A year ago, when the Turnbull Government had been dragged into setting up a commission on the finance sector, Peter Dutton and Kelly ODwyer relished the thought of exposing bad behaviour in the union-dominated industry superannuation funds, even though it had been clear for many years that the industry funds were serving their investors far better than the retail funds operated by the banks, as confirmed by the Commissions work. How did they get it so wrong?

The Liberal Party as represented by its members in the current federal Parliament seems to operate on three core beliefs articles of faith which they hold as self-evident.

One is that the public sector is no more than a big unproductive overhead, because onlybusinesses and individualscreate wealth and employment. Theres no need to argue the case for cutting spending on public services or for cutting taxes. The case for privatisation stands on the intrinsic virtue of the private sector.

Another is that the Labor Party is intrinsically incompetent, particularly in economic management. Its an efficient belief, because it saves ministers all the pain of comparing the economic record of Labor and Coalition governments, or of comparing policy proposals in election campaigns. That allows Morrison and his ministers simply to assert that if the Coalition is defeated in the coming election, we will be faced with the ogre of a Labor Government.

And the third is a deep-seated hatred of unions. Unions are the wreckers, holding back progress and sapping wealth from the economy.

This anti-union belief has allowed the government to score a spectacular own goal in the Financial Services Royal Commission.

In case anyone missed the TV clips of bankers squirming before Commissioner Hayne and his assisting counsels, the CommissionsInterim Reportis damning in its assessment of the superannuation funds operated by or on behalf of the four big banks and AMP. They have all been involved in fees for no service and conflicted remuneration structures for their customer advisors. People who trusted their superannuation savings to the retail funds, rather than to the industry funds (managed by unions and industry associations), have been poorly served. In its outline for the final round of hearings,Counsel Assisting Hodge said:

On the whole, it is our view that the Commissions review of documents identifiedfewer examples of types of conduct of the industry fund trustees that raise questionswarranting oral consideration as to whether the conduct is misconduct or conductfalling below community standards or inappropriate use of retirement savings whencompared with that of the retail funds that will appear in this round of hearings.

That the industry funds have far surpassed the retail funds in standards of behaviour and financial performance should not have surprised anyone. The very first paragraph of the Interim Report states “Some conductwas already known to regulators and the public generally; some was not. The comparative performance of industry snd retail funds has been published onAPRAs websitefor many years. The industry funds have consistently had delivered higher rates of return to investors than the retail funds, mainly because of their lower fees. While the investment performance of retail and industry funds have been much the same (no one can consistently beat the market), the big difference has been in fees. High fees charged in the retail funds, which we learn have gone into the pockets of financial advisors and into bank profits have sapped depositors of their retirement savings. The industry funds, by contrast, run lean operations.

Because that difference in performance has been evident for so many years, it is strange that the government was so insistent on including the superannuation industry in the Commissions inquiry. After all, the main political pressure for a commission had related to banks, not superannuation. But in an interview with Ray Hadley Peter Dutton said he saw the commission as an opportunity to put the industry funds which have union members and whatnot on the board under the spotlight. Kelly ODwyer went to the extent of an officialministerial press release, stating she wanted to lift [industry] superannuation funds to at least the same standard as other financial services organisations like banks and life insurance companies.

In retrospect its a relief that the industry funds have not lifted their standards to match their retail competitors, and press reports suggest that, in light of the commissions revelations, many people are switching their superannuation to industry funds. AsGreg Jericho wrote“The last thing anyone needs is industrysuper acting like retail funds and nowwe have proof.”

ODwyer wasMinister for Revenue and Financial Services at the time. She would have had access to no shortage of good advice from the Treasury Department. (That is, assuming the Treasury was not so politicised that it gave her only the advice she wanted to hear.) It would have taken one of her staff only an hour or two to look at the reports from APRA or ratings agencies to confirm that industry funds were performing so well. But she had a few anecdotes, including one about a TWU official having been paid $93 000 for half a week’s work for an industry fund. It was possibly an overpayment, but that figure was dwarfed by the amounts paid to financial advisors in banks for_no_work.

So how did Dutton and ODwyer get it so wrong? How did they set themselves up to appear ridiculous? Why did not then Treasurer Morrison or then Prime Minister Turnbull anticipate the damage that would be done to the Coalition and its supporters in the finance sector and restrict the commissions reach? One may charitably (or naively) suggest that they had the public interest in mind, but the Coalition had been fighting hard ever since the 2013 election to weaken the Future of Financial Advice (FOFA) reforms instituted by the previous Labor Government. Fortunately the Senate blocked the Coalitions proposals.

The compelling explanation is a triumph of belief over reason and evidence. If they could break from their blind faith, the Liberal Party ministers and their advisors may be able to see the way trade unions have played a vital role in taming the excesses of capitalism. They have protected capitalism from being brought down by its own destructive forces. One of Australias main ideological conflicts of the first half of the twentieth century was between communists, who wanted to see Marxs prophecy play out, and the Labor Party who believed that strong unions could keep capitalism in check. (Perhaps the Liberals have forgotten the 1961 election, when the Menzies Government was kept in power by communist preferences: the communists always favoured Liberal over Labor because they saw the Liberals as more likely to promote class conflict leading to disaffection. Plus a change )

The unions have lost much of their economic power, partly because of structural change in the economy (particularly the decline of big manufacturing establishments), but also because of relentless attacks from the Coalition when in government. Their role in superannuation, however, has been one area where they have maintained their effectiveness in making capitalism work for all.

The Liberal Party seems to be enslaved by its own hard-held beliefs. They seem to have learned nothing from the shock of the Wentworth by-election. Perhaps a period in opposition would give them an opportunity to re-examine their dysfunctional beliefs. Otherwise the best way they can serve the nation is to make way for a new centre-right party.

Ian McAuleyis a retired lecturer in public sector finance at the University of Canberra. He believes that a well-functioning public sector is vital for our prosperity, as outlined in his work, co-authored with Miriam Lyons,Governomics: can we afford small government?.