IAN McAULEY. Reclaiming the ideas of economics: Leadership

Dec 19, 2019

In dealing with economic problems requiring adaptive change we shouldn’t look to so-called “leaders”. We need leadership.  There is a profound difference.

Australia’s weak economic structure

Australia’s economy is underperforming.

Productivity is declining, wage growth is feeble, underemployment is high and rising, households are carrying huge burdens of debt, businesses are not investing.

These are not just passing cyclical phenomena to be rectified with a few tweaks to tax rates, incentives and subsidies. Nor will the cosmetic priority of a balanced budget do anything to bring the economy out of its doldrums.

These problems are symptoms of structural weaknesses, and without attention to these weaknesses our future prosperity is far from assured.

It is possible to identify at least six weaknesses in our economic structure.

  1. In spite of our natural endowments in wind and sun and early lead in renewable energy, and in spite of our rank as one of the world’s worst per capita contributors to greenhouse gases, we are not doing our part in averting destructive global warming and are years behind in re-structuring our energy sector.
  2. Our education standards are slipping, not only in comparison with other countries but also in absolute terms. We are wasting our human capital.
  3. Our export base is narrow, dominated by fossil fuels and iron ore exported to a small number of high-growth countries, de-stabilising our currency and aggravating our vulnerability to world economic cycles and changing policies on global warming.
  4. The benefits of economic growth have not been shared fairly. They have disproportionately accrued to rent-seekers, property speculators and financial intermediaries, rather than to those contributing through hard work and entrepreneurship to the real economy.
  5. In spite of our geographic vulnerability, we have been slow to adapt our food production and our settlement to a changing climate.
  6. Without population growth Australia would be in a deep recession, but we are not providing the infrastructure to cope with that growth. Our cities, once ranked as the world’s most liveable, are showing symptoms of urban dysfunction – congestion, unaffordable housing and social segregation.

I make no claim for this list to be comprehensive, but it is sufficient to illustrate a set of problems that call for adaptive change, to use the framework developed by Ron Heifetz of the Center for Public Leadership at Harvard’s Kennedy School.

Technical and adaptive problems

First, the distinction between technical and adaptive problems.

Governments, although discredited by right-wing detractors, are good at solving technical problems. Provided they are adequately funded and well-managed, governments do an excellent job keeping roads paved, controlling air traffic, protecting communities against petty crime and providing regulations and public goods to complement and support private markets.

In providing these services governments generally achieve what economists call “Pareto” solutions – “win-win” outcomes – where some or all benefit and no one suffers significant inconvenience. Perhaps a minor tax increase is involved, as with the National Disability Insurance Scheme, but if people can see the link between those taxes and government services they are generally satisfied.

But adaptive problems, such as those six listed above, present far more challenge. In a democracy they tend to go unaddressed, because they involve painful adjustment.

For example, if we are to deal with climate change in more than a tokenistic way, there are calls on all household budgets such as higher prices for electricity and gasoline (both significant in the budgets of those with low incomes), and for some, such as coal mining workers, there is loss of livelihood, loss of the dignity and recognition of work in a respected trade, and a loss of community in mining regions.

Similarly, if we are to lift our education standards in a world where competitiveness depends on the quality of our human capital, we cannot expect to go on with almost the lowest taxes of all prosperous countries. Education is expensive.

If we are to develop the industrial structure of a proper “developed” economy, rather than that of a resource-extraction one, we have to accept that the era of easy investment returns is over.

In Australia we have enjoyed 230 years of easy economic dividends in what economic historian Ian McLean calls a “settler economy” – an economy where returns have been made from appropriating land from its original owners, clearing trees, depleting stocks of water and soils, obtaining favours from government, finding and digging up minerals, and speculating on real-estate in fast-growing cities. As Donald Horne said in the 1960s while the postwar boom was in full flight “Australia is a lucky country, run mainly by second-rate people who share its luck”.

A half-century later that luck is running out, but the expectations of easy living live on.

We face the challenge of adaptive change, and adaptive change calls for leadership.

Adaptive leadership

A call for “leadership” generally results in a demand that those in authority – those we call “leaders” such as the prime minister – should shape up and do something, or, if we are dissatisfied with them, we hope other saviours will emerge.

Don’t look for a “leader”

But that’s a fundamental distraction, because as Heifetz stresses, leadership is not to be confused with the exercise of authority. To stay with Heifetz’s framework, adaptive leadership “is the practice of mobilizing people to tackle tough challenges and thrive”.  It’s about hard work – the work of leadership – and that work can be performed by anyone.

In fact in a democracy those occupying positions of political authority may face impediments thwarting them from exercising leadership, because even mentioning adaptive challenges, let alone suggesting ways to meet them, is fraught with real or perceived political danger. Consider the taboo Morrison imposed on use of the term “climate change”, and the frustrations Turnbull faced when he tried to raise the same issue when in office. Or consider the strident and immediate opposition to any hint of economic reform, such as road user charging, abolition of private health subsidies or deregulation of pharmacies.

Some may hope that events could galvanise a reluctant government into addressing our structural weaknesses. Won’t a bad PISA report on our failing education standards finally encourage the government to take education seriously?  Won’t severe bushfires force attention on climate change?

Unfortunately events don’t necessarily have that power, because as Heifetz points out, we are all adept at what he calls “work avoidance”. That is, pushing adaptive problems aside.  Governments have a huge armoury of work-avoidance mechanisms – holding an inquiry to report after the next election, shifting attention to another issue (terrorism is a proven winner), re-framing economic indicators in a favourable light, warning of the budgetary cost of any initiatives, raising the spectre of job losses, and falling back on bureaucratic variants of “she’ll be right mate” false assurances.

If we are looking to our present crop of political “leaders” for leadership, we are looking in the wrong place. Their authority, like all authority that attaches to an elected or appointed position, is conditional, and one of those conditions is that they maintain the equilibrium of the organisation. They don’t welcome disruption that’s likely to raise anxiety – the disruption of troublemakers who remind us of the need to deal with hard issues requiring adaptive change.

Some may point to the Hawke-Keating Government as a contradiction to this generalisation, because over their 13 years in office they achieved an unprecedented amount of structural reform, but they enjoyed a unique set of circumstances. They won office just after the country was hit with a severe recession. Hawke had been ACTU president, in which role he was a master in conflict resolution and negotiation, and was seen as someone from outside the establishment of elected government.

In the Hawke Government the task of removing tariff and related protection was achieved through the leadership of industry minister John Button, whose style was in line with Heifetz’s model: he acknowledged people’s possible loss and distress; he let others raise suggestions, never himself pushing a “solution” or “vision”; he paced the work, carefully steering a path between the destructive forces of complacency on one side and reform-blocking reaction on the other. Of course his reforms met with resistance, but Hawke (and later Keating) provided a heat shield to allow Button to get on with his hard work – the hard work of leadership. One of the tasks of the person in the top job is to provide a space for others to exercise leadership – Heifetz uses the example of President Johnston’s relationship with Martin Luther King.

The 2019 election campaign and the Coalition’s win illustrates how far we are now from the Heifetz-Hawke model of political leadership. Labor presented an impressive suite of solutions, but failed to acknowledge the pain of adjustment. The Coalition, using every known method of work avoidance, pushed hard issues off the agenda, and continues to do so in government, offering simple solutions to complex problems (carbon credits, a balanced budget, curbs on union power). Morrison presents himself as the “leader”, who will protect quiet Australians from the pain of economic adjustment.

But leadership is emerging from those who are unburdened with the constraints of executive authority or political expectations. Former senior politicians – Hewson, Keating, Turnbull – are raising hard issues to do with structural adjustment. Reserve Bank Governor Philip Lowe is stretching his mandate as far as it can go to talk about stresses on contemporary capitalism and the failure of traditional monetary policy. Independent politicians, free of the burden of party traditions and party structures, are raising hard issues—although they don’t always do eloquently. And way outside the formal structure of elected or appointed authority is a 17-year-old Swedish schoolgirl doing the hard work of “mobilizing people to tackle tough challenges and thrive”.


This is the fourteenth and last of a series of articles in Pearls and Irritations  on reclaiming the ideas of economics. Others have been:

General introduction (September 19)

Aspiration (September 26)

Jobs and Growth (October 3)

Society, economy and the environment (October 10)

Regulation and deregulation (October 17)

Taxes (October 24)

Globalisation (October 31)

Debt and deficits (November 7)

Wealth (November 14)

Competition (November 21)

Socialism (November 28)

Privatisation and prices (December 5)

Capitalism (December 12)


Ian McAuley  is a retired lecturer in public finance at the University of Canberra and a Fellow of the Centre for Policy development

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