Tag Archives: capitalism

Market v government? In fact, hybrid policy is the best fit for the 21st century

The Conversation

Mark Fabian, Australian National University and Robert Breunig, Crawford School of Public Policy, Australian National University

Politics remains mired in ideological preconceptions of what is optimal, often landing us with bad policy. Too often we see a simplistic and false dichotomy between partisan claims that markets are the best policy tool because they are efficient, or that government should lead because this ensures equity. This is a major drag on our progress and prosperity because today’s policy challenges typically require hybrid policy solutions: sophisticated combinations of government and market tools that promote equity and efficiency at the same time.

The 20th century can be seen as a process of trial and error through which we came to understand where governments or markets were more appropriate. Libertarian, free-market capitalism collapsed in the Great Depression. The welfare state, in which government sensibly intervened to overcome market failures in sectors like health care, saved capitalism from itself.


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But, far from being a perfect system, the social democratic welfare states of the post-war years terminated in the horrors of stagflation: rising unemployment and inflation amid torpid economic growth. To overcome this, structural adjustment was needed to bring markets back into areas of policy where they had a comparative advantage.

Welfare states rolled back tariffs, price controls, subsidies and other distortions. They deregulated many markets to encourage open competition and the productivity improvements it brings.

This resulted in prolonged economic growth around the world from the mid-1980s until the Global Financial Crisis. It also accelerated growth in poor countries throughout Asia, dramatically reducing poverty and improving living standards.

Taking account of winners and losers

A key factor in the long-term success of structural adjustment was whether the governments prosecuting it considered the compensation of losers from reform.

France and Japan had a strong focus on potential losers from change. Consequently, structural adjustment never took place. The state continued to dominate the policy space, and the French and Japanese economies stagnated.

In America and Britain, structural adjustment took place under neoliberal regimes (Reagan and Thatcher). These were ideologically committed to markets even where government had a clear role to play. Growth took off, but the gains overwhelmingly went to the privileged. Marginalised citizens saw their prosperity continue to flat-line.

As growth was not invested in mobility in the form of schools, hospitals and infrastructure, the losers from change were never reactivated. Today large portions of American society struggle with limited health and education. They have low productivity and low wages: a waste of human resources. And, as we’ve seen in recent elections, they are very angry about it.


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In Australia, Denmark and Canada, among others, structural adjustment was undertaken in a way that reaped the benefits of liberalisation while compensating losers from change. These countries put themselves on a long-term path that ensured both competition and opportunity by exploiting complementarities between markets and government.

The hybrid policy paradigm

Competition and opportunity are mutually beneficial. Competition in the absence of opportunity results in incumbents reaping the benefits of open markets. This is not because they are the most meritorious, but because they are in the right position. The resources of the underclass go underutilised, which is both unfair and inefficient.

Similarly, egalitarian policy settings without open competition lead to the dominance of insiders like belligerent unions at the expense of outsiders. This is evident in staggering levels of youth unemployment in France and workforce casualisation in Japan.

Routledge (2018)

Australia’s structural adjustment was begun in the twilight years of the Fraser government, prosecuted in earnest by Hawke and Keating and wound down by Howard. It has brought about several decades of growth with barely a budge in our Gini coefficient (a measure of inequality). We distil some of the lessons of this period in our new book on hybrid policy design principles.

Australia’s structural reform was largely driven by a range of hybrid policies. These included the HECS system of higher education financing, our mixed public and private health system, and our unusually low-taxing but highly targeted welfare system. The result is a quality social safety net without unnecessary drag on the economy.

Each of these policies brings to bear the strengths of governments and markets in tandem. This hybrid approach overcomes their respective weaknesses and ensures outcomes that both sides of politics can feel proud of.

The HECS system replaced a prohibitively expensive free-tuition university system. Most university graduates go on to earn middle-class incomes, so why should taxpayers who didn’t attend university subsidise this? The HECS system includes a small subsidy to price in the broader benefits to the nation associated with education that go beyond the private benefits to the individual student.

Ironically, including some tuition charges actually enhanced equality of opportunity by making it easier to scale up university admissions.

Having the government act as the provider of loans to cover tuition fees overcomes the adverse selection issues that result in private markets undersupplying student loans, as in the United States. Some academically borderline students are a risky bet for private loans because they might default. But, as a group, many of these students would graduate if given the chance and earn higher incomes. They would then pay more tax.

Through the HECS system, the government provides loans to all of these students. And, via those higher tax payments, it is then able to recover some of its losses from defaults. This efficiently promotes equality of opportunity.

Finally, making loan repayments income-contingent ensures equity, especially for at-risk individuals like mothers who don’t return to the workforce for many years.


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Grounded in evidence

It is important to understand that hybrid policy designs are grounded in a rich body of theory and evidence. Our empirical understanding of the impacts of incentives, institutions and regulations on economic behaviour has grown tremendously in recent decades. So, too, has our ability to monitor the impact of individual policies and institutional or regulatory settings.

We no longer need to rely on ideological conviction when choosing between different policy tools because we actually know what works in a lot of cases. We can further reduce our need to rely on conviction by attaching evidence-collection measures to policies as they are implemented.

Randomised controlled trials, for example, are being widely utilised to test the efficacy of different policies. This ensures poor policy designs are identified and discarded while effective ones are scaled up.

Well-designed policy implementation combined with detailed administrative data can allow us to evaluate programs even in the absence of randomised controlled trials. We have a wealth of tools at our disposal.

Politicians can sometimes fear evidence in public policy because of its ability to disprove their sacred truths. But the effect of evidence-based public policy is not to eject normative issues from governance. Instead, it focuses normative debate on normative questions like the appropriate balance between efficiency and equity. That leaves technical and factual matters to be decided on the basis of knowledge rather than belief.


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Challenges call for renewed reform

Australia is in desperate need of a fresh round of hybrid policy reform. By the end of the 20th century we had exhausted the gains from marginally improving where government and markets are used individually in policy settings.

The challenges we face today include making the most of the internet and automation, and responding to climate change, tax reform and urban and demographic change, to name a few. All require hybrid thinking to understand and solve.

The ConversationAustralia was a pioneer of this in the past. Many of our systems remain at or near world best even as we have lost focus on policy reform. We can reclaim our leadership position by applying evidence-based hybrids.

Mark Fabian, Postgraduate student, Australian National University and Robert Breunig, Professor of Economics and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.

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Steven Pinker on free markets

“We know that markets make countries freer, richer, and happier compared to totalitarian central planning, but we also know that the habit among both the hard left and hard right to equate capitalism with anarcho-capitalism (no regulation, no social spending) is wrong. You can be in favor of free markets with regulations, just as you can be in favor of free societies with criminal laws. Even the freest of free marketeers has to acknowledge that markets don’t provide a decent living to those with nothing to offer in exchange, such as the young, old, sick, and unlucky, and they also have to acknowledge that markets alone fail to protect public goods that no one owns, such as the atmosphere. Not surprisingly, all wealthy capitalist countries have extensive social spending and regulation. And as a Canadian I can confirm that free-market societies with greater social spending and regulation than the United States are not grim dystopias sliding down a slippery slope to Venezuela, but are rather pleasant places to live, with greater happiness and longevity, and less violent crime, abortion, sexually transmitted diseases, and educational mediocrity.” – Steven Pinker, The Weekly Standard, 15 February 2018.

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Reviewing an anachronism? Labor to debate future of socialist objective

The Conversation

Carol Johnson

The 2015 ALP national conference agreed that there will be a review of the Labor platform’s so-called “socialist objective”. The review follows calls from the likes of NSW Labor leader Luke Foley to revise the party’s objective, given that:

… no-one in the party today argues that state ownership is Labor’s central, defining purpose.

How the socialist objective has evolved

The socialist objective dates from a more radical time in the ALP’s history. When it was written in 1921, the Labor Party was responding to a period of industrial unrest and economic uncertainty following the first world war.

However, even then the party’s original 1921 commitment to “the nationalisation of banking and all principal industries” was quickly watered down to suggest that collective ownership was necessary only where such industries were being operated in an exploitative and socially harmful way.

That important proviso remains in the party platform’s current socialist objective, which reads:

The Australian Labor Party is a democratic socialist party and has the objective of the democratic socialisation of industry, production, distribution and exchange, to the extent necessary to eliminate exploitation and other anti-social features in these fields.

These words already leave a convenient loophole for those modern Labor Party politicians who argue that a healthy private sector is essential for economic growth and employment; that capitalism is not inherently exploitative; and that some basic government regulation, good industrial relations legislation and active unions – rather than nationalisation – is all that is needed to prevent problems of exploitation.

It is well over half a century since a Labor government attempted to nationalise an industry. In 1947, the Chifley government unsuccessfully attempted to nationalise the banks – a move which was found to be unconstitutional. However, Ben Chifley only resorted to nationalisation after Labor’s previous attempts to bring in increased government powers over private banking had failed.

Far from being part of a radical socialist agenda, Chifley’s attempts to have more government control over banking arose from his belief that the private banks were resisting Keynesian-style financial stimulation policies and were not adequately funding the development of Australian manufacturing industry.

With the exception of the banks, Chifley was generally very supportive of private industry, particularly manufacturing.

So, while Tony Abbott and Malcolm Turnbull may occasionally accuse the Labor Party of being fundamentally socialist, it is many years since Labor governments attempted any form of nationalisation.

Why the calls for reform?

The national conference decision is not the first attempt to remove or substantially water down Labor’s socialist objective. There was also a concerted attempt in the early 1980s, in which Gareth Evans played a leading role. He published key arguments critiquing the objective. Some of the 23 sub-paragraphs that modify and explain Labor’s current objective date from that time.

Consequently, the ALP’s socialist objective now has much less political significance than British Labour’s equivalent, Clause IV. Tony Blair argued that the:

… ideological refoundation of the party took place through the revision of Clause 1V.

Blair saw it as a central part of the modernisation process that separated “New Labour” from its socialist and, in his view, overly trade union past.

Years before Blair revised Clause IV and trumpeted New Labour’s arrival, the ALP under prime ministers Bob Hawke and Paul Keating had been moving in a similar direction. The ALP began placing an increased emphasis on the positive role of markets and private enterprise in achieving the party’s aims of economic growth, full employment and equality of opportunity.

Hawke and Keating had introduced their economic rationalist policies with the support of the trade union movement. They had even increased private profits by trading off real wage increases and some working conditions in return for providing superannuation, education and welfare benefits.

The Rudd government did not embrace such economic rationalism as enthusiastically as Hawke and Keating had. Nonetheless, both the Rudd and Gillard governments still saw a healthy private sector as having a crucial role to play in achieving Labor’s aims. Kevin Rudd and – contrary to popular opinion – Julia Gillard both saw the ALP as already being a modern social democratic party.

So, given that retaining the socialist objective hasn’t prevented Labor from developing pro-market policies, why is it still seen as such a significant issue? Why does it still generate passionate debate?

The objective’s opponents argue that it is time to make a definitive and symbolic break with Labor’s more radical socialist past. They claim Labor needs to reformulate its social democratic objectives given that nationalisation is no longer on the party’s agenda.

Since that clearly is the case, why are others still wanting to hold on to the objective? One reason is that the objective does reference a time when the ALP still had a critique of capitalist markets, even if a somewhat qualified one.

Also, vague references to “democratic socialisation” – and only when essential to prevent “exploitation” and “anti-social features” – can potentially include a variety of regulatory measures or forms of public sector provision, not just nationalisation. The sub-paragraphs explaining the objective make that clear. Many left-wing ALP members are concerned that Labor’s embrace of market-based solutions has gone too far.

After all, if there are no significant problems with relying on markets, why do we even need social democratic parties like the ALP? Consequently, Labor’s socialist objective has a much deeper significance than appears to be the case at first sight. Rather than just being an anachronism, it still raises issues about the ALP’s fundamental nature and political mission.

The ConversationCarol Johnson is Professor of Politics at University of Adelaide.

This article was originally published on The Conversation. (Reblogged by permission). Read the original article.


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