Tuesday, 21 August 2007

Economic Rationalism Triumphs with Faults

In our time, a miraculous gold finger in thinking is economic rationalism, as it called in Australia. Momentum was created during the Thatcher and the Reagan years in two of the most prominent Western countries. Moreover, these two entities of privatisation experiments are Anglo-Saxon societies, the closest cousins of Australia in the whole world. If these happened in a central continental European country, Australia would have taken on the trend more hesitantly.

The crux of the issue is the divide between the Anglo-Saxon and continental European types of capitalism. Given their common dislike of socialism and authoritarian regimes, they differ in many ways in the extents of free market in a society, namely the aforementioned mixed economy, and the right proportions for market operation and for government control.

The learning curve has been pretty long. The entire capitalist world, including the mighty US, had been crushed by economic upheavals such as the Great Depression and had willingly followed the prescriptions from Maynard Keynes. They all learned the bitter and sweet lessons of macroeconomics, in particular, of aggregate demand. Growing consumption would then propel the economy forward, as well as enlarging company profits and generating returns to investment. Governments are obliged to make public investment, in places of the dysfunctional “invisible hand”, in vivid memories of what happened in economic recession and depression.

There were still wide gaps between the US and Western Europe in this regard, with the market seemingly freer in the US while more regulated in the latter. Western European countries went many steps further to establish marvelous welfare societies on the back of economic prosperity, showing a determination to share economic gains in the market with the most citizens around. Despite the unmatched economic might the US commanded, thanks to its sheer size and uncontrollable exploitation of resources, Western European states demonstrated the true nature of social welfare and provided ample examples of well balanced economies, mixed at a desired proportion with adequate government involvement. The UK installed similar systems to Europeans’, albeit an Anglo-Saxon state, and Australia followed suit closely.

In those decades, public assets and projects were unquestioned domains, and welfare states worked fine, met with few challenges. There was a comfortable buffer zone between these practices and that of the Soviet bloc, existences of a lively and working market and of legal protection of private businesses, so that ideological severity did not make a large dent on public acceptance of this mild and feasible option.

The swings in the UK and the US to the right in the 1980s derived from an urgent response to their internal problems, in public budget shortfalls and in supporting existing provisions of welfare handouts. To spur more business activities and revitalise the economy, these conservative governments took tough actions on social welfare. They set examples of how to cut benefits and streamline government operations, reduce obligations to citizens thus save on spending. As the Soviet bloc staggered and reform initiatives emerged in places like China, there was a seriously sober tendency of rethinking, on how to deal with the disease of socialism and to distance oneself from. The Thatcher government made it clear that existing problems, the “English disease” as a collective term to sum them up, could not be cured by more social democratic measures.

The crushing of the Soviet rival in the Cold War also endangers the left, social democratic course in general. There came indiscriminate firing at such practice nominally comparable to socialism in the East, and budget shortfalls forced many to consider alternatives, in particular those offered by conservatives and experimented in two of the most “free” capitalist countries. It is very much like a dramatic, fundamental conversion in faith from one religion to an opposite one, out of sheer necessities or pure conviction. The difference between the two is precisely that between wet and dry Australian Labour, and within a short period of time dry Labour took the charge in the party and in national affairs. The last stimulus needed for conversion was the collapse of the Soviet bloc, as an ideological bastion as well as a military power. The 1990s indicated to many the way ahead, that the market rules, and that anyone with a slight chance of success should notice this historical turn in life. The popularity of this rethinking is incredible, as many knelt in front of the overwhelming might of the US, a proclaimed free market practitioner and a triumphant Anglo-Saxon achievement, and became hopelessly faithful worshipers.

Economic rationalism has been the guiding light of these movements in over two decades. The term varies as “neo-classical” or “neo-liberal” in other places. From this labelling, a sense of reappraisal is evident. Its clear intention attempts to climb a symbolic spiral staircase, above two of the most significant previous fashions in history of economics, the bible of classical economics by Adam Smith and once dominant Keynesianism of the 20th century. Neo-classical advocates display their utmost desire to go right back to the origin of classical economics and reapply the notion of invisible hand and all that in the reality of contemporary world. It is quite natural in academic and ideological domains that one school of thought once dismissed under unfavourable circumstances revived and resurrected as believers erected new defence and sought acceptance for a rerun. Apparently people witnessed some excess in public assets and state actions, so that a counter balance or even total reversal is necessarily justified. When there are visible flaws in economic management, a correction bounds to happen. This is seen as a rational enough response.

Economic rationalism aims at lifting the performance of the market. Above all, it intends to lift the market up to a place lofty enough from any damaging assault. The market is king, the sacred place of business, free of all bounds, and the most rational to bring benefits to all. Economic rationalism combines institutional economics, which traces all impediments to growth to bad or inefficient institutions of high transaction costs, and monetarism, which takes money supply moderation by Reserve Banks as the only permissible tool to cope with inflation and supports market self-correction rather than government fiscal policy or regulations on financial markets. It revives the idea that only a free market can make capital and goods flow to the places of demand in a fair and equal way, and that government regulation or provisions are outrageously irrational and demand depressing.

The ultimate implication of economic rationalism is to allow the market to run its course without restraints, and there must be considerable reduction in the shares of state control and diminishing of regulations. Public welfare is one of the targets, as expenditures should concentrate on the more efficient sectors, such as business, user-paid services, and finances, and withdraw from or cut down to lows in least efficient sectors, such as public utilities, benefits handouts, and services. Under the umbrella of rational management, it is clear to administrators where to spend more money and where to save. As public obligations shrink sharply as desired, there should be a healthier market and a small government in the end.

It is crucial to understand that by the late 1970s the concept of social welfare had been challenged, primarily on the question of how to finance all those public spending. By evaluating practice of restructuring in other developed countries, even Labour had little to resist. The Great Society is gone in the US, and social welfare countries in Europe have been troubled by common economic woes, in the forms of slower growth and heavy budget deficits. Australians subsequently found it much less attractive and fashionable to stand for the treasured past systems. In consensus, budget deficits emerged to become a paramount gauge of performance and an easy target in political debates. Another argument was the loss of efficiency and productivity in Australia. Financial burdens from providing social welfare for the community were commonly seen as dragging both of them down, especially lowering business competitiveness. For the simple reason of financial management, leaders of both political sides flocked to make budget cuts of various kinds. For Labour, they essentially saw no counter argument to this rationalising logic, since they are not able to accept the principles of economic rationalism but to reject some parts of it. Sentiments shifted to readily accepting rational or even radical solutions, leaving the issue of public welfare aside. Priorities were definitely drawn up in a completely different fashion.

The only odd thing is that these shifts went on initially under the name of Labour, with its traditional social democratic trait. Once the Coalition moved into the office, the picture got clearer and confusion about name versus nature is gone. There is then a fitting combination of a right wing government carrying out pro-business, market deregulating tasks. This is a time when economic rationalism rules and drowns out remaining sanity in social development.

Economic rationalism has become a new political correctness, replacing the previous one of social responsibility of the government. Its ingrained status was enforced by continued government deregulation, public sentiments and acceptance, and by continued showing of support from business sectors. Private businesses have been more vigorously encouraged, especially small and medium sized businesses. Union power being curtailed, these businesses are now subject to less state supervision, regulations, and bureaucratic red tape. This fulfils a key part of commitments of a conservative government to restructuring; in return, it was rewarded by solid support from business sectors, big or small.

By the standards of economic rationalism or pure economic equations, the measures taken by Labour and Coalition governments in a row make sense, as shown in published figures of budget surplus and growth. They are also the rules and benchmarks around in the developed world. Australia has fully integrated into the international trade system and won high praises for being the most deregulated economy in the world lately. The list of accomplished tasks is long, full of disposed or reorganised public entities, while the list of government undertakings has shrunk considerably. As both parties committed themselves to this cause and the more “rational” conservative Coalition government has effectively run the country for over a decade, economic rationalism has indeed triumphed in Australia.

The trouble is that those believers have tried exceptionally hard to ignore the background of a disregard towards their classical economics in a particular past period of history. They tend to forget awesome demonstrations of market failures and calamitous aftermath. The market is far from perfect, unlike enthusiastic depictions of learned scholars, and even competition is imperfect. As there is no equal chance for everyone in business opportunity and market success, there is every possibility that many get burned badly in financial and personal terms by spectacular market failure and meltdown. While in reality governments in developed economies have now many means to manage the market not to run wild or off its course, for instance the reserve banks and securities commissions, economic rationalism chooses to trust the market with total faith and preaches a lassie faire conception with a near bizarre conviction.

Deregulation is meant to open the fields and opportunities to investors for their involvement, as directed by market signals and projections. The market space and assets the government let loose are supposed to be picked up by competitive investors, private and foreign, so that business activities beat monopolies. These encouraged some bold manoeuvres by corporate Australia and generated enormous commercial gains to newly rising tycoons. Loose supervision and a lack of experience in financial leverage management gave rise to a series of scandals and downfalls of reckless corporations. All in all, the business environment appears to turned from being strict to kind to investors and those with grand-plan ventures.

The other side of the coin is the income gaps between the rich and the poor. Social inequality has become more visible. With the government shirking more of its responsibilities and paying much attention to reducing public spending, the people in lower end groups receive less concrete support for their life. The famous dole bludger image is to be shrugged off, and fewer of those in need would receive continued aid from social securities agencies. A parliamentary library report stated in 2005 that a large numbers of Australians, over 9 percent of total, about 1.7 million, lived in poverty. This is not to say that Australia has sunk to a third world country in income and poverty levels. The line is drawn at half of the average disposable income level. There are other reports which described or denied a widening gap between the poor and the rich.

The political significance in these figures and debates seems in making some conclusion on whether the Coalition government did a good job of social welfare after dismantling many of that type of facilities. Disparity could come from people being pushed by the government to get off social welfare and take low-paid jobs. With enormous gains from sustained growth, company profits, and falling unemployment rate in good times, income levels could rise higher and lift the average up as well. This does not solve the problem of inequality in income, since that is a completely different issue, more of a policy on distribution and provision of social aid in many forms. It could be the situation that many moved up to higher income brackets, making a pleasant line of higher average income, while due to bad distribution systems and policies the numbers of people in poverty may increase as well.

A clear sign is that pays to top corporate executives saw dramatic rises in the years of economic rationalism. Australians used to be unfazed and untempted by high pays. Their lives were not disturbed by the showing of six, seven figure salaries, and most were content with modest pays as reward to their consistent yet not hard work. When Australian basketball centre Luc Longley first played for the Bulls in NBA, some Australian sport commentators at the site went astounded by his pay cheque of 250,000 USD a year. That amount was only a tiny fraction of what NBA stars earned, but considering he was doing roughly what he would do for NBL of Australia, that figure was unimaginable at the time.

Well, people do get greedy when they are handed a chance, and citing international standards is a smart and convenient way to add extra benefits to oneself. Before you know it, pay rises and bonuses went through the roof. A chief executive of one of the four major Australian banks was reported to receive an annual pay of over 8 million AUD for a number of years. Million dollar packages have become less uncommon in an active game play. On average, the chief executives of top listed Australian companies got their pay rise of 16 percent in 2005, making it 2 million AUD a year. They are, however, beaten hands down by the new CEO of Telstra, an outsider restructuring expert, earning 10 million AUD a year. This precedent will soon be applied in head-hunting and recruitment of CEOs as a new benchmark for extraordinary demands of fat pay packages at the beginning of taking up a top job. The universal justification relies on taking direct reference from reputable international practices. Well, no one is keen on taking on international practices on the other end of spectrum, achieving low labour and management costs in order to compete globally with large producers like China. Few are willing to exercise self-imposed restraint on spiral pay rises. Hefty pays for the top group seems to have defied gravity and lifted up average income levels and poverty lines along with them.

No comments: