MICHAEL KEATING. Why Blame Neo-Liberal Economics?

The claim is frequently made that neo-liberal economic policies are responsible for an increase in inequality. However, no supporting analysis is ever offered to sustain such claims; the obvious reason being because they reflect the author’s imagination and prejudices.

In the introduction to a recent posting on this blog the claim was made that ‘governments internationally have allowed neo-liberal economics to undermine social equity today, with most of the spoils going to the privileged few’ (Bishop Vincent Long, posted 23 June 2017). Of course, if this were the only such claim I would not bother replying.  Many such claims have, however, been made over what is now quite a long period, and none of them ever seem to be accompanied by any serious analysis.

For a start, what is the evidence linking neo-liberalism with increasing inequality?  Indeed, what exactly is there about neo-liberalism that it inevitably leads to more inequality? Surely those who seek to blame neo-liberalism for the increase in inequality should feel some obligation to answer these questions, but that never actually occurs. So, in this brief article I will endeavour to set the record straight about the causes of the increase in inequality and the role of neo-liberal economic policies over the last thirty years.

First, one thing we are all agreed upon is that the evidence published by the OECD (and others) clearly shows that inequality has risen in most advanced economies since the early 1980s. Furthermore, the evidence shows that the increase in inequality over the last thirty years has been greatest in the US, which is the most market-liberal economy. But the evidence also shows that the other countries that have experienced the biggest increase in inequality are Finland, Germany, Luxembourg and New Zealand, with the Scandinavian countries not far behind in the extent to which inequality has risen there too. And of course, most of these countries would not be considered forerunners in the adoption of neo-liberal economic policies.

In addition, and just to complete the picture, the same evidence shows that income inequality has not risen much in Australia; indeed, by less than almost all other developed economies, but the critics of neo-liberalism in Australia seem to be blissfully unaware of such facts.

In short, a coincidence does not prove causation[1], and in this case there is not even a compelling coincidence between the increase in inequality and the adoption of so-called neo-liberal economic policies.  Instead, of neo-liberalism, the vast majority of independent experts, who have studied the evidence, have concluded that technological change has been the principal driver of the increased inequality observed over the last thirty years. Technological change has particularly impacted middle-level jobs and has thus hollowed out the workforce, which then shows up as an increase in inequality. To a much lesser extent globalisation has also played a role, and an increase in rent seeking is responsible for much of the huge increases in the share of people in the “top 1%” of the income distribution. But that begs the question of why the members of this top 1% could access such rents, and that comes back to the role of neo-liberal economic policies.

Speaking as someone who was engaged in the provision of much of the official economic advice to the Hawke and Keating Governments, I am sure that all involved thought that the purpose of the economic reforms of that era were intended to make the economy more competitive, productive and flexible. Increasing competition was the best way to reduce the opportunities for rent seeking, but where monopolies continued it was agreed that regulation should also continue, irrespective of ownership.

Importantly, none of the principal people involved thought the reforms would make the economy less equitable, and as summarised above there is no evidence that they did, with technological change accounting for most of the increase in inequality in Australia.  Instead, what these so-called ‘neo-liberal’ economic reforms made possible was the more than a quarter of a century of economic growth, involving large increases in employment and wages, which is about the best recorded, both in our history and relative to other developed countries.

My gripe is that the critics of neo-liberalism now want to throw away these achievements in the mistaken belief that somehow (still to be explained) that will improve equality.  But instead of offering any proof based on an examination of the evidence, we are asked to take these nostrums on trust.

In truth, these populists from what is often a ‘Leftist Elite’ are no different from the populists from the Right.  The right-wing populists blame foreigners for our problems, and the left-wing populists blame markets. They are not so very different. Both rely on their convictions rather than evidence. Both would do enormous damage to the principal drivers of economic growth and therefore to jobs and incomes. Both right-wing populists and left-wing populists should equally be resisted.

Nevertheless, as both the IMF and the OECD have been saying for some time, inequality is bad for economic growth, and governments can make a difference. Furthermore, the way forward to improved equality involves more government intervention, but not a return to the past. Instead, future government intervention should aim to help people adapt to the inevitable changes being brought about by increased technology; not shutting the gates to progress.

Michael Keating, AC was the Secretary of the Departments of Employment and Industrial Relations, Finance, and Prime Minister and Cabinet from 1983 to 1996. The ideas summarised above are more fully developed in a forthcoming book, co-authored with Professor Stephen Bell, Fair Share: Competing Claims and Australia’s Economic Future.

[1] If Bishop Long were interested he might like to reflect on the statistical finding that there was a very strong correlation between the length of the Archbishop of Canterbury’s sermons on a Sunday and the number of deaths in the Boer War in the following week.

print

This entry was posted in Uncategorized. Bookmark the permalink.

28 Responses to MICHAEL KEATING. Why Blame Neo-Liberal Economics?

  1. michael lacey says:

    “Surely those who seek to blame neo-liberalism for the increase in inequality should feel some obligation to answer these questions!”

    # The creditor classes have banded together to create a market friendly revolution and they liberated finance, deregulated banks and integrated the economies of the world
    # Here’s the crunch they globalised labour such that labour could no longer demand that it gets its share of productivity, if you don’t do as you’re told I will just move your job somewhere else!
    # All those trade agreements that were signed under globalisation which was inevitable, you cannot role back! Just go on line and type in WTO text and you will find it is very long 700 page legal agreement that took 5 years to thrash out between corporate and trust lawyers and lobbyists with very low input from civil society. The same is true of the agreements on capital movements; the banking union take your pick!
    # There is a moment when ordinary people began to figure out for the past 30 years huge amounts of money have been generated in the general economy as we know from economists Thomas Pickety and others most of this has gone to a tiny fraction of the population. So a huge amount of growth and hardly anyone has benefited. We do not have to go far to see this! Walk into neighbourhoods that have quick cash agencies, pawn shops, broken down fix your mobile phone shops, dollar stores!
    # So people finally were fed up and decided at any possible opportunity whether it is BREXIT or Italian constitutional referendum or anything to basically give the elites notice that enough is enough!
    # Now there is a macroeconomic one unpinning this as well; after we decided to target full employment for 30 years we decided to target inflation for 30 years. We have created a world where you can dump 15 trillion Euros for example into the global money supply, through QE and other programs and there is no inflation anywhere.
    # Here’s your problem, you have levered your banking system, billed it out and dumped it onto the public purse and said we have to cut that terrible debt. When people’s personal balance sheets are still bloated from all the credit they took on and there is no wage growth and no inflation to ease the burden of the debt, then the creditors fight harder to get their money back. That is the case of Germany versus the rest of the Euro zone, the creditor class versus the debtor class. What we have everywhere is creditor debtor standoffs
    # Those creditor debtor standoffs take different forms. For the left you see resistance through new left parties; the right it takes the form of the National Front and for Trump which is a weird coalition of sexist, racist, anti-immigrant; but if look at the States that really fell hard the rust belts it’s economic!
    # Now if you recognise that simple fact that it is economic you can put Trump in there with Brexit, or Jeremy Corbyn and you can put him in with all the rest of it!
    # Look at 2015 Wall Street bonuses not regular compensations bonuses seven years after they were bailed out with the public purse totalled 28.4 billion dollars. Total compensation paid to every single person in America on a minimum wage is 14 billion dollars! We have bought into this globalism which is really predatory capitalism; they are even using prison labour to produce products that under other circumstances they would be accused of slavery!

  2. Tony Kevin says:

    I am too focussed on other issues – opposing Cold War Redux- to seriously tackle Michael Keating’s interesting thesis ‘Why blame neo- liberal,economics?”. Let me just make a few quick points:
    Neoliberal economics might be the wrong words. If one replaces them by globalisation, the critique holds strong, as your first critical letter by Michael Lacey suggests.

    Why globalisation hurts ordinary people here as elsewhere , is because it surrenders power to a class ( the very rich owners and controllers of capital wealth) that has no national loyalty – the people who will close down a factory in their country to move it to a low wage country and import the product back. I’m all right, Jack.

    A nation is a political as well as an economic community. Supporters of globalisation do not understand this, mesmerised by the dogmas of the free market model, or they choose to ignore it in their economic self interest.

    I did not really want to leave my kids an Australia where the choices were either to become pushing-the-envelope R and D people if they were very very clever ( and a lot of those careers are overseas anyway, in US or Europe) or hospitality industry workers if not so clever. Where there is nothing much in between, because everything is imported from low wage countries. Including, increasingly, services as we automate.

    It has not just been tech change that hollows out middle level jobs. It is the choices of capital-owners where they locate production, services etc. And these are political as well as economic choices. Eg the decision to end Australia’s car industry costing 200,000 + jobs, while spending billions on submarines and aircraft we do not need and which generate/sustain few jobs in Australia, were political choices. Made by our political class, essentially an offshoot of the capital controlling class. Remember Hockey’s contribution to the death if our car industry.

    I want to read Picketty – not mentioned by Michael, but I know he is important to this issue.
    .
    Meanwhile, back to the Cold War work ….

  3. eva cox says:

    Were neoliberalism just focused on freeing markets, your comments may have some force, but you ignore the other changes it brought. Firstly, its basic assumptions are individualised, as homo economicus is a self interested rational being , and a customer not citizen. So our relationships, particularly with government changed as benefits were seen as individual , not communal or social. Secondly, the assumption that markets offer better services and value that public or welfare run services has resulted in privatising or marketising most once public and community services, thus adding to the distrust of government, as user pays grew. Thirdly, neoliberalism aims to reduce both government controls and spending, so most social /communal services were cut or offloaded, tax cuts were used to buy votes and the less material aspects of governance and equity were dropped if not profitable. We moves from social democracy that looked for a balance of societies and markets, to being individuated customers, not linked interdependent citizen. This adds to the effect of maldistribution obecause it is seen as unfair

    • Greg Bailey says:

      Eva has rightly pointed out that neoliberalism is a cultural system as well as a politico-economic system. It is predicated on individual choice, short term time frames (exacerbated by digital technology), competition and an absence of any cooperative ethic. The latter, in particular, is why it is necessary to have governments who will blunt the extremes of the large corporations who will always move towards monopoly situations as economic historians show us.

      When the economy began to be deregulated from 1983 onwards it benefited mainly those who already held large swathes of capital, not those who had none of it or only their labour to sell. In addition, the consultancy and business economist industries flourished as the public relations vanguard, pushing deregulation and privatisation, and their opinions were picked up by the mass media as economic gospel when really they were just public relations hawkers and lobbyists. This situation has only got worse in the past thirty years with the development of a huge financial services industry built around debt and speculation, not unlike what occurred in the first world in the late 1920s.

      From a cultural perspective the institutional equivalent of neo-liberalism is the corporation, where the corporation is essentially run for the benefit of the CEO and the board, certainly not primarily for the shareholders. Personal relations at the top are over represented by bullying, excessive self-confidence and aggression, all underlain by the individualism lying at the heart of neo-liberalism.

      Finally, it is time the praises being sung about Australia’s twenty-five years of constant growth are debunked. Most of the growth–much of it debt based– has trickled upwards, our public institutions need major infusions of capital and our public utilities are much more inefficient on a cost basis than their former public counterparts. And the processes to bring this situation back to something approaching ethical co-operation in society will cause immense disruption and may just result in a greater concentration of power.

  4. Rent seekers were mentioned but not elaborated upon.

    In the 80’s our essential services was in government hands and the public was sold the lie that corporations could fulfill the role of administering these essential services more efficiently and at a lower cost.

    One only has to see the disaster which is the electricity industry with private operators maximizing their profits and in so doing gouging the consumer.

    In effect the electricity consumer is paying a hell of a lot more than if it was in government hands.

    How much more the consumer is paying is a question that I’m not qualified to answer, but say for an average household, it’s possible that household is $1,000 worse off a year.

    Now these profits go to the energy companies and to their shareholders being a small section of the community whereas if the households had that $1,000 it would be spent in the local shops and businesses in rural, regional and city communities.

    So it’s not hard to see how privatization not only leads to inequality but it is also a huge drag to the wider economy.

    The neo cons like the Turnbull government is trying to privatize whatever they can get away with and you have Minister Alan Tudge working as a salesman for Murdoch with the ‘indue’ cashless card. In case you are not aware, the Star Group owned by Murdoch is the owner of the cashless card.

    The card is currently being trialed with the indigenous folk and Alan Tudge wants to trial it in other areas. Now I’m positively sure that Murdoch won’t be happy with a couple of trial runs and I’m of the opinion that eventually this card will be rolled out to all welfare recipients.

    The trial run is costing $10K per participant, and if Murdoch is successful in issuing this card to all welfare recipients the Treasury coffers will be drained by billions every year and most of this money will be going offshore and so there will be billions less for education and health or infrastructure and it’s the tax payers who suffer and widening the inequality.
    http://www.abc.net.au/news/2017-05-02/cashless-welfare-trial-costing-taxpayers-$10k-per-participant/8488268

    It’s time to buy back our essential services and to give the rent seekers a very big boot.

  5. Don Aitkin says:

    I liked both the content and the message of this essay, but I would have like a sentence or two about what exactly Mike meant by ‘neo-liberal’ Other commenters have used the lack of clarity here to push their own barrows. I agree with the author that we need to anticipate the adverse outcomes produced by technological change and help people adapt to them.

  6. Colin Cook says:

    Here is one explanation for increasing inequality:
    http://cooksourdough.blogspot.com.au/2016/10/the-great-economic-divide-explained.html
    and there are many more here:
    Game of Mates 2.5 min video

  7. Jon Stanford says:

    Surely it is important here to distinguish between policies that increase the size of the economy and those that determine the distribution of the additional wealth that is created.

    It is difficult to sustain an argument that neoliberal, or market-based policies, are inimical to economic growth, which ultimately depends on productivity growth. Policy changes such as opening up the Australian economy and national competition policy, introduced largely by the Hawke and Keating governments, provided the basis for much higher productivity growth in Australia. So in simple terms those policies made the cake bigger than it otherwise would have been. But Hawke and Keating were also sensitive to the fact that there were losers from these policies as well as winners. The issue of how the cake was distributed was still important at that time: the term ‘social wage’ was one that was frequently heard in those far off days and we never seem to hear it now. Keating’s superannuation policies, anathema to many conservatives, provide one example.

    Unfortunately it may well be that the success of neo-liberal economic policies encouraged conservative forces to implement a wider small government approach that is unlikely to support a more equal distribution of the national cake. The focus on reducing government expenditure rather than increasing taxation in order to repair the budget is one illustration of this. The often risible attempts by conservative economists to discredit Piketty’s thesis is another. Perhaps worst of all are governments that seem to lack any kind of guiding philosophy at all: why would you get rid of a lowly assisted industry like motor cars that directly and indirectly employs 200,000 people and then provide massive subsidies to the naval shipbuilding industry which will, on the government’s own figures, employ 18,000 people?

    The stark answer, horrible though it seems, may be to save one Minister’s seat. If so, this combines a bad growth policy with a shocking distribution policy: the worst of all worlds. Rent seekers are not necessarily confined to the private sector.

  8. Christopher Sheil says:

    With respect Michael, you seem rather ‘blissfully unaware’ of the literature yourself.

    Notwithstanding some ambiguity about what you mean by ‘neoliberal’ economics, there is a rather well known book by Thomas Piketty that has argued that rising inequality is a function of unmediated orthodox microeconomics, summarised here:
    http://media.wix.com/ugd/b629ee_2d2a62b529e847e89942d5a3d3a58580.pdf

    That well known ‘elite lefty populist’, the deputy head of the IMF’s research department, Jonathan Ostry, has also published some biting critiques of ‘neoliberal’ economics and its inequality effects. Here’s a short one for starters: https://www.imf.org/external/pubs/ft/fandd/2016/06/pdf/ostry.pdf

    As for Australia, you will apparently be surprised to find the growing level of inequality revealed by ABS and OECD figures in a fairly recent report (by me and Frank Stilwell), summarised here: https://theconversation.com/land-of-the-fair-go-no-more-wealth-in-australia-is-becoming-more-unequal-63327

    I must add that no-one I’m aware of would argue for a ‘return to the past’, which cannot be returned to in any event. The policy challenge is more complex than that straw man.

    With best wishes, Chris

  9. Peter Walsh says:

    Usual a big fan of Michael’s writings. But here he might have usefully defined his own boundaries for “neo-liberalism” – the scope of the term is obviously contested. Its also a turn-off when anyone references a conclusion of “the vast majority of independent experts” without some supportive sources.

    If neo-liberalism just means faith in the free market (setting aside the idea of privileging economic over social and environmental lines). Then there is an obvious link to globalisation. Isnt it reasonable to conclude that neoliberalism brought down trade (and other) barriers at various scales and thus caused globalisation.

    There are indeed many benefits of globalisation (and our 1990s economic reforms), but many unintended consequences. The problem is less in the ideology and more in the favours and deal doing (the “spaces in between”) the various projects, and consequential winners and losers.

    In Australia, we seem to have slowed down in our social progress endeavour coincident with neo-liberalism, after a long term positive trajectory between Federation and 1980s; perhaps more to do with wealth/property bias, in part encouraged by taxation incentives rather than neo-liberalism per se.

  10. Thanks for the post Michael, and I hope you can join the discussion below.

    The debate seems to be remaining comfortably ideological with Mike not admitting quite a few of the big things the ALP government did that promoted inequality. Cutting the top marginal rate, introducing 15% flat taxes on what is now $2 trillion of savings and introducing dividend imputation which is very strongly regressive and disgorges over $20 billion in capital tax revenue foregone without lowering the cost of capital (quite a feat I’d say!)

    But there were Brian Howe’s great achievements in the packages behind the words in Bob Hawke’s written speech for the 1987 election ‘By 1990, no child NEED live in poverty’. So that was good. And lots of other entirely sensible reform.

    One other comment regarding Jon Stanford’s contribution above:

    It is difficult to sustain an argument that neoliberal, or market-based policies, are inimical to economic growth, which ultimately depends on productivity growth.

    Where production is littered with mercantilist structures as was the case with Australian manufacturing and agriculture, then market-based reforms presumptively lift productivity and grow the economy. But that’s pretty much it. That presumption doesn’t apply in all manner of other sectors where as I argued in the piece linked to below, are much better thought of as jointly produced by competitive and collective forces.

    Likewise ‘market based’ utility reform was mostly botched, making things arguably worse (presuming existing state owned assets were managed with reasonable efficiency as we seem to be capable of for instance in the case of Australia Post) and pretty clearly worse in some areas like electricity reform. Then there was the lurch towards PPPs and other abominations under the rubric of ‘market based reform’.

    So it’s not such a pretty picture so it seems to me.

    http://clubtroppo.com.au/2014/09/18/time-for-the-reform-mantra-to-be-modernised-my-afr-column-of-yesterday/

  11. paul frijters says:

    Hi Michael,

    I am agreed with you that in principle, pro-market economics is not antithetical to a quite equitable society. I also agree that the label ‘neoliberalism’ for those riling against inequality is poorly chosen for a variety of reasons. At the end of this reply I regurgitate a remark I made a few days before to the same issue elsewhere on this blog.

    But I do have two gripes with your general assertions about inequality. The first is whether inequality has gone up and the associated claim that the US is the most liberal market economy we have (which is a claim I totally disagree with. I would put it roughly on a par with Australia in terms of rent-seeking).

    You state that the main driver of inequality in the last 30 years across the OECD is skill biased technological change. I used to believe that too. I even wrote a paper to that effect in 2005 (‘from golden age to golden age’). It is when I started looking closer at the data that I came to the conclusion I was totally wrong, and mis-directed by economic market thinking that was not suited to thinking of organisations as a stack of rents themselves, and of politics as just another competitive arena for rent-seeking. I did not see the masses of what I now call ‘grey gifts’ given out by politics, gifts that ultimately arise from imperfect property rights and around which coalitions form.

    What data? Two main pieces of data initially, followed by the flood that I talked about in my recent book (that I already see referred to above, thanks Colin!). The first was a paper by Andrew Leigh who put in a lot of effort (based on the methods of Tony Atkinson) to get the measurement of inequality as good as possible for Australia and the other Anglo-countries. Atkinson and Leigh (2013, p. 15) in their paper on the 5 Anglo-Saxon countries thus conclude that ‘reductions in tax rates can explain between one-third and one half of the rise in the income share of the richest 1 per cent’. As I said in my 2015 paper with Gigi Foster: ‘Including changes in other taxes (like those on capital) would likely push this percentage even higher, suggesting a direct political role in rising inequality.’
    Hence the statement that rising inequality is due to the private market is plain wrong, even if we restrict ourselves on the relatively simple question of pre-tax and post-tax inequality. Politics has everything to do with it. Of course this is doubly true for wealth inequality, which is worse than the income inequality you choose to talk about.

    The second thing that changed my mind is that I had a look at who is actually rich in Australia. I thought I was going to find entrepreneurs and inventors, the people who inhabit the world of the deserving in economic textbooks, the people pushing production frontiers. I could find almost no such people among the rich in Australia. I found people who looked like rent-seekers that move the hand of government: financial investors, miners, property speculators. They neither built stuff faster than others (construction is not where the profit is!) nor spawned anything I could see as new inventions. I was a bit amazed to be honest. What the hell was going on? What was not in my textbooks?

    So I asked myself two questions: how else should I think about an economy to rationalise the possibility that most of the rich are not productive, but more successful in getting gifts from politics? That question needed the notion of grey gifts on a massive scale (and they are easy to spot once you know what you are looking for!), and it needed to notion of the monopoly of violence of government (the ultimate market imperfection!). I also needed a new model of the macro-economy to see if what I saw in practice worked in theory (yes! But the paper is still in progress…). And the second question was when all these grey gifts got handed out and where I could spot the intricacies of the mechanisms. The answer to that question turned out to be ‘relatively recently’ (the rich now are mostly new people to the rich 50 years go. It’s been a stampede), and that the intricacies were surprisingly similar to the organisation of criminal gangs, which is now how I think of the main political parties in Australia (collections of gangs plus a few simpletons and frustrated idealists).

    Together, they also made me realise something else: our statistics grossly understate inequality, mainly because they understate the part of our consumption packages that are taxed away by the rent-seekers in the form of higher mortgages, higher transportation cost, etc. It is a kind of additional taxation that occurs after measured taxation, but that is highly regressive. On top of that of course, income at the top is more hidden than income elsewhere for reasons of tax-evasion. No-one has done proper statistics on these two issues, but I gave enumerating them a go in my book. It can be done much better, but that would need a lot more time and serious research resources.

    Your own book, Michael, on the rent-seeking activities inside ministries (that was yours, right?) showed me how the game was played inside ministries. I suspect that the reason you still have difficulty seeing the causes of inequality is that you have the same problem I had 10 years ago: the way you looked at firms, organisations, and politics came from 1950s textbooks in which corruption is a deviation of a single person from the equilibrium, and politics is by definition neutral and well-meaning. You need to see it in maths and in a structure before you can see it in reality, I suspect. I needed the maths to check that what I was thinking made sense. We tried in our recent book to explain the most important bits (the coalitions and the imperfect property rights) of an augmented economic view of corruption to the general public and people like yourself.

    In short, I think we are on the same side, Michael, so I hope you give it a try to augment your view of a political economy. For that, you do not need to abandon economics at all, since the rent-seeking literature is totally mainstream (from Chicago even! Arye Hillman is pretty much on the same page as I am about all of this!), but it has not been integrated well with macro and the overall view of the economic system, which I think is because the maths proved too hard for the people who tried.

    To return to the issue of the label ‘neoliberal’, I will repeat what I said elsewhere:

    “In general, I think the use of the word ‘neoliberal’ to signify the rent-seekers is a big mistake. It is both incorrect in terms of connotations and far too flattering to them, drawing us into senseless ideological debates where the ‘neoliberals’ will pose as pro-market and pro-growth (whereas in fact they are anti-market and hyper-regulators). The term thus plays into their hands and neuters our arguments. Why not call them corrupt, traitors to the public cause, or, if you have to use an ideological term, managerialist?

    References:

    http://onlinelibrary.wiley.com/doi/10.1111/1467-8462.12096/abstract

    Atkinson, A. B. and Leigh, A. 2013, ‘ The distribution of top incomes in five Anglo-Saxon countries over the long run’, Economic Record, vol. 89, no. S1, pp. 31–47.

  12. Graham Jones says:

    I must say I was surprised by this article being authored by Michael Keating. It may be a rather shallow but I would have hoped that even a devout economic rationalist was not so blinkered or naive. Keating’s understanding of ‘neoliberalism’ is obviously limited – the neoliberal ideology believes that competition is the defining characteristic of the polity where citizens are redefined as consumers. Prescriptions flowing from this market fetish include, for example, minimising government, expansionary austerity, trickle-down economics, passive fiscal policy, tax and regulation should be minimised, public services should be privatised etc etc. If Keating spent more time reading the literature, rather than writing such hollow articles, he would find a myriad of research supporting the connection between neoliberal prescriptions and inequality. I think (hope?)Michael Keating is capable of much more than this drivel.

  13. Thanks Paul,

    Completely beats me why you needed the maths to see the cost or magnitude of rent seeking within organisations. I can’t see your maths, but I believe your argument.

  14. Wayne J McMillan says:

    Hi Michael, I hope you read all the thought provoking responses to your excellent article. They represent a broad set of observations across the economic political divide that no thinking person could ignore. It has left me with some serious food for thought. Thank you for stimulating an interesting discussion.
    Best Wishes
    Wayne J McMillan

  15. John Bushell says:

    To some extent Michael Keating is correct – the neo liberals have hidden much of the increased in inequality behind “commercial in confidence” screens. For example borrowing for privatised infrastructure costs about 10% per annum, whereas government borrowing for provision of this infrastructure would cost about 2.5% p.a.

    Consider a person living in the Eastern Suburbs of Sydney who can travel locally and to the CBD without road tolls. Move to the Western Suburbs and you have to pay for the roads you use, particularly to access city jobs. In the last census Wentworth in the Eastern Suburbs had the highest Sydney wealth gain (24% in the last 5 years). The nearest other suburbs gained about 20% in the same time. Some of those gains would be a transfer of wealth from the Western to the Eastern suburbs in terms of toll road investment.

    Thomas Piketty in “Capital in the 21st Century” has demonstrated very clearly the acceleration in wealth transfer to the already rich from 1980 to the present, coinciding with the commencement of Thatcherism and Reganism.

    And we haven’t even talked about the disgraceful wealth transfer from the young to the wealthy: university fees, the vocational education sort, poor protection of low-paid workers particularly those employed in franchise businesses and mature peoples utter failure to effectively address global warming which will have very significant (fatal in many cases) impacts on their children and grandchildren.

  16. Peter Lynch says:

    I take issue with some of Dr Keating’s assertions. Firstly, he may be right that inequality in Australia is not as bad as in some other countries, but it is still egregious. It is at a level that recent research shows cannot be good for the economy, let alone for society. Secondly, while much good came from the Hawke/Keating reforms, a loosening of the reins on the market allowed some major distortions to develop. One of the worst has been the growth in monopolies and semi-monopolies in areas such as banking, telcos and retailing. Thirdly, reduced regulation has seen an explosion in unethical or even criminal behaviour in business. Fourthly, lax governance has led to a situation where it is easier to make money from government handouts and other favours than by providing new or better goods and services. A glance at the Australian rich list shows that that many of our billionaires have benefitted enormously from rezoning of land for development. There has also been huge growth in takeovers and mergers many of them not in ordinary shareholders’ or employees’ interests; a proliferation of essential services being privatized in a way that has transferred wealth from the many to the few with the inevitable associated cost blowouts; and a ballooning growth in the financial services industry far beyond what is necessary or desirable. These are the products of neoliberalism.

    But my main problem with the article is that it ignores the vast research by Thomas Piketty and his colleagues which shows that, over time, unregulated capitalism leads to inequality because the long term rate of return on capital investment always exceeds the return from labour. His persuasive argument is that, even in the best managed capitalist economy, there needs to be a mechanism to stop ever increasing inequality. Piketty’s answer is to set taxes on the highest incomes at rates necessary to stop the accumulation of huge wealth and to apply taxes to wealth and to inheritance. Neoliberal philosophy argues for lower taxes on the rich and less regulation. It inevitably leads to an undesirable level of inequality. Globalization plays a part in suppressing wages but it is not the biggest driver of inequality. Neither is technological advance. There is evidence to suggest that the role of technological change to date has been exaggerated.

    Few people today reject capitalism but Australia’s experience shows that deregulation has been very damaging. The suggestion that every thing is fine in our Australian economy and that rising inequality is not a problem is just ignoring the facts.

  17. Stephen Tardrew says:

    Very much an insiders point of view conditioned by an entrenched paradigm that has not demonstrated near enough flexibility or self-criticism. Taking the middle road is in fact a cop out because it ignores the fact that economics is not a science and is riddled with opinion and attempts to map mathematics onto the model rather than the other way around re: Steve Keen, Prof Bill Mitchell, Warren Mosler, Stephanie Kelton in fact the whole school of heterodox economists who have formulated a non disruptive transitional economic model more suited to the facts of a fiat economy rather than hangover attachment to a thoroughly discredited gold standard model which did not shift to cope with the contingencies of a fiat currency.

    Two issues are important. First a fiat currency is not capital constrained and can pay for anything it likes so prejudicial opinion plays a large role in how resources and wealth are distributed.

    Secondly taxes do not fund anything they are simply entries on the balance sheet helping control inflation and to keep currency flowing through the system.

    Another problem is the pseudo scientific survival of the fittest which is a complete misread of evolution. A lack of scientific literacy is one of the things that is causing such illogical and irrational decision making. Species in equilibrium generally cooperate for the betterment of the community by sharing resources and food. Not only that reciprocity and empathy are imprinted upon our brains through mirror neurons and familial sharing a caring.

    Another contributor is our subconscious fears driven by an autonomic nervous system that has strong feed forward reactivity from amygdala to pre-frontal lobe yet spare feed back the other way. We have to put conscious effort into maintaining stability under the threat of poverty, suffering and eventual annihilation. This leads to autonomic subconscious fear which often overcome reason utilising magical mythical and religious constructs rather than reason and rationality.

    There is much more we need to understand to come to a rapprochement with the facts of nature and the causal empirical laws underpinning our material reality. To claim that neo-liberalism has any sound empirical basis is nonsense and therefore opinion reins supreme.

    Modern Monetary Theory proposes an approach to economics from a rational factual observation of the implications of a fiat currency which is totally misconstrued by primitive dated and irrelevant neoliberal interpretations. Conservatives find change repugnant if it threatens the basis of their power and control, rational or otherwise, and will keep the myths alive to maintain and sustain their aberrant belief system. To divorce neoliberalism from the gross injustice and inequality by blaming technology is, at the least, disingenuous and at the most protection of, and investment in, a thoroughly discredited past purely for greed and self-interest.

  18. Bruce says:

    The biggest flaw in neoliberal economic theory is the concept of a free market. That, in the world of mass capital, is a fairy tale.
    A free market assumes that an individual can compete on a level playing field. Ask anyone who has tried to run a small to medium sized business “competing” against capital. It is akin to Tonga going to war against the United States.
    As the owner of a series of small businesses and as an investor in the share market for over a decade so called level playing fields are economic mumbo jumbo. If you can get enough capital behind you, you can run at a loss for over a decade. The essential ingredient is the ability to raise capital. Back this up with the ability to screw suppliers that smaller businesses do not have and so much for economic theory.
    As Paul says the movers and shakers are the money managers. Technological change is important, but much of it would not get off the ground without a financier manipulating the markets to enable it.

  19. Jim Coombs says:

    Just read Tony Judt’s “I’ll Fares The Land”, Michael.

    • Not sure why you’d recommend that to a non-believer. Do you think it is written to persuade people who don’t agree with it’s perspective?

  20. Dog's Breakfast says:

    So many eminent minds here, I can hardly add value. Thanks to those who have responded to question some of the weaknesses in Michael’s article. I thought pretty much everyone was starting to get on board, but this reads as a rearguard action defending the indefensible. That is not to denigrate much of the opening up of the economy under Keating and Hawke.

    So many others have said all that I was thinking. Don’t under-estimate just how unequal the Australian economy is now. That worries me, I’m doing quite well but I don’t sit high up the mountain thinking how good I’ve got it, I’m worried that the base will collapse and then it doesn’t matter how high up you are.

    I would add that if there is a term with a more arcane and mercurial definition than ‘neo-liberal economics’, it would be ‘technological change.’ While the OECD has been held in high regard for a long time, it seems to me that the King has no clothes and the crowd is becoming aware of it. The problem is, they aren’t laughing at the King, they are picking up their baseball bats and their pitch forks, and melting their ploughshares. The assumption that this will all end well is not one that can be made.

    Michael’s lack of acknowledgement of the poverty/paucity/rank incompetence in regulating those monopolies that should never have been privatised in the first place suggests that more reflection is in order.

    The lack of acknowledgement of how out of control the rent-seeking sector of the economy is concerns me. (Thanks Cameron and Paul, wonderful insights)

    The effects of changes to taxation of obscene income levels, the level of tax avoidance at those stratospheric levels, and the halving of capital gains tax all would fit under neoliberal economics and even go against classical economics, which itself is rightly under attack.

    But to leave out ‘trickle-down economic’ theory in talking about neoliberal economics suggests that Michael couldn’t see the wood for all the trees. We are well past the evidence on this one, it’s not so much trickle-down as trickle-out, usually to the Cayman Islands, and benefits nobody but the richest.

    Rather than suggesting that there is no evidence that neoliberal economics is to blame for inequality, I would have thought the phrase ‘case closed’ was more in order.

    But many others here are more credentialled than me to make that case.

  21. John Menadue says:

    Michael Keating will respond in due course but not presently. John Menadue

  22. david gray says:

    Michael Keating, I was disappointed and even angry that your defence of neoliberal economics conflated so many things, including what “neoliberal” has come to mean. Few would argue with the desirability of opening up our economy to the world as happened with your input in the Hawke/Keating era. However, your short piece has generated a rich and diverse discussion which contains some real gems, worth thinking about at length. Stephen Tardrew’s comments drew in some really insightful and pertinent (crossover) ideas about evolution and the way human rationality/irrationality actually work. Paul Frijters made extensive comments I am going to reflect upon deeply. There are many other fantastic contributors – thanks to all!

    I suspect that many of the politicians marching under the neoliberal banner are more focused upon facilitating the interests of a cabal of rent-seekers, albeit a different group than those who benefited under a closed economy, than upon achieving strictly macroeconomic goals. This discussion is really important, however, having implications for how our democracy can improve the manner in which it sets its objectives and handles rent-seekers.

Comments are closed.