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

Sep 6, 2017

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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