The dearth and decline of innovation:

Mick Peel writes: Re. “Terry Cutler: the dearth and decline of innovation” (yesterday, item 2). Dr Cutler has presented a terrific article by putting forward an idea that has been crying out for policy recognition in Australia for at least the last two decades, particularly among institutionalist and post-Keynesian scholars.

During this period of time, what little there was by way of industry policy in Australia succumbed to the relentless push for market-driven neoliberal policies. Indeed, Australia’s history of industry policy consists of little more than a system of tariffs (the aim of which, incidentally, was the increased demand for unskilled labour and skilled manual workers, in order to sustain growth in population and total GDP without wage reductions) and a handful of other trade restrictions, which were eliminated and replaced by a sprinkling of piecemeal subsidies. This is attested to by the mainstream public discourse on the topic of “Australian industry policy” — it largely begins and ends with a discussion of tariffs and “inefficiencies”.

Industry policy refers to any form of active support (whether monetary or administrative) by government to industry. Because industry policy contravenes or complements “market” imperatives, it falls outside English-speaking economic orthodoxy by definition. Broadscale industry policy is justified on a number of grounds that are commonly accepted by contemporary neoclassical economists, and generally by institutionalist and post-Keynesian thinkers.

One, the “new growth theory”, is based on the existence of external economies of scale — derived from the economics of networks and network activity. As John Quiggin (Great Expectations 1996:133) observes, “once an industry has located at a site it attracts a supply of workers, component makers and so on that perpetuates the advantages of that site.” The role of policy is to provide the coordination, resources and infrastructure to enable the external economies of scale to be realised.

Another justification is related to the nature of capital markets (particularly equity markets) in most developed countries — the “equity premium puzzle” highlights the excessive discount rates of private investors over public finance, leading to demands for short-term profits. Countries such as Germany and Japan have, to differing degrees, overcome this by encouraging (to the point of legislating) long-term industry investment by financial institutions and intermediaries. Of course, this can also be overcome by greater direct public involvement in investment, as proposed by the theories of John Maynard Keynes.

Australia’s experiment with neoliberal ideology and market-driven policies over the past 30 years resulted in the abandonment of significant institutions in the name of “competitiveness”, yet the supposed benefits are open to debate and, more importantly, the costs are largely ignored by liberal apologists. Paradoxically, however, the widespread belief in free markets has resulted in widespread complacency about the relative decline of industry. Any concern about potential de-industrialisation has been offset by a naïve optimism in a rosy future for the Australian economy. A massive trade deficit in value-added manufactures is seen as temporary.

Evan Jones, in 2006, mockingly suggested, “resources exports will be our perennial salvation; even greater scale is achievable by better infrastructure … tourism revenue will bring up the rear … the science and technology sector, should anything of substance eventuate, will be icing on the cake.” Dr Gary Banks, Chairman of the Productivity Commission, echoed similar words at the 2008 Colin Clark Lecture in Brisbane … but the latter was serious.

In an annual address to the Australian Business Economists gathering on 18 May 2010, Secretary of the Australian Treasury Dr Ken Henry discussed a number of issues relating to the state of the Australian economy. In terms of the impacts of mineral booms and the broader economy outside of the resources sector, he discussed the constraints and challenges facing Australia in the decades ahead. One aspect mentioned was the so-called “Dutch Disease” — the experience of uneven growth and productivity across sectors and the potential economic and social consequences.

The current proposal for changes in the treatment of mining industry taxation could potentially establish a base for broader development of industry policies in Australia. The associated economy-wide cut in the company income tax rate has other consequences linked to social product. Importantly, it would encourage companies to choose more capital-intensive production techniques, which would support growth in real wages. However, as Dr Henry noted, what happens to the overall pattern of domestic production, and consequent income distribution, depends critically upon whether the total capital-labour ratio rises or falls as more capital and labour are drawn into the Australian economy.

Given Australia’s status as a “small open economy”, the key factors that will determine this setting — principally, the relative strengths of foreign investment and net immigration — will largely depend on governments’ broader macroeconomic and industry policies in the decades ahead as Australia makes a transition to genuine mixed economy.

Labor’s identity crisis:

Les Heimann writes: Re. “Labor’s identity crisis: why voters don’t know what Gillard stands for” (yesterday, item 9). Bernard Keane’s beef has resonated like cathedral chimes. One won’t vote for the unknown — and that is the tragedy of modern Labor.

Modern Labor stands for prevention and correction. The Liberal Party stands for individualism and non interference. The wretched Labor apparatchiks who are all just too clever,  pouting and pontificating, shivering with anticipation over the next focus group/polling/sheep entrail reading are quite incapable intellectually and emotionally to get down to the basics, spell them out and make it happen. And these shrills are our next generation politicians.

The Lib’s meanwhile make much out of nothing by simply keeping that little bit short and simple. Meanwhile, Labor, tell Australia what you are about — the essential principle underlying social inclusion.

John Hunwick writes: I agree entirely with Bernard Keane in calling attention to Labor’s identity crisis. What I would like to see now as a follow up is his (or Crikey readers’) list of specific policies and details that would restore Labor’s credibility.

While there are perennial Labor issues, workers, housing etc, I would like to see a full-blown Labor position on such things as Australian Population Policy, Energy Infrastructure to move renewable energy about the whole country, A National Renewable Energy Target for 2020, Preservation and Restoration of Native Biodiversity, Food Security, etc.

Instead of bemoaning the absence of such policies why not engage the (Crikey) community in developing what they want Labor to stand for?

Referendums:

Niall Clugston writes: Re. “Crikey clarifier: how to recognise indigenous people in the constitution” (yesterday, item 12). It’s hard to pinpoint exactly why so many referendums get shot down, but one factor is the onerous conditions required to change the constitution. For a referendum to succeed it must attract the support of a majority vote nationally, as well as a majority of votes in a majority of states.

The “onerous conditions”?  How undemocratic can you get?  The first condition, a “majority vote”, seems to be a sine qua non. (Though it would be an interesting exercise if both sides were trying to score the lowest vote!)  The second condition, a “majority of states”, seems to be an unavoidable consequence of a federal system. And only 5 out of 36 referendums failed because of this second condition.

So blow me down: the reason that referendums fail is that the Australian people vote against them.  And the reason that Australian people vote against them? The dominant political ethos of Australia: conservative populism.

Australians are suspicious of governments, and even more suspicious of governments who are trying to increase their power. In fact, the only referendum that did succeed, that wasn’t mere constitutional housekeeping, was the Aboriginal rights one in 1967, in which both sides of politics, and the conservative populists of Australia, agreed to stop oppressing a dispossessed minority and start counting them in the census.

That was our finest hour!