Gittins has his road to Damascus moment

Via Ross Gittins today:

The economic rationalist thinking that drove extensive economic policy change in the ‘80s and ‘90s took the profession’s ubiquitous neo-classical, demand-and-supply model of how markets work and assumed it was all you needed to know about how the economy worked.

It thus overemphasised the role of competition between “self-interested” (selfish, greedy) individuals, but underestimated the role of co-operation and community spirit and the importance of touchy-feely things such as job security, loyalty and our trust in economic and political institutions in making the economy work well.

The simple model’s assumption that all individuals and firms unfailingly act with full foresight of their best interests implies that government intervention is unnecessary and may well make things worse.

So the greatest crime of the rationalists (including, until far too late, yours truly) was naivety. They saw reforms that worked well in theory and assumed they’d work just as well in practice. In many cases they did work well enough, but in too many others they failed badly.

Unintended consequences abounded, the greatest of which was what I call “the sanctification of selfishness”. When the econocrats were planning the removal of import protection they confidently predicted a benefit would be to discourage “rent-seeking” – businesses incessantly lobbying the government for favours when they should be getting on with running their businesses more efficiently.

In reality, rent-seeking has become rife. Since the mid-80s, the Canberra-based lobbying industry must surely have been one of our fastest growing and most lucrative. The economists’ greatest naivety has been their assumption that successive governments would faithfully implement their reform plans while resisting the temptation to do favours for generous mates.

Which brings us to next week’s budget. Recent days have seen big business campaigning for tax breaks, a further shift in the industrial relations power balance in favour of employers, and the removal of “burdensome regulations”, all to create jobs.

Trouble is, years of bitter experience have taught us to recognise rent-seeking when we see it. Because economic rationalists have left people with the notion that economic progress is driven solely by self-interest, the rich and powerful now see themselves as justified in demanding that the economy be re-organised in ways that facilitate their efforts to get richer and more powerful.

Yep. But this was never unknown to the reformers of the eighties. In The Great Crash of 2008, Ross Garnaut and I noted:

An economist with the International Monetary Fund, Fred Hirsch, introduced a subtle treatment of these issues into modern economic literature in the 1970s. In Social Limits to Growth, Hirsch argued that the modern market economy is successful only to the extent that it stands on the shoulders of a pre-capitalist ideology. He was concerned that the growth and maturation of the market economy undermined the moral and ideological foundations upon which it depended. The market economy depends on respect for rules that cannot be enforced by law alone. It depends on the owners of business being permitted to maximise their own wealth and incomes in certain defined ways, and on others in society foregoing the opportunity to take advantage of their own positions to do likewise.

Hirsch presented a pessimistic prognosis for capitalism and the market economy that resonated through the Great Crash of 2008. ‘As the foundations weaken’, he concluded, ‘the structure rises ever higher’.

MB is basically a project that aims to bulwark those behavioral and policy normatives to prevent the collapse of capitalism into some kind of dark opposite, be it oligarchy or socialism. For that, we are banished from the MSM.

We have had our successes but you’d be hard-pressed to declare that we are winning.

David Llewellyn-Smith

Comments

  1. TailorTrashMEMBER

    “The market economy depends on respect for rules that cannot be enforced by law alone. It depends on the owners of business being permitted to maximise their own wealth and incomes in certain defined ways, and on others in society foregoing the opportunity to take advantage of their own positions to do likewise.”

    Or being totally excluded from the opportunity in the first place
    ….straya is progressing well on this path

    You chaps may not be winning but keep fighting. A little voice in the wilderness is better than complicit silence.

  2. Neoliberalism was never supported by economic theory.
    So Gittins can’t claim to have been misled by economics.
    Neoliberalism was always an ideological project led initially by political science types and then later by business types.
    Even Friedman’s serious economic theory contradicted the small state rubbish he put on for tv.
    Nothing inherent in general equilibrium models imply government inaction is a good thing or market failure can’t happen or even in the most extreme rational expectations models that people have perfect foresight at all times.
    That is simply wrong. New Keynesian models assume market failure and frictions. Old Keynesian models assume uncertainty yet they are all framed in a general equilibrium framework.

    The truth is Gittins bought into the hype.
    Why?
    For same reason Keating did. They aren’t economists.

    • Good summary. The foot soldiers of neoliberalism were more often the technicians of ‘managerialism’ ideology than economics. They were the MBAs and true believers like Keating who learned their politics by throwing a can of petrol on a bonfire in suburban blocks during the 50s and 60s.

  3. An economist is only relevant insofar as he is employed to give advice on how to ‘manage’ the economy.

    By not advocating for intervention in the economy an economist is effectively voting himself out of a job.

    • Economists can’t mange the economy as they have little idea why an economy declines or how an economy generates wealth. There are few stumbling around in the dark towards understanding having joined a few dots.

      • Indeed. Economists are the useful idiots that justify Govt intervention in the economy.

        One day, when all goes to pot, the sitting Govt will hang the economics profession out to dry and say: “It’s their fault”

  4. Gittins writes: “Lefty academics who bang on about the evils of what they love calling “neoliberalism” seem to see it as some kind of conspiracy between the economics profession and big business.”

    On the other hand, Lefty academics don’t seem to have a problem with the utter nonsense of Cultural Marxism, political correctness gone mad and weaponised diversity/vibrancy.
    If there ever was a real Leftist “revolution”; these useful idiots would be among the first to be taken out and (deservedly) shot.

  5. Stewie GriffinMEMBER

    In Social Limits to Growth, Hirsch argued that the modern market economy is successful only to the extent that it stands on the shoulders of a pre-capitalist ideology. He was concerned that the growth and maturation of the market economy undermined the moral and ideological foundations upon which it depended. The market economy depends on respect for rules that cannot be enforced by law alone. It depends on the owners of business being permitted to maximise their own wealth and incomes in certain defined ways, and on others in society foregoing the opportunity to take advantage of their own positions to do likewise.

    So basically we live in an Economic Zone now?
    #EZFKA

    the market economy undermined the moral and ideological foundations upon which it depended. The market economy depends on respect for rules that cannot be enforced by law alone.

    Whoever would have thought?

      • Stewie GriffinMEMBER

        I wonder when the penny will drop for everyone else that culture is EVERYTHING.

        Culture is the foundation upon which understandings of honesty, motivations for honesty (Guilt vs Shame), Trust and ideas around the social contract and the mutual rights and responsibilities that come with it, and all the things that make Capitalism and Democracy work.

        Yet our most enlightened and progressive minds have been sneering at the thought that Culture Matters!

        • Absolute BeachMEMBER

          Bravo. Goethe wrote something like “He who does not know 5000 years is living but hand-to-mouth”. Culture is an implicit understanding that derives from living well, and over extended timeframes. And taking note of the details. History matters. These things hardly feature in the maths of a new economic model or policy direction. Culture is overlooked at a cost. Like the cheap man who usually buys twice.

  6. This is the only site on the internet I pay money to visit, and I happily pay that money so that Dave and Leith can keep sticking it to the Great Princes.

    More power to your arms, gents.

  7. This ‘situation ‘ won’t be corrected via well managed restructuring of our economic path. The vested interests will string this out until a critical mass turn on them. And I don’t mean 50%, more like 90 or 95% of people in the developed world will need to act as one. Against all of the resources, technology and economic constraints that are imposed it will take a high level of economic depression and desperation to see it change.
    I think we are still 10 yrs to a generation away from real change.

  8. Jumping jack flash

    “Hirsch argued that the modern market economy is successful only to the extent that it stands on the shoulders of a pre-capitalist ideology”

    Gold.

    “The market economy depends on respect for rules that cannot be enforced by law alone. It depends on the owners of business being permitted to maximise their own wealth and incomes in certain defined ways, and on others in society foregoing the opportunity to take advantage of their own positions to do likewise.”

    Ain’t nobody got time for that. Considering all these moral obligations may mean missing out on an opportunity to screw someone else to the wall, or crushing them under a huge pile of debt which they readily hand over to you and then spend a lifetime repaying.

  9. “”MB is basically a project that aims to bulwark those behavioral and policy normatives to prevent the collapse of capitalism into some kind of dark opposite, be it oligarchy or socialism. For that, we are banished from the MSM.
    We have had our successes but you’d be hard-pressed to declare that we are winning.””…….

    Welll. The free market think tank, the Institute of Economic Affairs laboured tirelessly from its beginnings in 1955 and its effective inception in 1958 in London, when economist Arthur Seldon joined Ralph Harris. During the Keynesian 1960s it was largely ignored except for ginger groups within the Conservative Party like the Bow Group which was peopled by future Thatcher ministers Geoffrey Howe, Leon Brittan, John McGregor, Michael Howard, Norman Lamont as well Tory free market ideologues such as Enoch Powell.
    It was not until the early 1970s when Heath’s tentative tilt towards free market policies resulted in the famous U turn which instituted anti free market industrial bail outs and the prices and incomes policy that the IEA really started gaining traction. So at a rough guess 13 years after its inception.
    Then when Heath was defeated in 1974 the first election of that year, senior Heath government minister Sir Keith Joseph declared that he had realised he was never a conservative in his time as a Minister in the MacMillan, Home and Heath governments but in fact was implementing socialist policies. With a degree of subterfuge, he gained Heath’s permission to set up a think tank called the Centre for Policy Studies within the Conservative Party. Margaret Thatcher and Alfred Sherman were the other senior figures at the founding of this party think tank. Purportedly to investigate social market economies in Europe but in fact to investigate implementing free market policies in the UK. With assistance from the IEA. Then when Heath lost the second election of 1974, moves began to oust him and he was replaced by Thatcher at the beginning of 1975. At this time it could be said that the IEA’s time had really arrived. So approximately 17 years. Compared to them, you’re running ahead of schedule and the IEA won enormous victories from 1979 onwards