An essay: Money Matters
Conversations with Mark Swivel
Conversation#2: Colleen Ryan (former editor of the Australian Financial Review).
Why Economics is key to democracy. A light speed survey of economic theory and policy from Smith to Mazzucato. With .
‘The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas’.
John Maynard Keynes, The General Theory of Employment, Interest and Money (1936).
Let’s Start with Albo in the 80s
At Sydney Uni 40 years ago, our current prime minister, Anthony Albanese staged sit-ins to defend the teaching of radical left-wing economics. Our university nabobs wanted to merge the school of Political Economy – the study of the ‘dismal science’ which incorporates history, power and lived experience – into the mainstream Economics department. Albo was fighting hard for the independence of academics like Ted Wheelwright and Frank Stilwell who put humans – and Marxism - at the centre of economics, rather than data driven theories of consumer preferences, businesses and market equilibrium. It was a watershed moment and Albo failed. I still got to study political economy, with great teachers though, and I am forever grateful for that.
I wonder how often Albo reflects on that experience in cabinet policy debates these days. His current ‘package’ to respond to the housing crisis is classic policy in the Keynesian tradition, with government intervening - making strategic investments in the economy - to solve a social problem. To be clear, Keynes was utterly mainstream – and establishment to a fault – but he was pragmatic and cared about the real life impact of economic theory and policy. But right now in 2024, Albo the PM knows 3 things: that whatever he does, the conservative opposition and the markets are generally against government intervention; that most of the community has little understanding of economics; and, critically, that the package will not solve the problem – it is good policy but not nearly enough. The same insufficiency of impact applies to tax policy and the tinkering with our tax brackets. Pragmatism and political tenability rule the day, despite the long term real crisis in housing across our entire country.
After 3 years study at Sydney Uni, I speak economics, more or less. Our communities are typically more fluent in astrology or sport than economics. If we talked economics in our pubs and cafes as we did in the heyday of trade unions - and their opponents - in the twentieth century, our democracy would be healthier. Like Nick Cave, I don’t believe in an interventionist god but I do believe in an interventionist government. But without understanding economics and history how can we believe or understand anything? The dismissal of the role the government can play is facile and hostile to our democracy; although distrust of government - given its alienation from the concerns of ordinary people in ordinary life - is legitimate. Government remains the only way to pursue the public interest.
Our world remains framed by economic ideas. The phantom scribblers mentioned by Keynes – the intellectual ‘winners’ of my adult life - have been Milton Friedman and Friedrich Hayek, whose theories and worldview have powered our free-market, low taxation, shareholder value and profit maximisation version, small government version of capitalism. Most people will not have heard of these economists but their ideas remain largely unchallenged in the public domain, and are regarded today as mere ‘common sense’. Equally, many will not have heard of the economists now pushing back, like Mariana Mazzucato, Kate Raworth, Robert Skidelsky, Rebecca Henderon and Thomas Piketty who see that the emergencies we face will not be solved by a market left to itself, with the state reduced to a mere referee of post industrial capitalism. At the heart of all this new thinking is a vision of social democracy powered by government orchestrating and collaborating with business and communities to address the emergencies we face in equality, climate and governance.
A Light Speed Survey
So how did we get here? Here is a light speed survey of the dismal discipline. For more, read Robert Heilbroner’s terrific book, The Worldly Philosophers. The discipline of economics begins in earnest in the 18th century as production moves from agriculture to industry. Economics is a child of the industrial revolution and the humanist philosophy of personal liberty. All this happens as Europe is escaping the yoke of fading medieval ‘divine’ monarchies. The Scottish philosopher Adam Smith, who dies the year after the French Revolution, and two years after the First Fleet arrives in Australia, writes the foundation work in economics: The Wealth of Nations. Smith articulates how self-interest powers economic activity, the logic of markets - how prices respond to supply and demand - and the role of specialisation or division of labour in the explosion of our productive capability, mainly in factories, mines and mills. Smith wanted business to be free of the state and the dead hand of aristocrats who benefited without effort from the mere ownership of land. We should remember that the state then was an absolute monarch, not the democratic state of the twentieth century that struggles on, misunderstood and underfunded, today.
Coming into the 19th century, Thomas Malthus, a famously miserable clergyman, warns of the tendency of population to outpace agricultural production and the risk of scarcity. The suave businessman David Ricardo chimes in with the study of trade between nations in the emerging age of empires - and pirates – arguing that nations should focus on comparative advantage – the business they do best – to prosper. The dread hand of Calvinist self-restraint was never far from the inkwell of economist scribblers. Discretion, frugality, and fear are fundamental to most of our economic thought. The key thing to remember is that none of this was obvious or had been fully expressed before. It was all, at the time, radical and transformative, changing the way people saw and discussed the world. Every bit as much as Newton, Darwin or Freud.
Economics then explodes with the theories of Karl Marx. The publication of Das Kapital, after the revolutions of the mid 1800s reframe society as a conflict between labour (the working class) and capital (owners of the means of production). Smith focussed on the process of the creation of wealth by capitalists while Marx zeroed in on the exploitation of labour to create that wealth. Without the surplus value created by the labour input to production there is no profit for the capitalist. Obvious now (if ignored) but a wild revolutionary leap at the time. This central idea still powers left-wing economics. A generation later, at the peak of empire, Alfred Marshall recasts the discipline for the twentieth century by framing the economy as a kind of machine, as a controllable object to be studied, a system of consumer preferences, of rational maximising behaviour by businesses and households - something to be both left to its (‘natural’) self and tamed by empirical analysis. Government for Marshall should largely leave the markets to themselves, which is what government generally did until the Great Crash of 1929.
Around the West, the ensuing Great Depression produced renewed interest in government intervention. Keynes comes in with his General Theory in 1936. A proper mandarin who attended the Treaty of Versailles as a young bureaucrat in the UK Treasury, Keynes wrote a famous book predicting that its punitive terms would lead to another war with Germany. Keynes argued government should invest in the economy, in public works, to create demand – generating work for ordinary people via government spending which was the gift that kept giving because a workers wages become the shop-keeper’s cashflow and the manufacturer’s profits. Keynes’ General Theory provided the basis for mainstream government from for two generations. Keynes created the idea of the ‘multiplier’ to explain the power of government investment. These ideas became the orthodoxy during the reconstruction of the West after the Second War World and had government planning at the heart of economic development.
This expansion of capitalism was powered by the Keynesian vision of the social democratic state - every bit as much as it was powered by cheap oil from the Gulf States. In the UK, Europe and Australia, the government played a key role in energy, transport, housing, banking and insurance, with government owned enterprises central to economic activity. It also oversaw a deeply protectionist state; on which there was a bipartisan consensus for decades. The basic idea from the end of WWII was that democratic capitalism could save itself - avoiding socialist revolution (and recessions) - by having government deliberately manipulate the level of demand in the economy to even out both the distribution of wealth and the larger peaks and troughs of economic life. John Maynard Keynes designed the post war settlement of global economic institutions and policy ideas (from Bretton Woods to the IMF). These institutions helped the western world in its long term recovery from the disaster of two massive wars.
But when the Middle East asked for its fair share of profits from oil, in the mid 1970s, the global economies went into shock - manifested in rampant inflation and unemployment - and the response was to abandon Keynes and reach for the monetarism of Milton Friedman. To be clear, it made sense to focus on how to revive our productive capability when access to ‘free’ energy was rudely interrupted by OPEC. It was an historic correction in the global economy emerging from imperialism. Absolute principle is bad policy in economics; it is always less the dismal science than the pragmatic science - even the insights of Keynes were no dogma but a flexible base for policy. Friedman was an influential academic economist - the leader of the Chicago school - and the intellectual architect of Ronald Reagan’s free market America. His seminal text was Capitalism and Freedom. In summary Friedman said we should leave markets to themselves, keep taxes as low as possible, respect and protect property as the basis of the economic order, put the individual first and resist collectivist tendencies in policy.
Friedman had a television program in the 1970s: Free to Choose. It was significant but not so popular at the time. By contrast JK Galbraith had a big hit with The Age of Uncertainty - the economics version of Robert Hughes’ Shock of the New series on modern art - a sprawling survey of the big economic ideas through history. Galbraith was the keeper of the Keynesian flame. Shortly after Albo lost the fight to keep Political Economy alive as a separate department, Galbraith came to lecture us in the old Merewether building on City Rd. It was 1984 and he reviewed the earlier revolutions through economic history then lectured us on the need for a bureaucratic revolution - to free us from the strictures of overly cautious thinking. JK argued wealth always had to be created and fostered before it can be usefully redistributed. Bureaucracy was holding us back! In pre-digital 1984. What on earth would he think of our ‘techno-feudal’ times where IT has created a social order closer to Foucault’s vision of the panopticon than Adam Smith’s invisible hand? Galbraith’s ideas have powered my thinking through my practical working adult life.
Friedman won the argument though and the vast array of free market policies from low taxes and low tariffs to union bashing to privatisation can be traced to him and his colleagues or successors. The thinking that led to the GFC was inspired by Friedman - allowing markets to run their own race, which enabled the utterly ludicrous financial instruments (exotic derivatives) that blew up the world economy. Under Alan Greenspan (an acolyte of Ayn Rand) the response was a wild mixture of monetarist Quantitative Easing (printing money) and classic Keynesianism via bank bailouts designed to ensure system stability. The merits and impact of all these measures remains hotly contested to this day.
The legacy of Keynes remains and his influence is re-emerging with theorists like Mazzucato, Raworth and Kennon. Mazzucato advocates mission economics - an explicit social democratic platform for government to invest in fairer economic outcomes, inspired by past government projects involving large scale collaboration and innovation with business and communities - like the New Deal projects of Roosevelt and the Apollo missions of Kennedy. Kennon and her Modern Monetary Theory (MMT) focusses on the ‘fallacy’ of budget deficit thinking. As we know, governments control tax, currency and the money supply. Kennon argues that government debt is manageable - the debts are never called in, but can be repaid and rescheduled over time like an eternal mortgage. Traction is elusive for MMT. It’s complex and not intuitive. Hard going on TikTok!
Where are we now?
We are in a cost-of-living crisis (as we drift towards likely climate disaster) and government has few tools to directly influence its two primary causes - low or declining incomes and high or rising prices. Over the course of my lifetime government has steadily reduced its role in the economy. The size of spending on government has remained high - around a third of our GDP - but from determining interest rates or exchange rates, from prices or inflation to wages and profits, government has less influence than ever. Our main economic tool has been to reduce the tax burden, where government retains direct influence. Albo PM has recently clipped the worst of a bad tax policy by removing tax cuts for our highest income earners and tax payers. The burden of direct income taxation has steadily reduced over time; the higher personal tax brackets are far lower than they were in 1966 or 1990. Our tax base is reduced by concessions to property owners or investors which mean the tax base is substantially lower than it might be. Tax advantages buttress property ownership as key to our economy. Our cost of living crisis is in fact a reflection of the housing crisis or the way property has been positioned. Our policy deliberately privileges property owners leaving property ownership harder than ever for the young and poor to achieve. Rents and mortgages are at unsustainably high proportions of annual or weekly income. We are wedded to property. Proudhon said ‘property is theft’, and many alive today would agree with him.
We have deregulated our economy in Australia over the 4 decades since Paul Keating opened up our economy introducing free trade and open competition to our industry and agriculture. We have very little protection for our businesses. We enter the global charnel house naively; I am not advocating a return to protectionism per se but other countries have not been so acquiescent. We have free trade agreements everywhere. We let our car industry go. We rely on mining and old school carbon extraction and commodities trading in a way we barely discuss. We expect tourism to continue. We expect international students to underwrite our universities. Our economy of course is stronger than ever as measured by traditional metrics - but what kind of Australia are we building? Tell me and we will both know.
The weakness of government as an institution has left us largely unprotected through the warp-speed advent of the internet and the digital economy. Uber, Airbnb, Amazon and everything else, even before AI has gotten started, have grown unchecked, on their terms without any filter of the public interest. AI and the digital economy will not regulate itself. Marx said the state would wither away but not in the way it has; his prophecy of a dictatorship of the proletariat is the husk of the state with which we languish.
However, the cycles and battles of history provide inspiration (and a warning against complacency or despair) for us now. It is high time for another correction as there was when Keynes intervened in 1936. Or even when Friedman intervened in the 1980 to undermine the social democratic state. Government must now intervene and it knows that. The federal government has begun to invest as shown in recent housing policy announcements. There is a global structural shift that has left people excluded from the property market. The realities of poverty are laid out forensically by Piketty - both between and within countries. The reality is exaggerated in Australia by deliberate policy providing still clear incentives to property investment that puts private interests ahead of the public interest. The Howard government introduced tax concessions - massive capital gains discounts and negative gearing deductions - that tilted the playing field towards owners and investors. This epitome of market intervention showed the power of government; but it was not motivated by public interest, privileging instead a minority. When do we stop to count the cost? The only solution - blindingly obviously - is to deal with the cause, by creating a vast new network of housing. The federal government housing program has a vague target of 1.2 million new homes and a huge ‘announced’ budget of $10bil to create 30,000 affordable homes over 5 years while we have over 200,000 applicants waiting for social housing today. At the same time we are set to spend more than $50bil over 10 years on the Aukus submarine program. We need to join this debate, whatever our politics, whoever we may vote for.
My inspirations for the economics of our future are clear. Kate Raworth creates a new image for thinking about economics. Instead of Smith’s invisible hand of the market or graphs tracking supply and demand or equilibrium trends, Raworth’s image of the doughnut asks us to visualise all economics as bound by two limits – two rings of the doughnut – the outer ring being the capacity of the natural world, our environment, habitats and climate and the inner ring being the basic material requirements for a sustainable lives and social cohension. Rebecca Henderson wants to reimagine capitalism from the inside shifting the goal from maximising shareholder returns as an end in itself - as Friedman would have it - to a model of shared value driven by a mission to solve social problems. Mariana Mazzucato, again, takes the Kennedy era Apollo project as the benchmark for government activity directed to a collective purpose, arguing for a Green New Deal, emphasising the role government played then – and since – in unleashing private economic activity. The role government has played - historically - in creating the technology and opportunity - for the creation of wealth is wildly understated and misunderstood. Taken together, we see in these new theorists a reappraisal of the concept of value that preoccupied the early thinkers in economics. And things are different now. The state Adam Smith knew was a single self-evident king but today we have an opaque cyber-bureaucracy. Population is also not the problem Malthus saw despite our numbers reaching 8 billion thanks to technology; our problems are in distribution not production and location of population or immigration. The nation states or empires of Ricardo have been replaced by global supply chains and ‘free’ trade agreements. The working class of Marx is now hollowed out, globalised and fragmented, no longer animated by socialism, atomised in the gig economy, unsupported by unions. The legacy of Keynes is still being argued over, and the challenge is for populations to engage and demand better from government.
It is our job as citizens to both distrust and believe in government - at the same time. It is our job to disagree but remain somehow unified. The crises in inequality, climate and government are too great to allow any other reasonable or coherent response. We need to start talking economics again. The ideas - old and new - are all there to absorb and debate. Democracy is not possible without us all doing that, and doing it somehow together. Mazzucato and her gang are worth reading closely. They provide the way to the way. Snakes always eat their tails. Government is a mirror of who we are.
Mark Swivel
27 April 2024
This essay accompanies Mark’s conversation with Colleen Ryan. The second in a series of conversations in collaboration with Byron Community College. Crisis? What Crisis? How History, Law and Policy can save the World!
Reading / Watching list
Robert Heilbroner, The Worldly Philosophers, Penguin, 1953.
Rebecca Henderson, Reimagining Capitalism, Penguin, 2020.
Mariana Mazzucato, Mission Economy, Penguin, 2020.
Thomas Piketty, A Brief History of Equality, Harvard University Press, 2021
Kate Raworth, Doughnut Economics, Penguin, 2017
EF Schumacher, Small Is Beautiful, Blond & Briggs, 1973
Robert Skidelsky, Money and Government, 2018.
The Age of Uncertainty, John Kenneth Galbraith: https://www.youtube.com/watch?v=KGSID_Uyw7w
Free to Choose, Milton Friedman - https://youtube.com/playlist?list=PLTplBPPoWdX2dsFq7tcFw9xPNqn8JMp9k&si=2TWtst3aFkVUFG6Z.