Business - and customers - pay for bad business behaviour

It's remarkable the way the Business Council of Australia constantly lectures us on the "reform" we should be accepting to improve our economic performance (and, purely by chance, their profits), but never seems to lecture its big-business members on their manifest need to "reform" their own standards of behaviour.

Among its most profitable members would have to be the four big banks. But the litany of scandals over their bad treatment of customers never seems to end.

The latest was CommInsure's denial of legitimate life insurance claims, but there's also been ANZ's alleged manipulation of a key commercial interest rate and the Commonwealth Bank's bad financial planning advice that lost money for many customers.

Now the chairman of the Australian Securities and Investments Commission, Greg Medcraft, has joined Australian Prudential Regulation Authority boss Wayne Byers in demanding the finance industry fix its corporate culture.

"Time and again, we have seen firms blaming [behaviour] on a few bad apples driving bad outcomes for consumers, rather than taking responsibility by looking more closely at their organisation and implementing the necessary changes to address the cause of the problem," Medcraft said on Monday.

"At the end of the day, you need to have a culture that your customers can believe in."

The captains of finance have not reacted well to the bureaucrats' admonition. David Gonski complained about the corporate regulator being the "culture police", while someone from the Institute of Company Directors offered the uncomprehending advice that corporate culture could not be imposed by law.

It would be wrong to focus only on the bad behaviour of the banks, of course. There have been other instances from other industries. Take 7-Eleven's underpaying of foreign workers.

Or take the many notorious cases of businesses rorting government subsidy schemes in ceiling insulation, childcare and vocational education and training.

It's possible what we're seeing is merely greater exposure of the bad behaviour of big business thanks to a surge in business investigative journalism, with Fairfax Media's Adele Ferguson at its head.

But I've been in and around businesses since I left school 50 years ago, and I think bad corporate behaviour is definitely worse than it was. As executive remuneration has headed for the stratosphere, so the willingness to exploit customers and staff has grown.

But why? One reason is the rise of a more fundamentalist approach to economics. "Economic rationalism" has prompted much deregulation, privatisation and outsourcing, which has made competition a lot more intense in many industries.

That's not necessarily a bad thing, but as managers have experienced greater pressure to perform – as it's become harder to keep profits high and rising – they've passed the pressure on to staff and customers.

Economic fundamentalism is both a product of the greater materialism of our age and a cause of it, with all its emphasis on monetary values and view of "labour" as just another resource to be exploited along with other raw materials.

What's worse is that economic fundamentalism has had the effect of sanctifying selfishness. When I put my own interests ahead of other people's, I'm not being greedy or self-centred or antisocial; I'm just being "rational".

One effect of the greater pressure to perform is the present "metrics" fad – the obsession with measuring aspects of the firm's performance, then using those measures to improve performance, such as by setting targets based on "key performance indicators".

What the KPI obsession is saying is: just get results; how you get them is of lesser interest. I'd lay money that the reason people at CommInsure were knocking back legitimate claims was they were being encouraged to do so by KPIs or other "performance incentives". (That's why it's dishonest for people at the top to blame "a few bad apples".)

Most people's sense of what is acceptable, ethical behaviour is determined by what they believe their peers are doing. If they do it, it's ethical for me to do it; if they don't do it, maybe I should feel guilty about it.

The trouble is, studies show that adults, like children, often harbour exaggerated impressions of how many others are doing it.

Social conformity (aka "culture") is such a powerful influence that it's always been hard for people to follow their own "moral compass". With the decline of religious adherence, it's harder even to have one.

The Business Council and its members ought to be a lot more worried about the decline in their standards of behaviour than they seem to be.

One fundamental the economic fundamentalists keep forgetting is that market economies run best on widespread trust: mutual trust between management and staff, and between businesses and their customers.

Allow declining standards of behaviour to erode trust and the economy suffers. Customers become harder to persuade, argue more with counter staff, are surlier with call-centre staff and more inclined to take their business elsewhere. They resist "upselling".

With less trust you have to waste a lot of money on increased security in its many forms. And governments react by multiplying laws and legal requirements.

When so many companies demonstrate their contempt for other taxpayers by the way they manipulate the tax they pay – their ethic is that if it's (barely) legal, it's ethical – it becomes much harder for governments to get voter support for cutting the rates of those taxes.

Who knew?

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Voter volatility caused by politicians' bad behaviour

The latest political excitements in Queensland and Canberra leave a lot more at stake than the future of Tony Abbott and the fortunes of the Coalition. They show the rules have changed in Australian politics, with lessons for politicians on both sides.

What's important for the good government of the country and the economy, however, is that the pollies draw the right conclusions.

Abbott's ministers are right to conclude that politics has become quite volatile, with voters capable of swinging from one extreme to the other between one election and the next. That's what we saw in Queensland on Saturday, and what we may see - to a lesser extent - in NSW next month. It's what the polls say would happen federally if an election were held today.

The first implication of this volatility is that, across the nation, no party stays in the wilderness for long.

In consequence, parties that indulge in blanket negativity in opposition, or vindictiveness towards their opponents when in government, won't have long to wait before the other side gives as good as it gets.

Until that lesson is learnt, it will be a race to the bottom in standards of political behaviour, which will only heighten voters' willingness to throw out governments.

Another implication is the end of the fair go. With the defeat of Coalition governments in Victoria last year and Queensland last week, the comfortable assumption that voters invariably give first-term governments a second chance to prove themselves has gone.

What's more, Julia Gillard's Labor government went within a whisker of defeat in 2010.

There's been a breakdown in voters' "brand loyalty". Some people remain rusted on to Labor and some will vote Coalition no matter what, but the proportion of voters willing to change their vote from election to election - and vote one way federally and the other in their state - is much higher than it was.

The classic swinging voter used to be regarded as someone who took little interest in politics between elections, but if my pilgrimage is any guide, they've been joined by people who follow the politicians' antics closely.

So what has brought this change about? The politicians want to blame the advent of the 24-hour media cycle, including social media. The game moves ever faster, with far more pressure on governments to react to every little thing that comes along and on pollies who "misspeak" in some way.

The media's attention span is much shorter, which makes it harder for governments to explain and justify their reform proposals. Mixing metaphors, this should make it easier for someone in the gun to stonewall until the spotlight has moved on. In practice, the intensity of the blowtorch is so great that offenders crack, adding to the instability.

There's a fair bit of truth to this complaint, but if the pollies think it does most to explain their predicament, they're deluding themselves. The greater explanation is that decades of ever more manipulative behaviour by our politicians have destroyed their credibility and eroded our trust and loyalty.

One problem is their preference for appearing to solve problems rather than actually tackling them. Another is the utter unreality of election campaigns, with all their unaffordable bribes and pretence of painless solutions to problems.

The biggest problem, of course, is decades of broken promises by both sides. Gillard broke her promises to balance the budget and not to introduce a carbon tax. Campbell Newman promised not to sack public servants. Abbott campaigned on the restoration of trust and high standards, but also made promises he can't have intended to keep - and didn't need to make to win.

The great risk from all this is that politicians ignore their own part in causing voters' caprice and convince themselves the public will no long countenance unpopular economic policies.

The biggest issue in the Queensland election was voters' rejection of a massive program of privatisations used largely to reduce government debt. But I'd wait for the outcome of the NSW election - where Mike Baird is promising to devote the proceeds from a smaller program to building new infrastructure - before concluding asset sales are now verboten.

Some Abbott ministers are concluding the public's rejection of last year's budget means voters don't care enough about debt and deficits to be willing to bear a little hip-pocket pain. This is self-delusion.

It conveniently forgets the calculated unfairness of Joe Hockey's choice of budget savings, all the broken promises and the government's ignominious climb-down from its pre-election claim that a "budget emergency" existed but could be fixed instantly and without pain.

The ubiquitous strategy of oppositions getting elected by making themselves a "small target", with promises to do nice things and not do a host of nasty things, is now revealed as a dangerous weapon. It works well enough if the incumbent government is on the nose, but leaves you without a mandate to tackle the difficult problems you inherit.

There's a difference between being tough and being extreme. Newman was sacked and Abbott is in trouble because of their unforeshadowed extremeness - both in their policies and their way of implementing them.

Trust can be restored and tough measures accepted if our politicians stop lying to us and playing favourites in the solutions they propose. Putting up leaders who are remotely likeable would also help.

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Bankers and wealth managers take ethics oath

As the misadventures of the can-do Commonwealth Bank remind us, even though our bankers didn't bring the house down in the global financial crisis as happened elsewhere, we still had too many victims of bad investment advice losing their savings.

So, what's the answer? Tighter regulation of banks and investment advisers, or a higher standard of ethical behaviour by individuals working in banking and wealth management? Try both.

I'm not so naive as to have much faith in self-regulation, but that's not to deny that some people's behaviour is more ethical than others', nor that more individuals behaving ethically would make a difference.

When you stop believing our personal behaviour matters, that we're all mere cogs in some uncontrollable machine, it's time to slit your throat.

My guess is most people like to think of themselves as reasonably ethical, which is not to say most of us actually are at all times (not even me). Trouble is, most people make their judgments about what is ethical and what's not from the behaviour of those around then.

Moral compasses are hard to find. But that's why I'd like to see a movement initiated by Dr Simon Longstaff, of the St James Ethics Centre, the "banking and finance oath", get more publicity and more signatories. The better known are the oath and those who've signed up, the better judgments others can make about how a particular action measures up.

The oath consists of nine principles: trust is the foundation of my profession; I will serve all interests in good faith; I will compete with honour; I will pursue my ends with ethical restraint; I will create a sustainable future; I will help create a more just society; I will speak out against wrongdoing and support others who do the same; I will accept responsibility for my actions; my word is my bond.

The names of the many signatories to this oath are listed on its website, thebfo.org. They include Glenn Stevens, Jillian Broadbent, Carolyn Hewson, Warren Hogan, Andrew Mohl and Elizabeth Proust.

Why doesn't someone ask the chief executives of the big four banks just what it is that makes them feel unable to sign up? It couldn't be a threat to their profitability, surely.



THESE days the world is positively awash with forecasts of what will happen to the economy. Treasury publishes its forecasts twice a year, the Reserve Bank publishes four times a year and a couple of dozen economists in the financial markets make their forecasts regularly and freely available.

But it wasn't always like that. Before the financial markets were deregulated in the early 1980s few economists worked in them, the Reserve kept its opinions to itself and Treasury's official forecasts in the budget papers were kept terribly vague. Billy Snedden's last budget advised that "economic growth is expected to quicken considerably in 1972-73".

When I became an economic reporter in 1974, one of the few unofficial forecasters was Melbourne University's Melbourne Institute, where the regular pronouncements of Dr Duncan Ironmonger drew rapt attention from the media.

And by then Philip Shrapnel's business selling his forecasts had been going for 10 years, meaning the economic analysis and forecasting firm BIS Shrapnel is celebrating its 50th anniversary this year.

Shrapnel, who trained at the Reserve, spent a few years working as a forecaster for pretty much the only notable management consulting firm in those days, WDScott, before going out on his own. He was a character, said to polish off a least half a bottle of scotch as he stayed up studying the documents on budget night.

A lot of the people who paid to attend his forecasting conferences - still held today - would have been there to get his forecasts and plug them into their company's annual budget. These days my guess is his company makes more of its money from its research reports on particular industries and its special focus on property and construction.

Whereas David Love's rival subscription newsletter, Syntec, made its name from its uncanny ability to read the mind of Treasury, Shrapnel was fiercely independent. Not for him the risk-averse strategy of clustering with everyone else around the official forecast.

His successors retain this approach of doing their own analysis their own way and sticking to it. Like all forecasters they've had their misses, but their independence of mind may explain some notable calls: no downturn as a result of the Asian financial crisis of 1997-98; a downturn in 2000-01 no one else was expecting; and no recession following the global financial crisis.

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Economists face criticism over poor ethics

Are economists ethical? Short answer: no more than most. Long answer: well, it's not something they think about much.

The question of ethics is starting to raise its head among economists, both overseas and in Australia, particularly in NSW. It's an issue the Sydney branch of the Economic Society is likely to start debating in the next few months.

The issue is arising as more economists find ways to sell their services to big business for big bucks. Business is attracted by the status, expertise and authority economists bring, and is willing to pay for it.

Various aspects of conventional economics make economists susceptible to such transactions. Almost all economists believe in the market system and believe that the bigger the economy grows the better off we are. So they have an inbuilt sympathy with business and its objectives.

They believe self-interest is a good thing because it's what motivates a market economy. It should never be a bad thing because it's held in check by countervailing market forces.

And there's a belief among economists that their discipline is "positive" rather than "normative". It's a "value-free" description of how the economy actually works, not a statement of opinion about how it should work.

It's because of this belief that, for example, many economists take no account of the implications of their recommendations for the way income is distributed between rich and poor. That's a "value" question they aren't qualified to comment on and so leave to others, such as politicians.

That's what they say when challenged. When they're not challenged they usually give the impression that distributional issues don't arise and economic efficiency is the only issue worth considering.

In truth, the neo-classical model is loaded with values, the most important being that individualism is superior to communitarianism.

So you see why ethics isn't something economists think much about. And this is reinforced by the profession's lack of organisation. Economics is unregulated; anyone can call themselves an economist (I don't, by the way).

Economics has no true professional body. The Economic Society is the closest they come, but it's essentially a discussion group that anyone can join. Its other function is to sponsor the academic economists' annual conference and the main Australian economic journal (which the academics don't rate highly because it's only Australian).

Without a proper professional association you could argue economists aren't a profession, just an occupation. Most are employed by governments and, these days, by banks and other financial services firms, which means they're not free to express opinions at variance with those of their employer. Academic economists are free, but often don't bother.

The question of economists' ethical standards arose in the US after the global financial crisis, when impertinent journalists pointed out that academic economists were writing articles posing as independent experts, without disclosing the financial firms they were affiliated with or for whom they had done consultancy work.

In Australia the spur is the rise of the new breed of economic consultancy firms, which are paid to provide allegedly independent modelling to private interests seeking to lobby governments. Sometimes even governments commission private modelling to provide evidence supporting some policy the pollies are pursuing.

For some reason, when the independent consultants run their models they invariably reach conclusions that support their paying customer's proposal. Remarkable.

These carefully contrived conclusions are then used to bamboozle the public, politicians and even judges who don't know enough economics to know how dodgy many modelling exercises are and how easily models can be tweaked to produce whatever answer you're seeking.

The issue has reached a head in NSW, where Dr Richard Denniss, of the Australia Institute, has appeared as an expert witness in a couple of court cases disputing the "independent" modelling being used to claim the development of a new mine will bring huge economic benefits to the district.

One judge was scathing in his condemnation of the use of an "input/output model" to exaggerate the indirect job creation from a project. A report by the independent Planning Assessment Commission on another project criticised the NSW Department of Planning for its uncritical acceptance of estimates of the project's economic benefits that had been challenged and were "not credible".

Last week the department's new minister, Pru Goward, announced that it would commission separate expert economic analysis of all future major mining projects. Good luck.

Issues of independence and conduct will be discussed during the NSW Economic Society's forum on cost-benefit analysis on July 18. And a later meeting of the society is expected to debate whether economists need a code of ethics. I'd start with an ethical code for modellers.

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Greed is the market's forgotten vice

Where do Easter and business intersect? Well, what about at greed.

According to Dr Brian Rosner, principal of Ridley Melbourne, an Anglican theological college, greed has been glamorised by the market economy and is a forgotten sin.

Maybe it's this that allows those Christians who are business people, economists and politicians to share their colleagues' commitment to unending economic growth and an ever-rising material standard of living.

In his book, Beyond Greed, Rosner defines greed as ''wanting more money and possessions'', a refusal to share your possessions and ''the opposite of contentment''.

Greed has always been with us, and insatiability isn't unique to modern Western civilisation, but we're certainly giving it a workout. To us, money is the simplest measure of whether you're winning at the game of life.

But what is unique to our age, according to another author, is the cultural acceptance, even encouragement of insatiability. A survey of regular churchgoers in America found that whereas almost 90 per cent said greed was a sin, fewer than 20 per cent said they were ever taught that wanting a lot of money was wrong, and 80 per cent said they wished they had more money than they did.

It seems that, by comparison with the past, greed is regarded as a trivial sin. A retired priest has recounted that, in his long years of service, all kinds of sins and concerns were confessed to him in the confessional, but never once the sin of greed.

But Rosner's having none of that. He says greed is at the heart of three major threats to our existence as individuals and societies: pollution, terrorism and crime.

Pollution is caused by human unwillingness to pay the price for the cleaner alternative (ain't that the truth, Tony). ''On any reckoning, climatic change due to the effects of pollution could cause major 'natural' disasters in the days to come,'' he says.

In most cases of terrorism, each side accuses the other of some form of greed, whether involving people, land or property. ''Greed also fits both sides of the equation in many cases of crime,'' he says. ''Thieves steal because they want more, and often because they perceive the victims as having more than their fair share.''

The greedy are those who love money inordinately, trust money excessively, serve money slavishly and are never satisfied with their possessions.

Rosner says greed is a form of religion, the religion of Mammon. Literally, mammon means wealth or possessions, but it could just as easily be taken as the biblical word for the economy. And if greed is a religion, that makes it a form of the greatest of all sins: idolatry. (First Commandment: you shall have no other gods before me.)

In Western society, the economy has achieved what can only be described as a status equal to that of the sacred.

''Like God, the economy, it is thought, is capable of supplying people's needs without limit. Also, like God, the economy is mysterious, unknowable and intransigent,'' he says. ''It has both great power and, despite the best managerial efforts of its associated clergy, great danger. It is an inexhaustible well of good(s) and is credited with prolonging life, giving health and enriching our lives.

''Money, in which we put our faith, and advertising, which we adore, are among its rituals. The economy also has its sacred symbols, which evoke undying loyalty, including company logos, product names and credit cards.''

Rosner says we have to distinguish between the legitimate enjoyment of material things, which the Bible takes for granted, and an illegitimate and unhealthy attachment to wealth as an end in itself.
But if we don't want to be greedy, what should we be? Contented.

''To be content is to be satisfied, to enjoy a balance between one's desires and their fulfilment. To be content is in effect to experience freedom from want,'' he says. But note, it's being content with your own lot, not those of others less fortunate than you.

And the other side of the contentment coin is giving. Rosner says that if Charles Dickens' Scrooge epitomises greed, giving is epitomised by Victorian jam maker Sir William Hartley. Hartley regularly and voluntarily increased wages, practised profit-sharing and supplied low-cost, high-quality housing to some of his employees and free medical attention to all of them.

He was also concerned for his suppliers, and would amend contracts in their favour if a change in the price of fruit and economic circumstances conspired against their making a decent living.

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Pollies' bad behaviour & dishonesty worsening all over

We are witnessing history being made. Unfortunately, it s a history-making decline in standards of political behaviour. At least it proves we 're not merely imagining that things were better in the old days.

Tempting though it is, one of the things incoming governments don' t do is delve into the affairs of their predecessor. The papers of the old government aren 't made available to the new masters.

But all that is out the window with the Abbott government 's decision to establish a royal commission into the Rudd government' s handling of the home insulation program and provide it with Labor' s cabinet documents.

It takes innocence greater than I can muster to believe the motive for the inquiry is to bring justice to the program 's victims rather than to embarrass the Coalition 's political opponents by raking over one of their more celebrated stuff-ups.

Labor can take its lumps. The real pity is that a long standing convention seeking to limit political vindictiveness has been cast aside. One thing we can be sure of is that when next Labor returns to power it will lose no time in retaliating, as will that government 's eventual Coalition successor. Advantage-seeking retaliation will become a bigger part of the political debate.

The man who set new lows in negativity and obstructionism in opposition is now taking us to new lows in government. In a more godly world, Labor would resist the temptation to sink to the level of misbehaviour set by its opponents, thus giving substance to its repeated claims of moral superiority.

But so intense is the competition between the parties that this seems unlikely. Last week Bill Shorten promised to lead a constructive opposition and not oppose everything for the sake of it. It 's a wonderful resolve - one which, if lived up to, many voters would find attractive - but I fear it' s another take from Tony Abbott: almost tearful promises to sin no more, followed by an immediate resumption.

The great likelihood is that Labor in opposition will model its behaviour on Abbott in opposition, in conformity with that great moral precept: tit for tat. The sad truth is that, for politicians as for most of us, the moral compass that guides us asks: what' s everyone else doing?

We take our ethics from our perception of the behaviour of those around us, particularly our competitors.
We all see ourselves as more moral than the next person, but when challenged our defence is always: I' m no worse than he is. After all, he started it.
Thus are our politicians locked in a race to the bottom.

Rather than trying to counter our fear of foreigners, politicians have preferred to pander to it, vying to be the side whose mistreatment of asylum seekers goes so far it discourages any more from coming - all intended to dissuade them from risking their lives on a dangerous sea voyage, naturally.

So far have our standards sunk that we must now suffer the indignity of being lectured on human rights by the Chinese government.

Declining standards at federal level have been matched by bad behaviour at state level. For an example of state politicians willing to blatantly mislead their electorates, look no further than the Victorian and NSW governments' dishonest explanation for the looming jump of about 25 per cent in the price of household gas.

The true reason for the rise is that the building of natural gas liquefaction plants in Gladstone will soon allow gas producers on Australia' s east coast to export their gas and obtain the much higher prices paid on the world market. The east coast will go from being outside the world market to inside it.

The price rise is thus inevitable unless governments were to prohibit the companies from exporting their gas, forcing them to continue accepting below-world prices. There has been no suggestion of penalising the gas producers in this way.

Rather, state politicians have taken up the dishonest claim of the gas companies that permitting them to build new and controversial coal seam gas plants would somehow prevent gas prices from rising or force them back down.

But as any student of economics could tell you, there' s no way NSW and Victoria could ever produce enough natural gas to significantly affect the world price of gas.

The price of gas in NSW and Victoria would stay below the world price only if the new producers were compelled to sell their gas to local users at below the world price. Again, there s been no suggestion of this.

Last week the gas companies' illogical argument was taken up by the new NSW Minister for Energy and Resources, Anthony Roberts. I' m prepared to believe Roberts may be economically illiterate, but I don' t believe his advisers are - nor that they don t read the papers, where the scam has been exposed.

Although Roberts has replaced a minister who left the cabinet under a cloud, he seems uninhibited in his efforts to mislead the electorate.

It' s hard to know whether he is simply seeking to advance the gas industry' s vested interests or is setting up an alibi which allows the government to blame the inevitable jump in gas prices on those terrible people opposed to fracking.

Either way, his only crime is seeking to deceive voters. And these days that 's the way everyone plays the political game, isn 't it?

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Top economist says what we hardly dare to think

Just as it s taking the world a lot longer to recover from the global financial crisis than we initially expected, so it s taking a lot longer than we might have expected for voters and their governments to learn the lessons and make the changes needed to ensure such devastation doesn t recur. But the penny has dropped for some.

Jeffrey Sachs, of Columbia University, is one of the biggest-name economists in the world. Yet in his book, The Price of Civilisation: Economics and Ethics after the Fall, he admits America s greatest problem is moral, not economic. Actually, he says that at the root of America s economic crisis lies a moral crisis. He puts into words thoughts most of us have hardly dared to think.

Sachs says America s weaknesses are warning signs for the rest of the world. The society that led the world in financial liberalisation, round-the-clock media saturation, television-based election campaigns and mass consumerism is now revealing the downside of a society that has let market institutions run wild over politics and public values, he says.

His book tracks the many ills that now weigh on the American psyche and the American financial system: an economy of hype, debt and waste that has achieved economic growth and high incomes at the cost of extreme income inequality, declining trust among members of the society and the public s devastating loss of confidence in the national government as an instrument of public well-being .

Even if the American economy is on the skids, he says, the hyper-commercialism invented in America is on the international rise. So, too, are the attendant ills: inequality, corruption, corporate power, environmental threats and psychological destabilisation.

A society of markets, laws and elections is not enough if the rich and powerful fail to behave with respect, honesty and compassion toward the rest of society and towards the world. America has developed the world s most competitive market society but has squandered its civic virtue along the way.

Without restoring an ethos of social responsibility, there can be no meaningful and sustained economic recovery.

America s crisis developed gradually over several decades, he argues. It s the culmination of an era the baby-boomer era rather than of particular policies or presidents. It is a bipartisan affair: both Democrats and Republicans have played their part.

On many days it seems that the only difference between the Republicans and Democrats is that Big Oil owns the Republicans while Wall Street owns the Democrats.

Too many of America s elites the super rich, the chief executives and many academics have abandoned a commitment to social responsibility. They chase wealth and power, the rest of society be damned, he says.

We need to reconceive the idea of a good society. Most important, we need to be ready to pay the price of civilisation through multiple acts of good citizenship: bearing our fair share of taxes, educating ourselves deeply about society s needs, acting as vigilant stewards for future generations and remembering that compassion is the glue that holds society together.

The American people are generally broadminded, moderate and generous, he says. But these are not the images of Americans we see on television or the adjectives that come to mind when we think of America s rich and powerful elite.

America s political institutions have broken down, so that the broad public no longer holds these elites to account. And the breakdown of politics also implicates the public. American society is too deeply distracted by our media-drenched consumerism to maintain habits of effective citizenship.

Sachs says a healthy economy is a mixed economy, in which government and the marketplace play their roles. Yet the federal government has neglected its role for three decades, turning the levers of power over to the corporate lobbies.

The resulting corporatocracy involves a feedback loop. Corporate wealth translates into political power through campaign financing, corporate lobbying and the revolving door of jobs between government and industry; and political power translates into further wealth through tax cuts, deregulation and sweetheart contracts between government and industry. Wealth begets power, and power begets wealth.

How have American voters allowed their democracy to be hijacked? Most voters are poorly informed and many are easily swayed by the intense corporate propaganda thrown their way in the few months leading to the elections.

We have therefore been stuck in a low-level political trap: cynicism breeds public disengagement from politics; the public disengagement from politics opens the floodgates of corporate abuse; and corporate abuse deepens the cynicism.

Sachs says globalisation and the rise of Asia risks the depletion of vital commodities such as fresh water and fossil fuels, and long-term damage to the earth s ecosystems.

For a long time, economists ignored the problems of finite natural resources and fragile ecosystems, he writes. This is no longer possible. The world economy is pressing hard against various environmental limits, and there is still much more economic growth and therefore environmental destruction and depletion in the development pipeline.

Two main obstacles to getting the global economy on an ecologically sustainable trajectory exist, he says. The first is that our ability to deploy more sustainable technologies, such as solar power, needs large-scale research and development.

The second is the need to overcome the power of corporate lobbies in opposing regulations and incentives that will steer markets towards sustainable solutions. So far, the corporate lobbies of the polluting industries have blocked such measures.

In Australia, of course, the public interest has so far triumphed over corporate resistance. But the survival of both the carbon tax and the mining tax remains under threat.

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Two minds make us all muddled thinkers

Conventional economics got set in its ways long before neuroscientists discovered something that helps explain why the decisions consumers and business people make are often far from rational: our brains have two different, and sometimes competing, systems for deciding things.

Psychologists call it system one and system two thinking. System one is our intuitive system of processing information. It's fast, automatic, effortless, implicit and emotional. It's controlled by the earlier, more primitive part of our brain. It's highly efficient and is thus the most appropriate tool for the majority of mundane decisions we make every day.

By contrast, system two thinking is slower, conscious, effortful, explicit and more logical. It's controlled by the more recent, frontal part of our brain. When we weigh the costs and benefits of alternative courses of action in a systematic and organised manner, we're engaged in system two thinking.

In the hands of scholars who study behavioural ethics - such as Max Bazerman and Ann Tenbrunsel, the authors of Blind Spots - system one is seen as our "want-self" and system two as our "should-self". Almost all of us regard ourselves as ethical. Before decisions arise our should-selves think "I should behave ethically, therefore I will".

When we're looking back on decisions, our should-selves think: "I should have behaved ethically, therefore I did." Trouble is, when the decision is actually being made, our want-selves take over and we often do things that ignore the ethical implications of our actions.

The task for behavioural ethicists, therefore, is to help us find strategies that allow our should-selves to dominate our want-selves. In another context, psychologists say we have different systems for wanting things and liking things. So some of the stuff we really want, and spend a lot of time pursuing, doesn't give us as much satisfaction as we thought it would once we've got it.

This explains why children will spend weeks nagging parents to buy them a guitar or a pet but quickly lose interest once they have it.

It also explains a lot of futile adult behaviour. I suspect our two thinking systems explain the paradox of advertising. I'm not influenced by all the advertising I see, but a lot of people are. Do you think that, too? Trouble is, most people think it.

If it's true, just who are the dummies that fall for advertising? And how come so many businesses spend millions on advertising, convinced it's money well spent?

I think all of us are more susceptible to advertising than we realise. Most advertising is designed to appeal to our emotions and instincts, not our intellect. In other words, it's aimed at our unconscious, system one decision-maker and we're not conscious of the way it affects the choices we make. Meanwhile, our conscious, reasoning system two brain is unimpressed by the illogical connections we see in ads.

I'm sure they're not all Robinson Crusoe, but economists often show signs of having two-track minds. They believe certain things intellectually, but these beliefs don't seem to have the effect on their behaviour that you'd expect.

For instance, when you criticise their model for its absurd assumption that people are always rational - carefully calculating and self-interested - they'll tell you they don't actually believe people are rational; that's just a convenient assumption needed to get the model going.

But then they'll argue vigorously for propositions that come from the model, oblivious to the way those propositions rest on the assumption that people are indeed rational in all they decide.

Or, take the exaltation of gross domestic product. When you argue that GDP is a poor measure of national well-being and point out its various limitations, economists will agree. But that won't stop them continuing to treat GDP is though it's the one thing that matters.

One of the most ubiquitous problems in daily life - and thus in the economy - is one the economists' model assumes away: achieving self-control. We need to control our natural urges to eat too much, to smoke, to drink too much, to gamble too much, spend too much, watch too much television, get too little exercise and even to work too much.

Here, again, we seem to have two selves at work: an unconscious self that's emotional and shortsighted and a conscious self that's reasoning and farsighted. We have trouble controlling ourselves in circumstances where the benefits are immediate and certain, whereas the costs are longer-term and uncertain.

When you come home tired from work, for instance, the benefits of slumping in front of the telly are immediate, whereas the costs - feeling tired the next day; looking back on your life and realising you could have done a lot better if you'd got off your backside and played a bit of sport, sought a further qualification at tech, studied harder for exams, spent more time talking to your children, etc - are not so clear-cut.

Similarly, the reward from eating food is instant whereas the costs of overeating are uncertain and far off: being regarded as physically unattractive, becoming obese, becoming a diabetic, dying younger, etc.

As everyone who has tried to diet, give up smoking, control their drinking, save or get on top of their credit card debt knows, it's hard to achieve the self-control our conscious, future-selves want us to achieve.

People have developed many strategies to help their future-selves gain control over their immediate-selves, including pre-commitment devices - similar to those proposed by the Productivity Commission to assist problem gamblers.

Economics will become a more useful discipline when its practitioners catch up with developments in neuroscience and offer us solutions to common behaviour problems it now assumes away.

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You're not as ethical as you think

Another long weekend, another personal question: how honest are you? According to the people who study these things, not as much as you think you are.

In an experiment in which people were asked to solve puzzles and were paid a set amount for each puzzle they solved, some participants were told to check their answers against an answer sheet, count the number of questions answered correctly, put their answer form through a shredder, report the number of questions they got right to the experimenter and receive the money they had earned.

A second group wasn't allowed to shred their answers before reporting how many they got right. Those whose claims about how many they got right couldn't be checked claimed to have got significantly more correct than the second group.

Those who cheated probably counted a problem they would have answered correctly if only they hadn't made a careless mistake. Or they counted a problem they would have got right if only they'd had another 10 seconds.

In other words, they didn't tell blatant lies, they just gave themselves the benefit of any doubt, bent the rules a little bit in their own favour. And get this: they wouldn't have thought they were cheating.

When subjects are asked to rate how ethical they are compared with other people on a scale of 0-100, where 50 is average, the average rating is usually about 75. That is, almost all of us consider ourselves to be more ethical than other people.

Clearly, that's not possible. In their book, Blind Spots, Max Bazerman, a professor of business administration at Harvard Business School, and Ann Tenbrunsel, a professor of business ethics at the University of Notre Dame, say most of us behave ethically most of the time.

Even so, most of us overestimate our ethicality relative to others. We're unaware of the gap between how ethical we think we are and how ethical we actually are. We suffer from blind spots.

Bazerman and Tenbrunsel are exponents of the emerging field of ''behavioural ethics'' - the study of how people actually behave when confronted with ethical dilemmas. They say our ethical behaviour is often inconsistent and, at times, even hypocritical.

''People have the innate ability to maintain a belief while acting contrary to it,'' they say. ''Moral hypocrisy occurs when individuals' evaluations of their own moral transgressions differ substantially from their evaluations of the same transgressions committed by others.''

Hypocrisy is part of the human condition; we're all guilty of it. So you could say accusing someone else of being hypocritical is itself a hypocritical act.

Some people are consciously, deliberately unethical. But Bazerman and Tenbrunsel stress their interest is in unintentional ethical misbehaviour. How can we behave unethically and not realise it?

We suffer from ''bounded ethicality'' because we suffer from ''bounded awareness'' - the common tendency to exclude important and relevant information from our decisions by placing arbitrary and dysfunctional boundaries around our definition of a problem.

One way we limit our awareness is by making decisions on the basis of the information that's immediately available to us - maybe that someone has presented to us - rather than asking what information would be relevant to making the best decision, including other aspects of the situation and other people affected by it.

An organisation's ethical gap is more than just the sum of the ethical gaps of its individual employees, the authors say. Group work, the building block of organisations, creates additional ethical gaps.

Goupthink - the tendency for cohesive groups to avoid a realistic appraisal of alternative courses of action in favour of unanimity - can prevent groups from challenging questionable decisions.

And functional boundaries can prevent individuals from viewing a problem as an ethical one. Organisations often allocate different aspects of a decision to different parts of the organisation.

''As a result, the typical ethical dilemma tends to be viewed as an engineering, marketing or financial problem, even when the ethical relevance is obvious to other groups,'' the authors say. So everyone can avoid coming to grips with the ethical issue by assuming someone else is dealing with it.

Now consider this. You're a 55-year-old and have just been diagnosed with early-stage cancer. You consult a surgeon, who wants to operate to try to remove the cancer. You consult a radiologist who recommends blasting the cancer with radiation. You consult a homeopathic doctor who believes you should use less intrusive medicine and wait to see how the cancer develops.

Many of us would assume each specialist is lying so as to drum up business. But it's actually more complicated. Each person genuinely believes their treatment to be superior, but they fail to recognise their beliefs are biased in a self-serving manner.

They don't realise their training, incentives and preferences prevent them from offering objective advice. They just don't realise they're facing an ethical dilemma. They don't see they face a conflict of interest because they view conflicts of interest as problems of intentional corruption.

Bounded ethicality occurs because our cognitive limitations - the limitations of the way our brains work - leave us unaware of the moral implications of our decisions. Aspects of everyday work life - including goals, rewards, compliance systems and informal pressures - contribute to ''ethical fading,'' a process by which ethical dimensions are eliminated from a decision.

It's common for decisions at work to be classified as a ''business decision'' rather than an ''ethical decision,'' thus increasing the likelihood we will behave unethically.

Sometimes differences in language allow ethical fading. Albert Speer, one of Hitler's ministers and trusted advisers, admitted after the war that by labelling himself an ''administrator'' of Hitler's plan he convinced himself that issues relating to the treatment of people were not part of his job.

Why does the way we classify decisions matter? Because classification often affects the decisions that follow. When we fail to recognise a decision as an ethical one, whether due to our own cognitive limitations or because external forces cause ethical fading, this failure could well affect how we analyse the decision and steer us towards unintended, unethical behaviour.

Why do we predict we will behave one way and then behave another way, over and over throughout our lives? General principles and attitudes drive our predictions; we see the forest but not the trees. As the situation approaches, however, we begin to see the trees and the forest disappears.

Our behaviour is driven by details, not abstract principles.

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