Rates of tax tell us nothing about economic success

When Leigh Sales of 7.30 asked Scott Morrison what evidence he had to support his claim that the economy would be weaker under Labor because it would impose higher taxes, he replied “I think it’s just fundamental economics 101”. Sorry, don’t think so.

The belief that an increase in taxes must, of necessity, discourage work effort, saving and investing is regarded as a self-evident truth by the well-paid. Similarly with the converse: a decrease in taxes must, of necessity, encourage work effort, saving and investing.

But since no one particularly enjoys paying taxes – and some people really hate it – they would think that, wouldn’t they.

It’s a simple, all-purpose, no-need-to-explain argument against me being asked to pay more tax and in favour of me paying less. What’s not to like?

Just that it misrepresents what economics teaches.

It’s true that some economists emphasise the “deadweight loss” involved in imposing taxes. In principle, a tax distorts an individual’s choices, causing them to do things they otherwise wouldn’t.

This distortion of choices is said to be “economically inefficient”, in that it fails to produce the allocation of economic resources – land, labour and capital – that maximises the “utility” (satisfaction) the community derives.

The degree of allocative inefficiency differs for different taxes, with some said to involve greater deadweight loss than others.

By this logic, one of the worst taxes is conveyancing duty (which discourages people from moving house) and the best is a poll tax (everyone pays the same dollar amount each year which, being impossible to avoid, doesn’t change behaviour).

One thing often not mentioned in economics 101 is that tax on the unimproved value of land (such as council rates) and inheritance taxes score well.

But these calculations are based on theory and assumptions. The first of their limitations is that they ignore the benefits that flow when the taxes are spent. When they’re spent on government provision of “public goods” (goods or services that would be undersupplied if their provision was left to the private sector) they increase allocative efficiency.

You shouldn’t have to go beyond first year economics to learn that changes in the price of something have two effects: an “income effect” and a “substitution effect”.

People who believe an increase in income tax (which is a price) discourages work, and a cut in income tax encourages it, are focusing on the substitution effect and ignoring the income effect.

It’s true that a higher rate of income tax should discourage work by reducing the monetary benefit you get from it, relative to the benefit you get from not working. That is, from enjoying more “leisure”. It thus should encourage you to substitute leisure for work – that is, work less.

 By contrast, lowering the tax on work should encourage people to substitute work for leisure – work more.

Trouble is, the income effect works the opposite way. Increasing income tax reduces your after-tax income. If you don’t want your income to fall, you have to do more work, not less. Similarly, cutting income tax increases your after-tax income, encouraging you to work less.

The fact that the income effect and the substitution effect pull in opposite directions means economic theory can’t tell us whether or not tax increases discourage work. To answer that question you have seek out empirical evidence from the real world.

In doing so you’ll make up for theory’s implicit assumption that money is the only factor motivating people to work. If that’s what you think, you’ve got a lot to learn about human nature.

The empirical evidence says changes in the rate of income tax for “primary earners” – the main person a family relies on for income, who’s usually working full-time – aren’t great.

It’s only “secondary earners” - often women working part-time – whose hours of work are much influenced by increases or decreases in income tax.

This is pretty obvious when you think about it. The number of hours worked by full-time employees is set by their boss, whereas part-timers have some degree of control over the hours they work. Certainly, they decide whether they want to move from part-time to full-time.

Let me tell you: politicians’ motive for tax cuts is almost always more political than economic. If Morrison was really on about encouraging more work, his tax cuts would be aimed at working mothers, not the highly paid full-timers they are aimed at.

But there’s another empirical test of his confident assertion that high rates of tax discourage economic growth and low rates encourage it.

If that were true it should also be true that countries with high tax rates have low living standards, whereas countries with low tax rates have high living standards.

Try as they might, however, economists have never been able to find an inverse correlation between the level of taxes and a country’s rate of growth.

For a start, the poor countries have much lower rates of total taxation than the rich ones. Rich countries have high tax rates so they can enjoy the many benefits of being rich: the welfare state, good public infrastructure, good health care, good education and much else.

The Organisation for Economic Co-operation and Development regularly publishes figures for their 35 member-countries’ rates of total taxation (federal and state) as a percentage of gross domestic product.

Its latest figures, for 2017, show its rich-country members ranging from 46 per cent for France and Denmark to 23 per cent for Ireland. Sweden is on 44 per cent, Germany on 37.5 per cent.

The average for the whole OECD is 34 per cent, with us on about 28 per cent and the United States on 27 per cent (but with a much bigger budget deficit).

If they don’t tell you all that in economics 101, ask for your money back.

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Unhealthy, unhappy lives aren't fair exchange for higher incomes

In his Australia Day address, social researcher Hugh Mackay said that "the Australia I love today – this sleep-deprived, overweight, overmedicated, anxious, smartphone-addicted society – is a very different place from the Australia I used to love".

He identified three big changes: the gender revolution, increasing disparity in wealth, and social fragmentation.

He approves of the first, but laments that we’re "learning to live with a chasm of income inequality" and that social fragmentation means Australians are become "more individualistic, more materialistic, more competitive".

The third big change, he said, posed the biggest challenge – preserving social cohesion.

Earlier this month, the playwright David Williamson lamented that, since the advent of neoliberalism, "the world has become a nastier, more competitive, more ruthless place".

"There’s no perfect society, but I don’t think it needs to be as brutal as it is now."

As we move on from our officially required season of national navel-gazing – "yes, but what does it mean to be Australian?" – these concerns are worth pondering.

Economists object to being blamed for every ill that’s beset our country in the past 40 years. Where’s the proof that this economic policy or that has caused a worsening in mental health, they demand to be told.

It’s true that few developments in society have just a single cause. It’s also true there’s little hard evidence that the A of “microeconomic reform” caused the B of more suicides, for instance.

But there’s a lot of circumstantial evidence. After all, the specific objective of micro reform was to increase economic efficiency by making our markets more intensely competitive. The economists’ basic model views us as individuals, motivated by self-interest, and the goal of faster growth in the economy is aimed at raising our material standard of living.

And if some of our problems stem from changing technology – pursuing friendship via screens, for instance – can economists disclaim all responsibility when one of their stated aims is to encourage technological advance in the name of higher productivity?

Economists assume that economic growth will leave us all better off. Most take little interest in how evenly or unevenly the additional income is shared between households.

The Productivity Commission’s recent and frequently quoted report, finding that the distribution of income hasn’t become more unequal, refers to recent years, not the past 40. And the report averages away the uncomfortable truth that the incomes of chief executives and other members of the top 1 per cent have increased many times faster than for the rest of us.

Sometimes what’s happened since the mid-1980s reminds me of the old advertisement: are you smoking more, but enjoying it less?

Our real incomes have grown considerably over the years – even for people at the bottom – and economic reform can take a fair bit of the credit. It can take most of the credit for the remarkable truth that, unlike all the other rich countries, we’ve gone for 27 years without our least fortunate experiencing the great economic and social pain of recession and mass job loss.

But though most of us are earning and spending more than ever, there’s evidence we’re enjoying it less. Our higher material living standards have come at the cost of increasing social and health problems.

Is that so hard to believe when the key driver of our higher incomes is more intense competition between us?

Economists generally take little interest in social and health problems, regarding them as outside their field. But though problems such as loneliness, stress, anxiety, depression and obesity were with us long before the arrival of neoliberalism, they seem to have got worse since the mid-1980s.

Last year, Dr Michelle Lim, a clinical psychologist at Swinburne University, and her colleagues produced the Australian Loneliness Report, which found that more than one in four Australians feels lonely three or more days a week.

It’s most common among those who are single, separated or divorced. Compared to other Australians, the lonely report higher social anxiety and depression, poorer psychological health and quality of life, and fewer meaningful relationships and social interactions.

Turning to increased stress, it’s an inevitable consequence of living in bigger, faster cities and working in more competitive workplaces. Our bodies respond to stressful events with a surge of adrenaline, which increases our reaction speed and helps ensure our survival.

Trouble is, our bodies aren’t designed to cope with repeated stressful events and adrenaline rushes. Our readiness for fight or flight doesn’t decline, and we remain permanently aroused, which damages our health, making us more at risk of a heart attack or getting sick in other ways.

If more "jobs and growth" and the higher incomes they bring are intended to make us happier, maybe governments would do better by us if they switched their objective from increasing happiness to reducing unhappiness.

For instance, if the banks are now being criticised on all sides for putting profits before people, why are governments – facing an epidemic of obesity and diabetes - so respectful of the food and beverage industry’s right to continue fatten its profits by fattening us and our kids?

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Give economists a PC and they start making more sense

Economies turn down and back up, but one of the biggest, long-running economic stories of our time is the way the digital revolution is disrupting one industry after another. So let me tell you how it’s changing the academic study of economics.

You probably imagine the economic research carried out in universities is terribly theoretical and impractical. It used to be, but not anymore.

You can trace the progress of academic economics by looking at who’s been awarded the Nobel memorial prize in economic sciences from about 2001 onwards, and what they did to deserve it. Of course, there’s usually a long delay between when you make your seminal contribution and when you get your gong.

Until the turn of the century, the prize usually went to people elaborating on orthodox neo-classical theory, particularly by shifting to mathematical reasoning.

It may surprise you that the man who wrote the most popular introductory textbook of the post-war years, Paul Samuelson, was also the individual who did most to turn economic reasoning from words and diagrams to equations.

The development of the first mathematical “econometric” models of the macro economy was another important advance.

It was about 30 years ago that the frontier of economic research took a more realistic turn by shifting to the study of “imperfect competition”, where the idealised assumptions of the simple neo-classical model of markets were critically examined.

In 2001, for instance, the prize was shared by three American economists – George Akerlof, Michael Spence and Joseph Stiglitz – for their demonstration that, rather than being perfectly shared by everyone in a market, information is usually asymmetric – with sellers knowing more than buyers – and, rather than being costless, is expensive to acquire.

Another example: Paul Krugman got his gong in 2008 for demonstrating that there’s more to international trade than just each country pursuing its “comparative advantage”, as mainstream theory assumes.

It was about 40 years ago that the psychologist Daniel Kahneman (gonged in 2002) and the rebellious economist Richard Thaler (2017) began formulating behavioural economics, an advance on the neo-classical assumption that all decision-making is rational. Robert Shiller got his in 2013 for his study of non-rational behaviour in financial markets.

But recent studies of articles in the world’s top economic journals (mainly American) have shown that, since about the turn of the century, theoretical papers have largely been replaced by empirical studies of particular relationships in particular markets (competition between male and female drivers in Japanese speedboat races, for instance).

This shift from deducing conclusions from assumption-based theory to examining the relationships between real-world variables, to see how the theory measures up, is a big improvement. But why has it happened?

I give most credit to the information revolution. Computerisation has hugely increased that number of “data sets” of business information waiting to be discovered and subjected to statistical tests by academic economists checking hypotheses or just looking for interesting relationships.

All of which is easily done using programs on your personal computer, rather than waiting your turn for time on the main-frame. And it fits with economists’ modern addiction to using stats and maths for “academic rigour”.

As part of their greater interest in empirical evidence rather than what theory tells us should be the case, economists have started doing something they long believed was impossible: economic experiments – including searching out “natural experiments”, such as the famous study of two nearby cities in different US states, where one state raised the minimum wage and the other didn’t.

By the standards of real mathematicians, economists’ maths isn’t that fancy, but it’s more advanced than used by others in the social sciences. Economists have made more progress in moving from finding correlations to establishing causal relationships than the psychologists have – which probably means they get more research funding.

It also means there’s less resistance from international journals to publishing research about that uninteresting and unimportant place called Australia. I’m told doctoral students come to Oz because they’ve heard we have good data sets.

The risk, however, is that research projects are chosen because good data are available, rather than because the questions being answered are important to our understanding of how the economy works and to finding better solutions to our economic problems.

We don’t want academic economists losing interest in their theory, we want them using their empirical evidence to improve it. Making it more realistic and thus more reliable in its predictions about what happens if you do X, or whether policy A or policy B is more likely to improve things.

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You'd be surprised what's propping up our living standard

It’s the last lazy long weekend before the year really gets started, making it a good time to ponder a question that’s trickier than it seems: where has our wealth come from?

The question comes from a reader.

“Australia has been without a recession for 25 or more years, the economy seems booming to me, just by looking around: employment, housing prices, explosive building in major capitals, etc. Where is the wealth coming from? Mining? Other exports? Because the resources have to come from somewhere,” he writes.

That’s the first thing he’s got right: it’s not money that matters (the central bank can create as much of that stuff as it sees fit) it’s what money is used to buy: access to “real resources” – which economists summarise as land (including minerals and other raw materials), labour and (physical) capital.

But here’s the first surprise: of those three, when you trace it right back, probably the most important resource is labour – all the work we do.

The first complication, however, is the word “wealth”, which can mean different things. It’s best used to refer to the value of the community’s assets: its housing, other land and works of art, the equipment, structures and intellectual property owned by businesses (part of which is represented by capitalised value of shares on the stock exchange), plus publicly owned infrastructure (railways, roads, bridges and so forth) and structures.

To get net wealth you subtract any debts or other liabilities acquired in the process of amassing the wealth. In the case of a national economy, the debts we owe each other cancel out, leaving what we owe to foreigners. (According to our national balance sheet, as calculated by the Australian Bureau of Statistics, at June last year our assets totalled $15.4 trillion, less net liabilities to the rest of the world of $3.5 trillion.)

But often the word wealth is used to refer to our annual income, the total value of goods and services produced in the market during a year, as measured by gross domestic product (which in the year to June was $1.8 trillion).

The people in an economy generate income by applying their labour to land and physical capital, to produce myriad goods and services. Most of these they sell to each other, but some of which they sell to foreigners. Why? So they can buy other countries’ exports of goods and services.

Only about 20 per cent of our income comes from selling stuff to foreigners and only 20 per cent or so of the stuff we buy comes from foreigners. This exchange leaves us better off when we sell the stuff we’re better at producing than they are, and buy the stuff they’re better at than we are.

Much of what we sell to foreigners is minerals and energy we pull from the ground and food and fibres we grow in the ground. So it’s true that a fair bit of our wealth is explained by what economists call our “natural endowment”, though it’s also true that we’re much more skilled at doing the mining and farming than most other countries are.

Speaking of skills, the more skilled our workers are – the better educated and trained – the greater our income and wealth. Economists call this “human capital” – and it’s worth big bucks to us.

How do the people in an economy add a bit more to their wealth each year? Mainly by saving some of their income rather than consuming it all. We save not just through bank accounts, but by slowly paying off our mortgages and putting 9.5 per cent of our wages into superannuation.

It’s the role of the financial sector to lend our savings to people wanting to invest in the assets we count as wealth: homes, business structures and equipment and public infrastructure. So if most of our annual income comes from wages, most of our savings come from wage income and our savings finance much of the investment in additional assets.

But because our natural endowment and human capital give us more investment opportunities that can be financed from our savings, we long have called on the savings of foreigners to allow us to invest more in new productive assets each year than we could without their participation.

Some of the foreigners’ savings come as “equity investment” – their ownership of Australian businesses and a bit of our real estate – but much of it is just borrowed. These days, however, our companies’ (and super funds’) ownership of businesses or shares in businesses in other countries is worth roughly as much as foreigners’ equity investments in Oz, meaning all our net liability to the rest of the world is debt.

Naturally, the foreigners have to be rewarded for the savings they’ve sunk into our economy. We pay them about $60 billion a year in interest and dividends, on top of the interest and dividends they pay us.

The main thing we get in return for this foreign investment in our economy is more jobs (and thus wage income) than we’d otherwise have, plus the taxes the foreigners pay.

People worry we can’t go on forever getting wealthy by digging up our minerals and flogging them off to foreigners. It’s true we may one day run out of stuff to sell, but our reserves – proved and yet to be proved – are so huge that day is maybe a century away (and the world will have stopped buying our coal long before we run out).

A bigger worry is the damage we’re doing to our natural environment in the meantime, which should be counted as reducing our wealth, but isn’t.

But mining activity accounts for a smaller part of our high standard of living than most people imagine – only about 8 per cent of our annual income.

Most of our prosperity – our wealth, if you like – derives from the skill, enterprise and technology-enhanced hard work of our people.

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More jobs for older workers than ever before

“Too old, too senior, too experienced, too expensive – heard ’em all. Ours is a society which does not value age and lived experience. Over 50? It’s the scrap heap for you.”

I can’t remember where I saw that quote, but I bet you’ve heard those sentiments many times. The media are always bringing us stories about people who, having lost their job in late middle age, find it very hard – even impossible - to get another one.

It’s understandable that people experiencing such treatment get pretty bitter about it. And it’s not surprising the media and the politicians take their complaints so seriously. The federal government has appointed successive age discrimination commissioners, and instigated various schemes offering subsidies to employers willing to hire older workers.

All of which is just as likely to increase prejudice as reduce it. The more public figures bang on about the prevalence of age discrimination, the more they risk sending a message to employers that if everyone else is ridding themselves of older workers, why aren’t they?

And if older workers weren’t sub-standard, why would the government find it necessary to subsidise their cost?

It would be silly to deny that some employers are prejudiced against older workers – just as some are prejudiced against young workers (an injustice the media are far less eager to tell us about).

But it’s just as silly to leap from the truth that some proportion of older workers has trouble finding re-employment to the outlandish claim that every worker over 50 is headed for the scrap heap.

I don’t know the true extent of discrimination against older workers, but I’m pretty sure we’ve been given an exaggerated impression of it, with many older workers caused to worry unnecessarily.

If there was any truth to the notion that everyone over 50 is headed for the scrap heap, we should be seeing a sharp decline in the rate at which people over 50 are participating in the labour force.

But we’re not. Indeed, the reverse is happening. The statistical truth is that the participation rates of older age groups are higher than they’ve ever been – a point Reserve Bank governor Dr Philip Lowe made in a little-noticed speech last year.

The ageing of the population – and, more particularly, the retirement of the baby-boomer bulge – means the proportion of older people working should have declined. Remarkably, it’s increased.

There was a time when early retirement was all the rage. As soon as you could retire, you did. And a lot of workers were retired involuntarily.

But those days are long gone. The age at which men and women are retiring keeps rising. In the 1980s and ‘90s, less than one worker in 10 was over 55. Today it’s almost one in five.

Since 2000, the “participation rate” for men aged 55 to 64 has risen from 60 per cent to about 67 per cent. The rate for women has been rising since the early ‘80s – from 20 per cent to 60 per cent.

For men aged 65 and over, the participation rate has risen since 2000 from 10 per cent to almost 20 per cent. (Read that again if it didn’t sink in.) For women in the same age group, participation has gone from a per cent or two to about 10 per cent.

The big news is that older people are staying longer in the workforce than ever before, but the story we’re being fed is that employers are discriminating against older workers wherever you look.

How has this remarkably under-reported truth come about? Partly for negative reasons. The higher cost of homes has caused people to take on mortgages later in life, meaning some people have higher levels of mortgage debt as they approach retirement and don’t want to stop working until it’s paid off.

The knowledge that we’re living longer – combined with the super industry’s unceasing efforts to convince us we haven’t saved enough – has prompted some people to delay their retirement.

Governments have lifted the age pension age to 65 for women, and are now phasing the age for both sexes up to 67. They’ve also raised the age at which you may access your superannuation savings.

But then there are the positive reasons. The present generation of older workers is much healthier than earlier generations.

And we’re living longer. Which makes it hardly surprising we’re working longer. Of course, another factor that’s helping is greater acceptance by employers of “flexible work practices” – including allowing workers to shift from full-time to part-time. That is, there’s been a rise in semi-retirement.

Then there’s the fact that more and more people work in the services sector, in jobs that tend to be less physically demanding.

But perhaps the biggest factor is the delayed effect of the trend for most mothers to return to the workforce after childrearing. Now more of them are still working decades later.

Oldies are always expounding on the supposed shortcomings of the younger generation. But there’s one respect in which oldies set youngsters a bad example: they’re champions at feeling sorry for themselves – even when the facts don’t back them up.

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Positions vacant: economists (women preferred)

Never in the field of economic conflict was so much analytical effort devoted to so few... as in Reserve Bank governor Philip Lowe’s one-man crusade to save the economics profession.

This latter-day Lord Kitchener wants more young Australians studying economics at high school and university, then enlisting as economists in the holy war against economic inefficiency.

His message: Your country needs you. Opportunity cost is being flouted on every hand, yet we have just 3000 professional economists fighting the tide of economic illiteracy.

Young women, in particular, should look at themselves in the mirror and ask the hard question: what good reason have I not to become an economist? Why should I squander my life on any lesser calling than the orderly regulation of mammon?

And let’s have no weak excuses that you know nothing about being an economist – what kind of people they are, what they do, where they work, how hard it is to find a job. Not forgetting a question that could cross the mind of someone with the right stuff to be a dismal scientist: how well does it pay?

Field marshal Lowe has had his people working night and day scouring data bases far and wide to answer all such questions. Rochelle Guttmann (ably assisted by James Bishop, a mere male) does so in the subtly titled paper, Does It Pay to Study Economics? taken from my rapidly dwindling pile of unused reports, seasonally adjusted from 2018.

According to the 2016 census, fewer than 3000 people work as economists, even though there are 73,000 people with post-school qualifications in economics. What’s worse, only about two-thirds of people working as economists actually hold a qualification in economics.

But this is misleading. It’s not nearly that bad. For a start, the 3000 excludes about 2000 academic economists, who are classed as university lecturers. More significantly, to be classed as holding a qualification in economics, you must have that word in the name of your degree.

This is silly. In the day, the title of your degree said as much about which uni you went to as about the subject you majored in. Economics majors at Melbourne or UNSW walked away with a BCom, whereas accounting majors at Sydney got a BEc.

Little wonder people holding an “economics” degree are more likely to work as an accountant than as an economist. And you can forget the notion that a third of working economists are unqualified academically.

Returning to the recruiting drive, the authors make two observations about the huge disparity between those having done an economics degree and those getting a job as an economist.

First, it probably shows it’s hard for someone with an economics degree to actually get a job as an economist (ie, S > D). But it probably also shows that an economics degree is generalist in nature and provides a breadth of skills that allows you to work in a broader range of jobs compared to other degrees.

Get this: “80 per cent of economics graduates work in high-skilled white-collar occupations”.

More than a third of economists (narrowly defined) work in public administration, well over a quarter in private-sector professional services and about 15 per cent in financial services. But people with economics degrees work in a broader range of occupations and industries than people with degrees in most other fields.

Whether you’re talking economists or people with economics degrees, more than 60 per cent of them are men. Lowe believes – as does his teenage daughter, apparently – this disparity must be corrected. (The daughters of powerful men are far more influential than is commonly understood.)

Now to the question no economist would regard as sordid. Figures from the Australian Tax Office say economists have hourly earnings that put them in the top 3 per cent of earnings by occupation.

Graduates with economics degrees typically have higher full-time earnings than other graduates. They’re comparable with STEM (science, technology, engineering and maths) degrees, and higher than for business and other social science degrees.

Guttmann and her male sidekick say the labour market tends to pay the highest wages to people with the skills, abilities and knowledge that are in shortest supply [relative to employers’ demand].

So which skills make economists well-paid? Apart from their knowledge of economics, economists have skill in maths that’s way above the average for other skilled occupations, and above-average analytical skill, for reasoning and problem solving (which is what brings the big bucks).

Looking for the catch? You’ve found it. If you’re weak on maths, you might be happier as a journo.

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Squaring the world's waste circle ain't that easy

If you think we’ve been standing still – even going backwards – on reconciling the economy with the natural environment, that’s not wholly true. While our refusal to get real on climate change drags on, we’ve started our journey to the nirvana of a “circular economy”.

Never heard the term? Heard of it, but not sure what it means? Really? It’s the great intellectual fashion statement of 2018.

And, since it has more merit than I suspect many of its advocates realise, we must hope it doesn’t fall out of fashion long before it’s done any good.

Governments around the world are doing things about it. Mainly, saying what a nice idea it is, writing reports and designing “road maps”.

The Organisation for Economic Co-operation and Development has taken up the cause in its RE-CIRCLE project. And no lesser bunch of worthies than the World Economic Forum (the Davos brigade) is enthusiastic.

Here in Oz, last year saw a favourable report from a Senate committee. The Victorian, South Australian and NSW governments have recently signalled their support, with the latter issuing a “circular economy policy statement” in October.

Some of my information comes from an explainer by the Victorian Parliamentary Library, written as recently as October. Circularity is hot, hot, hot.

The explainer explains that, as presently organised, market economies are linear. You take natural resources, process them into many and varied goods – from food to fancy electronic gizmos – which you and I consume before eventually disposing of them. Then we take more natural resources and start the process again.

In contrast, the goal of a circular economy is to keep natural resources in use for as long as possible, extract the maximum value from them while in use, then recover and regenerate products and materials at the end of their serviceable life.

Get it? The ultimate goal is to “decouple” economic growth from the consumption of natural resources.

The OECD points out that, over the last century, global use of raw materials grew at almost twice the rate that the population grew.

To minimise the – to some extent irreparable - damage that economic activity does to the natural environment, we need to ensure it involves less net use of natural resources.

The idea that natural resources should be recycled is one Australians – and people throughout the rich world – happily embraced ages ago. Almost all of us divide our garbage between recycling and the rest before we put it out.

But the concept of a truly circular economy requires us to go a lot further than that. We need to repair the durable products we use rather than throwing them out and buying another.

But that means changing the design of those products from disposable to repairable – and upgradeable. It means making much greater use of recycled materials in the manufacture of “new” products, as well as doing something sensible about all that packaging.

In my limited reading of all the circular economy bumf, I haven’t seen it explained that the basic problem arises from the first law of thermodynamics, which says that matter can be transformed from one form to another, but can be neither created nor destroyed.

In other words, something has to happen to all the natural resources we use to produce and consume. They don’t cease to exist, they just change form. They turn into multiple forms of waste, which we dispose of down the sewer and in landfill.

One important form of waste created by the economic process – particularly if it involves burning fossil fuels – is the emission of greenhouse gases. For more than 200 years we couldn’t see this happening, so we didn’t think it was a problem.

Now we know the gases hang around in the upper atmosphere, trap the earth’s heat from the sun like the roof of a greenhouse, and raise the earth’s temperature.

When you consider how much trouble we’re having agreeing on a solution to that small part of our waste problem, don’t kid yourself dealing with the rest of the waste will be a simple matter of everyone seeing the light and doing the right thing with a bit of encouragement from the government.

What worries me about the circular-economy push is not the objective – it’s dead right - it’s the naivety of those doing the pushing. They want to radically transform the economy, but haven’t seen the need to consult any economists about how you might go about it.

All the governments know better, of course, but they seem to have decided that, as long as it stays on the level of appealing to people to Do The Right Thing, it could keep the greenies diverted without doing much harm.

No one seems to have asked the obvious question: just why is the economy presently linear not circular? Answer: because all the powerful economic incentives push us in that direction.

Because the resources the environmentally aware care about – natural resources – are relatively cheap, whereas the resource they don’t think about, but everyone else does, labour, is relatively dear.

Why do you think the nation’s local councils have been taking most of our recycling and shipping it off to China? Because processing that stuff in a rich country like ours is uneconomic.

Why have the Chinese been taking it? Because their wages were low enough to make processing profitable (that is, economic).

Why have the Chinese now stopped taking it? Because their economic success has raised wage rates and made it no longer profitable.

So, how on earth could we make our economy circular?

Ask economists to figure out a plausible way of reversing our incentive structure. That's the kind of job they do when asked.

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We are too busy for our own good

Years ago, I took a sabbatical and we lived a few months in California and a few in the backblocks of New Zealand’s South Island. I’d just got used to how impatient shop assistants were if you couldn’t immediately spit out exactly what you wanted to buy, when we moved back Down Under and I was expected to wait politely while the person ahead of me in the queue passed the time of day with the lady behind the counter.

We’re not yet as bad as America, but there’s no doubt life in big cities such as Melbourne and Sydney is a lot faster and more furious than it used to be – and still is in quieter parts of the state.

We have to move faster in the big cities, of course, because we have so much to do, so much to fit in. Or so we imagine. We blow our horns at other motorists who slow us down as we hurry to our next commitment. (When did we become a nation of horn-blowers? Yuck.)

And that brings me to your summer break. Did you – or are you still – enjoy the chance to take it easy, get up late, stay in bed reading, potter about, read the paper, avoid doing much?

Or did you rush about, keeping busy, trying to fit in as much fun as possible, keep the kids entertained?

In other words, did you really get a break, or were you as busy as ever, just doing a different list of things?

When I was young, annual holidays were almost synonymous with being bored. There was never anything much to do apart from go for a walk. My big sisters sat on their beds reading – they had eiderdowns, I remember – so I hung around them doing the same. They fed me issues of a little children’s magazine called Sunny Corner, continuing the adventures of Milly-Molly-Mandy. (I’ve had a weakness for chick-lit ever since.)

I became a bookworm at an early age partly because everyone else at home was reading books but mainly because there was nothing else to do. And, in my very religious family, reading was allowed on Sunday between going to meetings. Even comics.

And that brings me to weekends. Do you see them as a chance to do a lot of pleasant things you can’t do during the week? Do you start with a list of great things to do, but end with a lot of the pleasures you’d hoped to achieve not crossed off?

Sometimes I think being so busy at the weekend is a form of greed. Of having eyes bigger than your stomach. I doubt it’s much of a recipe for the good life.

But have you noticed how, when you try to tell a friend how exceptionally busy you’ve been, they invariably counter that they’ve been busy, too? No one wants to admit to being unbusy.

Even the retired claim to be terribly busy. Everything’s relative, I guess.

In his latest book, Australia Reimagined, social guru Hugh Mackay reflects on the “culture of busyness”, about which he has many reservations. “No matter how we try to dress it up, disguising it as a virtue or a badge to be worn with pride, relentless busyness is a health hazard – yet another contributor to our epidemic of stress and anxiety,” he says.

“For too many of us, holidays have been compressed into ‘short breaks’, the pleasure of walking or running in the open air has been swapped for a quick burst at the gym, the therapeutic joy of aimlessness has been overwhelmed by the need for everything to have both a purpose and an outcome.”

A sane person would regard excessive or sustained busyness as a warning signal, he says. “No time to read? No time to walk? No time to play? No time to nurture a neglected relationship over a cup of coffee? Surely there’s something awry in a life like that.”

Sometimes we keep ourselves busy because we feel we need to be – and be seen to be – busy, especially at work. Many bosses keep themselves busy making the easy decisions so they can put off the really hard ones.

Sometimes we’re busy because we’re not as efficient as we should be. Sometimes we’re busy at work because it’s better than being at home with our not-so-loved ones. Sometimes we keep busy because it leaves us no time to think about the meaning of our lives.

Mackay says our addiction to busyness has three adverse consequences. First, we’re becoming a sleep-deprived society.

Second, we’re becoming afraid of stillness, solitude and inactivity.

Third, busyness can both distract us and insulate us from the needs of the people around us. Busyness “decompassions” us, he concludes.

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How canny treasurers keep the tax we pay out of sight

We can be sure that tax and tax “reform” will be a big topic (yet again) this year, but what will get less attention is how behavioural economics explains the shape of the existing tax system and makes it hard to change.

I read that this year we may attain the economists’ Holy Grail of replacing state conveyancing duty with a broad-based annual tax on the unimproved value of land under people’s principal residence.

Economists regard taxing homes whenever they change hands as highly economically inefficient because it discourages people from moving when they need to move, whereas taxing the ownership of land as highly efficient because it’s hard to avoid and is naturally “progressive”, hitting the rich harder than the poor.

Holy grails are, however, wondrous things, but almost impossible to attain. Economists have been preaching the virtues of such a switch for at least the past 30 years, with precious few converts (bar, in recent times, the ACT government).

Why have state politicians been so unreceptive to such a patently good idea? Because politicians instinctively understand what most conventional economists don’t: the wisdom of Louis XIV’s finance minister’s declaration that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.

Or, to put it another way, because conventional economists don’t know enough behavioural economics – the study of how the world actually works thanks to human fallibility, rather than how it would work if we were all as rational as economic textbooks assume us to be.

A central element of the political economy of taxation is that what the punters don’t notice they don’t worry about.

And to every revenue-hungry state treasurer (which is all of ’em), the great virtue of conveyancing duty is that when you’re buying a place for $1 million and someone presents you with a tax bill for $40,000, it looks a relatively small amount and the least of your worries right now.

By contrast, when you open your mail one day and find the government demanding to be paid, say, $5000, you tend to get resentful. Because we’ve spent all our lives in a market economy, we’re used to the notion that, if you want something, you have to pay for it.

And with the converse: you don’t shell out good money without getting something you want in return. Annual land tax breaches that rule: you write a cheque for five grand and just post it off into the void. (This was also part of the reason the old “provisional tax” was so unpopular.)

Behavioural economists demonstrate empirically what politically astute treasurers know instinctively: you greatly reduce the hissing if you can whip the tax away without it being seen. This is why, when introducing the goods and services tax, Peter Costello wrote into the act the requirement that retail prices be quoted inclusive of the tax, without the tax being shown separately.

Of course, for wage earners, personal income tax has worked that way for decades. The pay office extracts an estimate of the tax you’ll have to pay and sends it to the taxman before you even see your pay.

After a while, you pretty much forget you’re paying tax on much of what you buy and are being paid much less than you’re earning. Which also demonstrates the wisdom of a saying familiar to treasurers: a new tax is a bad tax; an old tax is a good tax.

We object loudly to almost all proposals for new taxes – land tax on the family home, a road congestion tax and many more. We spent 25 years working up the courage to impose a value-added tax on “almost everything we buy” (during which time we copied the Kiwis’ crafty idea of renaming it the more innocuous “goods and services tax”).

But here’s the trick: once the new tax has been passed and taken effect, it takes only a year or two for us to accept it as part of the furniture. Behavioural economists call this quirk of human nature “status-quo bias”.

And, of course, just about the oldest tax of all is what Malcolm Fraser used to call “the secret tax of inflation” aka bracket creep.

It’s the tax increase you have when you don’t like tax increases.

Our “revealed preference” (not what we say, but what we do) is that bracket creep's our favourite tax.

Which is why treasurers of both colours give us so much of it.

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Japanese speedboats tell us how women and men compete

What would an economist know about Japanese speedboat racing? Why would they want to know? Ah, that would be telling.

It’s a spectator sport that’s hugely popular in Japan, but little known elsewhere – perhaps because it’s so Japanese. That’s to say, odd to Western eyes. Even its fans admit it’s more mesmerising than entertaining.

It’s been going only since 1952, but is held most days in 24 locations across Japan. These “stadiums” are built on lakes, rivers or the sea, with others on artificial concrete ponds in the midst of cities. The course is just a 600-metre-long oval.

Each race consists of six boats going just three times round the course, and lasts less than two minutes. But they string it out by having a practice race, and then individual 150-metre time trials before the race.

The boats are quite small, with a detachable engine. They get off to a flying start, with boats that jump the gun, or pass the starting line more than a second late, being disqualified.

As you can see from YouTube, much of the skill comes from manoeuvring into the best position at the start. But being first round the first turn is also important, and usually means you’ll win. What we’d call sledging is another competitive tactic.

All the boats are identical and owned by the stadium, being issued to each competitor for each race at random. Same with the engines. Each driver – all of them professional - gets a short time to tune their allotted engine for better performance. You’re allowed to supply your own spark plug, but that’s all.

Drivers crouch down in the straight to give less resistance, but then stand up, using their body to slow the boat for the turn. They crowd so close together on the turns it’s amazing more of them don’t collide.

Why do so many Japanese get so excited about all this? Sorry, didn’t I mention it? Speedboat racing is one of the few sports in Japan on which it’s legal to gamble.

Extensive statistics are kept on the past performance of drivers, boats and engines to help the punter with their bets. All the race preliminaries are there to give the punters more information before they place their bets.

But why would any this be of interest to economists? Well, as you may know, economists are great believers in competition, and are curious about how it works.

In this case, however, there’s another attraction. Japanese speedboat racing involves competition between men and women. Better, competition between men and women in the same races, but also all-male and all-female races.

There is great controversy over whether men and women are equally competitive or women are, in general, less competitive. And, if less competitive, whether this is innate or is learned behaviour.

Many people’s answer to these questions is based on their beliefs (and some use social media to tear into those who say things than conflict with their beliefs) but these days, surprisingly, academic economists search for empirical evidence to shed light on such controversies.

Which means academic economists spend their days searching for good “data sets” of empirical information to which they can apply their statistical tests and reach conclusions about issues of interest.

Guess what? In speedboat racing those meticulous Japanese have produced a fabulous data set with which to compare the competitive behaviour of men and women.

The more so because, though men outnumber women by more than seven to one, they all receive their one-year training at the same college and are treated equally in the race, being randomly assigned to races. In mixed-sex races there’s usually one woman and five men.

Such a “natural experiment” with real drivers competing professionally for big money is far more persuasive than some lab experiment where student volunteers compete for tiny amounts.

Two economics professors, Alison Booth of the Australian National University, and Eiji Yamamura of Seinan Gakuin University in Japan, have examined more than 140,000 individuals’ racing records in a study.

They found that women’s race times are slower in mixed-sex races than in all-women races, whereas men’s race times are faster in mixed-sex races than in men-only races.

In mixed-sex races, they found that men were more aggressive – as shown by lane-changing – in spite of the risk of being penalised if they contravene the rules, whereas women followed less aggressive strategies.

So the same woman performs relatively worse in mixed-sex races compared with single-sex races, while for the average male racer the opposite is true.

This shows that female competitive performance – even for women who have chosen a competitive career and are very good at it – is enhanced by being in a single-sex environment rather than in a mixed-sex, in which they are a minority.

But they found no difference between the genders on number of disqualifications. So while male racers do more lane-changing than females, the men are no more likely to be caught.

“We suggest that gender-differences in risk attitudes and confidence may result in different responses to the competitive environment, and that gender-identity is also likely to play a role,” the authors say.

According to the “gender-identity hypothesis”, a society’s prescriptions about appropriate models of behaviour for each gender might result in individuals experiencing a loss of identity should they deviate from the relevant code.

The gender imbalance in mixed-sex races may trigger awareness of gender-identity for both men and women, and this may go some way to explaining each gender’s different behaviour in mixed-sex races to same-sex races.

“For example, a man’s gender-identity may lead him to consider being defeated by women to be more dishonourable than by men, and he will try to avoid it,” the authors conclude.

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In the pursuit of happiness, extroverts get a head start

When Bob Hawke famously said economists were in the happiness-raising business, he wasn’t wrong. But he didn’t endear himself to the profession, which these days prefers to think of itself as in the incentives business.

A few economists study happiness, but for the most part they leave it to psychologists – who prefer to call it by the more scientific sounding “subjective wellbeing”. How satisfied you feel with your life or, as I prefer to think of it, how fulfilled you feel.

One finding we got last year from the world of happiness research is that people with certain types of personality tend to be happier than the rest of us.

Social psychologists have put decades of work into studying personality, and are widely agreed on the “big five” personality traits: conscientiousness, agreeableness, neuroticism, openness to experience, and extroversion.

Conscientiousness refers to being industrious, orderly and dependable. It’s about the way we control, regulate and direct our impulses. Conscientious individuals avoid trouble and achieve success through planning and persistence.

Agreeableness refers to co-operation and social harmony. Agreeable people value getting on with others. They're considerate, friendly, generous, helpful and willing to compromise their interests with others’ interests.

The trait psychologists call neuroticism would be better labelled by its inverse: emotional stability. So it’s one on which you’d like a low score. Neurotics have a tendency to often experience negative feelings such as anxiety or depression – or always getting angry. They can be moody and irritable. People who score low on neuroticism are less easily upset and less emotionally reactive. They tend to be calm and emotionally stable.

Openness to experience refers to being intellectually curious, imaginative, creative, inventive and insightful. Less open people prefer familiarity over novelty and tend to be conservative and resistant to change.

Extroversion refers to being outgoing, talkative and bold. Extroverts want to engage with the outside world. They tend to be enthusiastic, action-oriented, assertive and want to draw attention to themselves (some of them wear loud ties or go everywhere in sneakers).

Although surveys often show us to be wildly overconfident about our own capabilities – a recent survey shows 65 per cent of Americans think they’re more intelligent than the average person, for instance – a study last year by Stefano Di Domenico of the Australian Catholic University and others has found we’re quite accurate in assessing our own personality.

You give yourself a score out of 10 for each of the five factors, where 5 is average, 1 is very low and 10 is very high.

I’ve written before about the benefits of being an optimist – which, fortunately, about 80 per cent of us are. Unsurprisingly, optimists are happier than pessimists.

Optimists score well on four of the big five personality traits – emotional stability, extroversion, agreeableness and conscientiousness – with only openness being of limited relevance.

But last year’s big news about the effect of personality on happiness concerned the benefits of extroversion. Psychologists have long known that extroverts rate highly in measures of wellbeing. And they’re less likely to suffer from depression, anxiety or other mental health problems.

So much so that some studies seem to be encouraging us to act in more extroverted ways in the hope of becoming happier. Fake it till you make it.

A study by Dr Luke Smillie, of the University of Melbourne, and others has found it’s not that simple.

Their randomised control trial confirmed that people told to “act extroverted” did become happier. But it turned out that those who were naturally extroverted benefited the most, whereas those who were relatively introverted didn’t seem to benefit at all.

This - and other evidence – suggests that our personality has a bigger influence on how happy we feel than many have assumed. That is, how happy we are with our lives is less susceptible to our conscious control than we thought.

Smillie (who must be terribly tired of hearing the words “nominative determinism”) and colleagues say that’s not as bad as it sounds, however. Our personality may shape our lives, but it also changes. “Personal change may not be easy,” they say, “but we now know personality is not ‘fixed’.”

Research suggests personality is most likely to change between the ages of 20 and 40, but can occur at older ages.

This fits my own experience. When I first became a journalist, I dreaded having to phone people I didn’t know. But I must have become more extroverted over the years because, when I try to tell people I’m actually quite shy, they just laugh.

In any case, I think it’s possible to be more extroverted in some aspects of your life – some “domains”, as psychologists say – and less in others. Just ask my wife.

Smillie & Co say they’re not meaning to imply you need to be extroverted to be happy. Scoring well on other character traits will get you there.

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In poor countries income does trickle down

Try this test of your economic literacy: has world poverty decreased or increased since 1990? If you said decreased, congratulations. You’re smarter than the average bear.

If you were sure it had increased, you’re the victim of a news media gone overboard in indulging your preference for bad news over good.

A lot of bad things are happening in the world, but also some really good things, and we immiserate ourselves when we fail to give them the notice they deserve.

In October the Word Bank issued a report announcing that world poverty had fallen in the two years to 2015. But since this was the continuation of a longstanding trend, the media took little notice.

So let me give it the fanfare it deserves. World poverty has been falling continuously – and rapidly - for the past quarter century. In 1990, 36 per cent of the world’s population lived in extreme poverty, but by 2015 this had fallen to 10 per cent – the lowest in recorded history.

This means the number of people living in extreme poverty has fallen by a billion, from almost 2 billion to 736 million. And that really does make it “one of the greatest human achievements of our time”.

The World Bank defines extreme poverty as living on less than $US1.90 a day, which has been adjusted for the US dollar’s differing purchasing power in different countries in 2011.

But how did this great achievement come about? It’s the result of rapid economic growth in the developing countries over the past three decades, particularly in China (and its trading partners in east Asia) and India (and other south Asian countries, including Bangladesh).

These countries have made no herculean efforts to redistribute income from the rich to the poor, they’ve just grown a lot over a sustained period. Which makes the fall in poverty in these countries a fabulous advertisement for the benefits of market economies and freer trade between countries.

And it’s a reminder that, in poor countries at least, a fair bit of the income generated by economic growth does trickle down to those at the bottom. Low-income households also benefit as more of the country’s income is spent on increasing primary education and spreading access to electricity, decent water and sanitation.

Actually, lower-income households in Australia have benefited from our 27 years of continuous economic growth, with their incomes growing quite strongly in real terms. That’s because of employment growing faster than the working-age population, wages growing faster than prices (until five years ago) and pensions (but not the dole) being indexed to wages.

But real wage and pension growth occur because of government policy. And since, in truth, tax cuts for companies and high income-earners do little to boost the economy and employment, their benefits don’t trickle down to any great extent.

Back to the point. Though the rate of extreme poverty has fallen in all the world’s regions since 1990, it’s fallen only a bit in Sub-Saharan Africa, while its population has continued growing strongly.

This means the Sub-Sahara now accounts for more than half the 736 million people remaining in extreme poverty, with south Asia accounting for a further quarter. It’s been largely eliminated in east Asia and the other regions.

If India’s present strong economic growth continues, its share of world poverty will fall away. The World Bank projects that, by 2030, Sub-Saharan Africa will account for nearly nine out of 10 of the world’s extreme poor.

Globally, poor people live overwhelmingly in rural areas and have lots of children. Judge poverty not by people’s income but by their access to education, electricity, water and sanitation, and the proportion in rural areas is even higher.

Note that the World Bank’s austere “international poverty line” of $US1.90 a day is an absolute measure of poverty. You work out the value of goods needed to barely stay alive, then adjust it for inflation over time, ignoring what’s happening to the incomes of the better-off.

By contrast, in rich countries like ours we measure relative poverty: how are real incomes at the bottom (often defined as half the median income) travelling relative to those around the middle and at the top?

So absolute poverty falls whenever low incomes grow faster than inflation whereas, for a fall in relative poverty, the real incomes of the poor need to grow at a faster rate than everyone else’s.

This, by the way, explains why absolute poverty in China and India can fall even while income inequality – the gap between rich and poor – increases. As it usually has.

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Compared to you and me, the feudal serfs had it easy

Back at work yet, or still enjoying your summer break? Either way, you probably wish you had more annual leave. I could tell you to count your blessings, that today’s full-time workers get much longer holidays than workers have ever had.

But maybe that isn't true. It’s certainly true that we get longer holidays and work fewer hours than workers did in the 19th century but, according to the sociologist Juliet Schor, the 19th century – not long after the end of the Industrial Revolution – was an aberration in the history of human labour.

Indeed, if we’re to believe Dr Lynn Parramore, senior research analyst at the Institute for New Economic Thinking, we’re working a lot harder than medieval peasants did. “Ploughing and harvesting were backbreaking toil,” she says, “but the peasant enjoyed anywhere from eight weeks to half the year off.”

The church, mindful of how to keep a population from rebelling, enforced frequent holy-days. Weddings, wakes and births might mean a week off, quaffing ale to celebrate, and when wandering jugglers or sporting events came to town, the peasant expected time off for entertainment, she says.

There was no work on Sundays, and when ploughing and harvesting seasons were over, peasants got time to rest, too. In fact, according to Schor, during periods of particularly high wages, such as 14th century England, peasants might put in no more than 150 days a year.

I’m not sure every scholar would agree with this assessment, and the 14th century was the tail end of England’s feudal system, which began after the French Norman Conquest of England in 1066.

So if you’re not sure you’d have been happier as a serf – good thinking.

Feudalism was the system of political and economic organisation that preceded England’s Agricultural Revolution and Industrial Revolution, before we got to a capitalist or market economy approximating what we have today.

According to the father of modern economics, Adam Smith, feudalism was a social and economic system defined by inherited social ranks, each of which possessed social and economic privileges and obligations. Wealth derived from agriculture, which was arranged not according to market forces but on the basis of customary labour service owed by serfs to landowning nobles.

The king owned all the country’s land, but leased much of it to nobles, often called barons. The barons ran the decentralised, feudal system. These “lords of the manor” were in complete control of their manor, meting out justice, minting their own money and setting their own taxes.

The barons divided some of their land between their knights. The knights, in turn, distributed some of their land to the serfs, also known as villeins or peasants.

That covers people’s privileges, now their obligations. In return for their land, the barons paid rent to the king and provided him with knights to fight his battles when required. In return for their land, the knights provided their baron with personal protection and military service to the king.

In return for their land, the serfs paid their master with maybe a third of the food they grew, as well as being compelled to work on his own land. They couldn’t leave the manor and needed their lord’s permission to marry. They were often charged a fee for use of any of the improvements on the manor – roads, bridges, mills and bakehouses. And sometimes they had to fight in the baron’s battles.

Serfs lived with their animals in one-room homes they built themselves with wattle-and-daub (woven twigs daubed with mud). Their clothes were self-made, mainly of wool and very scratchy. They grew rye, wheat and other grains, grazed sheep on the common, had a kitchen garden and a few apple and pear trees.

Most of what they ate they grew themselves: little meat, but lots of rye bread and a stew of peas, beans and onions, called pottage. Berries, nuts and honey were gathered from the woods.

The feudal system fell into decline for many reasons. One was that the military became full-time professionals. Another was the Black Death (bubonic plague) of 1348, which killed many of the serfs. Landowners desperate for workers to harvest their crops had to do the unthinkable: pay actual wages to anyone who’d work their land – and the wages were high. Thus did the lords lose their hold over the serfs.

But Professor Richard Grabowski, of Southern Illinois University, has advanced a more economic theory. Manorial agriculture wasn’t very efficient, even though productivity could have been improved by such measures as removing stones from fields, adding mineral fertilisers and making greater use of fodder crops.

But the system of forced labour precluded use of these techniques because they required more care and skill than the serfs had any incentive to apply when working in the lord’s fields rather than their own.

Creating this incentive would have required shifting to paid labour, but this would cost the lord the ability to order his serfs to help fight a rival lord trying to grab his land. The first lord to free his serfs would lose his land to the others.

So the lack of national enforcement of property rights was another barrier to greater productivity. As the feudal system gradually broke down, the basis for power shifted from how many serfs you controlled to how good you were at using your land to generate more income.

England’s long Agricultural Revolution involved moving to market relationships between land owners and labourers, and almost all rural production being sold in markets, as well as huge improvements in agricultural productivity, making the nation much more prosperous.

People may have worked more hours on more days in the year, but they were much better paid to do it.

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What the economy really needs more of: trees

I think the first economist must have been named Horatio. He’s the one who had to be reminded there were more things in heaven and earth than dreamt of in his model.

I try to keep my horizons wide by regularly consulting my second-favourite website, The Conversation (with academics who know a lot of interesting things about a lot of topics), to which I’m indebted for most of what follows.

We’re meant to know all about photosynthesis, but did you realise it means that, “with a bit of sun, a tree uses the natural miracle of photosynthesis to combine a little water with carbon dioxide from the air to produce the building blocks for its own growth, as well as oxygen,” according to Associate Professor Cris Brack, of forest measurement and management at the Australian National University?

So, to oversimplify a little, we breathe in oxygen and breathe out carbon dioxide, whereas trees breathe in carbon dioxide and breathe out oxygen – making them useful things to have around when we have a problem with excess carbon emissions.

But trees do far more for us than help with our greenhouse problem. For a start, they cheer us up. Academics at the universities of Melbourne and Tasmania examined 2.2 million messages on Twitter and found that tweets made from parks contained more positive content - and less negativity - than tweets coming from built-up areas.

Why are people in parks likely to be happier? Because parks help them to recover from the stress and mental strain of living in cities, and provide a place to exercise, meet other people or attend special events.

The world is becoming more urbanised. There’s now more than half the world’s population living in cities. In Australia, two-thirds of us live in capital cities and nine out of 10 of us live in urban environments.

There are sound economic reasons why so many of us are piling into big cities, but it seems there are also health and social problems. According to the experts, cities are becoming the epicentres for chronic, non-communicable physical and mental health conditions.

But there’s growing recognition of the crucial role of urban green spaces in helping reduce these health problems. More than 40 years of research shows that experiences of nature are linked to a remarkable breadth of positive health outcomes, including improved physical health (such as reduced blood pressure and allergies, less death from cardio-vascular disease, and improved self-perceived general health), improved mental wellbeing (such as reduced stress and better restoration), greater social wellbeing and promotion of positive health behaviours (such as physical activity).

Our cities are getting hotter, more crowded and noisier, while climate change is bringing more heatwaves, according to environmental planners at Griffith University. The obvious answer is more air-conditioning, but this brings more carbon emissions, so a better answer is more infrastructure – “green infrastructure”, otherwise known as street trees, green roofs, vegetated surfaces and green walls. In reality, however, vegetation cover in cities is declining, not increasing.

Planting trees in parks, gardens or streets has many benefits, helping to cool cities, slowing stormwater run-off, filtering air pollution, providing habitat for some animals, making people happier and encouraging walking.

According to those environmental planners, shading from strategically placed street trees can lower surrounding temperatures by up to 6 degrees – or up to 20 degrees over roads. Green roofs and walls can naturally cool buildings, substantially lowering demand for air-conditioning.

By contrast, hard surfaces – including concrete, asphalt and stone – increase urban temperature by absorbing heat and radiating it back into the air.

But though scientists have much evidence that trees and other greenery improve our mood and health, they know less about the actual mechanisms by which this occurs. Japanese research, however, suggests that when we walk through bushland we breathe in three substances: beneficial bacteria, plant-derived essential oils and negatively-charged ions.

We live our lives surrounded by beneficial bacteria, breathing them in and sharing our bodies with them. Gut-dwelling bacteria break down the food we can’t digest and produce substances that benefit us physically and mentally.

Plants and the bacteria living on them produce essential oils that fight off harmful micro-organisms when we ingest them.

And despite the nonsense talked about negative-ion generating machines, there’s evidence that negative air ions may influence our mental outlook in beneficial ways.

This may sound very new and scientific to some (or pseudo-scientific to others) but, as Hugh Mackay observes in his latest book, Australia Reimagined, being connected to nature is a traditional source of relief from anxiety: gardening, bushwalking, strolling in a park, walking the dog, climbing a tree, swimming in the sea or sailing on it, picnicking in a tranquil and beautiful setting, playing games that take you outdoors and into a natural environment.

We know instinctively that “grass time” – running on it, rolling in it, throwing and catching a ball across it – is vital for the health and wellbeing of children. Particularly if they’ve been cooped up indoors, glued to a screen. But adults are no different, the wise man says.

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Find parenting tough? Be glad you're not American

I have a news flash: being a grandad beats being a parent. Parenting is now a much tougher gig, whereas grandparenting is all care and no responsibility. And it’s a lot cheaper.

These thoughts are prompted by an article in the New York Times, in which Claire Cain Miller writes that parenthood in the United States has become much more demanding than it used to be.

“Over just a couple of generations,” she writes, “parents have greatly increased the amount of time, attention and money they put into raising children. Mothers who juggle jobs outside the home spend just as much time tending their children as stay-at-home mothers did in the 1970s.”

(How does she know how much time mothers spend on their kids? Because the US government conducts regular surveys of how people use their time. We used to do so too, but have since decided we can’t afford to keep it up. Great decision, guys.)

“The amount of money parents spend on children, which used to peak when they were in high school, is now highest when they are under 6 and over 18 and into their mid-20s,” she writes.

The most momentous social change in my lifetime came sometime in the 1960s when Australia’s parents decided (as did parents in most advanced economies) that their daughters were just as entitled to a good education as their sons.

That simple attitudinal change has had huge economic and social ramifications, to which we and our governments are yet to fully adjust.

These days, most kids go to year 12, and most of those go on to uni. But girls outnumber boys in year 12 and at uni. When girls (and their parents and the taxpayer) have invested so much time and money in attaining a good education, it’s hardly surprising most of them want to put that education to work, so to speak, to gain the monetary reward but also to gain more intellectual (and social) stimulation than they would staying at home.

This “economic emancipation of women” has greatly increased the rate at which women participate in the (paid) labour force, making Australians a lot more prosperous, including by creating a lot of jobs for women performing services most women formerly performed for themselves at home, such as childcare.

The rise of the two-income family is one factor contributing to higher house prices. Governments have had to do a lot of work (and spend a lot of money) renovating the institutions of the labour market which, over the centuries, were designed exclusively to meet the needs of male breadwinners.

They’ve had to spend a lot more on high school and university education, legislate to ensure women (and later men) keep their places when they go on parental leave, receive at least some payment while on that leave, and receive big subsidies for a greatly expanded and heavily regulated system of childcare – in which childcare workers are better trained and much better paid.

Now there are strengthening efforts to ensure women get a much bigger share of the top jobs (with pay equal to the top men) – including in parliament.

Meanwhile, however, the nature of parenting has changed. Two-income families have more money to spend on fewer kids, and spend it they do – partly, I suspect, because mothers feel guilty about the time they don’t spend with their kids (I’m not saying they should, just that many do).

Parents, mainly mothers, put much time and money into taking their kids to after-school sporting and cultural training and (particularly in NSW) exam coaching. Many imagine sending their kids to expensive private schools will buy them a better education.

We’ve entered the era of “intensive parenting”, which brings us to Miller’s point that modern American mothers spend just as much time parenting as their stay-at-home mothers or grandmothers did. They just do different things.

As yet, however, it’s not nearly as bad in Oz as it is in the US. The gap between rich and poor has widened so much in America (with a bigger cost and status gap between government-funded universities and private Ivy-League colleges), that parents worry their kids won’t be able to live as well their parents did. In the States, parenting has become a lot more competitive.

Nor is it nearly as true here that children are most expensive before they get to school and after they leave it and head to uni. Our childcare is much more heavily subsidised than America’s. And our HECS-HELP “income-contingent loans” for uni tuition fees are much more concessional than what the Yanks do.

We have no need to worry about our kids being loaded up with HECS debt.

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Indigenous small business is on the rise

It’s the season of good cheer, so let me give you some good news: we’re not making the progress we should be in Closing the Gap between Indigenous and non-Indigenous Australians, but when it comes to increasing the ranks of Indigenous small-business people we’re doing surprisingly well.

The number of Indigenous owner-managers is conservatively estimated to have increased by 32 per cent between 2006 and 2011, and by 30 per cent between 2011 and 2016.

That’s coming off a low base but, even so, the number increased from 10,400 to 17,900 over the decade to 2016. This took the proportion of Indigenous owner-managers in the over-15 population from 3.2 per cent to 3.4 per cent.

This may not seem much, but it occurred while the proportion of non-Indigenous owner-managers actually decreased from 10 per cent to 8.6 per cent – a fall that probably reflects the difficulties affecting the economy since the global financial crisis in 2008.

It says Indigenous small businesses are making headway in the economy despite its relatively low growth over the past decade.

The figures have been derived from census data in a paper by Siddharth Shirodkar and Dr Boyd Hunter, of the Centre for Aboriginal Economic Policy Research at the Australian National University, and Professor Dennis Foley, of the University of Canberra.

The authors note that the historical exclusion of Indigenous Australians from mainstream economic life has led to low accumulation of wealth across many Indigenous communities. Only a relative few gained formal business experience before the past decade.

The result is that the vast bulk of entrepreneurially inclined Indigenous Australians probably lack the key preconditions to start a business and prosper in our capitalist economy, they say.

Today, however, things are improving – to some extent as a result of government policy. In 2015, the Indigenous Procurement Policy established targets for federal government departments to buy what they needed from Indigenous suppliers.

The value of successful tenders by Indigenous business owners has grown from about $6 million in 2012-13 to more than $1 billion in the policy’s first two and a half years to the end of 2017. Today, more than 1000 indigenous businesses are contracting with the feds.

This year the government also announced the Indigenous Business Sector Strategy, which includes measures to provide greater business support, improved access to finance, stronger connections to business networks and better sharing of information about commercial opportunities.

But all of that is insufficient to explain the rise in Indigenous enterprise over the past decade. And get this: official analysis of the register of Indigenous businesses suggests that Indigenous-owned firms are between 40 and 50 times more likely to hire Indigenous employees than are non-Indigenous firms.

So the establishment of Indigenous businesses is an important mechanism to deliver economic development and increased Indigenous participation in the workforce. And this, the government tells us, is shifting the narrative from welfare and dependence to aspiration, empowerment and independence. (A lovely thought – if only it had more substance.)

Certainly, “Indigenous entrepreneurs offer their community an avenue for greater and long-overdue economic self-determination, create positive role models within families and communities, and can serve as mentors to young, entrepreneurial Indigenous Australians,” as the authors say.

The businesses these owner-managers run are spread across Australia, but the vast majority of owner-managers are located on the east coast, particularly in greater Sydney and the rest of NSW. Large numbers also live in Brisbane, the rest of Queensland and in Melbourne.

The growth in capital cities over the past decade has occurred at double-digit rates except in Darwin, where the number of Indigenous businesses fell over the five years to 2016.

But the pattern in the regions was mixed. In regional parts of NSW, Queensland and Victoria there was double-digit growth over the decade, with the number in regional NSW doubling to more than 2700.

In regional South Australia, Western Australia and Tasmania, however, numbers remained flat between the censuses of 2011 and 2016. And they actually fell by 44 per cent in regional Northern Territory.

This could partly reflect the reduction in business opportunities following the end of the resources boom, though the same effect isn’t apparent in regional Queensland, probably because its business activities are more diverse.

But mining doesn’t fully explain the falls in the NT. Here the feds’ NT “intervention” may be to blame.

The largest declines in the number of owner-managers were in remote regions of the NT and very remote parts of WA. This reinforces the story that remote areas, where about 20 per cent of the Indigenous population lives, are underdeveloped in terms of access to markets. Clearly, it’s getting worse.

Abolition of the Community Development Employment Projects scheme may be another part of the explanation. These involved local community-run organisations creating work experience for participants and opportunities to work in communities and meet community needs through small-scale activities not otherwise funded.

Funding provided for the scheme was used to support the on-costs for these community organisations. Its abolition led to the closure of many of them. Even if they were unlikely to have owner-managers associated with them in the census, they may have supported other local enterprises by providing them with low-cost or subsidised labour.

You can argue that, by giving people subsidised jobs and solutions to community needs, the scheme robbed them of the incentive to find real, better-paid jobs and start unsubsidised businesses but, as the decline in owner-managers suggests, that doesn’t justify simply pulling the plug without providing a better substitute.

Smacks to me of controlling the growth in government spending at the expense of the most disadvantaged people in the most remote parts of the country, where opportunities to lift yourself up by your bootstraps are even rarer than in comfortable middle-class electorates.

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Does gift-giving make sense? Silly question

It’s the season of the year when the bylaws of the economists’ union require me to issue the stern admonition that the medieval practice of gift-giving should cease and desist forthwith. And the fact that I’m a bit late won’t stop me.

Perhaps more people - recipients of socks and handkerchiefs and other wondrous surprises - will be receptive to the profession’s utterly disinterested (look it up) advice and see the wisdom of my words.

Gift-giving is an irrational act, one where sentiment and emotion triumph over good sense. Since it’s hardly possible for the giftor better to know what the giftee would like to be given than the giftee themself, the success rate of the practice is abysmally low.

So low, in fact, as to justify economists using one of their worst pejoratives to brand the practice as involving a “deadweight loss” – one where the benefit to the giver and the benefit to the receiver are insufficient to justify the cost of the transaction, thereby creating a loss to the community.

(And please, please don’t ruin my Boxing Day by arguing that the commercialisation of Christmas at least creates jobs. The economists’ union’s Christmastide message is that any mug can create jobs, all you have to do is spend money – your own or someone else’s. The whole point of economics is to help the community spend money in ways that yield it greater benefit than other ways.)

But fear not. Go back to eating your leftovers in peace (and goodwill). I’m not actually a member of the economists’ union, but an adherent to a dissident sect known as behavioural economists (people who, too late in life, realised psychology made more sense than economics).

This bunch of heretics delights in pointing to the glaring weaknesses in the oversimplified model conventional economists carry in their heads.

But you need only to have gone to Sunday school to see the weakness in all the nonsense about the deadweight loss of Christmas. I think it was the little chap himself who said it was more blessed to give than receive.

And there is, in fact, plenty of what a deranged economist would call “giver’s surplus”. How do I know? Because psychological experiments have demonstrated it – many of them conducted by Professor Elizabeth Dunn, a psychologist at the University of British Columbia.

But just last week came new research by Ed O’Brien, of the University of Chicago Booth School of Business, and Samantha Kassirer, of Northwestern University Kellogg School of Management, showing that “the joy of giving lasts longer than the joy of getting”.

One of the great limitations of human nature is “hedonic adaptation”. The happiness we feel after a particular activity or event diminishes each time it’s repeated. It’s likely this phenomenon is “adaptive” – we’ve evolved to react that way because it increases our ability to survive and reproduce; it keeps us striving.

But the researchers find that giving to others may be an exception to the rule. In two studies they found that participants’ happiness did not decline, or declined more slowly, if they repeatedly bestowed gifts on others versus repeatedly receiving those same gifts themselves.

Separate research by Dr Vera te Velde, a lecturer in economics at the University of Queensland, has found evidence for the existence of “beliefs-based altruism” – concern about other people’s emotions and other psychological experiences, beyond any material measure of their wellbeing.

This means “we don’t give gifts only because we want people to have something that they want; we also give gifts because we want them to feel cared about, experience joy or a pleasant surprise when receiving it. Or to prevent them from feeling disappointed if we fail to give anything,” she says.

This kind of altruism can apply in many other situations. “When girl guides come to our doors to sell cookies, we buy them not only to support the group and because we like cookies, but also because we want the girls to feel successful and valued,” she says.

But how can we be sure that a pure concern for others’ feelings is the motivation for these behaviours, instead of – or maybe, as well as – concern about our own reputations? After all, I may not only want girl guides to feel good, I may also want to be known as someone who supports them.

To help answer this question Velde experimented with a sharing game. One person is asked to share $10 with another person. But the bank handling the transfer occasionally makes a mistake and transfers exactly $1 to the other person. So if that person receives $1, they don’t know if it’s a bank mistake or the first person’s selfishness.

Asked whether they thought the recipients would prefer to know about giver’s true intentions, many participants thought they would. Even so, when they played the game themselves, the participants were more likely to give either exactly $1 (thereby hiding their selfishness) or exactly $5 (thereby revealing themselves to be perfectly fair).

But get this: even the people who tried to hide their selfishness were demonstrating their concern about the emotions of the other person. Economics makes a lot more sense with a bit of psychology thrown in.

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How to get more bang from your bucks

They say people who think money doesn’t buy happiness just don’t know where to shop. Sorry to have left it so late in your preparations for Christmas and summer, but on this score I have breaking news.

It’s a funny thing that, though economists hold consumption to be the “sole end and purpose” of all economic activity, it’s not a subject that greatly interests them. They’ll help you maximise how much you’ve got to spend, but they’ll give you no help in deciding how to spend it in a way that yields the most happiness – or, as they prefer to say, “satisfaction”.

No, for advice on how to get the biggest bang from your bucks, the experts are social psychologists.

For the past 15 years, their prevailing wisdom has been that spending on experiences – from an overseas holiday to a trip to the movies – yields more happiness than buying more stuff.

The pleasure you get from buying a new CD or pair of shoes or car or even a new home falls off surprisingly quickly, whereas the enjoyment you get from what the US psychologist Tom Gilovich has dubbed “experiential consumption” tends to be longer-lasting.

Subsequent research has found three reasons why experiences provide greater happiness. First, experiential purchases enhance our social relationships more readily and effectively than do material goods.

That is, a lot of the enjoyment comes from our interaction with the people we share the experience with. (This, BTW, gets closer to what I really believe about all this: deep satisfaction comes from our human relationships, not from what we buy.)

Second, experiential purchases form a bigger part of a person’s identity. We are the sum of our life’s experiences – pleasant and otherwise – much more than the sum of our material possessions.

Third, experiential purchases are evaluated more on their own terms and evoke fewer social comparisons than material purchases.

Good point. A lot of our spending goes on keeping up with the Joneses or on buying “positional goods” – goods that demonstrate to the world how well we’re doing in the battle for social status. Trouble is, my delight in my new Volvo is punctured when the chap next door arrives home with his new Beemer.

We make sure our house is as well-appointed as the others in the street, the lawn’s always mown, the car in our driveway is late-model European, and the kids go to private schools. But the one thing the neighbours can never see is how your total debt compares with everyone else’s.

If keeping up with the neighbours has required you to rack up a crippling debt, you’re unlikely to be enjoying a care-free life. Ditto if your financial commitments keep you chained to a well-paying job you hate.

But, as the researchers say, when you’re spending money on experiences, you do it much more for your enjoyment of that experience than to impress the neighbours – unless, of course, you’re into matching their skiing trip to the Snowies with yours to Aspen.

Actually, I think there’s more to it even than those three points. Major experiences such as overseas touring holidays yield pleasure in expectation of them, pleasure while you’re doing it, and pleasure while you’re reliving them and recounting your adventures to family and friends.

And the great beauty of thinking about past holidays is that you remember the highlights, laugh about the bad bits, and forget the boring bits – such as the trouble you had trying to find a public toilet.

Sorry, I promised you breaking news on the experiential front. Research out this year, by Lee, Hall and Wood, finds it’s not as simple as experiences good, stuff bad.

Turns out, which of the two yields the higher happiness count depends on your social class, with class being measured according to income, education or self-assessment.

Dividing people into two categories – higher or lower – the researchers found that “experiential advantage” held for the top half, whereas the bottom half either rated experiences and material purchases equally or rated goods more highly than experiences.

It seems people of higher social class have an abundance of resources, meaning they can afford to focus more on their internal growth and self-development.

In contrast, people who have fewer resources are likely to be more concerned about making wise purchases of the stuff they still needed.

I think it’s probably a gradient: as your material affluence rises you pass through the point where experiences and things deliver roughly equal satisfaction, until eventually your material needs are pretty much satisfied and its experiences that do most to make you happy.

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