Date created: 28 November 1996

Last modified: 18 November 1997

Maintained by: John Quiggin

John Quiggin

Making sense of rationalism

The Canberra Times ,

3 April, 1995

The current policy debate reflects a new stage in the evolution of that curious phenomenon 'economic rationalism.' The term 'economic rationalism' first entered the Australian lexicon in the period of the Whitlam government and was used primarily in a positive sense. The connotation was that of policy formulation on the basis of rational analysis, as opposed to tradition, emotion and self-interest. With the exception of support for free trade, there was no presumption in favour of particular policy positions. The views of the first generation of economic rationalists were generally in the economic mainstream of the period, Keynesian in macro terms and supportive of the 'mixed economy' in micro terms. The strongest feature of the economic rationalists of this period was a rejection of the cosy interest group politics of the McEwan era. It was on this basis that Whitlam (who may even have been the originator of the phrase 'economic rationalism') claimed to lead the first free enterprise government in Australia's history.

During the period of the Fraser and Hawke governments, the policy content of economic rationalism changed. In particular, a belief in the desirability of cutting back the public sector became a core component of rationalist ideas. Also, whereas the economic rationalists of the Whitlam period favoured progressive taxation, economic rationalism became associated with support for income redistribution from the poor to the rich and from labour to capital.

The critical and sceptical thinking that characterised the first phase of economic rationalism was gradually replaced by a dogmatic (indeed, quasi-religious) faith in market forces and in the supreme importance of 'efficiency'. More and more, economic analysis was based on deductions from supposedly self-evident truths, which were effectively immune from any form of empirical testing. This has been seen at its worst in the case of financial deregulation - the failure of nearly all of the predicted benefits of deregulation has scarcely shaken support for deregulation among economic rationalists. Similarly, the refusal of policy-makers to believe that they were creating a serious recession in 1989, and their willingness to induce another one now results, at least in part, from the dogmatic approach to policy that has long been dominant. Because of this dogmatic approach, and because some of the older generation of 'economic rationalists' still wear that label with pride, it has been suggested that the term 'economic fundamentalism' is a more apt description of the dominant economic policy framework of the eighties.

During the nineties a further shift has taken place. The fundamentalists' support for deregulation and free trade made them natural allies of the financial sector and the mining industry. The economic models used by the fundamentalists, in particular the Industry Commission (IC), and the way in which those results are reported, have been tweaked and adjusted to the point where they routinely give answers favorable to these sectors, even when these answers are apparently contrary to basic economic theory.

Conversely, deregulation led to a massive expansion of well-paid employment opportunities for economists in the financial sector. At the same time, the increasing importance of economics in the policy debate led to the emergence of well-heeled business lobby groups pushing fundamentalist views. The result has been a steady flow of economists from public bodies such as the IC and the Treasury to the financial sector and to business lobby groups, particularly those influenced by the mining sector, to the point where such a progression can reasonably be regarded as a standard career path.

Over time, this alliance has led to increasing sympathy for the interests of these sectors and an increasing absorption of their cultural outlook. Crucial elements of this cultural outlook include a focus on narrowly monetary measures of well-being and an obsession with the balance of payments (and exports in particular) as an index of national economic performance. Neither of these cultural biases is justified by mainstream economic theory and, curiously, both were central elements of McEwanism.

This is reflected in attitudes to services such as health and education, and to the environment. A few consistent libertarians suggest that a purely free market approach to the provision of health and education, and even to environmental protection, is feasible. However, given that state provision of these services is likely to continure, the majority of economic fundamentalists in Australia have responded by becoming increasingly hostile to the services themselves. Thus, for example, a respectful hearing is given to the tiny minority of scientists who claim that global warming is a myth and to theories implying that higher education is a waste of time and money. This attitude neatly fits in to the naive mercantilism common in the business sector, where services are seen, not as a central element of our economic well-being, but as a cost burden detracting from 'competitiveness' on export markets.

Despite their dogmatic certainties, and their dominance of the policy debate for more than a decade, the fundamentalists have failed to produce any tangible economic benefits for the Australian people. It is time for a revival of a spirit of sceptical enquiry - for rationality as opposed to rationalism.

John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.

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