Professor Ross Garnaut, author of the Garnaut climate change review for the federal government, delivered the following speech last night as a part of the University of Melbourne Hamer Oration lecture series:
I am glad of the chance to deliver this oration in honour of Dick and David Hamer, contributors to civilised Victorian and Australian political discourse. Barry Jones once described Dick Hamer as the finest flower of the Victorian Deakinite tradition. That tradition encompassed the ideas that people of goodwill sharing sound knowledge could find the best way through a policy dilemma; and that citizens should be seeking to reconcile competing interests and perspectives, and to strengthen institutions that neutralised extreme viewsby providing opportunities for sound elements in them to be partially absorbed into the mainstream.
Barry Jones had in mind leadership covering a wider field than economic policy, extending into the environment, the arts and humane administration of justice—contrasting sharply with Victorian Governments in times immediately preceding the Hamer years.
These are matters of political culture rather than policy. They have been influential and productive in Victoria and Melbourne, and part of the success of this State and city as civilised polities and communities over more than a hundred years. I focus mainly on economic issues. Today, sound economic policy embraces the environment. To ignore the environmental impact of policies is as economically irrational as to ignore the effects of allowing demand to exceed the productive capacity of the economy, or to ignore distortions which force investment to shift from highly productive to wasteful activities.
I begin by introducing a few basic ideas about means and ends in economic policy in a democratic polity. This is a bit formal, but hopefully will avoid some misunderstandings and save some time later in this presentation. It is a recurring challenge of democratic capitalism to reconcile Government by the people, with its necessary concern for equity, with maintenance of the competition in the market place and the incentives for economising behaviour that are necessary for sustained prosperity. And it is a recurring challenge to reconcile the inevitable accumulation of wealth from success in the market economy, and the influence of wealth in the democratic process, with Government by the people. Compromises that are made and political alliances that are struck in meeting one of the recurring challenges can ease or exacerbate the other.
For the outcome of the political process to be conducive to broadly based prosperity and to the preservation of democratic institutions, there must be knowledge of the effects of various policies; education of the democratic polity in that knowledge; restraint in the use of political power to achieve sectional economic objectives; and restraint in the use of economic power in the political process. A successful democratic polity is built around analysis, public education, tolerance and restraint. The presence of these qualities in the polity allows leaders who are concerned to follow some conception of the public interest to appeal to the democratic electorate over the heads of vested interests, which otherwise have a privileged influential place in the policymaking process.
We now know from much experience and analysis quite a lot about the conditions that must be met for a country’s economic success. To the greatest possible extent, goods and services need to be traded and capital allocated through competitive markets.
There are economic efficiency advantages in labour also being traded through competitive markets, although in this case, democratic rights must constrain the treatment of labour as a commodity. The legitimate debates on regulation of labour markets are about the boundaries between what is conducive to good outcomes for economic efficiency and equitable distribution of material economic benefits, and what is necessary to preserve valuable human freedoms in a democratic polity. The best outcomes for efficiency and equity will give the largest possible role to the market subject to securing the essential democratic freedoms, with budget rather than labour market interventions being used to secure equitable distribution.
The prime role of markets does not mean that the role of Government is incidental to economic success. Far from it. Many services that are essential to good economic performance are provided by Governments or not at all. These services have the characteristics of “public goods”—they cannot be provided efficiently through private markets. In addition, there are activities which generate benefits or impose costs on firms other than the parties to market transactions. Efficient economic outcomes require all such external costs to be taxed or discouraged by regulation, and all such external benefits to be subsidised or encouraged by regulation. One special case of intervention to increase economic efficiency is the increase in aggregate demand to maintain full employment for labour and capital in times of “Depression Economics”.
A second is the internalisation of external environmental costs—now including the important special case of greenhouse gas emissions. Markets do not generate a distribution of income that bears any relationship to what a society considers to be equitable. It is a legitimate and necessary objective of policy in a democratic country with a market economy to intervene to make the distribution of income and wealth more equitable than would emerge from an unconstrained market. The challenge is to achieve the socially desired modification.
What extraordinary arrogance displayed by Garnaut when he says
“The laws of economics cannot be repealed by ignoring them—any more than
the laws of gravity, or of climate science.”
To compare gravity with economics is mind blowing.
Never mind Prof Ross, I’m certain you will be invited to Julia’s talkfest, perhaps even be a guest speaker……or perhaps not!
@ Kevin
Touche
Ogygen Thief at talkfest
Ross you have just explained rather brilliantly explained why the unffettered market genie you were instrumental in releasing from the bottle has come back to bite you on the bum. In a pseudo democracy such as ours and the other majoritarian political systems, politians are bought by the big end of town as a consequence of the power of the media and the power of big business and the employer groups. No political party can get in unless they are privately sponsered by big business and to a lesser extent big unions. As a consequence politicians are now merely the court jesters of the rich and powerful.
The idea that politicans represent the Aussie Battler or even the ageing economist is now well and truly consigned to the dustbin of history. The big end of town run’s things now and sadly you weren’t singing from their sheet of music on climate change. Now you know what it feels like for the rest of us. You are now part of the the bewildered herd as Chomski quite rightly describes us.
We had a mixed economy when we had large institutions like the SECV. Such institutions were not the most economically efficient entities, however economic efficiency is perhaps not the only things that needed to be considered. These organisations gave governments power over poople who were not content free , but who could implement Government policy with with strong technical ability and with their self interest moderated to whatever extent the politicans requireds.
Now we have the situation where foreign, amoral companies decide what happens in Australia. All to satisfy “the market” which I thought was an instrument to deliver wealth to people.
Politiians in the US, the UK and Australia are powerless to cahnge this situation look at what happened when they challenged the miners. Thanks for your contribution.
Those who sneer or draw ideological daggers, I suggest you take a closer look at the full text of Prof Garnaut’s speech sometime between now and August 21.
This will be the first and last time in a generation that a true master of economic policy explains so clearly and succinctly the malaise of Australian politics: the rut which out governments have dug themselves into, the reasons why Australia’s golden years may be coming to a close, how close it is to drifting into a permanent state of mediocrity as so many other once-prosperous countries have done.
It is about the balance between economic efficiency, social equity, and the special-interest groups who so easily hijack the political process to ruin both these qualities for their own ends. It is about abject failure of leadership. Those who think Garnaut is too right-wing, you’re not paying attention. He is one of the very few eminent economists who can honestly claim neutral ground.
Garnaut’s speech in its entirety is the most illuminating summary I’ve read yet on the condition of Australian government in the 21st century, and it has the tolling sound of our last warning. The last time anyone warned us so clearly of the consequences of political lassitude, it was Paul Keating pointing the road ahead to a banana republic, a fate which we only avoided by a massive feat of leadership.
We are at that point once again: uphill to prosperity, or downhill to become another banana republic in a world full of banana republics who were once as fine as Australia. I suspect this may be our last warning.