THOUGHTS ON THE BANKRUPTCY OF ECONOMICS
John Hermann
Economic Reform Australia


THE NEW ECONOMIC WAR

In a recent conference paper, the famous economist J.K. Galbraith made reference to a “war being waged against the poor of the world”, the overall impact of this war being to transfer wealth on a continuing basis from poorer countries to more affluent countries, and within the affluent countries themselves to redistribute wealth and income upwards. One mechanism for effecting this redistribution, sometimes referred to as “the race to the bottom”, is a competition between governments to progressively reduce (and ultimately abolish) minimum wage standards and conditions, and also to reduce the power of organised unions (de-unionisation).

A characteristic current phrase of neoclassical economists is “deregulation of the labour market”, which effectively means removing existing constraints on the exploitation of the working community and ultimately allowing slave labour conditions and rates of pay to exist. Those advocating this new and nasty policy regime seem to believe that it can be sustained indefinitely by maintaining the current historically high levels of unemployment. The widespread fear of unemployment may be used to “discipline” (intimidate) the workforce into accepting terms and conditions which would be quite unacceptable in other circumstances.

Regrettably, the objective of full employment has now ceased to be either government or opposition policy within most countries. Regrettably too, the media within this country (by and large) have tamely and uncritically accepted this abandonment of full employment as a policy objective. The economic program described above is absolutely necessary, we are assured (indeed, “there is no alternative”). It is being carried out for reasons of efficiency, competitiveness and countering inflation. However a number of independent commentators and academics have recently been asking embarrassing questions, one being the celebrated architect of financial deregulation in Australia, Prof Fred Argy, who reportedly now believes that the markets should be told to “go to hell”. Our attention has also been drawn to a recent paper by Prof Russell Mathews (‘Financial Markets and Failed economic Policies’, in Dialogues on Australia’s Future, 1996). In this well-argued paper, Mathews states that:

“…..It is especially ironical that one of the obsessions of governments and their
policy advisers has been with efficiency, the chosen instrument for which has been
micro-economic reform and the wholesale shedding of labour in both public and
private sectors. Because there has been no corresponding action to create jobs, the
result has been macro-economic inefficiency on a scale that far outweighs the ineffic-
iency that has been eliminated through the industry restructuring and the downsizing
of the public sector. The cost of heavy unemployment has been incalculable in human
and social terms, but even in economic terms it represents a loss of production many
times the value of the efficiency savings from the micro-economic reforms…..
Improving the competitiveness of Australian industries has been another declared
objective of governments. Many of the policies that have been implemented to
achieve this objective have perversely and unfairly discriminated against Australian
industries in favour of foreign competitors, whose own governments already protect
or support them, thereby forcing many Australian firms out of business or making
them relocate overseas….”

In relation to the unemployment problem, Hugh Stretton has also commented recently (Australian Options, vol 1, no 1, p14):

“….even if (members of the government) could restore full employment, they
would no longer dare to, because of the effects full employment would now have, in
an open deregulated economy, on inflation, the balance of payments and the foreign
debt…..
......…..As debt and the interest payments mount, the government has come to fear
full employment, and now acts to prevent it. It has come to value unemployment as
a defence against inflation….”

The case for maintaining a high level of unemployment as a counter to inflation is demonstrably severely flawed. It is not difficult to find examples of national economies (Japan being a notable case in the past) in which low inflation and low unemployment were allowed to co-exist over a long period of time. These desirable features are therefore not mutually exclusive. The objective of low inflation should be seen as one of several means of achieving a well-ordered and healthy society, but it should not become an overriding obsession. It is important to get the problem of inflation into its proper perspective. Many of our current economic problems should be of much more concern than the effects of a mild level of inflation.

The threat of deflation, for example, is far worse in its social consequences than inflation. Indeed, it could be argued that in some circumstances a moderate degree of price creep is perfectly acceptable. I find it particularly hard to understand how any reasonable person can subscribe to the view that it is acceptable to seek to “beat inflation into the ground” by choking off and ultimately killing the entire economy (ie, by precipitating a deep and protracted recession). And not simply as a one-off exercise, but on a recurring basis. Yet this is precisely what many modern economists seem to endorse

Let us return to the issue of competitiveness. It is usually insisted by economic rationalists that the public sector is inherently inefficient and lacking in competitiveness, and therefore that as much of it as possible should be sold off to the private sector. The forced part sell-off of Telstra is a case in point. From a rationalist perspective, this Australian public utility must be embarrassingly profitable. What justification then has been given for the part- privatisation of Telstra (can the remainder of Telstra’s sell-off be far behind?), and for the anticipated loss of tens of thousands of jobs in its wake?

The present coalition government has made much of the proposed channelling of profits from the sell-off into “one-off” funding for the environment, and evidently regards this as a sufficient and acceptable reason. Perceptive observers have remarked that this explanation is a red herring, the entire trade-off exercise being nothing less than a cynical and unashamed attempt to secure the support of senators who hold the balance of power. It also neatly avoids the issue of whether environmental funding ought to be maintained on a recurring basis, properly factored into each national budget alongside other recurring expenditures. Also, once the principle of the part-privatisation of a public utility has been accepted, the “softening-up” process so-to-speak, full privatisation must surely follow.

Apart from examples of highly profitable and efficient organisations like Telstra, one can easily find examples of similar large public sector utilities around the globe, particularly within Europe and Asia, that have been deliberately and wisely retained within the public domain. It is abundantly clear that the privatisation agendas of many governments are being driven mainly by a combination of ideology and greed, and so one should not assume that logic and true rationality will prevail in decision-making processes involving either the markets or the public sector.

This preoccupation with, and subservience to, dogma rather than scientific methodology now characterises modern (neoclassical) economics, which may be likened to a new-age religion. The new faith naively worships the financial markets and despises the public sector. The principal article of faith is the proposition that benefits supposedly generated from globalisation, privatisation and deregulation will inevitably flow to society as a whole. The extent to which most economists really believe this proposition is debatable however. A more cynical, and perhaps realistic, view would be to see their outpourings as a form of rationalisation of the belief that markets are invincible and that it would be better to get with the strength than to fight against the tide. In this connection it is worth noting that Prof Evan Jones has remarked (3rd TOES proceedings, 1995) “…for all their worldly naiveté, economists can unerringly develop an attachment to opinions which attract an elevated status and income”.

In an ABC radio interview (29 June, 97) the Labor premier of NSW was asked to list the goals of his government. He replied that from his perspective the main goals were (i) infrastructure management, (ii) fiscal responsibility, and (iii) the quality of education. When asked how these might be achieved he gave the simple and telling prescription further privatisation of the public sector. This response provides a measure of how far the Labor Party has moved from its traditional position on privatisation. An interview with a backbench Labor MP within the same program revealed that, although previously regarded as a right-wing member of the party, he is now by his colleagues as being on the left. He interprets this as reflecting a major shift in ideological orientation of the party’s centre of gravity towards the right (he claims, by contrast, to have not changed his position on political and economic matters at all).

The community of rationalist economists who advise all governments now perceive almost all public spending to be an unnecessary drain upon the taxpayer, and regard it as their duty to see such spending wound back as much as possible. They ignore modern research which has found a strong correlation between public sector investment in infrastructure and private sector profitability. They ignore the position put by a minority of their academic colleagues that it is wrong and misleading to hold that public and private sectors are (or need be) in competition with each other. They ignore the important point that there is no gain for anyone in dismantling a public sector bureacracy if it is simply going to be replaced by a private sector bureaucracy (as has usually been the case in practice). They would undoubtedly dispute the proposition that any healthy economy requires a relatively strong public sector because no private sector organisation can be trusted to self-regulate in a manner which adequately allows for social priorities and the national interest. They seem blind to the fact that private sector operations almost always entail a conflict between the interests of private shareholders and the wider public interest. The idea that a strong public sector might provide a valuable instrument by which governments can intervene to create effective demand, eg by providing assistance to manufacturing industry and agriculture, whenever this is desirable for the common good, is anathema to them. They would obviously strongly oppose such notions as governments expanding employment in the public sector, where necessary, to provide the services essential to a civilised quality of life.

WHY DO GOVERNMENTS MAINTAIN THE PRESENT POLICIES ?

There is undoubtedly a widespread realisation within the Australian community that the “holy trinity” of deregulation, privatisation and globalisation have not provided the dividends and pay-offs that were intended and expected following the first flush of policy changes initiated by the Hawke-Keating administration. This realisation has also been underpinned by the now well-publicised admission, concerning the deregulation of Australia’s financial system, from one of the previous government’s key economic advisers - Prof Fred Argy:

“…. Financial markets have become increasingly perverse, erratic, inconsistent,
and extremely arrogant - they think they should be dictating policy to governments
…. What we now have is a situation where speculators - the new barbarians at
the gates - want to have fun making a quick buck. We have increasing volatility,
which has a significant effect on real interest rates, and there are effects on business
confidence and long-term economic and employment growth. You’ve got to ask
yourself whether it isn’t the lesser of two evils to have the guts to stand up to them -
tell them to go jump in the lake….”

There has also been some general community perception of failure in certain key elements of the entire “rationalist” strategy, particularly with respect to Australia’s historically high levels of unemployment, the maldistribution of wealth and income, and the serious balance of payments problem. Nevertheless, only a handful of media commentators and informed critics have pursued and emphasised the matter of the magnitude and social ramifications of what is, in reality, a spectacular failure of economic policy. These critics include Russell Mathews, B.A. Santamaria, Hugh Stretton, Kenneth Davidson, Frank Stilwell and Eva Cox. The majority of economic commentators within the media, however, remain firmly wedded to hard-line rationalist prescriptions.

Why is there a measure of tolerance of these failed policies within both the general community and the media, rather than outright hostility and active opposition? In particular, why have the major political forces within this country, and particularly the Labor Party, not seen fit to campaign on these issues and on the need for a change of direction within recent election campaigns? It is almost as if there were a major blind spot preventing politicians from even recognising their obligations to oppose immoral and antisocial policies.

A significant part of the explanation has been given by Russell Mathews (ibid), namely (i) a feeling of powerlessness in those most affected by these policies, since the policies have been embraced by all of the main political parties, leading to a lack of will to force the issues onto the main political stage, (ii) an ideological barrier to change due to the construction of economic rationalist concepts from economic models of an ideal world rather than the real imperfect world, and (iii) a denial that the existing policies have actually failed, partly attributable to ignorance and gullibility, and also to a tendency, wherever the perception exists that there is no pain-free alternative, to “stick with what we know”.

A SINISTER ELEMENT

Although the blame for the present situation cannot be placed entirely in the lap of the mainstream economists, undoubtedly it would not have developed so far and so rapidly in its present disastrous direction if they had thought and behaved differently. Apart from advocating and engineering economic measures that haven’t worked as originally anticipated, these economists are culpable for their failure to foresee many of the devastating long-term social and environmental impacts of these measures, as well as for failing to rethink and modify their positions when confronted with firm evidence detailing the damaging effects. The inane mantra “no gain without pain” should be etched onto their tombstones as a mark of derision and condemnation.

However there are some less obvious, and to date very little publicised, consequences of economic rationalist ideas which in my opinion are set to deliver enormous suffering to the community as a whole. I refer in particular to the Multilateral Agreement on Investment (MAI), which is being secretly negotiated by corporate advisers and economists from nations represented in the OECD. It is anticipated that the agreement will be signed by mid-1998. The details have been filtering through from various internet authors and various interdisciplinary conferences, particularly from a series of perceptive articles by Prof John McMurtry at the University of Guelph in Toronto, Canada. In a nutshell, this evil proposal represents the ultimate push by the international markets for total power, being nothing less than a plan to replace the authority, control and sovereignty of democratically responsible governments around the world. If this quasi-fascist description seems like an exaggeration, perhaps it would be well to quote Prof McMurtry directly (Conference on the evolution of world order, Toronto, June 7, 1997):

“…What unifies the diverse and sweeping prescriptions of this extra-parliamentary
formation of a transnational framework of law is the single, final goal of releasing
corporate investment from any interference or social condition set by national or
local public authority. Every term of the agreement is to guarantee this free subject-
hood of “investment” as sovereign over any democratic decision to set limits on its
movement, location, time-frame, objective or volume.

What unifies the private monetary interests driving this would-be regime, in turn,
is the fact that trans-nationally mobile corporations in of the signatory jurisdictions
are freed from accountability to any other interest, government or citizen body in
their new guarantee of unlimited access to all of the markets, resources, subsidies
and assets of the 29 societies involved.

What makes this appropriation of public power by for-profit transnational
corporations possible to impose on peoples’ historically evolved rights of self-
government is, in further turn, its absolutised expression of the market program of
value which is widely accepted as the final authority on how all societies ought to
live. This dispossession of citizens and communities of their collective rights to
protect their lives and resources as their own is, in the end, grounded on a
metaphysical principle that unfettered market rule has a natural right to regulate all
of the world’s societies in their best interests.”

With one quarter of the world’s people starving, one third of all children malnourished, nearly one third of the world’s 2.2 billion workers estimated to be unemployed, evidence of social breakdown in both capitalist and formerly communists societies alike, and serious degeneration of the all-important life-supporting biosphere, how could any intelligent observer arrive at the conclusion that the further freeing up of market power and control offers hope of improvement ? It can be said with some confidence however that the consequences of further relaxing democratic controls and regulations must be an ever-accelerating deterioration on all of the fronts listed above. Put within an historical context (and more starkly) it might be said that the human species is successfully preparing the ground for its own extinction.

JAH
(29 Dec 97)