Opinion & Commentary
The Ascendancy of Economic Rationalism
A spectre is haunting the world - the spectre of economic rationalism. All the powers of the world have entered into a holy alliance to hunt down and exorcise this spectre...’. This is how Karl Marx and Friedrich Engels might have adapted the opening of their Communist Manifesto, had they lived to witness the amazing recent renaissance of economic liberty and its consequences. Just when governments had become more pervasive and dominant than ever before, when an all-embracing welfare state promised to solve age-old material uncertainties and when observers predicted a convergence of capitalism and communism, the ideas of a derided minority of pro-market philosophers gained influence over policy around the world. These ideas helped undo the Soviet Union and the Berlin Wall and challenged Western political establishments, which were promising voters the ‘Great Society’. These ideas are the ‘spectre’ of economic rationalism.
The term has, at a populist level, become an all-purpose piece of invective for the protagonists of big government, political redistribution and favour-mongering, from the ABC to the Evatt Foundation. At that level, one might simply retort that to advocate irrational economics is as nonsensical as urging engineers to build machines that break down. However, such polemics among the deaf only induce wilful misrepresentation and prevent us from confronting some basic human realities.
'In essence, economic rationalism is about a most fundamental human problem: how to find, develop and use resources - knowledge, skills, labour, natural resources, and capital - so as to improve the human condition'.
These resources are scarce but can be increased by our creativity. This is why most people now live longer, healthier, cleaner, more interesting, secure and peaceful lives than their forebears 200 years ago, and why more of the destitute survive.
What drives economic development? How are resources best found, coordinated and utilised? The task is unimaginably complex. Just imagine for a moment how many people have to interact to produce a simple pencil! Graphite miners, chemists, timber getters, engineers, traders and thousands of others in different continents have to cooperate. How best to facilitate such cooperation to supply millions of changing products is a task to be tackled rationally.
Essentially, there are two ways of achieving productive cooperation. One is to coordinate producers from the top down and distribute the results by a visible hand, with knowledgeable public office-holders planning the use of collectively owned resources and allotting goods by political fiat. The other way is to allow millions of people to interact in the market place, pursuing their own diverse, changeable interests and using their own limited knowledge. Suppliers, including of labour and skills, will then rival with each other, cutting costs, improving their methods and inventing new products in order to attract potential buyers.
Whether a specific good or service should be provided by competing private choices or the alternative of collective, public choice has to be decided pragmatically, case by case. However, as the world becomes more complex, as technical and social change accelerates and as people get used to wider choices, political command-and-control increasingly fails. What works well within a family business or small organisation may fail in complex national economies. Leaders simply do not know enough, and are not motivated enough, to solve most daily economic problems at the national scale.
Decentralised private choices inflict risks and costs on individuals but, overall, the aspirations of most are better satisfied most of the time than under public choice. Competition stimulates economic growth - and the by-products are longer and healthier lives, cultural diversity and many other non-material gains. Collective action has to work within hierarchies and by coercion (taxation, regimentation, regulation) and breeds passive recipients of government handouts and directives. By contrast, competitive capitalism offers and demands self-responsibility, individual purpose and freedom, breeding more self-assured, creative and enterprising citizens. It empowers ordinary citizens.
Two fundamental observations modify this philosophical stance. Firstly, not all goods and services can be supplied effectively through markets. Thus, basic law and order, national defence and other protective functions are best left to collective agents AND financed by tax. Experience has shown - to me, anyway - that some public production of goods and services and the public provision of a minimum income and of access to education and other essentials are unavoidable. The political process, if properly designed and supervised, can handle this task. I guess that about a quarter of economic decisions should be left to collective choice.
Secondly, while many (including Karl Marx) concede the creative capacity of competitive capitalism, many fear resulting inequalities. Not all enjoy equal starting opportunities or have adequate resources or power to compete successfully. This is why economic rationalists argue for some collective provision of the financial means to access schooling, health care and the like, in the form of education vouchers or tax-supported basic health insurance for example. Financial provision does not, however, imply that unwieldy bureaucracies should produce the services! Most intolerable inequalities arise where interventionist bureaucracies bend the rules for cronies and the well-organised. This is why economic rationalists argue against political preferment or privileges. In any case, whether competition indeed leads to lasting inequalities is unclear. Some of the most competitive societies, such as Taiwan, display the relatively most even distribution of opportunities, incomes and wealth.
'Economic rationalists advocate competing private choices wherever collective choice has no demonstrated general advantage'.
That is why they argue for deregulation, lower taxes, targeting welfare at the destitute and privatising government-owned monopolies (just consider the improvement, for example, in telephone services). That is also why they demand the enforcement of basic laws against fraud and the use of force and wish to remove the many institutional and judicial obstacles to effective markets. The plea is for the abolition of privilege and favouritism, so that all can have a fair go.
In Australia’s established political culture, this plea is perceived by many as a dangerous spectre. Political careers are often made by favours to well-connected client groups and industries. Work incomes are often determined by tribunals amid political grandstanding. And firms used to prosper by lobbying for tariffs and subsidies, not by innovation. Little wonder that many politicians, lobbyists, unionists and industry apparatchiks resent the ascendancy of ‘Dry’ philosophy. Those good at politicking, who can argue and score points, and those who enjoy tax subsidies, such as in public broadcasting, universities and the arts, naturally favour elite guidance. But the corollary is the disempowerment of the Battlers, whose daily ‘dollar votes’ are constrained by high tax and unnecessary regulation.
The enemies of rational economics are fighting losing rearguard battles. One reason is that the shift to rational policies under Hawke and Keating paved the way for rapid productivity increases, better service, cheaper imports and new career opportunities for many of the young. Many voters now also realise that governments tend to redistribute from the weak to the well-organised, regardless of ‘social justice’. Another reason for the continuing ascendancy of economic rationalism is that improved measurement technology now facilitates private choice; thus, electronic transponders now make private roads feasible. Yet another reason is that the world is becoming less predictable and plannable; technical changes alter what regulators tried to pin down only yesterday. And Australians will only prosper in the open, global competition if they can work under small government, which concentrates on fostering reliable, simple rules that leave them free to experiment in markets - and to keep their hard-gotten gains.
About the Author:
Wolfgang Kasper was Professor of Economics at the Australian Defence Force Academy 1977-99 and is now a Senior Fellow in The Centre for Independent Studies.
