

The inescapable consequence, however, has been to make the workings of our economy and many other aspects of our lives infinitely more complex than they were. There was a time when car owners did much of their own routine maintenance; today, many hardly dare lift the bonnet.

When I joined the Herald it still subscribed to the notion of the "universal journalist" – any Herald-trained journalist was capable of accurately reporting any story on any subject. I doubt if this was true then; it's become less true with every passing year.

Since I became economics editor in 1978, I've worked to ensure that all economic reporting is done by journalists with economic qualifications. Ideally, legal reporters have law degrees, science reporters have science degrees and so forth.

With the growing complexity of daily life has gone an ever-rising level of educational attainment in the workforce. The Herald has always had a better-paid and better-educated readership, but it's never been better educated than it is today.

This means a readership far keener to know how and why, not just who, what, where and when.

But not all "advances" have been for the better. Governments have become bigger, ministers' staffs have become bigger, politicians are far more adept at marketing, more focused on perceptions and appearances, and unceasing in their attempts to "manage" the media.

At the same time, the lobbying of government by business and myriad interest groups has proliferated. A small industry of "economic consultants" has grown up in Canberra just to produce modelling that purports to prove the rightness of lobbyists' claims.

If keeping governments and power-holders honest is one of the primary responsibilities of the quality press, never have its services been more sorely needed.

A more complex world requires more explanatory journalism from more specialised and qualified journalists. The blizzard of information assailing us requires more trusted guides to what's worth worrying about and what isn't.

A world of more active lobbying by powerful interest groups and more manipulative and secretive governments requires more investigative journalism, not just by dedicated investigation teams but also by more specialised journalists who do more than meekly report the claims of politicians and lobbyists.

This is what I've tried to contribute with my "comment and analysis" in my time at the Herald. It's needed far more today than when I started. I confidently predict the need will only grow.

It's why I hope to see the Herald meet the challenge of digital disruption, making whatever adaptations are needed to ensure it continues to serve readers and contribute to the nation's good governance.

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Why the banks' activities should be constrained

Is there any justification for a royal commission into the conduct of the banks? Is it just a political stunt? All royal commissions are called for political reasons and many are stunts, in the sense that their primary objective is just to bring particular issues into the public spotlight.

To me, the best justification for an inquiry into the banks is that they still don't seem to have got the message. They've been caught treating their customers badly, but so far they've shown little sign of contrition - sorry about the few bad apples, but I didn't know - and little willingness to make amends.

For years they've been locked in a race to maximise profits. They've put profits and executive bonuses ahead of the interests of their customers, and seem keen to resume profit maximising as soon as the fuss declines.

We need to keep the fuss going until the bank bosses realise how unacceptable we find their behaviour. Only then may they accept the need to stop incentivising​ their staff to exploit their customers' vulnerabilities, even at the cost of a little profit.

But if you think we have trouble with our banks, you should get out more. So far, at least, we've been let off lightly. I've just been reading the latest book about the banks' central role in causing the global financial crisis of 2008 and the Great Recession it precipitated.

Almost eight years later, the recovery has been anaemic and looks like staying that way for years yet. If China's slowdown becomes a "hard landing", it's likely to be because the financial crisis has finally caught up with it, too.

The book is Between Debt and the Devil, by Lord Adair Turner, who took over as chairman of Britain's Financial Services Authority just as the crisis struck.

Among the many reservations that may be expressed about the "financialisation" of the developed economies - the huge expansion in the share of the economy accounted for by the banks and other providers of financial services over the past 30 years - Turner is particularly critical of all the credit creation - lending - the banks have done.

For decades before the crisis, in every developed economy, bank lending grew at two or three times the rate at which the economy grew.

Central bankers and other economists came to believe this was normal and natural; how you achieved a growing economy.

In reality, it just meant that when the mountain of credit finally collapsed, plunging the world into its worst recession since the 1930s, many households and businesses were left deep in debt.

According to Turner, it's this "debt overhang" that's doing most to stop the major economies returning to healthy growth. As part of the initial response to the crisis, governments shifted much of the banks' own debt onto the government's books.

This did nothing to diminish the overall amount of debt, just made governments reluctant to increase their spending to support the economy.

But it's the continuing debts of businesses and households that do most to explain the continuing sluggishness of the major economies. When your debt far exceeds the value of your assets, you cut your spending to the bone so as to use as much of your income as possible to pay down that debt.

Trouble is, when so many others are doing the same, their spending cuts cause your income to fall, leaving you with little to use to repay debt. The economy can't really recover and, collectively, it makes little progress in "deleveraging" - getting its debt below the value of its assets.

This is the bind the North Atlantic economies find themselves in.

Turner says the huge growth in bank-created credit has been particularly pernicious because the banks much prefer to lend for purchases of real estate. They do little lending to big businesses investing in expansion, and much of their lending to small business is secured against the owner's home or other property.

Trouble is, with the banks infinitely willing to lend for housing, but with the supply of land in desirable locations strictly limited, the inevitable result is to bid up house prices.

This explains why - though local economists staunchly reject the thought - when foreign economists look at our stratospheric house prices and record rate of household debt, almost to a person they see an asset-price bubble that must one day burst.

Turner devotes much of his book to proposing radical ways the major economies can extract themselves from their unshakable debt overhang and return to healthy growth, and to proposing ways governments can curb their banks' unending credit creation so as to ensure it's a long time before their excessive lending for real estate brings on the next global financial crisis.

But ever-increasing lending is the main way the banks make their ever-increasing profits. They would put up an enormous fight to stop governments clipping their wings in this way.

Which brings us back to the royal commission. Do we want to be governed by politicians deferring to their generous backers in banking, or do we want to send politicians and bankers alike a message that the interests of customers and the wider economy must come first?

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WHAT DOES THE FUTURE HOLD FOR THE ECONOMY?

Talk to Athenaeum Club, Melbourne, Wednesday, April 20, 2016

Today I want to ask: what does the future hold for the economy? The honest answer to such a question is - no one knows, certainly not me. But I doubt if you find such an answer very satisfying, so I’m happy to give you some opinions. They’re highly likely to be wrong since, as Donald Rumsfeld reminded us, our predictions are likely to be confounded by “unknown unknowns”. By definition, I can’t tell you anything about the unknown unknowns, so I’ll limit myself to known knows and known unknowns.

So, what does the future hold? As you may have gathered from my writings, I’m a congenital optimist - though I fear that, by the time I’m through, you’ll find that hard to believe. Another thing you may find hard to believe is that I’m a reasonably conservative person, in that my default position is to expect that things will continue much as they have been. Recessions will be followed by recoveries; the resources boom will be followed by a return to more normal sources and rates of growth.

But of late I’ve begun to fear that Australia - and the world - are in for a further extended period of weak economic growth. Our longer-term rate of growth in GDP has been about 3.5 per cent a year, but I fear we’ll stay closer to 2.5 per cent.

I’m not a person who believes that, whatever is happening in the rest of the world will be pretty much what happens in Oz. We’re part of the world and are influenced by it, of course, but, equally, the domestic influences on our growth are more significant than many people imagine. Even so, there’s widespread agreement overseas that the outlook for the world economy over the coming decade or so is far from bright.

It’s become almost a ritual for the International Monetary Fund to continuously revise down its forecasts for growth in the world economy. It did the same again last week, but this time the accompanying commentary from the fund’s economists was unusually downbeat. Whereas, in the five years before the global financial crisis, growth in the world economy averaged just over 5 per cent a year, it grew by little more than 3 per cent last year and is expected to grow at the same rate this year.

Many economists see that weak growth persisting for years to come. Why so much pessimism? Any number of reasons. One of particular relevance to us is the relatively high risk that China’s slowdown turns out to be a “hard landing”. But I’ve just been reading the challenging new book by the former chairman of Britain’s Financial Services Authority, Adair Turner, Between Debt and the Devil, which attributes the North Atlantic economies’ anaemic recovery from the Great Recession to the deadening effect of the overhang of debt - private more than public - following the many decades before the crisis in which bank credit creation grew at two or three times the rate that the economy grew.

To that you can add all the complications and inhibitions arising from the ill-fated decision to establish the euro single-currency area.

But if that’s not enough for you we have the American productivity expert Robert Gordon’s prediction that we’re in for a sustained period of weaker growth because, contrary to conventional wisdom, the digital revolution isn’t sufficiently revolutionary to provide the sustained productivity growth we enjoyed from earlier innovations, such as electricity or the motor car. Then there’s the leading American economist and former US Treasury secretary, Larry Summers, with his fear of “secular stagnation” - a sustained period of chronically weak demand, caused by the combination of increased desired saving and reduced desired investment. For good measure there are the reputable economists fearing that the digital revolution is about to displace skilled services-sector jobs at rate far faster than those workers can be reabsorbed in other parts of the economy, leading to mass unemployment.

But that’s enough about death and destruction in the international economy. Let’s turn to factors that suggest weaker growth in the domestic economy. One reason growth is likely to continue below average is that we’re likely to see lower immigration and thus slower population growth, down from a peak of 2 per cent a year in the years of the resources boom, to 1.4 per cent or so more recently. It’s easy to imagine that immigration is “exogenous” as economists say - a lever that can be moved higher or lower by the government - but, as Professor Peter McDonald, our leading demographer, has pointed out, it’s actually largely “endogenous”: it’s set within the system by the economic conditions at the time.

The rise of China as a global powerhouse of manufacturing has long had, and will continue to have, a dampening effect on Australia’s manufacturing. Steel production in Whyalla is the latest example. Competition from Asian manufacturers - and local manufacturers’ very real threats to move their factories overseas - are part of the explanation for a significant structural decline in workers’ bargaining power over recent decades. The present exceptionally low rate of wages growth is a two-edged sword when it comes to economic growth: on one hand, the price of labour being relatively low should encourage growth in employment, particularly in labour-intensive service industries. On the other, low wage growth isn’t doing a lot to bolster household income and consumer spending. Savings ratio.

This next point is less true in Oz than it is in America, but economists are becoming more conscious that rapidly widening income inequality - with incomes near the top growing strongly, while incomes around the middle and lower experience little or no real growth for decades - is working to inhibit the growth in consumer spending, simply because high-income households save rather than spend a much higher proportion of their incomes.

 Another factor underlying my fear that we face a future of below-par growth is the knowledge that our record 24-year upswing since the last serious recession in the early 1990s can’t continue forever. Frankly, we’re long overdue for another recession. I don’t know what factor will precipitate that recession - perhaps a sharper than expected fall in Sydney and Melbourne house and apartment prices - but I do know that a year of “negative growth” sometime in the next five would leave average growth for the period looking pretty sick.

One key cause of weakness in the period since the financial crisis is the lack of growth in investment spending in the non-mining economy. There doesn’t seem much sign of this changing any time soon. Some have sought to explain this in terms of business’s lack of confidence thanks to uninspiring political leadership - first under Labor but now, more surprisingly, under the two brands of Liberal leadership. There may be something in this explanation, but I think it can be pushed too far. A rival explanation is that businesses have simply failed to lower their “hurdle rates” of return for new projects to take account of the much lower cost of capital - interest rates - we now face. But I think it’s easier to explain much of the lack of business investment spending more simply: businesses haven’t been investing because they haven’t been seeing many profitable opportunities.

This bring us at last to the econocrats’ long standing argument that what we need to increase the rate of productivity improvement and achieve stronger growth is a new round of economic reform. The business lobbies have taken up this cry with gusto, nominating cuts in rates of personal income tax and company tax, and reforms to industrial relations as top priority. It now seems clear, however, that not even Malcolm Turnbull is prepared to pursue such reforms. Which probably means many of you share my suspicion that growth will remain inadequate in coming years.

I must caution you, however, against the error of believing your own bulldust. It’s not hard to believe lower taxes and a stronger hand for employers would do wonders for the economy when such “reforms” would leave you yourself better off, even if they ended up doing little to benefit the wider economy.

I believe it’s been convenient for the advocates of these reforms to imagine the economic benefits to be greater than they’re likely to be if Treasury and other modelling is to be believed. After all, when Turnbull decided that the huge compensation bill had rendered the plan of using an increase in the GST to pay for income tax cuts too politically costly, he had no trouble demonstrating that the efficiency cost of increasing indirect tax offset almost all the efficiency benefit from cutting income tax. Although I have little faith in the results of economic modelling, I note the finding by Dr Janine Dixon of Victoria University that a cut in the rate of company tax would, after 15 years, cause GDP to be just 0.15 percentage points higher than otherwise.

I believe that a less self-interested search for the most high-potential areas of economic reform would lead us away from tax and wage-fixing towards reform of health, education and infrastructure, particularly big city transportation. But when I say reform I don’t just mean spending more money.

I can understand that many business people will be feeling quite disillusioned at the way Malcolm has shied away from reform in recent days. There must be a great temptation for business people to revert to their earlier diagnosis of the problem: in contrast to earlier times, we simply lack any politicians with the vision and courage - the leadership - to take the risks needed to solve our economic problems. But I’m here to warn you against such a self-serving analysis: the only problem is caused by our politicians’ lack of moral fibre.

You might find this hard to accept, but in all our privatisation, deregulation, globalisation and other reforms over the past 30 years and more, we’ve had a situation where governments in all the developed countries have reshaped their economies in the direction of strengthening markets and making like easier for business. Partly as a result of this process, we’ve seen a widening of the gap between high and low incomes.

In more recent times we’ve also see the rise of unceasing lobbying of governments, particularly by business interests. I think what we’re seeing now is not so much “reform fatigue” or a sudden loss of courage on the part of our political class, but a standoff between business interests on the one side and ordinary voters on the other. It’s the revolt of the punters, with our politicians caught in the middle. Too many voters have compared how well business people seem to be doing with how well they are doing and decided something is badly wrong. They don’t really know what it is that’s going wrong, but they’ve had enough and they’re not going to take it anymore. You can see this in the puzzling rise of Donald Trump and Bernie Sanders in the US, and you can see the same thing going on here in a less dramatic way.

A classic example of this standoff comes with business’s confident expectation that governments will proceed with plans to cut the rate of company tax at the same time as the parliamentary hearings and now the Panama Papers are reminding voters of how successful so many businesses have been in reducing the tax they pay.

I doubt that economic reform will be an answer to the era of below-average growth we face because the era of governments regularly adjusting the regulation of the economy to please business has also come to an end.

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The economy rests on Christian foundations

I can't think why, but Easter always reminds me of Christianity. Not, of course, that Christianity has anything to do with the grubby, materialist world of economics. Or does it?

Australia is the most unbelieving it has ever been, with the most recent census saying that only 61 per cent people identify themselves as even nominally Christian.

Twenty-two per cent say they have no religion and another 9 per cent didn't bother answering the question. People of non-Christian religions account for 7 per cent of the population.

Separate figures say only about 8 per cent of Australians attend religious services regularly. This is about the same as in Britain and France, but a lot less than in Canada or the United States.

With so few people having had much contact with organised religion, it's not surprising that so many people imagine Christianity to have little bearing on the modern world and economy.


But that is far from the truth, as Australian author Roy Williams argues in his latest book, Post-God Nation? I'm quoting him liberally.

Williams says he's sick of being told that religion's influence on our country has been either minimal or malign.

"It is a fact of history that Australia would not exist in anything like the form it does but for Judaeo-Christianity," he says.

"Deep-seated legacies of our religious heritage still endure, and will continue to do so for the foreseeable future."

Sydney Anglican Peter Jensen says "we are . . . secular, in a Christian sort of way".

This might be a new thought for many younger people, but it's not a rare observation. Former British prime minister Margaret Thatcher said "the Christian religion . . . is a fundamental part of our national heritage. For centuries it has been our very life blood."

Historian Geoffrey Blainey has said that the Christian churches did "more than any other institution, public or private, to civilise Australians".

All market economies rest on a foundation of laws, which enforce private property rights, the honouring of contracts and much else. Williams writes that all Western legal systems are grounded in two core assumptions, both from the Bible: that humans have free will and that morality is God-given.

But the English legal system has many other religiously based features, such as the separation of church and state, the jury system, Magna Carta (negotiated by the Archbishop of Canterbury) and the Bill of Rights (asserting Parliament's supremacy over the king, since both were "bound by the laws of God and nature").

The system of common law, based on rulings by judges rather than parliaments, was established by the devout Henry II, who ensured that most of the early judges were clerics, because of their knowledge of canon law.

Economic growth comes mainly from productivity improvement, productivity improvement comes mainly from invention and innovation, and invention mainly involves applying scientific discoveries.
Guess who were the West's first promoters of science and the inventors of universities?

The scientific method – discovery by empirical reasoning – is, Williams writes, unquestionably a byproduct of Christianity. To know the truth of God's creation, it's not enough to rely on human logic. It's also necessary to observe closely what God has created.

Most people today don't realise how many of the leading politicians, judges and business people who shaped the social and economic system we have inherited had religious beliefs or backgrounds.

Most of the founders of the trade union movement and the Labor Party, for example. John Fairfax, who bought The Sydney Morning Herald in 1841, was a deacon of the Pitt Street Congregational Church, who attended up to four services on a Sunday.

Four of the Herald's first five editors were ministers of religion. In his research, Williams found it remarkable how often famous Australians turned out to have been the son of a clergyman (me, too).

But Christianity has permeated our attitudes and values, not just the institutions of our society.
You can be an atheist or a humanist, but if you have any ethical beliefs or moral values they might be influenced by Buddhist ideas, but they're far more likely to reflect Judaeo-Christian thinking.

And though economists keep forgetting it, it's the ethical behaviour of ordinary business people and consumers that keeps our economy ticking over satisfactorily and makes the CommInsures still the exception rather than the rule.

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How signalling helps make the economy work

Why do so many people go on to university after finishing school? Why do some uni graduates get a job, but then go back to uni for further qualifications?

Why do sensible people dress up for a job interview – or wear a suit and tie if they're in court charged with an offence?

For that matter, why do people engage in conspicuous consumption – buy flash clothes or cars or houses, or send their kids to flash private schools?

Why do so many businesses put so much money and effort into protecting and projecting their brands?

Short answer to all those questions: because they're trying to signal something. What? Usually, their superior quality – although in the case of conspicuous consumption they're signalling their superior social status.

Signalling is something you don't read about in economics 101 textbooks, even though it occurs in all real-world markets.

That's because the simple neo-classical model makes the unrealistic assumption of "perfect knowledge" – buyers and sellers know all they need to know about all goods and services – not just the range of prices on offer but also the characteristics of the goods offered by various sellers, including their quality.

For many years, progress in economic theory has involved relaxing the various assumptions of "perfect competition" to see what we can learn from more realistic assumptions – which, by the very nature of theory and models, will still be a fairly simplified version of reality. (If a model was as complex as the real world, it would tell us nothing about what causes what in that world.)

Since the early 1970s, economic theorists have been studying "imperfect knowledge" (which in econospeak means "far from perfect", not "almost perfect"), recognising that there's much relevant information people don't know and that information is often costly to collect (in money or time).

As well, information is often "asymmetric", in that the people selling something, usually being professionals, know a lot more about it than buyers, usually amateurs, do.

In 2001 three American academic economists – Michael Spence, George Akerlof and Joseph Stiglitz – shared the Nobel prize in economics for their seminal contributions to the relatively new field of "information economics".

Akerlof (who's married to a certain central bank chairwoman) got his gong for a paper he wrote in 1970 called The Market for Lemons, aka used cars. Spence got the gong for a paper he wrote in 1973 about signalling in the job market.

So let's start again: why do people delay their income earning to get educational qualifications?

If you say it's because they want to gain knowledge and expertise in some field to make their labour more valuable – to increase their "human capital" – and help them get a better-paid job, you're not wrong and Spence wouldn't disagree with you.

But he focuses on a different, less obvious motivation. Employers are looking for intelligent workers and are willing to pay more for their services. But when you're hiring workers, it's hard to know how smart they really are. As economists say, it's an "unobservable characteristic".

So how do workers who know they're smart demonstrate that to potential employers? By using their educational qualifications to signal the fact. Employers are impressed by qualifications because they know they're not easy to obtain – they're costly, in a sense.

Of course, people who aren't so smart can gain qualifications if they try hard enough. But genuinely smart people don't have to try as hard, so they can gain higher, better qualifications than the less-smart can, and employers know this.

You're in line for a Nobel prize when you open up a new field and then other, more junior academics come along behind you to elaborate and expand on your discovery, eventually making it look pretty primitive.

By now thousands of academic papers have been written about signalling in various markets. It's become part of the study of "industrial organisation" (industry economics, as we used to say) but is also a branch of game theory.

Theorists have looked at cases of people sending signals implying they possess qualities that they don't and cases where signals are distorted by "noise" (say, you struck it lucky in the exams). And whereas in simple theory markets only ever have one equilibrium point – where everything is in balance – with signalling there are multiple equilibria.

One signalling theorist is Dr Sander Heinsalu, a bright young Estonian now in the Research School of Economics at the Australian National University.

In a recent paper he develops a "repeated noisy signalling model", quoting examples such as a politician giving speeches intended to make him appear competent, a firm buying positive product reviews, and a male deer growing antlers every mating season.

He finds that, if the cost and the benefit of signalling are constant across periods, the degree of signalling effort falls over time. This fits with the way conspicuous consumption falls with age.

In another paper Heinsalu says the conclusion of most signalling papers is that people for whom gaining more of the valued characteristic would be costly don't exert as much signalling effort as those for whom it is less costly.

But in his own paper he demonstrates that in some circumstances it can be the other way round.

With corruption, politicians face minor temptations and big ones. A pollie who is "too clean" may be avoiding minor misdeeds so he can survive long enough to engage in major graft when the opportunity arises, whereas another planning to avoid graft may not worry about small misdemeanours.

The guilty may deny accusations more strenuously than the innocent do because the innocent know they'll have less trouble proving it later.

As Shakespeare said, "the lady doth protest too much, methinks".

But if you want more proof than a quote from the bard, read the paper on his website. Hope your maths is up to it.

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Business - and customers - pay for bad business behaviour

It's remarkable the way the Business Council of Australia constantly lectures us on the "reform" we should be accepting to improve our economic performance (and, purely by chance, their profits), but never seems to lecture its big-business members on their manifest need to "reform" their own standards of behaviour.

Among its most profitable members would have to be the four big banks. But the litany of scandals over their bad treatment of customers never seems to end.

The latest was CommInsure's denial of legitimate life insurance claims, but there's also been ANZ's alleged manipulation of a key commercial interest rate and the Commonwealth Bank's bad financial planning advice that lost money for many customers.

Now the chairman of the Australian Securities and Investments Commission, Greg Medcraft, has joined Australian Prudential Regulation Authority boss Wayne Byers in demanding the finance industry fix its corporate culture.

"Time and again, we have seen firms blaming [behaviour] on a few bad apples driving bad outcomes for consumers, rather than taking responsibility by looking more closely at their organisation and implementing the necessary changes to address the cause of the problem," Medcraft said on Monday.

"At the end of the day, you need to have a culture that your customers can believe in."

The captains of finance have not reacted well to the bureaucrats' admonition. David Gonski complained about the corporate regulator being the "culture police", while someone from the Institute of Company Directors offered the uncomprehending advice that corporate culture could not be imposed by law.

It would be wrong to focus only on the bad behaviour of the banks, of course. There have been other instances from other industries. Take 7-Eleven's underpaying of foreign workers.

Or take the many notorious cases of businesses rorting government subsidy schemes in ceiling insulation, childcare and vocational education and training.

It's possible what we're seeing is merely greater exposure of the bad behaviour of big business thanks to a surge in business investigative journalism, with Fairfax Media's Adele Ferguson at its head.

But I've been in and around businesses since I left school 50 years ago, and I think bad corporate behaviour is definitely worse than it was. As executive remuneration has headed for the stratosphere, so the willingness to exploit customers and staff has grown.

But why? One reason is the rise of a more fundamentalist approach to economics. "Economic rationalism" has prompted much deregulation, privatisation and outsourcing, which has made competition a lot more intense in many industries.

That's not necessarily a bad thing, but as managers have experienced greater pressure to perform – as it's become harder to keep profits high and rising – they've passed the pressure on to staff and customers.

Economic fundamentalism is both a product of the greater materialism of our age and a cause of it, with all its emphasis on monetary values and view of "labour" as just another resource to be exploited along with other raw materials.

What's worse is that economic fundamentalism has had the effect of sanctifying selfishness. When I put my own interests ahead of other people's, I'm not being greedy or self-centred or antisocial; I'm just being "rational".

One effect of the greater pressure to perform is the present "metrics" fad – the obsession with measuring aspects of the firm's performance, then using those measures to improve performance, such as by setting targets based on "key performance indicators".

What the KPI obsession is saying is: just get results; how you get them is of lesser interest. I'd lay money that the reason people at CommInsure were knocking back legitimate claims was they were being encouraged to do so by KPIs or other "performance incentives". (That's why it's dishonest for people at the top to blame "a few bad apples".)

Most people's sense of what is acceptable, ethical behaviour is determined by what they believe their peers are doing. If they do it, it's ethical for me to do it; if they don't do it, maybe I should feel guilty about it.

The trouble is, studies show that adults, like children, often harbour exaggerated impressions of how many others are doing it.

Social conformity (aka "culture") is such a powerful influence that it's always been hard for people to follow their own "moral compass". With the decline of religious adherence, it's harder even to have one.

The Business Council and its members ought to be a lot more worried about the decline in their standards of behaviour than they seem to be.

One fundamental the economic fundamentalists keep forgetting is that market economies run best on widespread trust: mutual trust between management and staff, and between businesses and their customers.

Allow declining standards of behaviour to erode trust and the economy suffers. Customers become harder to persuade, argue more with counter staff, are surlier with call-centre staff and more inclined to take their business elsewhere. They resist "upselling".

With less trust you have to waste a lot of money on increased security in its many forms. And governments react by multiplying laws and legal requirements.

When so many companies demonstrate their contempt for other taxpayers by the way they manipulate the tax they pay – their ethic is that if it's (barely) legal, it's ethical – it becomes much harder for governments to get voter support for cutting the rates of those taxes.

Who knew?

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Let's 'reform' lack of satisfaction at work

Has it ever occurred to you that, in all our economic striving, most of us – almost all our business people, economists and politicians, but also many normal people – are missing the point?

It occurred to me years ago, and I've thought about it often, but reading a little book by one of my gurus, Barry Schwartz, a professor of psychology at Swarthmore​ College in the US, has revved me up.

In my job I have to focus mainly on whatever issues everybody else is getting excited about. I've written a lot lately about the budget deficit, mainly because I see the Coalition swinging from exaggerating the size and urgency of the problem while in opposition, to virtually ignoring it now it's in government.

They had one big ill-considered and ill-fated attempt to fix the problem in their first budget, but now they don't even want to think about it.

Of course, getting the budget back to surplus is really just a housekeeping measure. It doesn't advance our cause in any positive sense, it just stops problems building up for the future.

No, the more positive efforts to improve our lot have focused on the need for "reform". The economists have noticed that the rate of productivity improvement has slowed and, since improving our productivity is the main way we keep our material standard of living rising, they're casting around for something we could do to improve matters.

When economic-types look for things to improve, their first thought is to "reform" taxation in a way that does more to encourage people to "work, save and invest".

Sorry, but all this is missing the point. Schwartz's little book is called Why We Work, and he asks us to reconsider the most basic question in economic life: why do we work?

To most people that's a stupid question. We work to make money, which we then use to keep body and soul together and buy the other things we need to give us a happy or satisfying life.

Next question: do we enjoy our work? Answer: sometimes yes, sometimes no. Some people do most of the time; most people don't.

The basic economic model assumes that people don't enjoy work; they do it only for the money. And, except perhaps to the individual, whether they do or they don't isn't of great consequence.

Most employers organise work in ways designed to maximise their employees' productivity – their productiveness. If their workers happen to enjoy their jobs, that's their good luck. If they don't, that's not something a boss needs to worry about.

Schwartz's argument is that we've allowed money – and the economists' way of thinking about work, which goes back to Adam Smith in 1776 – to get us muddled between means and ends.

Money is merely a means, not an end in itself. The end money is meant to be a means to is life satisfaction. But if satisfaction is the object of the exercise, why on earth would we organise the economy on the basis that whether or not people get satisfaction from their jobs doesn't matter?

Why fixate on earning money to buy satisfaction when we could be doing much more to gain satisfaction while we earn?

When you remember how much of our lives we spend working, think what a fabulous "reform" it would be if more of us got more satisfaction from our work.

If we got more satisfaction from our work, economists and politicians wouldn't have to worry quite so much about ensuring our money income kept growing strongly so we could keep attempting to buy more satisfaction. (Tip: the satisfaction you get from enjoying your job and doing it well is more powerful than the satisfaction you get from buying more stuff.)

And if bosses got more satisfaction from their own jobs, maybe they wouldn't be so obsessed by achieving ever faster-growing profits so as to justify ever-bigger bonuses.

You'd think that, with all the status and executive assistants to wait on them and people to boss about, bosses would be rolling in job satisfaction.

But when I see how obsessed they are with pay rises and bonuses, it makes me wonder if they actually hate their jobs more than most of their employees do.

Of all the company's workers, they're the ones showing most sign of only doing it for the money.

By now, I know, many managers will be thinking, if I made making sure my workers had a good time at work an objective, their productivity would suffer.

That's certainly why many jobs have been designed in the soul-destroying way they have been, and the mentality that informs the way many managers manage. Treat 'em mean to keep 'em keen.

But consider the reverse possibility. There's growing evidence that workers who gain satisfaction from their jobs try harder and think more about how they could do their jobs better. Is that so hard to believe?

I'm convinced greater effort to make jobs more satisfying could leave most of us better off with, at worst, no loss of efficiency.

How do employers go about making jobs more satisfying? How can someone with a deadly job make it more emotionally rewarding?

These questions have been well studied by industrial psychologists and Schwartz has lots of useful things to say. But I'll leave that for another day.

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