Monday, December 13, 2010

Faithful few attend the economic church

If the nation's economists are right in assuming almost all of us share their belief that the pursuit of an eternally rising material standard of living must be a key goal of government, they're left with a puzzle: why then is there so little support for further micro-economic reform?

It's true virtually all our politicians and business people share the economists' assumption that almost every Australian sets a high store by an ever-rising standard of living.

At the Australian Business Economists' conference in Sydney last week, Saul Eslake of the Grattan Institute went so far as to say that only those who are "deep green" would doubt the primacy of ever-rising living standards.

In that case, Saul, you'd better start calling me Kermit the Frog. But I doubt I'm Robinson Crusoe.

The chief speaker at the conference was Gary Banks, chairman of the Productivity Commission and a high priest in the economists' Temple of Mammon. With Eslake as altar boy, he preached a fiery sermon about the need for more micro reform to lift Australia's faltering productivity performance.

Factually, he's right. If you're obsessed by economic growth then, as Paul Krugman has famously put it, "in the long run, productivity is nearly everything". Over the past four decades, growth in the productivity of labour accounted for about 80 per cent of the growth in Australians' real income per person.

The main way to increase the productivity (productiveness) of labour is to give workers more machines (physical capital) to work with. But 36 percentage points of the 80 came from "multi-factor" productivity improvement - that is, not from using either more labour or more capital, but from pure technological advance.

But though our productivity performance surged in the 1990s, in the early noughties it fell back to its long-term average. And since then it's worse than it was before the '90s. In 2009-10, there was only slight growth in multi-factor productivity - though the year before, buffeted by the global crisis, it actually fell by 2.4 per cent, something not seen in almost 30 years.

Like most economists, Banks attributes the surge in productivity during the '90s to the delayed effect of the many micro reforms begun by the Hawke-Keating government in the mid-1980s. He attributes the poor performance in the noughties to the dearth of further reform.

He notes that the surge in national income we're enjoying at present thanks to sky-high coal and iron ore prices is concealing our poor productivity performance and warns that, when those prices eventually come down, our weak economic performance will be exposed for all to see - and feel in their pockets.

But is the nation's presumed commitment to higher living standards that superficial? Are we so ignorant or lazy we're content to enjoy the easy affluence of the resources boom while it lasts, uncaring about the underlying deterioration in the endless-prosperity machine's performance?

If so, this hardly fits with another of the economists' assumptions: that we're all ruthlessly rational in our single-minded pursuit of more baubles and bangles.

The alternative possibility is that we're not nearly as committed to ever-rising living standards as the economists presume; that we have a range of objectives, of which acquiring more stuff is only one.

Economists have a concept they call "revealed preference", which boils down to a belief that people's true motivations are revealed by what they do, not by what they say.

(It was by means of this device that economists managed to convert their assumption that people seek to maximise their "utility" into a belief that utility could be measured by gross domestic product - the market's production and consumption of goods and services - thus making economics the handmaiden to materialism it is today.)

But if revealed preference is the test, there's a lot of economic apostasy and agnosticism about, starting with our politicians.

It's fashionable to berate the Rudd-Gillard government for its lack of commitment to economic reform, and it's true it hasn't shown all that much determination, particularly not compared with the performance of the Hawke-Keating government.

But, as Banks is at pains to remind us, that version of Labor was able to press on with its reforms secure in the knowledge it would draw little criticism from its Liberal opponents, particularly under John Howard and John Hewson.

By contrast, the present Labor mob has experienced from the Liberals nothing but criticism and active Senate resistance to its reform attempts. Their obstructionism has ranged from implacable opposition to putting a price on carbon to trouble-making on the Murray-Darling Basin to opposing the rolling back of Howard's middle-class welfare.

The Libs have never had a more destructive, anti-rational leader than Tony Abbott. Every timid Labor attempt at reform has been used as an opportunity to fan populist resistance for partisan gain.

To be fair, the bipartisan support for micro reform broke down just as soon as Labor lost government in 1996. Turning their face against the rationalism of Bob Hawke and Paul Keating, Kim Beazley and his colleagues did all they could to profit electorally from the unpopularity of the goods and services tax and much else.

Even so, if economists, business people, economic rationalists within the Liberal Party and economic commentators are dismayed or distressed by Abbott's resistance to what little reform Labor has attempted, they've got a funny way of showing it.

No, I think the truth is staring us in the face: the two parties' loss of enthusiasm for economic reform merely reflects the public's lack of single-minded commitment to the pursuit of ever-greater, ever-faster material acquisition.

And the punters are right. Human well-being is a bit broader and more complicated than it suits the economic priesthood to acknowledge.