PAUL FRIJTERS. It’s not about state versus markets.

It is said that all generals prepare for the last war. So too it often seems in ideology land, where  the conflict with the Soviet Union seems to have left us with an obsession with state versus market. Just as we are not preparing for the cyber wars of the future by building obsolete submarines that would only have been useful in WWII, we are not addressing today’s economic challenges by thinking in Cold War economic terms either.

All major Western economies are mixed economies in the sense that a sizeable proportion of the income of the country is collected and reallocated by the state. The percentage that go through the state vary remarkably little over Western countries, with OECD data claiming that a supposed ‘state light’ country like the USA reportedly having 38% spent by the state, versus 44% by that notorious state-monolith, Germany. Differences are smaller if you account for the fact that some countries mandate private expenditure (eg compulsory health insurance) or have private firms supply goods and services that in other countries are generated by the government (eg private roads). So if you for instance look at the sum of all social expenditures as aggregated by the OECD, US social expenditure is actually higher than that of Australia.

Little has changed over time in this general picture, with the US general government spending 36.5% in 1975 versus 37.7% now. Hence no Westerner truly lives in a ‘market economy’. Everyone lives in a mixed economy. In Australia, the general government is counted as 36% of GDP, but Australia has a lot of hidden government, for instance because many activities normally counted as government are in a large non-profit sector that employs some 10% of the workforce (universities, hospitals, care homes).

A free market is like a dragon: it supposedly does amazing things and appears on the emblem of many countries, but no-one has ever seen a real one. No market comes close to the assumptions of a free market in which information is costless, technology is instantly taken up by competitors, and profits are zero. An important economic clue about our current supposed market sector is that profit ratios are much higher now than before (just look at the stock market, which essentially measures levels of profit). Profits have gone up both in the visible private sector and in the non-profit sector where profits appear in the form of salaries and job-perks for the top. To any trained economist, sustained profits are an indication that markets are not free at all.

Governments as a whole decide on the key things that give profits in our economies. Governments give out licenses, patents, monopolies, accreditation, contracts, standards, permissions. They give out small favours at local levels, ranging from contracts for garbage collection to permits for new apartment blocks. And they give out larger favours at higher levels, from the monopoly right to supply superannuation to an order for 50 useless submarines.

The major changes in the last decades is that it is all about the power of government, particularly in things calling itself corporations and markets. Profits and the state are a symbiotic whole.

Governments as a whole is the real power in our society. It is by the grace of government that there is private ownership and private wealth. Any look at apocalyptic movies wherein governments collapse, such as the Mad Max series, show you that truth: without government, respect for property vanishes and smaller-scale gangs emerge. Hence those most invested in the state are in fact those with greatest private income and wealth.

And what has happened in this sphere in Australia? There has been an absolute explosion in regulation and lobbying in the last 30 years. Whereas in 1970, the number of pages of new regulation was around 1750, we are talking about tens of thousands of pages a year nowadays, and that is only counting federal parliament. The number of lobbyists has gone from a handful to thousands, and those lobbyists are not there because the people paying for them are stupid.

The key question you should ask is who wanted all this new regulation and who has it actually benefitted? The old Cold War warriors immediately think the driver was the state bureaucracy and its army of meddling incompetents. The economists studying rent-seeking have long realised it is exactly the opposite: those benefiting from the regulation lobbied the machinery of state for it. The boom in profits and regulation are two sides of the same coin.

A good example is the regulations around pharmacies, with legal inhibitions against having too many pharmacies close together and all kinds of legal barriers to reducing the profits of pharmacies. Those regulations protect billions of dollars of profits for pharmacies at the expense of consumers and the rest of the health system. Ask yourself how such regulation came to be, and what do you think keeps it in place? I can assure you that it is not incompetent bureaucracy that is keeping it in place.

Then ask yourself more uncomfortable questions: what does it say about our politicians that this regulation is still in place? What does it say about our anti-monopoly systems that this has gone on for decades? Have people tried to fight this and why have those efforts failed? Why are the newspapers not full of this? Where is the open register of all the ways our population is fleeced? And what does it say about the population that they have not exercised their democratic powers against this?

So the story of our time is neither of markets, or of interfering states, but of our halls of power crawling with profit-oriented manipulators and their lackeys. That is not Marxist, liberal, neoliberal, progressive, Christian, anti-fascist, communist, libertarian, radical green, or even alt-right. It has nothing to do with political ideology, whatever clothes it dresses in or however much the ideologues imagine themselves in a war of ideas. It is much more basic than that. It is corruption. It is cronyism. And it is on a roll, virtually unopposed.

Paul Frijters is a Professor of Wellbeing and Economics in London. He worked in Australia for 15 years on general economic issues. He co-authored  with Cameron Murray, Game of Mates,a book on widespread business corruption in Australia

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10 Responses to PAUL FRIJTERS. It’s not about state versus markets.

  1. David Brown says:

    those of us that agree with your observations are consumed with two questions:

    – how to rescue democracy from its ineptitude?

    – why voters seem to vote for their own self-destruction?

    • derrida derider says:

      “- why voters seem to vote for their own self-destruction?”
      Actually it’s that nasty neoliberalism that has the best answer for that, via its “public choice” branch. The costs of regulation are diffused over the whole population, the benefits concentrated on a few. So only the few have sufficient motivation to learn about the effects and to vote/lobby accordingly (learning being expensive both in time and cognitive bandwidth).

      Of course if it was genuine self-destruction that was at stake this would not be true, but for very indirectly losing a tiny amount of real income or status by each individual policy …

  2. Jennifer Meyer-Smith says:

    Thanks Paul,

    I doubt you would have any intelligent person argue with you about corruption and high powered rent-seekers being the source of the poison oozing through our political and socio-economic systems.

    I imagine in Australia, we could name Twiggy Forrest, Rupert Murdoch, Gina Rinehardt, as obvious examples of manipulating our decision-making processes. They’re the ones, who pull the strings of the lackeys in government. However, lesser known offenders manage to stay below the radar of public outrage for their offences against the public interest. I want them outed too, and named and shamed, so their dirty dealings are better exposed and opposed.

    (I imagine in America, you could identify the Koch Brothers, as such examples of political abuse too.)

  3. david gray says:

    I likewise have a vain hope that we could re-frame debate to exclude the neo-liberal shibboliths about state versus the market, and do real work on making our mixed systems of government work better, with greater integrity.

    Recent work by academics in the Netherlands which tracked the shifting of profits from high-tax jurisdictions to low or zero-tax showed that the United Kingdom, the United States and the Netherlands were countries which actively facilitated profit shifting, and Australia is also an active facilitator, albeit on a lesser scale.

    By the active efforts of the rent-seekers (rent-grabbers?) and the lobbyists putting their cases, Australia now relies more on income tax as a source of Federal Government revenue than all other comparable developed countries, barring Sweden, which has a more comprehensive welfare system. Other sources of income have progressively dried up, particularly corporate tax. The effective rate of company tax is low, despite the supposedly high headline rate.

    We do need a Federal anti-corruption body, as is asserted by many highly respected Australians who know what is going on. But we also need, as you point out, a shift in the attention of Australians and less tolerance of endemic cronyism in our institutions.

    • Jennifer Meyer-Smith says:

      Have you read anything about Modern Monetary Theory, which Professor Bill Mitchell and Professor Stephen Hail explain with great conviction and common-sense persuasion?

      When you do, you will see that our Australian government retains its sovereign powers to administer its OWN sovereign currency to PAY for everything we Aussies need and reasonably would expect of a civilised society.

      When coming to see how it works, you will also see that our taxpayer dollars work as balancers upon inflationary pressures so there’s not too much capital floating about that cause inflation when there is decreased amounts of products and increased capital.

  4. derrida derider says:

    Pharmacies is a good example, Paul. The Department of Health and its predecessors have made repeated efforts to get less restrictive regulation of pharmacies over, to my personal knowledge, at least four decades.
    The relevant lobby has got wind of it and gone straight to the Minister every time (except for once when it went straight to the Prime Minister) to block it, usually with implicit or explicit threats of campaigns by respected community pharmacists in marginal country seats.

  5. Colin Cook says:

    ‘How to rescue democrat from its ineptitude?’
    First recognise that our democracy is a ‘work in progress’ – or should be; when white Australia started, democracy was a dirty word and even now local government exists ‘by the pleasure’ of the States.
    China is often criticised for not being a democracy – yet the northern province of Liaoning has an elected assembly of 594 deputies – about 13.5 elected lawmakers per million population. In Australia we have about 10 elected lawmakers per million. But if we counted even just half the number of of lobbyist as lawmakers we could boast of 30 lawmakers per million of population – but only a third would have been democratically elected! I have written more fully on this at http://cooksourdough.blogspot.com.au/2017/07/
    I am not saying that China is more democratic than Australia – only that we should recognise that we have work to do on ours – lots and urgently. China’s system is their concern.

  6. Julian says:

    Thank you Paul. Your report rings true for me and I can certainly understand your anger. I find it difficult to cap my own anger and disappointment.

    I think that the full extent of the unfettered arrogance and venality that surrounds the parliamentary process at every level is only now beginning to be seen for what it is; and it is thanks to you and others that is so.

    So while there is perhaps only the slightest chance the incoming Labor Government in Canberra may alter this situation for the better, it falls to the rest of us to do what we can when we can.

    Many years ago there was an excellent American TV western, the central character of which had a business card which read: “Have gun. Will travel.”

    In the present mess, for my own part I can say: “Have computer. Will communicate”.

    Also it never hurts to firmly, politely and continually remind our parliamentary reps that they represent the community and therefore the “common good” comes first.

  7. Dog's breakfast says:

    “Where is the open register of all the ways our population is fleeced?”

    That would be a long book Paul, measured in volumes.

    The health sector is rife with it, with narrow specialisations restricting entry to keep incomes high. The legal sector does it with their arcane ‘silk’ processes, essentially the most difficult of all unions to join.

    At Federal, State and local government level, it all permeates. Land sales, asset sales, land zoning, etc, as I know you covered so well in your book.

    Of most relevance is this; that the current situation is not actually a problem of ideology because any ideology will be undermined by the business/political culture.

    And as a corollary, the solution to the problem is not ideological, but cultural. There are forms of corruption across the board, currently not illegal, just corrupt in the literal sense (putrid, tainted, adulterated, debased)

    I look forward to a largely post-ideological polity. Sure, there will be urgers supporting market-based as opposed to government run solutions, but their input should be peripheral, in that the intent of policy is to ensure that systems and processes are not corrupted by the lobbyists and rent-seekers. In that climate, ideology is very much a second rate consideration, and akin to arguing over the number of angels that can fit on the head of a pin.

    Best wishes

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