Jim Chalmers’ manifesto in favour of values-based capitalism

Feb 7, 2023
Treasurer Jim Chalmers at a press conference at Parliament House in Canberra, Wednesday, January 25, 2023. Image: AAP / Mick Tsikas

The Treasurer, Jim Chalmers’, recent essay in The Monthly explores the relationship between the state and the private sector, and how that matters for the problems of our time.

Chalmers’ thesis

The Treasurer, Jim Chalmers, has published in The Monthly a very thoughtful essay calling for “a new values-based capitalism for Australia.”

Chalmers starting point is that “after a lacklustre decade of wasted opportunities which delivered weak investment, flatlining productivity, stagnant wages, and anaemic growth” a new approach is called for. Furthermore, as Chalmers says: “It’s clear now that the problem wasn’t so much more markets as poorly designed ones.”

Chalmers then goes on to say: “The type of economy and the type of growth matters – and its distribution matters.” As the experience of the United States shows, democracy itself will struggle to survive when people feel that they are left behind.

Chalmers’ solution is to “redesign markets for investment in social purposes, based on common metrics of performance”, with an immediate focus on:

  • An orderly energy and climate transition, with implications for living costs,
  • A more resilient and adaptable economy, and
  • Growth that puts equality and equal opportunity at the centre.

In effect, Chalmers is seeking to interlock economic, environmental and social policy objectives. Government leadership has a role. Chalmers also calls for co-investment with the private sector, citing the role of the Clean Energy Finance Corporation. But most importantly we need to put values at the forefront of how our economies work, and redesign markets “to ensure our private markets create public value”. That will then ensure that more private capital flows to organisations which are supporting the “social purpose economy … and can offer decent returns and demonstrate a social dividend”.

The criticisms

Perhaps not surprisingly, the reaction by the usual suspects in the media has been strongly critical of Chalmers’ essay. Apparently The Australian’s headline was: “Chalmers vision: Corporates wake in fright”. I can’t tell you more as I don’t read the Australian. But the Financial Review (AFR) was, if anything, more damning, with its headline claiming that “Chalmers’ new manifesto ignores all the lessons of Hawke and Keating”.

According to the AFR, “The Hawke-Keating government was held-up internationally as a model of economic reform. It combined macro-discipline with an incentives-based and pro-competition agenda of supply-side reform that included a broader tax base to finance lower tax rates.” By contrast, the AFR claims that the Albanese government’s big-spending programs, early re-regulation of the labour market and higher wages is running what the AFR calls “an old-fashioned conservative agenda”.

Instead, the AFR repeats the familiar conclusion that Australia’s prosperity depends upon productivity-enhancing economic reform. “Without the productivity and economic growth reforms that should be included in Dr Chalmers’ manifesto, particularly to the critical labour market and tax system” there will not be the money for Labor’s social policy agenda.

And of course, the AFR is well-attuned to the views of the major business organisations. Their pre-Budget submissions demand that real government spending be limited to a 2 per cent annual rate of increase, that the government do more to encourage business investment and lift productivity, while maintaining a tax-to-GDP cap of 23.9% of GDP. There is, however, no real assessment of how or why these policy changes would actually benefit the economy or peoples’ well-being – just an implicit assertion that what is good for business is good for the rest of us.

My assessment

In a reply to the AFR, Jim Chalmers has denied that his thinking is a rejection of the thinking in the Hawke-Keating era. Instead, he says that: “In fact, much of it comes from conversations with Paul Keating himself.”

As someone who was personally heavily involved in most of the reforms of the Hawke-Keating era, I too would attest that Jim Chalmers is right – his thinking represents a continuation of Labor philosophy which has always sought to design markets to facilitate the achievement of social purposes.

The reality, however, is that the nature of the economy and economic challenges have changed over time. The principal challenge in the Hawke-Keating era was that markets were not working well, and needed to be fixed. Financial regulation, industry protection, and the then wages system were all leading to an economy that lacked the flexibility to respond to shocks, was prone to stagflation and was sliding down the league scale, with the risk that Australia would become the “white trash of Asia”.

In short, Australia’s key economic problem was that its markets were too rigid, and too uncompetitive. So the Hawke and Keating reforms were very focused on micro-economic reform to improve market competition and flexibility, and they largely succeeded.

But the problems are different today. Productivity has stagnated and inequality has risen. Governments are struggling to finance the legitimate demands for public services, such as health, education, aged care and childcare. And we now have finally recognised that the necessary response to climate change requires massive government intervention.

The conservatives keep calling for more micro-economic reform, without specifying what exactly that would mean today. Like the proverbial galah, they call for lower taxes and less regulation without providing details, nor why these types of reform are necessary.

The fact is that the micro-economic reforms of the past were one-off reforms. Their benefits have therefore been realised and appropriated. These reforms cannot be repeated, and that agenda is now largely completed.

Presumably this is why the Productivity Commission’s most recent 5 year productivity review, Shifting the Dial, (2017) was very much focused on improving the delivery of government programs. No doubt many of these reforms would be worthwhile, but they would nowhere near restore productivity growth to past levels.

In the last decade or so, the rate of labour productivity growth was about one percentage point less than its average growth rate during the 1980s, 1990s, and 2000’s. But even in the heyday of micro-economic reform, the gains estimated by the Productivity Commission added up to much less than half the present shortfall in the continuing rate of productivity growth, and another round of different reforms would make much less difference again.

The truth is that productivity growth is primarily driven by innovation in new technologies, and that innovation is mainly dependent on investment both in research and development and in the resulting new equipment. Both the public and private sectors have a role to play, but business investment depends primarily on the rate of capacity utilization and expected demand. Lowering taxes and increasing profits will not entice businesses to invest in new equipment if demand is stagnant and their existing equipment is under-utilised.

Low wage growth and increased income and wealth inequality has led to stagnation in consumer demand around the globe, and this in turn is the obvious reason for the fall in the share of business investment and consequently lower productivity growth in all the developed economies. There is a widespread consensus among economists, that this low wage growth and increased inequality has been caused by technological change hollowing out routine jobs that are mostly middle-level jobs. Thus, the Albanese government is dead right to insist on increasing the funding and improving education and training as the key to raising wage growth, and ultimately productivity growth, in the future.

Equally, given the shortage of public funds, Chalmers and the Government are also right to look for ways to increase the involvement of the private sector in investing in the provision of services that the public are demanding, but which have traditionally been financed mainly by the state.

What the future debate should be about, however, is not whether it is desirable to combine government and private funding to pursue social objectives through “impact investment”. Rather the debate should be about the safeguards necessary to protect the taxpayers’ funds from being wasted.

But overall, what is really interesting in the Chalmers essay is the new light that he throws on a very old issue – the relationship between the state and the private sector.

As Hall and Soskice concluded in their book, Varieties of Capitalism, published more than twenty years ago in 2001, the fundamental problems facing economic policy makers is not to provide incentives for firms, but to improve the capacity of firms to coordinate with other actors in the economy. Markets work best when what is wanted are arms-length relations and high levels of competition. But when there are important externalities and/or high risks, systems designed to facilitate information-sharing and collaboration, enable firms to coordinate strategies to which they would not have been led by market relations alone.

Thus, instead of the neo-liberal model that relies purely on market prices to determine the allocation of resources, with no interference by the state, Chalmers argues persuasively that his “values-based capitalism”, based on “well-designed and well-informed markets, can “facilitate flows of capital into priority areas, and ultimately make progress on our collective problems and purpose.”

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