FUNDING SCHOOL EDUCATION

Talk to Cornerstones Conference, Sydney
September 23, 2006

By rights, what I should be giving you now is a learned and crystal clear exposition of federal-state funding of school education, about how crazy, unfair and irrational the Howard Government’s formula for funding non-government schools is and about how, when you look at it properly, what Howard and his cronies claim to be economic rationalism is actually quite irrational, bad for the economy in the longer run and, certainly, bad for the people in the economy.

This is what my friend and adviser, Lyndsay Connors, hoped I’d do but, unfortunately, I didn’t leave myself enough time to get on top of all the technicalities, so what I’m actually going to do is much easier - and possibly more interesting: talk about the politics of school funding and then say something more personal about my love/hate relationship with teachers and the Teachers Federation.

It’s true that the formula the Howard Government has adopted for determining its grants to non-government schools - independent schools, and Catholic systemic schools, but I’ll call them private schools for short - is quite appalling. For one thing, it sweeps away need as the basic criterion for assistance, making large payments to quite prosperous schools and doing so in a quite eccentric way so that certain schools, not necessarily the most prosperous, get more than other elite schools because of an accident of postcodes. One particular private school, only an associated school not a GPS school, with not a fraction of the social status of Cranbrook or the opulence of Kings, won the jackpot, getting an extra $25 million: Trinity Grammar. More of Trinity anon. For another thing, the formula is corrupt in that it’s self-multiplying. The more students drift to private schools, the more the average cost-per-student rises in the public schools because of the loss of scale economies, and the more the public per-student cost increases the more the per-student grant to private schools increases because the latter is indexed to the former. For a third thing, the formula ignores the competitive disadvantage the public schools face in being left with the poorest and least-able students, having to take the kids with behaviour problems rejected by the privates and having to stay open without enough students to remain viable if they’re the only school left in a district. For a fourth thing, the Howard Government doesn’t bother enforcing the funding formula whenever it would result in a reduction in a private school’s grant.

So the formula is completely rigged in favour of independent schools. Now, people should be studying these defects and shouting them from the rooftops to bring them to the public’s attention. But do you think it makes much difference politically? Politically, it’s beside the point. Do you think the defects are there by accident? Do you think the Howard Government can’t know about them or it would have fixed them? No, the formula is blatantly biased towards private schools because the Howard Government is blatantly biased towards private schools.

So, politically, what are the Liberals on about? It might look like they’re on about economic rationalism, but they’re not. They’re on about traditional Liberal ideology. They believe in private schools and want to see them expand and prosper. They may believe this will attract them a few extra votes at the margin - if so, it would only be in the swinging ‘aspirational’ seats in the western suburbs - but for the most part this policy is for the party heartland; for the party faithful who already send their kids to private schools and would see a greater subsidy to their school as a boon. If the increased subsidy attracts more kids to the private system, fine, but Howard would do it anyway because he shares the Liberals’ traditional support for private health insurance and private schools. Was the funding formula deliberately selected because it was so biased in favour of independent schools? Sure. Will Howard ever reform it? Why?

A similar analysis applies to Howard’s line that it’s vitally important parents be able to choose between public and private. Now, it’s probably important that somebody somewhere subjects this choice argument to critical scrutiny. The first point is that there’s choice and there’s choice. What does being free to choose mean? If it means that, in a capitalist economy, where for almost everything else, the more money you have the more you can buy and the better quality you can buy - where one dollar equals one vote - you simply can’t sustain a situation where people who can afford to buy their way out of public provision are actually prohibited from doing so. You can’t stop rich people sending their kids to expensive schools or being treated in expensive private hospitals. In that sense, yes, there should be ‘choice’ and we’ve always had it. But that choice is just the standard choice that exists in all markets: you can buy what you consider to better than standard issue provided you can afford the full cost. That is, this argument contains no implication that the private receives any public subsidy, just as private health insurance carried no public subsidy in the original concept of Medicare.

But that’s not what Howard means when he says people should be free to choose. He means that the private - whether it’s private schools or private insurance - must be generously subsidised so people are free to choose. It’s the same when he talks about mothers of young children being free to choose whether to have a job or not. What gives them the freedom is the extra family benefit paid to stay-at-home mums. What these three examples - private schools, private hospital insurance and stay-at-home mums - have in common is that they’re all things the Liberal middle-income heartland is already doing or wishes it could afford to do. So we’re talking straight taxpayer subsidy to the middle. All the fancy talk of choice is just a cover for Howard’s addiction to middle-class welfare.

How does Labor fit into this story of political motivations? I think federal Labor does have a firmer commitment to egalitarianism and equality of opportunity, so it could be relied upon in government to change the funding formula to something far less generous and more needs based, and that’s true pretty much regardless of its specific promises before the election. It would probably do this in the traditional way - that is, a hastily contrived budget blowout crisis immediately after the election, which is used as a cover while policies that favour the Liberal heartland are cleaned out and replaced with policies that favour the Labor heartland.

But I must add two qualifications. Labor, being the party that really got into ‘state aid’ under Gough, will be ‘working both sides of the street’ - seeking the public-school vote but also the private-school vote. That’s particularly true, of course, with special deals for the Catholic systemic schools. The idea of attracting the Catholic vote, of being photographed beside a beaming archbishop, is so enticing to politicians of both sides at both federal and state level that it will be a permanent feature of school funding for the duration. This is one reason it isn’t possible to try to simplify the terrible matrix of both federal and state levels funding both public and private sectors by having the states simply leave private school funding to the feds and focus exclusively on the public system. No state pollie would ever walk away from such a chance to buy the Catholic vote.

The second qualification is that the greater the drift from public to private, the more Labor will focus on winning and retaining the private school vote. It’s a straight numbers game. The greater the drift, the greater the political momentum it develops, making it harder to reverse.

If you enjoy feeling persecuted - and I suspect some of you do - you’d do well to note the message coming out of all the budgetary future-gazing exercises we’re seeing. Peter Costello kicked it off with the Intergenerational Report of 2002 (a revised version of which will be published with next year’s federal budget), then the Productivity Commission had a go and pretty much all the state governments, with NSW Treasury’s report on Long-term Fiscal Pressures as part of this year’s state budget. All these exercises involve projecting government spending and revenue out for the next 40 years to get an idea of how they’re likely to be affected by the ageing of the population. They all come to the same conclusion: in this country, ageing’s effect on the budget won’t be too terrible. Even so, all these reports end up pointing to the likelihood of significant and increasing pressure on budgets in coming years. Why? Because of the inordinate pressure on governments - state and federal - to increase spending on health care. Advances in medical technology are always expensive, but the public wants access immediately.

Why do federal and state treasuries keep producing reports that say this? Because they want to use them as a stick to keep the spending ministers in line. But there doesn’t seem much doubt that health care spending will come to dominate government budgets as never before. In NSW, for instance, it’s expected to go from second biggest item to first, from 26 pc of total recurrent spending to 37 pc. Why am I telling you this? Because as health spending expands, the main thing that’s supposed to contract to accommodate it is spending on school education. Student numbers will decline which ‘presents some opportunities to redirect spending to more pressing needs’. That will happen only if declining enrolments lead to fewer classes and the closing of whole schools. But education’s share of total state recurrent spending is projected to decline from 28 pc to 20 pc. You have been warned.

But here’s where the persecution complex comes in. What better way to ensure that education spending’s share of total spending does decline than to allow the drift from public to private to roll on forever? Now, Lyndsay Connors’ Public Education Council has argued persuasively that the individual student moving from public to private saves the public system very little - because most school costs are fixed costs rather than variable costs or, if you like, because the loss of an individual involves diseconomies of scale. But significant savings do come when the number of individuals lost reaches the point where whole classes or schools are lost.

Diabolical, eh? Just continue on our present path and the problem of education funding drifts away. Let all those silly parents, desperate for the social status of having kids at independent schools, pay extra for their kids’ education. Privatise government spending. Of course, the extent to which the drift to private schooling saves you money is determined by the extent to which you’ve ramped the public subsidy to private schools. And I’m not at all sure the Howard Government will resist the temptation to keep raising the subsidy.

That’s enough politics. Now to something more personal: my love/hate relationship with teachers and the Teachers Federation. In a nutshell, I love teachers and hate the federation. I have to be careful what I say in public about teaching for a range of reasons. The first is that I come from the teaching class. My sister’s a teacher, most of my friends at uni became teachers and a lot of my friends at present are teachers. So, if I had known my place, I would have been a teacher myself. Actually, I’m a frustrated teacher. If you examine my columns you find they’re much more pedagogical than most journalists’ columns. Sometimes I think I’m the most overpaid teacher in the country. Another reason I have to be careful what I say about teachers is that economics teachers are the local organisers of my fan club - and I know many of them.

Lately, however, I’ve acquired a special reason for watching what I say about teachers: my son, Sandy, has just become one (and, of course, a member of the federation). He’s on his first year out as a maths teacher - with a full load - at a high school in Albury, which he’s loving. I want to tell you about my son, mainly because I’m so proud of him, but also because I think it’s instructive in this context. Where did he acquire his ambition to be a teacher? Well, that’s his guilty secret: he acquired it at the unspeakably evil Trinity Grammar. Why did I, the product of two selective schools (Fort Street and Newcastle Boys) out of three high schools and five primary schools in all, not a believer in private schools, send my son to Trinity? I’ll tell you.

Why do I have a love/hate relationship with the federation? Because it combines the best and worst of trade unionism. Its best is its unwavering commitment to liberal values: its preoccupation with equity concerns, equality of opportunity, its belief in co-operation and suspicion of competition. When Howard said people want to send their kids to private schools because they wanted them to be given ‘values’ he implied that public schools lack values. Nothing could be further from the truth, and I’m sure Howard knows it. His problem is that he so dislikes the federation’s values. In particular, he wants everything done to foster competition between students. Liberals, economists and business people are great believers in the virtue of competition in reducing inefficiency and getting everyone to do their best. They think the competitive spirit is a fragile flower, perpetually at risk of dying out unless constantly ‘incentivated’. I used to believe that but, since I’ve read more evolutionary psychology, I’ve come to the view that competitiveness is hard-wired in our brains, particularly in males, and that it needs to be controlled and civilised rather than ramped up. So I’ve come to sympathise with the federation’s view that children should be protected from full-on competition and rather have their natural curiosity and love of learning fostered.

John Howard is a life-long Liberal warrior against the class enemy, the unions. You can see that in his enmity towards industry super funds and in WorkChoices, his ultimate attempt to stamp out unions forever. He would look at the public school system, see it as amazingly union-dominated (as I do), and be repulsed (as I’m not). But that brings me to the worst of the federation. At its worst it’s too keen to protect failed teachers, who should be gently shown the door, too into levelling down, where the best are required to subsidise the worst, too into rewarding seniority rather than merit, too resistant to being publicly accountable (always wanting to suppress information on the spurious argument that the media and parents are too ignorant to interpret it correctly), and too reluctant to share power with parents at the local school level. The federation is a reflection of teachers’ remarkable persecution complex and inferiority complex. Talk about defensive.

The bias in the Howard Government’s funding of private schools, and the state governments’ neglect of public school infrastructure, have made capital works the main battleground of the competition between the public and private sectors for the hearts and minds of parents. The generous funding of independent schools has had zero impact on the rapacity with which they raise their fees. They’re charging what the market will bear, and the market will bear big fee increases because education is both a ‘merit good’ and a ‘positional good’. This means they have huge funds to pour into lavish campus improvements. Maybe even the Catholic systemics have more funds for maintenance and capital works.

I’m sure many of you - with your shitty toilet blocks and rundown buildings - feel the injustice of this keenly. You’re terribly conscious of the competitive disadvantage at which it places the public system. It’s all true. But I’m here to say: hey, let’s not be too materialistic about this. Anyone who believes the thing that makes a good school is the quality of its sporting facilities or its music and drama wing is a fool. Anyone with any sense - any parent with any sense - knows instinctively what the research tells us: that what makes or breaks a school is the quality of its teachers and its teaching, plus the leadership skills of its principals.

So while you’re feeling your keen sense of injustice at the way the game has been stacked against public schools, while you’re despairing for the future of egalitarianism and equality of opportunity (as I am), while you’re waiting eternally for the political pendulum to change direction, you need to be out there competing, doing all in your power to halt the drift to private by raising the quality of public schools. That’s about raising the quality of teachers and teaching, doing more to encourage and reward excellence and responsibility, about putting the needs of students ahead of the needs of teachers (as I know many, many teachers do) and being more co-operative with well-motivated principals.

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CHRISTIANS IN A CONSUMER CULTURE

Talk to Baptists Today conference at Collaroy
August 24, 2006

In his book In Praise of Slowness, the journalist Carl Honore says that all the world’s a store and all the men and women merely shoppers. Sometimes it feels like that. I think we all know what consumerism is, but let’s look at it anyway. Consumerism is the belief that personal happiness lies in the purchasing of material goods. Sometimes that idea motivates our behaviour without us consciously believing that consumption is the source of happiness. But I have to say that I regard ‘consumerism’ as merely a euphemism for ‘materialism’. Materialism means a devotion to material rather than social or spiritual considerations. I’ve done a lot of thinking about materialism in recent years, so please forgive me if I use that term more than consumerism.

The material is an important and, indeed, inescapable part of our lives. You can’t live a life of utter unconcern for the material aspects of life - unless you’ve got someone who worries about them for you. You can’t avoid spending a fair bit of your life buying things in shops unless you’re the Queen. And it would be foolish to spend all that time and money with complete disregard for the choices available, the prices being charged, the amount we have available to spend and the need to get value for money. So it’s really a question of how high a priority you attach the material business of life. A question of whether you view the material as a means to some more important end - to staying alive and healthy so you can be of service to others, for instance - or as an end in itself. A question of where your heart is. As Christians like to say, it’s not money that’s the root of all evil, it’s the love of money. Materialism and consumerism are about the love of money - for the things it will buy. Some people are open about their love of money and material possessions, but I think there’s a much larger group - perhaps including many of us - who, while never espousing materialism as the great guiding principle of our lives, nonetheless end up allowing material concerns to crowd out relational and religious obligations that, in principle, we’ve always held to be more important. The material is seductive. Why? Because it’s tangible - you can see it, it’s always there and its importance is readily apparent, whereas the relational and spiritual are intangible. You can’t see them and it’s easy to underestimate their importance. And, since they’re less likely to have deadlines attached, they can be pushed back in the queue for our time and attention.

All of us are materialist to a greater or lesser extent. And in seeming to preach a sermon against consumerism, I don’t mean to imply that I’m impervious to its temptations. I suspect that Christians are particularly susceptible to the temptations of consumerism. Why? Two reasons. First because, with so many of the pleasures of the flesh declared off-limits - smoking, drinking, gambling, illicit sex - there’s a tendency to break out in areas that, for reasons I don’t quite understand, our preachers seem reluctant to speak out against. But second because the Christian life of sobriety, honesty and diligence is conducive to material success. I suspect many of you would be in the position of saying, well, yes, I do have a comfortable income and our family does live well, but I don’t love money, I’m not a materialist. There’s a good test of this claim: how generous are you? If all your money isn’t important to you, how much of it do you give to people who need it more than you do? From my reading of the psychological literature I’ve discovered another test: how much do you throw away? Some research suggests that people with materialist values are reluctant to give up all the stuff they’ve acquired.

There’s nothing new about materialism or even its trendier brother consumerism. That’s why you can find a fair bit about it in the Bible if you’ve a mind to. But I think it can be demonstrated that we’re more materialist than we used to be and that at present we’re going through a period of what I call hyper-materialism. Sometime over the past 20 or 30 years we suddenly became a lot more preoccupied with money than we had been. Materialism is the dominant characteristic of our era. Our descendants will look back on the last part of the 20th century and the early part of the 21st as The Age of Materialism. That’s true not just for Australians, but for people throughout the developed world. Such claims about changes in people’s values are hard to prove, but a leading American social psychologist, David Myers, has produced impressive evidence for the United States.

In an American poll that regularly asked people what factor was most important in a job, ‘high income’ rose to second highest between the early 1970s and the early 1980s. Now consider the evidence from the American Council on Education’s annual survey of over 200,000 newly entering college students. Asked about their reasons for going to college, the proportion agreeing that an important one was ‘to make more money’ rose from half in 1971 to almost three-quarters by 1990. And the proportion believing it ‘very important or essential’ that they become ‘very well-off financially’ rose from 39 per cent in 1970 to 74 per cent in 1990. Over the same period, the proportion who began college hoping to ‘develop a meaningful philosophy of life’ slumped from 76 per cent to 43 per cent. This reversal stayed unchanged throughout the 1990s. Professor Myers calls this cultural shift ‘the greening of America’. And though our bank notes are multicoloured, I don’t doubt it’s true of us, too.

If we have become more materialist over the past 20 or 30 years, what has changed to bring this about? I don’t know. It’s tempting to blame it all on economists, especially that evangelistic brand of economist known as the economic rationalists. But I think it would be wrong to blame economists for starting the trend to hyper-materialism. The economic rationalists in the bureaucracy have been proposing the same policy prescriptions to their political masters for many decades. The question is, why was it that, from the early 1980s, the pollies began accepting the advice they’d ignored for so long? Perhaps because they sensed some change of attitude - some more materialist tendency - in the electorate. But even if it’s wrong to blame economists for starting the trend, there’s no denying that, by the policies they have persuaded the politicians to adopt, the economic rationalists have considerably heightened the trend. Take the rationalists out of the picture and we wouldn’t be as materialist as we are today.

Economic rationalism turns out to be the religion of materialism and rationalists the high priests in the temple of mammon. Economics is the study of how best to achieve humankind’s material objectives. It’s meant to be all about means, and say nothing about ends. But it’s about material ends, and the best way to maximise those ends. It’s on about efficiency in the use and allocation of physical resources so as to maximise consumption. Even an economist as sensible as Keynes, for instance, wrote that ‘consumption - to repeat the obvious - is the sole end and object of all economic activity’. This is why economists are obsessed with promoting economic growth - which means continuously increasing production and consumption of goods and services, and involves an ever-improving material standard of living.

Now, I think you have to agree that, given their objective, the economic rationalists’ advice on policy has been very successful. Over the past 15 years of economic expansion since the recession of the early 90s productivity has grown strongly, real incomes have grown strongly and consumer spending has grown strongly - all of them more strongly than during the 70s and 80s. So what’s the problem with economics? The problem is that it’s one-dimensional analysis. It focuses exclusively on our material objectives - on factors whose value can be expressed in dollars - while ignoring the non-material. In consequence, non-material ends - such as family life, relationships more broadly, and the spiritual - tend to be sacrificed to material ends. We should be optimising our material objectives, given the competing claims of our non-material objectives, but instead we maximise the material at the expense of the non-material because the non-material is excluded from our calculations. At one level the economists say, sorry, the material is all we’re professionally competent to advise on - which is true - but they’re always tempted to forget the limitations of their model - all the factors they have deliberately abstracted from - and lay down the law about what we must do to maximise efficiency as though consumption was our only goal.

If we had any sense as a community we’d take advice from economists about the material, but then weigh it against the advice of people who specialise in the social and spiritual. Why don’t politicians seek wider advice? Why do they allow people whose advice is so narrow so much influence? Because they’re responding to what they believe is the materialist preferences of the electorate. Why is almost every politician - Labor or Liberal - a vocal believer in rapid economic growth and rising material living standards? Because they’re convinced that’s what the punters want. Why do even Green politicians rarely express any doubt the supreme objective of maximising economic growth? Because they believe their opponents would wipe the floor with them if they did.

Conservative politicians are always lecturing us about the evils of envy. Say that a tax cut is unfair because high income earners got disproportionately more than middle and low income earners and you’ll be accused of indulging in ‘the politics of envy’. Trouble is, they never lecture against the opposite vice, greed - of which there’s a fair bit about. So their message on behalf of the well-off is, ‘it’s immoral for you to envy the fruits of my greed’.

The main device the economic rationalists have used to increase economic efficiency has been increased competition - competition from imports, or competition from other domestic players because of reduced government regulation of markets. But one of the consequences of the increased competitive pressure to which business people have been subjected has been to make them more aggressive in urging governments to change laws in ways that benefit producers. Businesses are in the business of satisfying our material needs. So the pressures on politicians from business are also pushing them in a materialist direction.

Many people imagine that capitalist economies must exist for the primary benefit of the capitalists. But, as hinted at in that quote from Keynes, one of the tenets of conventional economics is the doctrine of ‘consumer sovereignty’. This is the belief that the chief beneficiaries of the economy should be - and are - consumers. So production isn’t an end in itself, it’s a means to an end - consumption. And consumers are the king of the capitalist economy because the operation of markets means that producers maximise their profits only by giving their customers exactly what they demand.

If you find that hard to believe - so you should. It simply doesn’t fit with the pervasiveness in modern market economies of advertising and other marketing techniques. Advertising is an embarrassment to economists. They don’t like thinking about it and try to tell themselves it’s purely informational - that the purpose of advertising is merely to make sure consumers know what you’re selling, how much you’re charging and where your shop is. But we all know advertising is persuasive. The advertiser is seeking to persuade us to purchase his product and he does this not by intellectual argument but by appealing to our emotions. In the old slogan, advertisers sell the sizzle, not the steak. The ads for margarine, for instance, are trying to persuade us that buying a certain brand of marg - or sliced bread - is the way to have a happy, healthy family. Ads for menthol cigarettes used to associate themselves with good-looking women on pristine tropical beaches. At an intellectual level, these propositions are absurd. At an unconscious level, however, they work - which is why advertising persists. All of us are far more influenced by advertising than we realise.

And it’s not just the ads that promote consumerism. Most of the TV shows and films we see do it too. They do it by portraying a totally unreal world in which most people are very good looking, slim and fit. They live in beautiful, always-tidy homes, in leafy suburbs. Families always get on well together and no one’s ever boring or bad-tempered. All this exposure to the beautiful people leaves many of us perpetually dissatisfied with our own far-from-perfect lives and unconsciously trying to attain the beautiful life by buying things. The trouble with all this is that it turns consumer sovereignty on its head. This is not the producers as servants of the consumers, it’s producers seeking to con consumers into buying more stuff - stuff they didn’t know they wanted and that won’t satisfy the crazy aspirations the advertisers have excited.

Another device the modern economy uses to promote consumption is the greater availability of credit, particularly through personal loans and credit cards. In principle, credit should produce only an essentially once-only drawing forward of consumption, not a continuous increase. I suspect that those people who make heavy use of credit cards don’t consume all that much extra at the end of the day. Rather, their impatience to draw forward their consumption means they end up devoting a lot of their income to interest payments. It’s true that household debt has grown amazingly over the past decade, and that some people will get into difficulties. Even so, I think the extent of problem with household debt is easily exaggerated. The great majority of the growth in debt is due not to credit cards but to increased borrowing for housing - including for investment housing.

That raises another spectacular demonstration of rampant consumerism in recent years, the record housing boom with its doubling of house prices. House prices and mortgage debt doubled for various reasons, but by far the greatest reason was the halving of mortgage interest rates following our return to low inflation. The halving of rates roughly doubled the amount people on a given income were able to borrow. They didn’t have to respond by borrowing more to move to a bigger and better house, but many people did. Because they all did it at pretty much the same time, however, the main thing they achieved was to bid up the price of houses. It was, as I say, a spectacular display of rampant consumerism. Australians idolise their homes.

Another manifestation of the Age of Materialism is the longer hours some of us are working. Not every person with a full-time job is working long hours, but a significant minority are. It’s fashionable to see longer hours as something that’s been forced on us by grasping employers, but I believe most long hours are voluntary and are paid for by employers, directly or indirectly. People are doing it for the money, either because they want to buy more stuff or because they need to pay off the debts they’ve already incurred from buying more stuff.

People often ask what happened to all that extra leisure time the experts predicted back in the 70s would have come our way by now. The answer is that we’ve had plenty of productivity growth that would have permitted us to work fewer hours without loss of pay, but we’ve preferred to take those productivity gains in the form of higher pay rather than shorter hours. Another sign of our increased consumerism.

Perhaps this is the time to point out that all the increased consuming we’ve been doing has done nothing to make us any happier. Surveys of how satisfied people are feeling about their lives don’t go back far in Australia, but they do in most other developed countries and the conclusion from all of them is the same: the population’s average level of subjective wellbeing hasn’t budged in decades - it hasn’t fallen, but it hasn’t risen despite very much higher material living standards. Why not? Psychologists advance two reasons.

First, because of a pervasive human trait psychologists call adaptation. We do feel happier after we’ve had a pay rise, bought a new car or dress or house, but that feeling of pleasure doesn’t last long. It doesn’t take long before we get used to our newly improved circumstances and come to take them for granted. They get absorbed into the status quo and we go back to being about as happy as we always were. Studies show that even people who win the lottery return to their earlier level of happiness within a few months. To put this point another way, soon after we achieve a higher level of material success, our aspirations move up another notch and we go back to being dissatisfied with our achievements. Surveys show that a lot of people believe they’d be happier if only their incomes were ‘just a little bit higher’. Trouble is, they always believe that. Their income rises over time, but they’re still saying, I’d be happier if only I had just a little bit more. Talk about the donkey chasing a carrot. Actually, the psychologists call it the ‘the hedonic treadmill’ - you keep running and running to earn more and spend more, but you never get anywhere.

The second explanation psychologists propose for the inability of general increases in the standard of living to make us happier is our tendency to compare ourselves with those around us. When I get the same pay rise as everyone else, that doesn’t do a lot for me, but when I get a bigger pay rise than other people that does make me feel good. Trouble is, the people I’ve passed in the status race now feel worse. And when we all engage in an eternal struggle to get ahead of each other - a kind of arms race - no one feels better off for long.

Australia is a prosperous country. Most of us managed to satisfy our most basic needs for food, clothing and shelter a long time ago. So what have we done with all the extra income we’ve enjoyed since then? I believe most of it has gone on what economists call ‘positional goods’ - goods (or services) that, as well as doing whatever it is they’re designed to do, are also intended to demonstrate our superior position in the social pecking order. Why do we buy an expensive European car when an old Toyota would get us from A to B just as comfortably and reliably? Because we want to display our socio-economic status. Why do we send our kids to private schools, dress toddlers up to the nines, keep moving to bigger houses in better suburbs? Because we’re trying to impress people. The older term for it, of course, is ‘conspicuous consumption’. Why do we pressure governments to cut taxes? So we can devote more of our incomes to conspicuous consumption.

I said earlier that the modern emphasis on reforming the economy to make it more efficient and so raise living standards even higher gave priority to the material at the expense of social and spiritual objectives. The man who’s done most to make me conscious of the price we’re paying for our material success is Dr Michael Schluter of Britain’s Relationships Foundation and now our own Relationships Forum. Consider the way WorkChoices’ attack on penalty rates seeks to continue the abolition of the weekend - or the sanctity of Sunday, if you like - begun by the deregulation of weekend trading. There’s no doubt that the way to raise the productivity of capital is to keep factories working and shops open for as close as we can get to 24/7. But there’s equally no doubt that the more we move away from having common days when most members of a family aren’t working or at school, the more strain we put on families and other relationships. Similarly, there’s no doubt that economic efficiency and living standards are raised by having resources, including labour, as mobile as possible. But there’s equally no doubt that moving people around the country is deleterious to our relationships - relationships that psychological research joins the Bible in proclaiming to be of the highest importance to our lives.

But let’s say we were successful in persuading people to be less materialistic and consumerist. Or say we banned all advertising. Wouldn’t the economy collapse? You often hear people say that - and there are plenty of business people who’d be happy for you to believe it - but the answer is no, not really. They’re just displaying their ignorance of economics or lack of imagination. The first point is that the economy exists to serve us, not we it. It’s true that if everyone suddenly slashed their consumption, this would plunge the economy into recession and rising unemployment. But the economy would eventually adjust. In any case, it’s hardly likely that everyone would slash their consumer spending at once. It’s more likely to be a gentle slowdown in the rate of growth of consumption and hence in the economy’s rate of growth. And that wouldn’t be a bad thing if, in return, we got the benefit of more stable and satisfying relationships and more room for the spiritual. Assuming the same thing wasn’t happening in all the economies with which we trade, we could move to a position of lower consumption, but higher saving, increased exports and falling foreign debt. Does that sound bad? But let’s assume the worse and imagine a situation where the economy wasn’t growing fast enough to generate sufficient additional jobs for people joining the workforce. We could then engage in the job-sharing economists have frowned on as being not particularly efficient. But that’s the point: we’d give up some efficiency - some growth in income - in return for better relationships - with man, and God.

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THE MEANING OF BUSINESS LIFE

Australian Institute of Management breakfast briefing
June 6, 2006

When I was asked to talk to you today I spent some time thinking of what I could talk about. I could preach a sermon on the need for more micro-economic reform, or I could urge you all to be more competitive, or argue passionately that the Government should slash the rate of tax we high income-earners pay so as to encourage us to work much harder. Well, you may have been prepared to get out of bed early to listen to me say that sort of thing - especially about how we’re all groaning under the weight of our crushing tax burden - but I wouldn’t have been prepared to get out of bed early to say it. No, the only topic that really attracted me was to say something more reflective about the nature of modern business life. Why are we doing what we’re doing and what do we imagine it proves? What’s it costing us and is it worth it? Remember that everything we do - every choice we make - has an opportunity cost, and sometimes it’s worth thinking about that cost.

We live in a hyper world. There’s nothing much that’s new about the things we do in business, it’s just that it’s all been stepped up. We’re competing a lot harder, working harder, making bigger profits and caring a lot more about the growth in profits. As managers and professionals we’re making a lot more money than we did. But why? Why is business life so much more intense than it was 10 or 20 years ago?

I think a big part of the explanation is micro-economic reform. Business people think the point of micro reform is to make Australian businesses more competitive - better able to meet the competition from imports or in export markets. But that’s not it. The point of micro reform is not so much to make us better able to meet foreign competition as to expose us to more competition in domestic markets. To that end, successive governments have floated the exchange rate, cut away the protection against competition from imports, deregulated many industries, broken up a lot of monopolies among the utilities, sold off a lot of government businesses and decentralised wage-fixing and industrial relations. So the competition is fiercer in many industries and, as a consequence, we’re all having to try harder. Part of the way we’ve felt the effect of greater competitive pressure on us is via the share market. The performance of the managers of public companies is much more closely and critically scrutinised these days by share analysts and fund managers.

But why now? Econocrats had been urging economic rationalist policies on their political masters for decades without much success. Why, starting about 25 years ago, did governments start acting on this advice? The obvious answer is the pressure of globalisation, but I think there’s a further cause. To a greater or lesser extent, all of us are - and always have been - materialist. But I believe the world is going through a period of heightened materialism. And if we look around we can find evidence of this. Consider the evidence from the American Council on Education’s annual survey of over 200,000 newly entering college students. Asked about their reasons for going to college, the proportion agreeing that an important one was ‘to make more money’ rose from half in 1971 to almost three-quarters by 1990. And the proportion believing it ‘very important or essential’ that they become ‘very well-off financially’ rose from 39 per cent in 1970 to 74 per cent in 1990. Over the same period, the proportion who began college hoping to ‘develop a meaningful philosophy of life’ slumped from 76 per cent to 43 per cent. This reversal stayed unchanged throughout the 1990s.

So why has the longstanding wish-list of economists become the dominant ideology of public life? Because it fits perfectly with the current mood of heightened materialism. Now, more than before, both sides of politics see faster economic growth and rising material living standards as the primary objective of government, and there’s no doubting that following the prescriptions of conventional economics will give you a faster rising standard of living. Economic rationalism was made to assist an era of heightened materialism.

You’ve probably noticed that I’ve become a great student of psychology in my old age. The findings of modern social psychology provide a valuable counterpoint to economic orthodoxy and have a lot of light to shed on why we are as we are and why we do as we do. Take, for instance, competition. Conventional economics smiles on competition. It’s a valuable commodity, spurring innovation and fostering productivity and efficiency, which lead to faster rising material living standards. So you can never have enough competition, but the trouble is there is never enough of it. Competition takes effort, and people won’t bother competing very hard unless you make it monetarily worth their while. So we must always be cutting taxes and improving incentives lest we encourage too little competition.

Talk to an evolutionary psychologist, however, and you get a very different perspective. Thanks to natural selection and the survival of the fittest, humans - particularly men - are naturally highly competitive. It’s been bred into us. So why do we compete? Because we can’t help ourselves. We’re a competitive animal. Civilisation tries to contain and channel our competitiveness into exams and sport and even business endeavour, so as to stop us brawling in the streets and fighting rival tribes at the drop of a hat. So whereas the conventional wisdom sees the competitive spirit as a fragile flower to be carefully nurtured, unorthodox economists such as Professor Richard Layard of LSE see it as something we’ve probably got too much of already and should avoid stirring up.

Let me tell you about some research by two female economists at Pittsburgh and Stanford. They used laboratory experiments to demonstrate that men were a lot more competitive than women - no doubt for evolutionary reasons. Given a choice between doing work for a piece rate or competing in a winner-takes-all work tournament, twice as many men as women opted for the tournament. So even if you took away all the discrimination against women in the workforce and compensated for the handicap of being the childbearing sex, you’d probably still find women underrepresented in senior management. Why? Because women are less likely to see the point of giving up so much for the dubious joys of being a boss. But why were the men so much more likely to give up the certainty of income in preference for a contest in which they won everything or nothing? In a word: overconfidence. Neither the men nor the women had any way of knowing how their work performance compared with others’. But three-quarters of men believed they were the best in the group, compared with 43 per cent of women. The thing to note about this is that, while it’s OK for three-quarters of men to be convinced they’d be the winner in the competition before the competition starts, once it’s completed you’re surely looking at a fair bit of disillusionment and dissatisfaction.

Another bit of light we can get from psychology is its reminder that humans are a social animal. Conventional economics assumes we’re rugged individualists. We do our own thing according to our personal and firmly fixed tastes and preferences, largely unaffected by the choices being made by people around us. In truth, however, we’re heavily influenced by the choices our friends and workmates make. Being animals that evolved to live and work in small bands of hunter-gatherers, we have a great desire to fit in and do what our peers are doing. We care deeply about what other people think of us and we’re always comparing ourselves with the people around us. We can see this in our children, but we can also see it in ourselves. We’re heavily influenced by fashions, we confirm to group norms of behaviour, our idea of what’s ethical is largely determined by what we believe ‘everybody’s doing’. We evolved to live in hierarchical groups, which leaves us terribly preoccupied - more preoccupied than we care to admit to ourselves - with our social status. With where we stand in our reference group. One important thing this means is that materialism is catching. If the people around us at work are getting in for their chop, we want ours. If the people we compare ourselves with are working long hours so they can afford a flash house in a well-regarded suburb, a late model imported car and private schools for the kids, we want to match them.

Economists believe in something called ‘revealed preference’ - they you find out what people really want by looking at what they do, not what they say. And no one - certainly no government - can know what I want better than I know myself. That’s because they assume me to be rational in all my decisions. But psychology demonstrates that our decisions are heavily influenced by emotional factors - often to a far greater extent than we’re conscious of. And studies by psychologists and behavioural economists show we’re often quite bad at predicting what will bring us utility -what we’ll ultimately find satisfying and be glad we chose to do. We often keep doing things we don’t actually find satisfying. Part of the reason for this is that our brains seem to have two separate systems for desire: one for wanting stuff, but a different one for actually enjoying stuff. What this means is that some of the stuff we really want and spend a lot of time pursuing, when we get it, it doesn’t give us as much satisfaction as we thought it would.

I suspect that a lot of us who are caught up in the business whirl have come to wonder about whether it’s all we imagined it to be when we started out. If not, let me give you some things to think about. First, are we doing it just for the money? Is so, is the money buying us much real satisfaction? We’ve got lots of fancy possessions, but do they bring us or our families much lasting satisfaction once the novelty wears off? How much satisfaction is there in owning a flash boat we have little time to use? Sounds like a poor consolation to me.

Are we becoming workaholics? I’ve got nothing against hard work; I do a lot myself and, contrary to the assumption of the simple economic model, the work itself can be far more satisfying than the stuff you buy with the money. I think the test is why you’re working so hard. If it’s because you love the work for its own sake, that’s fine. But if you’re doing it just for the money, or just for promotion, or you’re afraid of some sort of kick in the backside, or you’re getting away from life at home, you’ve got a problem. If we don’t like our work, but aren’t willing to shift to something we’d find more satisfying because of the lower pay or loss of status, we’ve got a problem. We’re trapped not by ‘the system’ but by our own materialism.

One qualification to the idea that long hours are OK if we love our work is that we have to take account of the implications for our spouse and family. All of us know that, at the end of the day - or even just in retirement - it’s our relations with our family that matter to us above all else. We know it, but in practice we’re always letting the urgent take priority over the important. How many of us have unhappy husbands or wives? Many of us - if only we could be honest with ourselves - are risking ending up in the divorce court. Does this sound a cheap price to pay for a successful corporate career? Then there’s our kids. They can’t divorce us, but they can reproach us when we’re old and need them more than they need us. How many of our extra hours could at least be done at home rather than the office? There’s evidence that a lot of young kids say they’d rather have their father’s company than his money.

Another thing that worries me about modern business life is the way we’re encouraged to neglect rest and recreation. Too many people don’t take all their annual leave and maybe don’t even get enough sleep. Apart from living narrow, unsatisfying lives, they’re heading for burnout. And again, money - in the form of being able to afford quickie visits to luxury resorts - is a poor substitute for time. Leisure is something we were intended to do, not buy. The idea of encouraging employees to cash out up to half their annual leave is pernicious. What people need in their lives is balance: hard work combined with satisfying play.

But do we have any choice? Is the only choice to play the competitive game full tilt or ‘downshift’ to Nimbin? Economics teaches us that life’s not about all-or-nothing choices but about finding the best trade-off between equally attractive but conflicting objectives. Many of us may feel we’ve neither the desire nor the possibility to take the seachange option. But I believe all of us have some degree of control over our lives and jobs, and there are plenty of changes we could make at the margin which would add up to a better, more balanced lifestyle. We could loosen up a bit here and a bit there - particularly if we take the amazingly liberating step of stopping worrying about our next promotion and caring less about our status and keeping up with the neighbours.

We fall into the habit of imagining that history moves in straight lines, that the trends we see happening now will keep rolling on forever. In truth, history moves like a pendulum: it keeps running one way until it gets to an extreme point, where there’s a reaction against it and it starts heading back towards the other extreme. I believe that our present era of hyper-materialism - with all its overwork, intense competition, stress and ever-quickening pace - can’t go on forever, just as double-digit profit growth can’t go on forever. Sooner or later there’ll be a reaction against it. Why? Because people will see it’s not as good as we imagined it would be.

That reaction will start not when some new radical government gets elected, but when enough individuals in the system begin modifying their own lives in small ways to make them less intense and more liveable. More relaxed and comfortable. That’s when the business world will start calming down. And a calming down is all I’d like to see - something that took us back to being no more materialist than we were in the 60s and 70s.

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AUSTRALIA’S POLITICAL AND ECONOMIC OUTLOOK 2006

Talk to Australian Business Economists Annual Forecasting Conference, Sydney, December 13, 2005


At last, at last, economists are getting what they’ve longed for: the return of micro
reform. With the Howard Government’s acquisition of a majority in the Senate, the
good times are back. We’ve had completion of the privatisation of Telstra and now
the Holy Grail of economic rationalism, reform of the labour market. What’s more,
and as we shall see, the next cab off the rank looks likely to be that other economists’
chart-topper, tax reform. Yippee! But whether the reform is what economists
imagined it would be is another matter, as is whether what we’re getting will do much
good to the economy.

Take Telstra. I suspect it’s now dawning on some economists that privatising a near
monopoly isn’t such a wonderful thing, and that much turns on the ability of a quite
intrusive regulatory regime to ensure a hugely resourced and political powerful
company doesn’t abuse its market power. It’s clear the natural monopoly element of
Telstra should have separated from the contestable element before privatisation
began, but I don’t recall hearing many economists saying this back in 1996 -
especially those working for outfits hoping to win the contract to organise the float.

The economics of WorkChoices

Similarly, I doubt if many economists now think WorkChoices is all they had in mind
when they dreamt of labour market reform. It certainly can’t be thought of as
deregulation. It’s hugely prescriptive about what unionised workers may and, more
particularly, may not do. I’ve written that only the employers have been deregulated,
but even that may be too generous. Employers will find the new system more
complex and legalistic. The new act is more voluminous and prescriptive, there’ll be
more work for lawyers, no tribunals have been abolished but additional ones created,
and the minister is given greatly increased discretion to intervene in bargaining.
Rather than reduce regulation of the labour market, WorkChoices simply biases it in
favour of employers by doing all it can discourage collective bargaining and shoving
the old system of awards and arbitration into the background. Because economists’
neoclassical model abstracts from the question of relative bargaining power,
WorkChoices assumes (possibly correctly) that economists won’t notice what’s amiss.
Likewise, it picks up the economists’ point that restrictions on the ability to fire end
up being restrictions on the willingness to hire, while ignoring the more subtle point
that workers (including even economists) derive much utility from perceiving that
their job is secure.

If you draw a distinction between trying to swing one to employers and trying to
improve labour market outcomes, it’s hard to see how WorkChoices will do much for
the economy. In the OECD’s rating of different countries’ employment protection, it
gave our unfair dismissal regime quite a good (ie low) score, and when you remember
that getting rid of the unfair dismissal provisions encourages firing as well as hiring,
you wouldn’t expect much net increase in employment.

Most economists’ main hope of employment growth would come from lowering the
minimum wage, but as Mark Wooden of the Melbourne Institute has pointed out, the
Fair Pay Commission’s freedom to lower the minimum in real terms will be greatly
constrained by the indexation of unemployment benefits. The most the commission’s
likely to be able to do is slowly lower the minimum relative to the faster-growing
median wage. And, as Saul Eslake of ANZ has reminded us, this was already
happening under the much-reviled Industrial Relations Commission. Over the eight
years to 2004, the federal minimum wage fell as proportion of median earnings from
60.6 per cent to 58.4 per cent. Without the ability to change tax and transfer policies,
there won’t be a lot Ian Harper can do.

You might hope that less protection of penalty rates would permit greater flexibility in
the deployment of labour, but make sure you get your analysis right. One little
acknowledged point is that, while the penalty payments specified in awards may be
arbitrary, it’s perfectly legitimate for workers to set a higher reservation price for
work at unsociable hours. And when the cost of labour falls simply because of
unequal bargaining power, what results is a transfer of income from workers to
employers without any net gain to the economy.

The politics of WorkChoices

But let’s turn to the political implications of WorkChoices. Reading my various
columns on the subject, one of the young chaps at work concluded that I’d changed
my mind about it. No, I said, it’s just that my views are complicated. I regard
WorkChoices as bad in principle, but not likely to be terribly bad in practice. It’s clear
the public is most disapproving of the changes, and this accounts for John Howard’s
quite serious slump in the polls.

But let me make this fearless prediction: the changes won’t stay a hot topic now
they’re through parliament and I’ll be surprised if they’re a significant issue at the
election in (presumably) October 2007. There are five reasons for thinking this. First,
the changes won’t be as bad as some have painted them. When bush lawyers pore
over new legislation, they have a tendency to see worst-case scenarios and imagine
they’ll be the new norm. They forget that acts are always conferring rights that are
rarely exercised because they’re considered impractical or impolitic. Second, it can
take quite a while for people to change their behaviour in response to changed
legislative opportunity. Much of the fear of WorkChoices rests on the spread of
Australian Workplace Agreements, but these have been available since 1997 and so
far have spread to less than 2.5 per cent of the workforce.

Third, the changes are designed to be slow release, with some taking a year, three
years or even five years to take effect. Fourth, and this is a point for economists to
note, the very nature of decentralised wage fixing means it’s hard for observers to
know what’s going on. Whereas all decisions by the IRC were made public, and the
terms of all collective agreements are on record, the Act goes to much effort to ensure
the terms of AWAs are kept secret. So, in the event of AWAs becoming much more
significant in the wage-fixing process than they are today, it will be hard for the
public to know if a lot of employers are driving hard bargains, it will hard for the
firms and workers in an industry to know what the going wage is (meaning there’s
likely to be a fair bit of variation), and it will be hard for the Statistician and
economists to know what’s happening to wage growth.

But my fifth reason for distinguishing between principle and practice is, to me, the
killer: it won’t be long before the Government’s efforts to shift bargaining power in
favour of employers are overtaken by the marked shift in the balance of supply and
demand for labour brought about by population ageing and the retirement of the baby
boomers. Many people can’t conceive of a time when even the unskilled are in short
supply, but everyone over 50 lived through such a time. People say a recession would
speed up employers’ exploitation of WorkChoices. That’s true, but it would be wrong
to assume the next recession, when it comes, will be as severe as those of the early
1980s and 90s. I think we could be returning to the pre-1974 period where recessions
were much milder because, in an era when shortage of labour was the norm, there was
a lot more labour hoarding. We’ll soon be entering a period where workers have the
upper hand. It may prove that the one great virtue of WorkChoices was to remove
any institutional addition to workers’ bargaining power, thus limiting the extent to
which the economy is dogged by perpetual worries about excessive wage settlements.
This will, to an extent, offset the ill-effects of the Howard Government’s chronic
underinvestment in education, training and skill-formation, which will be coming
home to roost.

What’s next?

Even so, it seems clear Howard will want to find a new, and preferably less
unpopular, reform issue to fill the vacuum left by the IR changes. He’ll want to
change the subject and he’ll want to look busy - whether he’s going or staying. He’ll
want to get the business urgers off his back and he may well want to add to his tally of
economic reforms something that fits with his long-held views about the key reforms
needed. That all points to one thing: more tax reform, this time focusing on personal
income tax and, in particular, the top rate.

But he can’t just cut the top rate. That would be too simple - too little to occupy
people’s attention - and too much like a blatant handout to his rich mates. It would
compound the impression given by the IR changes that he’d switched to doing the
dirty on Howard’s Battlers. It would also be relatively cheap. No, he really needs to
do something where he’s seen to be working on the tax problems of everyone, even if
some people end up with much bigger tax cuts than others.

One of the people leading the campaign for further tax reform has been Malcolm
Turnbull, of course. You can understand why Peter Costello has been trying to hold
back the push for further reform. He knows that his big achievement in this area -
raising the top threshold to $125,000 a year so that only 3 per cent of taxpayers are
still subject to the top rate - hasn’t even taken effect yet, but has already been brushed
aside and threatens to be subsumed by something even bigger. He would have a
Treasurer’s caution about leaping to early conclusions on how big the ‘surplus
surplus’ is likely to be looking in five months’ time. And he would be aware (as most
people have failed to realise) that at present he’s committed to half a tax cut next July
- one for everyone earning more than $63,000 a year - and that he’ll be in trouble
politically if he doesn’t come up with the revenue for the bottom, far more expensive
half. In other words, he knows he’s up for the cost of another expensive tax cut for the
punters, before he worries about making the tax cut for high income earners even
more generous than already planned.

Is his reticence on the question of tax cuts also influenced by rivalry with Turnbull?
Quite likely. It may even be influenced by his preference for making further incometax
reform the first big reform of the Costello Government rather than the last reform
of the Howard Government. But that’s all the more reason why Howard’s likely to
insist the question of further tax reform be explored immediately rather than left for
later. The test of whether this exercise proves to be anything more that a government
with an embarrassingly large surplus finally giving in to pressure from the most well-off
taxpayers in the land is, first, whether anything significant is done about a far
more important problem - the work disincentives facing mothers returning to work
and people moving from welfare to work created by their much higher effective
marginal tax rates - and, second, whether high income earners are required to
contribute to the cost of their tax cuts by way of base-broadening measures.
So tax ‘reform’ presents an opportunity for genuine reform, but it remains to be seen
whether that opportunity is taken. What else is there on the reform agenda? Not much
that I can see. The next item on Howard’s list is media regulation, but he’s made it
clear he won’t proceed with anything unless the two media barons to whom all
politicians are in thrall, Murdoch and Packer, can agree on what they want. I wouldn’t
hold my breath waiting for any competitive opening up in this area. My colleague
Alan Mitchell has argued that, while labour market reform never looks like it adds up
to much, its power comes from the opportunity it provides to firms now facing
increased pressure from reform of their product markets. His line is that, if the
Government wants to maximise the economic gain from WorkChoices, it will need to
come up with a lot more product market reform. Not a bad argument, but I don’t see
the Government obliging.

The Liberal leadership

As soon as I turned my mind to preparing this talk I knew I’d have to say something
about the leadership, whether Howard is going or staying, and I knew an audience
such as this wouldn’t let me get away with any two-handed economist routine. I
wouldn’t be allowed out of the room without making ‘a call’. That’s quite a tall order,
since I doubt if Howard himself yet knows which way he’ll jump. But, just so you’ve
got something to throw in my face if I’m invited back next year, here’s my call: I
think Howard will announce his retirement early in the second half of next year. He’ll
be tempted to stay - he’ll feel fine, and more Liberal members will want him to stay
than want him to go - but in the end he’ll go because he knows he has to go sometime
and now’s a more propitious time than in three years’ time. That’s a point to note:
since he can’t resign too soon after an election and must give his successor at least a
year (and preferably longer) to settle in before the next election, if he hasn’t resigned
before the end of next year, he’ll have to stay on for pretty much another three, by
which time he’ll be 70. Another technical parameter is that he won’t leave before next
March, which is when he’ll have notched up 10 years as PM. The Costello camp had
set March-April as some kind of deadline, but by then it would be too late to hand the
budget to a new boy, so the revised expectation is not long after the budget. Howard
won’t want any appearance that he’s been pushed out, and I think Costello and his
camp have realised that being too overtly pushy could prove counterproductive and
prompt him to dig in his heals. Like Bob Carr, Howard may delay his announcement
for a month or two till people had concluded he was staying, but I’m sure Howard
will want to avoid the unpleasantness and diversion that could arise should Costello
and his troops fear they’d been cheated. Few prime ministers have had the judgment
and self control to quit while they’re on top, but I believe Howard will be one of
them. Should he stay, however, I confidently predict Costello will cop it sweet - he
won’t challenge (he’s way short of the numbers), he won’t go to the backbench and he
won’t resign. Party support for Costello would gather should the Government stay
well behind in the polls, but I’ll be surprised if it does.

Why the rush?

A related question is why we’ve witnessed the unseemly, undemocratic rush of
Howard banging his key legislation on Telstra, terrorism and WorkChoices through
the Senate before Christmas with insufficient time for scrutiny. And this after he’d
promised to use his Senate majority wisely and not provocatively. Could it be he’s
getting these key items on his personal reform agenda on the statute books so he can
retire in triumph as early as he likes next year? It could be. But there are two other,
equally plausible reasons for his haste. One is that both the Telstra privatisation and
the WorkChoices legislation are highly unpopular, and the Government knew it would
bleed for as long as they were in the public eye. It follows that the way to minimise
the bleeding was to get them through parliament as quickly as possible.

The second is interesting: now Howard has a one-seat majority in the Senate, the
opposition seems to have moved inside his own backbench. While Barnaby Joyce is
the only one threatening to cross the floor, there’s been a lot of rumbling on the
backbench and a fair few changes made to accommodate that dissent. It’s as though
there must always be a balance of power, and when it doesn’t reside with the minor
parties it moves to whoever on the government backbench has the courage to exercise
it. Joyce is a bit wet to be a member of the Howard Government, a Catholic social
justice type. He has his populist streak, but he’s smart and knows how far to push it.

He won’t be crossing the floor very often, but he’ll be winning his fair share of
concessions and getting constant publicity. He’s lifted the profile of the Nats in the
bush; done them a favour. He’s not hugely popular with other backbenchers, but
that’s mainly envy of someone with more initiative. Anyhow, my particular point is
that, with a fractious backbench, Howard would believe that the less time he gave his
troops to think about the finer points of his measures, the less trouble he’ll have
getting them through.

The Labor leadership

Things aren’t terribly flash on the Labor side of the aisle. Kim Beazley is competent
and likeable, but not inspiring. Labor may be ahead in the polls thanks to
WorkChoices, but that doesn’t prove much and isn’t likely to last once the fuss dies
down. Don’t forget that Howard has been well behind in the polls in each of his terms,
only to pull back in front when it mattered. As for the boost from IR, Beazley could
easily find himself caught the way he was with the GST before the 2001 election. He
thought the unpopularity of the tax meant he was on a winner, only to find that
everyone had calmed down - and been calmed down by bribes from Howard - by the
time the election arrived.

You don’t get the feeling his troops are terribly happy with his leadership, but there’ll
be no challenge because no one in the shadow cabinet looks a better bet. Remember,
however, that should Howard retire, Beazley will be a much closer match for
Costello. In with a real chance, I would have thought.

Monetary policy

Before we get down to it, there are some housekeeping matters to note. On the
Reserve board, Frank Lowy will need to be replaced after his term expired last week,
and Don McGauchie will be re-appointed when his first term expires at the end of
March. I think we can be confident Lowy’s successor won’t have being a generous
Liberal Party donor as his only qualification. One dud is enough. Ian Macfarlane’s
term ends in mid-September. On past precedent his successor should be announced
about a month before hand. As deputy governor, Glenn Stevens is in poll position but,
though I know of no reason to doubt he’ll get the nod, there are no guarantees.
My text for today is: the Reserve stays quick on its feet, so so should you. Why?
Because Stuff Happens. I think most people have got the right fix on the outlook for
monetary policy in 2006. Growth is expected to be ‘solid’ (code for unspectacular),
though just how solid remains to be seen. But with underlying inflation likely to drift
up towards the top of the target and headline inflation likely to stay at the top of the
target, ‘policy will need to be responsive to any sign that demand and inflation
pressures are stronger than currently expected’. The Reserve keeps hearing from the
firms it speaks to that they’re experiencing cost pressures - that they’re operating
close to full capacity, with shortages of labour - so it’s got its hand on the lever ready
to tighten when it sees things moving out of line. It will be looking not just at wages -
wage pressure is there, though so far it’s coming through pretty gradually - but also
for signs of pricing power, such as too many firms using petrol prices as an excuse for
a disproportionate price rise. So at this stage I won’t be surprised if we see further
tightening next year. If so, the Reserve would do another 25 basis points, then sit back
to see the response, then do a little more if it thought it needed.

The Reserve’s not likely to be inhibited in any needed tightening by worries about the
deflating housing bubble. After two years in which house prices nationwide have been
flat rather than falling, with the misalignment getting smaller, it’s more relaxed. It’s
true that household interest payments are a higher proportion of disposable income
than they were at their peak in 1989, and are still rising, but they’re rising not because
of sharp rises in interest rates, rather because people are still borrowing quite strongly.
From its peak rate of 20 per cent, housing credit is still growing by 11 per cent a year.
That’s hardly a sign of distress. If anything, it’s a sign mortgage rates are still too low
rather than too high and too tight.

The worry has always been that, during this period in which the economy is
vulnerable because households are so laden with debt, we might be hit by some
exogenous shock that caused a downturn in growth and a rise in unemployment. The
knock-on effect from that could be nasty. But shocks are, by definition, unexpected.
And you don’t fail to do what you should do - keep inflation pressure in check - just
because of what might happen. You do what you have to do, then worry about how to
respond to the shock if it happens.

All this implies that, at present, you wouldn’t expect to see rates being cut next year.
If a year from today rates were lower, they would have gone higher in the meantime.
But all I’ve said represents merely how the future looks ‘at present’. The safest
prediction I can make is that, before we’ve got too far into next year, the future will
look quite different from the way it looks now. That’s what I mean about the Reserve
staying quick on its feet. It responds to the incoming data, and is quite prepared to
change its view - and its policy - as the evidence evolves.

I observed at this show some years ago that ex-bank business economists were better
at second-guessing the Reserve than ex-Treasury economists. Peter Horn said to me
later than he thought he knew why that was. The trouble with Treasury is that it has
detailed published forecasts, which it’s only able to revise once in a year. This means
it feels obliged to defend its forecasts until such time as it’s able to revise them. It
faces a temptation to interpret incoming data in the light of its forecast rather than
vice versa. The Reserve, by contrast, doesn’t really publish its detailed forecasts, and
so doesn’t hesitate to revise them as often as the weight of evidence dictates. It
doesn’t have any institutional ego attached to its forecasts. You can see that in the
way Ian Macfarlane explains to the parliamentary hearing why his predictions of six
months earlier didn’t work out. He does it without a hint of embarrassment. I think the
Reserve’s pretty humble about the low probability of getting forecasts right.
So that’s what I mean about it staying quick on its feet. And this year’s been an
instructive year in that respect because the Reserve went through four distinct changes
of view in the space of 10 months.

The first change came at the February meeting and was signalled in the February
SoMP. Everything seemed to be on hold when Glenn Stevens spoke to the ABE
dinner this time last year, but by the February meeting we were quite worried about
inflation with the economy running out of capacity. What had happened in the
interim? The signs of sharply rising costs in the December quarter PPI, I suspect. At
the February meeting it was felt the public needed to be got ready for a tightening,
which came after the March meeting.

Many people would say the second change of view came at the April meeting, when it
was decided not to tighten again. I guess you can blame me for that. But it had never
been intended to do two in row and the decision not to tighten further came actually
came a month or two later.

The third change came in the Big Mac’s appearance before the parliamentary
committee in August. The point he meant to make was just that the Reserve had
abandoned its tightening bias, that in the SoMP released earlier that week ‘we
refrained from making the point we have been making for the past year or so about it
“being unlikely that there would be no further rises in the course of the expansion”.’

In our present estimation, he said, ‘there is no longer a more than 50 per cent
possibility of [a tightening] happening’. But then he went on to say something a bit
different, that ‘when we look further into the future, we no longer see a clear
probability of it moving in one direction rather than the other’. And that’s where he
inadvertently gave people a bum steer. Understandably, many people went away with
the notion of a 50 per cent chance of tightening and a 50 per cent chance of easing. In
truth, the probability scheme in the Reserve head would have been 20 per cent
tightening, 20 per cent easing and 60 per cent no change.

So the fourth change of view for the year came with the November SoMP, when the
Reserve restored its tightening bias. It could have reverted to saying it was unlikely
there would be no further rises in the course of the expansion, but it didn’t - not
because it wasn’t true, but because, as we discussed last year, that formula was
devised to cope with the election campaign, to warn the public that it reserved the
right to raise rates after the election and to discourage the parties from making
promises about stopping rates rising. In that, of course, it was only partially
successful. But though it hasn’t resurrected that formula, be in no doubt that the bias
to tighten is back.

One last point. We began this year with a major change of tune between the
December meeting and the February meeting. If you think back, you realise the same
thing has happened over many Christmas breaks. When the Reserve gets back from
summer holidays towards the end of January and views things with a new eye, it often
doesn’t pick up where it left off. Why does this happen? I can think of two
mechanical reasons to explain why view-changes are more likely over the summer
break than between meetings during the year: there’s double the amount of new data
because of the missed January meeting, and the summer period also includes one of
the year’s four releases of inflation data. I don’t think that’s enough to explain the
phenomenon. Maybe the fresh eyes do make a difference. But my advice to you is
simple: stay quick on your feet and always keep an eye out for another over-
Christmas view-change.


AUSTRALIA’S POLITICAL AND ECONOMIC OUTLOOK 2006

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AN ECONOMICS FIT FOR HUMANS

Ronald Henderson Oration, Melbourne
August 2004.

1. Introduction

The further I have strayed from my days as an undergraduate, the more convinced I have become of the importance of theory – not just to economics, but to any discipline. Theory is important because it is so pervasive in influencing the way we think, the way we analyse problems in our discipline and the nature of the solutions we favour. Often, we fall into ways of thinking about issues without fully appreciating the influence theory is having on us (Keynes 1936).

At a time when economic rationalists are so influential in government policy making, theory becomes highly relevant because economic rationalists can be defined as people who take conventional economic theory – the neoclassical model of markets, in its simplest form – and raise it to the status of religious doctrine.

In addition, I have become interested in some relatively recent developments in cognitive and social psychology. Psychology has become a lot more interesting to people interested in public policy since the advent of ‘positive psychology’, which has switched the focus from the study of mental illness to the study of people who are perfectly well (Seligman 2002; Kahneman et al. 1999: p. ix).

Two aspects of psychological research present significant challenges to conventional economics: the study of how people make decisions and the study of happiness or ‘subjective well-being’. I wish to draw out the respects in which these advances challenge various aspects of economic theory and the policy prescriptions conventionally flowing from the theory. The first challenge – concerning decision-making – is being taken quite seriously by the economics profession. The thriving school of economic thought it has given rise to is behavioural economics, and the psychologist who did most to inspire this school, Daniel Kahneman, was awarded the Nobel Prize in economics in 2002. The second challenge to conventional economics – from the burgeoning happiness research – is taking longer to win converts among economists. But I am enough of an optimist to hope that we are witnessing the early stages of another revolution in economics, one to match or even exceed the influence of the Keynesian revolution of the 1940s and 50s. Surprisingly, Keynes is now being hailed as one of the earliest behavioural economists (Akerlof 2002), though his contemporary followers largely ignored that aspect of his contribution.

2. Decision-making

2.1 Challenge to theory

Psychology’s first challenge to microeconomic theory strikes at one of its central elements: the assumption of Homo economicus. Economic man is assumed to be rational and self-interested. He or she always carefully evaluates all the options before making any decision, and always with the object of maximising his or her personal ‘utility’ or satisfaction. But cognitive psychologists have demonstrated that humans simply lack the neural processing power to make the carefully calculated decisions economists assume (Simon 1957). People are not rational, they are intuitive. And altruism is often an important consideration in their decision-making (Mullainathan and Thaler 2001; Frey and Meier 2002). People can’t chose correctly between three options where the best option is not immediately apparent (Simonson and Tversky 1992). Rather than carefully thinking through the pros and cons of every decision, people tend to rely on mental shortcuts (‘heuristics’) which often serve them well enough, but also lead them into systematic biases (Tversky and Kahneman 1974). People are often slow to learn from their mistakes (Mullainathan and Thaler 2001). They are frequently capable of reacting differently to choices that are essentially the same, just because the choices have been ‘framed’ (packaged) differently (Kahneman and Tversky 1979). This means that, rather than being coldly rational, people’s decisions are often influenced by emotional considerations.

All this means that Homo sapiens differs from Homo economicus in many important respects. He doesn’t conform to economists’ assumption of fungibility (one dollar is indistinguishable from another), he is often not bothered by opportunity cost and thus has a strong bias in favour of the status quo (Thaler 1980). He does not ignore sunk costs as he is supposed to (Thaler 1980) and often cannot order his preferences consistently (Tversky and Kahneman 1974; Kahneman and Tversky 1979). He is not averse to risks so much as averse to losses and he focuses more on changes in his wealth than on its absolute level (Tversky and Kahneman 1981).

Unlike Homo economicus, Homo sapiens cares deeply about fairness (Kahneman et al. 1986). Experiments show people will walk away from deals they consider treat them unfairly, even though those deals would leave them better off (Kahneman et al. 1986). People are prepared to pay a price to punish others they consider to have been behaving badly towards the group (Fehr and Gachter 2000). Often people are concerned about ‘procedural fairness’ – how things are done, not just how they end up (Tyler 2000).

2.2 Policy implications

I believe this has powerful implications for the aspect of the neoclassical model that economic rationalists (particularly right-wing rationalists) find so attractive: its elevation and celebration of individualism. The individual should be free to choose, and governments should be most circumspect in how they constrain individuals’ freedom, including by taxing them to pay for the public provision of services and to redistribute income. This elevation of the individual and, by implication, denigration of a more communitarian approach, turns out to rest heavily on the assumption that individuals are rational. If individuals are rational decision-makers then it follows, as the rationalists keep asserting, that governments can never know what is good for you better than you know yourself. Governments should therefore tax individuals as little as possible, and maximise the private provision of such things as education and health care. If individuals are not particularly rational in their decision-making, however, then there may well be a case for government paternalism in certain circumstances. Add to this the findings that people’s decisions are often influenced by altruism, their concerns about fairness, their willingness to punish people who act contrary to the interests of the group, and that their behaviour is often influenced by the behaviour of those around them (Ormerod 1998: chap. 2), and you get a further argument in support of communitarian interventions and income redistribution.

A second strand of policy implications also flows from abandoning the assumption that people are rational. It calls into question economists’ adherence to consumer sovereignty – their belief that consumers should and do determine what producers produce. When consumers’ decisions can be influenced by the way propositions are framed, and when decisions are frequently influenced by emotions, producers can use advertising and other marketing to manipulate consumer demand. This contravenes a basic tenet of market economics that, in Keynes’s phrase, consumption is ‘the sole end and object of all economic activity’ (1936: chap. 8). If producers can use advertising to increase as well as manipulate consumption, this puts the cart before the horse, it reverses the direction of causation in the economic system, turning means into ends.

Economists do not like talking about advertising. To make it fit their model they have to assume that it is purely informational, whereas we all know that smart advertisers sell the sizzle not the steak (Camerer 2003). Advertisers prey on our inadequacies and irrationalities (Layard 2005), subtly selling us propositions which become absurd as soon as someone puts them into words: that buying certain products will at last put us among the beautiful people or give us a healthy, happy family. But if advertising is antithetical to consumer sovereignty, why are economists usually so disapproving of proposals to limit or ban advertising?i

3. Happiness

3.1 Challenge to theory

There’s not a big difference between subjective well-being – happiness - and the economists’ goal of maximising utility or satisfaction (Easterlin 2001; Frey and Benz 2002; Frey and Stutzer 2002). So this is an area of research that ought to be of considerable relevance to economists. One common reservation they have, however, is that it is all so subjective – asking people to rate their satisfaction with life on a scale of one to 10. But psychologists have demonstrated that a person’s own assessment of their happiness has a high correlation with other people’s assessments of that person’s happiness and with physical measurements of brain electroencephalogram readings (Diener 1984; Veenhoven 1993; Davidson et al. 2000).

The most surprising finding of the happiness research, confirmed in an Australian study by Heady, Muffels and Wooden (2004), is that the link between life satisfaction and income and wealth is quite weak. It exists, but it is small. Once a nation’s income per person exceeds about $US15,000 a year (Inglehart and Klingman 2000; Helliwell 2003), the acquisition of further income is subject to rapidly diminishing returns. And, as was first pointed out 30 years ago by the economist Easterlin (1974), in the period since World War II the correlation between GDP and happiness has broken down in rich countries (Myers 1993). In America, for instance, real GDP per person has trebled while subjective well-being has been unchanged (Diener and Seligman 2004). Similar results are found for other developed countries where life satisfaction has been regularly measured (Blanchflower and Oswald 2000).

This is a devastating conclusion for economists – and particularly economic rationalists – whose whole practical motivation has been based on the assumption that helping the community raise its productivity and increase its production and consumption of goods and services will leave it unequivocally better off. There is no doubt that, materially, we are better off than we were even 10 years ago: our homes are bigger and better, our cars are better, our food and clothing are fancier and we have any number of wonderful new gadgets to save us labour or entertain us. But though we are better off, we do not feel better off. Why not? Why is it that the acquisition of income does so little to increase our satisfaction?

Psychologists (and a few economists) have proposed two main explanations. First, it’s a characteristic of humans that we adapt surprisingly quickly to our changed circumstances (Helson 1964; Frederick and Loewenstein 1999). We get a promotion, move into a better house or buy a new car and, for a while, we really feel better off. But all too soon we adapt to our new circumstances and absorb them into the status quo. People who win the lottery are no happier than normal within a few years but, by the same token, most accident victims who suffer paraplegia end up being no unhappier than normal (Brickman et al. 1978). The thing that is surprising about all this is our failure to learn from all the times the buzz from an acquisition has worn off so quickly (Schwartz 2004). We keep striving to acquire another new toy in the hope it will be the one that finally delivers nirvana. This amnesia – which, in terms of the economists’ model, constitutes a major information failure (Layard 2005) - is why psychologists describe us as being trapped on a ‘hedonic treadmill’ (Brickman and Campbell 1971).

The second part of the explanation for the diminishing marginal utility of money is rivalry (Duesenberry 1949; Hirsch 1976; Frank 1985, 1999; Solnick and Hemenway 1998; Easterlin 2001). The economic model assumes that what satisfies us is absolute increases in our income or wealth. This is because we’re all individualists, who not only don’t care about the well-being of others, but also don’t ever compare ourselves with others. In truth, we are highly social animals, obsessed by what those around us think of us and what we think of them. Remember Gore Vidal’s crack: when I see a friend succeed . . . a little part of me dies. Evolution has made us a species highly conscious of our social status. We care deeply about how we rank in the pecking order, and are always striving to advance our status – or avoid slipping back - by the promotions we get, the size of our incomes, the location and opulence of our homes, the newness and foreignness of our cars, the private schools we send our children to and the private hospitals we use when sick. In our mania for getting ahead of the Joneses, what we care about is not absolute increases in our income, but relative increases.

The trouble with this rivalry, however, is that it is a zero-sum game. To the extent that I succeed in making myself happy by moving up in the pecking order, those people I move ahead of suffer a loss of status that makes them unhappy. In economists’ language, my efforts to advance myself generate offsetting negative externalities for those I pass. And what is more, the whole leapfrogging game tends to leave us perpetually anxious about slipping back in the race for status.

3.2 Policy implications

There are many policy implications from this and I will only scratch the surface. Layard (2005) says that, beside adequate income, the research shows six main factors affect happiness: mental health, satisfying and secure work, a secure and loving private life, a secure community, freedom, and moral values.

So my first policy implication is that reducing unemployment should be given a much higher priority by the economic policy-makers. Research shows that being unemployed makes people particularly unhappy (Clark and Oswald 1994), a lot more unhappy than can be explained by the loss of income they suffer by not having a job (Di Tella et al. 2001). What people miss is the sense of identity and self-worth that comes from a job, and also, no doubt, the social contact. Economists may protest that they are already giving high priority to reducing unemployment but, in truth, their pursuit of this goal is conditional. Their concern with the efficient allocation of resources means they frown on any solutions (job sharing, job-creation schemes, public sector employment, for instance) that involve modest inefficiencies. The truth is that the overwhelming goal of economists is to hasten the growth in the economy’s production of goods and services, and the jobs generated in this process are just a fortunate by-product.

My second policy implication is that governments and employers could do a lot to raise subjective well-being if they put more emphasis on the enrichment of jobs – increasing job satisfaction by giving workers more personal control, opportunity to use their skills, variety in tasks, respect and status, and contact with others. Taken literally, the economists’ model assumes that all work is unpleasant – a disutility – and is undertaken purely to gain the money to buy the things that bring utility. Like the rest of us, economists know that, in reality, work carries much intrinsic satisfaction. But they don’t follow this realisation through to their policy prescriptions. They are perpetually advocating labour market reform aimed at ensuring labour is used more efficiently, treating labour as though it were just another inanimate economic resource, and ignoring the feelings of the human beings attached to the labour. Various of the ways labour can be used more efficiently make life unpleasant and even unhealthy for the workers involved: ever-changing casual hours, rolling shift work, split shifts and firms continually moving their staff to different cities. When we pursue efficiency at the expense of people, economists have got things round the wrong way, trashing ends so as to advance means.

A third implication is that economic policy-makers should recognise the benefit of stability. People like stability – it makes them feel secure and happy. What’s more, it breeds a highly valuable commodity: trust. People don’t like continuous change. Macroeconomic management is aimed a stabilising the rate of growth in demand, and that’s good. But microeconomists perpetually advocate change (‘reform’) aimed at increasing efficiency, raising productivity and quickening the production of goods and services – the very objective we now know doesn’t make people any happier. Often, micro reform involves ‘displacing’ workers from the reformed industries where their labour wasn’t being used efficiently. This is a process that causes no heart searching among economists because their model: first, assumes alternative employment will be readily forthcoming; second, ignores the intrinsic satisfaction from work and, third, assumes unemployed workers will have a whale of a time enjoying all their new-found leisure.

A fourth policy implication is that the thing economists celebrate as ‘competition’ and are always trying to encourage because it acts as a spur to efficiency and growth, is actually ‘rivalry’ that creates losers as well as winners and thus generates roughly as much unhappiness as happiness. Rivalry is hardwired into our brains, but a case can be made that social comparison is not something we should be encouraging (Layard 2005). Seen in this light, we should think twice about the unceasing calls for us to do this or do that to preserve or improve the economy’s international competitiveness. But why? It is just rivalry on a global scale. It is saying, we must make sure foreigners do not get richer at a faster rate than we are, or even, God forbid, overtake us on the league table.

Fifth, instead of merely unquestioningly promoting consumption, economists should be doing something they rarely do: studying it (Scitovsky 1976). They need to see whether there are some forms of consumption that that yield more satisfaction than others. It may be that, in our striving for social status, we are devoting too much of our time and income to the purchase of ‘positional goods’ (Hirsch 1976) - conspicuous consumption – and too little to activities empirical research now tells us would yield greater satisfaction. Frank (1999) says the ‘gains that endure’ are more likely to include social life, time with our children, less travel time to work, more job security and better health care. Layard (2005) says we should be spending a lot more on fighting glaring evils – and sources of profound unhappiness - such as depression.

Sixth, the evidence that income is subject to diminishing marginal utility strengthens the case for redistributing income from rich to poor, since such transfers should increase total happiness. As yet, however, there is mixed evidence on the question of whether people who live in countries with a narrower gap between rich and poor are happier. Alesina et al. (2001) find that income inequality has a large negative effect on happiness in Europe, but not in the United States.

Finally, we should look sceptically at the incessant calls for lower tax rates to encourage people to work harder. By its very nature, the economists’ model assumes away all non-monetary motives for work. We do it only for the money. But the reminder of the intrinsic satisfaction we derive from work also reminds that higher income-earners in particular have powerful non-monetary motives for working long and hard: job satisfaction and the pursuit of power and status. Reducing tax rates would merely allow us to run faster on the hedonic treadmill, whereas I think we should slowdown. The drive for reduced government spending and lower taxes would leave people with more disposable income they could use to purchase education and health care privately, in the hope that these positional goods would enhance their social standing. Layard (2005) warns we should worry lest leisure, public goods and inconspicuous consumption (consumption that is not compared with the consumption of others) are under-produced because people focus so much on conspicuous consumption.

4. Conclusion

My conclusion is not that economics should be abolished but that it, rather than the economy, is what is in desperate need of radical reform. Neoclassical economics is a product of the state of man’s knowledge during the 18th and 19th centuries, and has actually lost some of its human subtleties since then as it has been made more mathematical (Frey and Benz 2002). It needs to assimilate our now vastly superior understanding of human decision-making and motivations. The community will always need the advice of people who specialise in studying the economic aspects of our lives, but those specialists need to rebuild their models using more realistic assumptions about human behaviour. This would give us an economics fit for humans.


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