Here I am back… in the Treasury like a recurring decimal – but with one great difference. In 1918 most people’s only idea was to get back to pre-1914. No one today feels like that about 1939. That will make an enormous difference when we get down to it.
John Maynard Keynes, 1943
Nicholas Gruen tracks where economic reform lost its way and suggests new directions.
In 2010 Bank of England governor, Mervyn King, commented that “of all the ways of organising banking, the worst is the one we have today.” We’ve dutifully duct-taped it together: a little more capital adequacy here, tighter prudential standards there. Earlier this year the International Monetary Fund measured global debt at US$164 trillion in 2016, or 225% of global Gross Domestic Product (GDP), 12% higher than its last peak in 2009. Banking remains structurally unstable; just as it was before. It amplifies the economic cycle; just as it did before. It distorts the practice of economic statesmanship within and between nations to the continuing outrage of citizens. And will blow up again, with taxpayers footing the bill. Again.
What’s this all about?
These stark facts stand as a beacon to the failure of economic reform to live up to its promise. But we should look at it with a wider focus. The architects of economic reform – from academia to opinion leaders – have stuck with a vision of reform that was already stale at its zenith in the 1980s and 90s. After the global financial crisis, that vision stands today bereft and becalmed, increasingly irrelevant in today’s financialised, professionalised and digitised world.
This essay seeks, in three parts, to anatomise our state and propose glimpses of an alternative.
Part one. The scene is set
The first part argues that reform at its best and at the outset consisted of a series of discrete ideas and critiques of existing policy that cashed out as specific “policy hacks1”. Fairly soon this degraded into the vaguer idea of economic reform unleashing market forces. I argue instead that reform should have seen itself as refurbishing the institutions of an ineluctably mixed economy.
Part two. We need to get a grip
The second part takes the economics of information as a case study in how economic reform has barely addressed fundamental economic problems of our time.
Part three. We missed the exit but there’s a roundabout ahead
In the third part I propose some ideas that might have sent us down a different and more promising road – and still can.
The scene is set
The post-war and post-60s reform waves built on new ideas originating in the academy. Keynes’ economics, originating in the mid 1930s, underpinned post-war reform. The next reform wave began in earnest in the 1980s. Its political impetus was declining economic performance in the wake of the 1970s oil-shocks, but its intellectual underpinnings went back to a cluster of ideas originating in the 1950s. Some offered new ways of thinking about our economy which could then be cashed out in a repertoire of new policy “hacks”. Thus Milton Friedman highlighted the scope for unbundling the delivery and the funding of government services (using vouchers and income-contingent loans, for instance), and Ronald Coase explored the re-assignment of property rights to achieve specific objectives (think pollution permits and spectrum auctions).
Other reform ideas critiqued existing presumptions, notably George Stigler’s research into the way regulatory regimes that putatively protected consumers, came to serve producer interests. This offered a new illustration of Adam Smith’s famous maxim:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
All this work was from University of Chicago economists who favoured freer markets. But all these ideas were technocratic rather than ideological. Many, probably most,2 had egalitarian implications in their early application and the support they received from intellectual leaders in academia and policymaking came from across the political spectrum3. They’ve all been hugely valuable as part of economic reformers’ toolkit.
Reform fell short of its promise in crucial ways. First, as it made its transition into policy, different interests had differential influence. Thus the business community and reform policy makers gave huge attention to the cost of restrictive practices amongst blue-collar workers and little to analogous arrangements at the big end of town amongst lawyers and medical specialists4. Likewise “tax reform” usually focused on cutting tax for business and the wealthy, often funded from the expansion of broad-based, indirect tax, whereas the surge in urban congestion, real estate prices and the need for emissions abatement suggested substantial new opportunities for efficiently taxing rent which went mostly untapped.
A second problem has been overreach. Neoclassical economics seeks to formalise Adam Smith’s idea that, within markets an “invisible hand” transforms self-assertion into socially efficient outcomes. It lists the preconditions for this mechanism to work. Given how numerous and formidable those preconditions are, we must then make judgements about which conditions are tolerably met, how much confidence this should give us in market outcomes and the extent to which alternatives might improve things or simply confound market failure with other organisational failures5. It also specified the terms on which winners might compensate losers to leave everyone better off. Alas, as it unfolded, economic reform had no such scruples replacing them with a summary aesthetic that tended to valorise “market oriented” solutions however ill-defined that might be on inspection6. I elaborate this problem of overreach later.
And there’s a third, sadder problem which is the failure of economic reform to replenish the intellectual larder. As the information richness and complexity of our economy surged, no new “hacks” found their way into the policy repertoire. Later I elaborate a slew of such possibilities.
Ideology and vested interests are one explanation for this turn of events. It was the right-leaning, business-backed governments of Margaret Thatcher and Ronald Reagan that are forever associated with this swing towards “neoliberal” reform, as it came to be known. But there’s more to it.
This essay takes many of its examples from Australia’s experience as in many respects “best in breed” reform. Its left-of-centre Labor Government from 1983 until 1996 engineered most of Australia’s neoliberal reform. It expanded and re-targeted state welfare and health systems largely neutralising rising inequality in household incomes before-tax. Furthermore, its predecessor Whitlam Labor Government established the forerunner of the Productivity Commission which the later Government continued to fund and rely on. It was an influential government institution that brainstormed and proselytised economic reform7.
The early sweeping away of regulation that arose from decades of political deal-doing worked well in Australia as it often did elsewhere – for instance the deregulation of the airlines by US President, Jimmy Carter. But simple preference for deregulatory routines without careful consideration of context was no way to reform sectors pervaded by market failure. There, as Mark Twain is reputed to have said, “It’s not what you don’t know that does the damage. It’s what you know for sure that just ain’t so.”
Looking back the policy reform landscape is strewn with disasters.
In infrastructure and utilities, monopoly problems abound, so regulation remains inevitable and new rent-seeking pathologies lie in wait for those unpicking the old ones. In Australia reform brought forth overpriced tollways, energy, desalination plants, airports and airport car parks. Governments sold buildings only to rent them back at vastly higher long-run cost. And that was just the opening salvo of a new kind of crony capitalism to replace the old protectionist cabals, as the insiders who engineered the changes parachuted into careers lobbying their successors on behalf of the firms and individuals who’d grown rich on their reforms.
We need to get a grip
Concatenation is the word
Here’s the standard view among economists, and, more informally, the public: Markets provide private goods like cookies, cars and cameras, while governments raise taxes to provide public goods shared by all like roads, rubbish removal and regulation. That’s a good start, but a lousy conclusion. It ignores how profoundly individual and collective endeavour are enmeshed.
And that’s before considering something that economists have largely ignored since Adam Smith founded his whole view of society on it – the dialectic of individual endeavour within the collective bonds of culture. The very language in which I’m writing is a public good that is owned – to the extent the term makes any sense – collectively. So are any number of other aspects of its transmission to you, from the open-source software powering so much of the internet to the internet itself. None of them are provided by government8.
In areas like education, health, care for the aged, finance, research, legal services and cultural industries like the arts and sport, and in networks like media, transport, energy, telecommunications and other infrastructure, and in city planning, output is better thought of as the joint product of competitive and collective (collaborative and regulatory) activity. Sometimes the collective interest can be effectively represented by national governments, but often it will be at other levels in the system – represented by such things as social expectations, technical standards, industry self-regulation, user groups, local governments and NGOs.
Each sector requires the evolution of quite different institutions in which public and private, competitive and collaborative considerations concatenate at every level from high policy down to the lifeworld. And we’ve barely started on the project of trying to shed intellectual light on these issues in ways that cash-out as practical improvements. We might have begun decades ago, if we’d understood reform as refurbishing the institutions of the mixed economy with the necessary changes identified on their merits within sectors and contexts rather than depending on ideological heroics.
Information: pass it on
Economists’ treatment of information offers an excellent case study of the problems of thinking too “ideologically”. As Hayek insisted over eighty years ago, the information distributed throughout the economy is central to economic functioning. Yet it’s poorly available to central planners. In many ways Hayek’s case for decentralised decision-making has grown stronger as our economy’s complexity and information intensity has grown9.
Yet there are two enduring ironies of Hayek’s embrace of markets as paragons of information flow. First, the centrepiece of his illustration of the miracle of the market is the price system. Yet price is the only information that flows unimpeded within markets because buyers and sellers must agree to it. Beyond that, each party retains pervasive incentives to mislead opportunistically – for instance about product quality and their own intentions, a subject explored many decades after Hayek in the work of Arrow, Akerlof, Stiglitz and others. Second, note that, to the extent the parties cannot suppress it, news of the price they paid circulates (anomalously) as a free externality of market trading10.
So in terms of the ideological set pieces beloved of policy debates – where antagonists side with either markets or governments, or with individual or collective interests – information is enigmatic. Central planning manages information poorly in many respects. Yet being “non-rival” – able to be endlessly and costlessly reused – information is also, in principle, always and everywhere a potential public good. This requires the evolution of hybrid institutions to harness the best we can from both competition and collaboration. Such institutions have burgeoned outside government in response to the internet – most noticeably in open source software or more generally in peer-production on platforms like Wikipedia and Facebook.
Yet economic reformers have shown little curiosity as to how they might contribute to the task of evolving such hybrid institutions. Under cover of this intellectual timidity an information age for spin doctors and conmen arises before us.
The fool and his money
The 19th century market for patent medicines is the paradigm of a market gone wrong. All manner of wild claims gulled the gullible and degraded the credence that might otherwise have been given genuine claims. We think we’re largely beyond this today, but a closer look is not reassuring. Most advertising targets our irrational urges, providing scant useful information. Whether this makes sense and if not what might be done about it was once a prominent subject amongst economists and policy makers. Not today.
When choosing a computer or a knee surgeon we go by reputation. Yet we’ve built surprisingly little policy around this insight. Around the Western world, regulatory attempts to improve information flow are mostly stuck in early prototype. Virtually all regulation to inform consumers of complex matters seems to envisage them doing “due diligence”, as if we’d improve knee surgery if we boned up on anatomy and anaesthesia before choosing a surgeon.
Today regulation of investment advice is highly prescriptive and expensive. Yet it puts lipstick on the pig of pre-existing deceptive marketing. Salespeople on commission still play their well-rehearsed role as their clients’ fiduciary advisors (though most still lack even a university degree). But now they can pose as government-licenced professionals with the formal written “advice” they’re required to provide customers topped and tailed from master scripts spewed forth from software marketed to the industry as “sales technology.”
Other regulation on retail marketing of investments requires elaborate documents that purport to inform consumers but are costly, lengthy and almost invariably ignored. Yet despite its cost and clumsiness, all this regulation does nothing to help with retail investors’ one real need – to find someone both knowledgeable and trustworthy on whom to rely.
Trust me I’m a spin doctor
These problems reach right into the sinews of our information economy. Thus regulators insist on basic integrity in the information that firms provide to the market by requiring accounts to be audited. Yet firms appoint their own auditors. And conforming to professional standards leaves plenty of wiggle room. So increasing resources go into “stretching the envelope,” to use an expression that, tellingly, first appeared in the 1990s.
Within governments, the same pattern is repeated endlessly; part of the apparatus that Lord Acton observed made rowing the perfect preparation for public life – enabling one to go in one direction whilst facing in the other. All manner of “impact analyses,” from regulatory to environmental, are performed or commissioned by the very agencies whose impact is under review with this offered as “best practice” within the Organisation for Economic Co-operation and Development (OECD).
This is the tip of the iceberg. The corruption of academic research proceeds apace as traditional professional standards give way to the intensifying pursuit of revenue and other institutional imperatives. Academics and learned journals compete to “publish or perish” which intensifies incentives to “torture the data until it confesses” as they say in the trade. That undermines costly but unglamorous activities such as replication of experiments and the publishing of null results. So published, peer-reviewed, academic and other research literature is full of bogus findings.
Scholars recently found that only 11% of pre-clinical cancer studies could be replicated. A leading scholar in the field, John Ioannidis, came to this devastating conclusion: “Overall, not only are most research findings false, but, furthermore, most of the true findings are not useful.” Incredibly, the process by which research then feeds into the approval of drugs for human use is tangled in similar, often more obvious conflicts. Researchers’ funding depends on the favour of drug companies and widespread suppression of “unsuccessful trials.”
Once drugs are on the market, their marketing is further compromised by conflicts of interest. And so the dominant treatments for some of the most vexing, chronic and widespread conditions, from anxiety and depression to the unusually short attention spans of some children, are marginally efficacious drugs while less easily privatised and possibly more efficacious social cures go largely unfunded and unexplored.
This is worst in the United States, which tolerates the most aggressive drug marketing. One result is the opioid epidemic, which has now given the United States the extraordinary distinction of being the first country since records were kept ever to experience peacetime falls in life expectancy for large socially mainstream demographic groups.
Note first, that none of this comes firmly within the purview of mainstream “economic reform”. Australia’s Productivity Commission produced a list of unfinished economic reform business. It proposes, sensibly enough to deregulate constraints on pharmacy ownership from the “bad old” protectionist days. But none of the more fundamental problems outlined here make it onto the list.
Secondly, even if these matters were to qualify as major issues by those at the commanding heights of economic and policy reform thinking, it would be difficult to address them with singular fixes. Rather the currently unhealthy ecology of public and private interest needs to be addressed at many different levels, a point to which we return below. Given that so many institutions of science are creatures of public policy and/or funded publicly, it’s remarkable they’ve been able to stray as far as they have from the public interest.
The whole truth
Identifying a problem can leave one a long way from solving it. There’s now a vast literature on the economics of information. Many of the canonical papers uncover plausible economic mechanisms behind well-known commercial phenomena like excesses on insurance contracts and other phenomena that had somehow fallen from view within the neoclassical synthesis11. The formal models required for academic publishing typically require ruthless abstraction down to ideal types which enables one to “rediscover” old ideas but can be less promising in suggesting “policy hacks” that can help build new ecologies, new hybrids of private and collective endeavour.
At the heart of many of our economy’s information problems is the lack of standards against which performance can be measured. (Standards are public goods). One promising avenue would be to seek to elicit information that would improve the process by which reputations are made. A modest ad hoc approach might ask how we could bootstrap institutions to get important information to people in ways they can use. Regulation works quite well in this regard for nutritional food labelling. There are plenty of other areas. We already know the recent on-time departure rates for airlines, for instance, and the workers’ compensation premiums of firms, which offer a good proxy for workplace safety. What kinds of institutions would bring this and other relevant information to the attention of those who need it – buyers of airline tickets and prospective employees respectively – when they need it?
More systematically the value of investment advisors’ advice could be tracked over time with records of that advice compared with subsequent results. Advisors could publish the performance of sample portfolios. Nor should this be simply imposed from the outside, as many governments have done to force school accountability for performance against OECD Programme for International Student Assessment standards in education. If we do that, what’s made transparent will often be the wrong thing. And even where it’s not, its measurement can still be vitiated by gaming and buck-passing.
Professions, firms and industries must be closely involved in, but should not dominate the building of reporting standards against which users can judge them, while we ensure that users are properly represented so that standards represent their interests. I’ve proposed the Gruen Tender – one means of crystallising such a system in which professionals offer prognoses or predictions of outcomes they expect to achieve. The ongoing measurement of such prognoses against subsequent performance generates the data necessary to correct for any systematic bias.
It may be possible to use such a system or a variant of it in many different areas to improve consumers’ knowledge of the quality of professional services and of the professionals themselves. In the right circumstances it could be used for medical specialists, lawyers taking legal cases or collectives such as firms or clinical units within hospitals or wider systems. Nor need these ideas be limited to the provision of expert services to consumers. A variant of this approach might be used for company directors issuing forecasts of future company performance or anyone occupying other positions of trust12. As I’ve shown, a similar system could be developed for workplace quality.
Though reformers have been keen to promote workplace flexibility, prospective employees continue to have poor information about the quality of the workplaces they seek work in. Most firms regularly survey their workforce to determine employee engagement. Firms with the best results have an interest in cooperatively developing a partial standard to publicly report their performance13. The well-documented link between employee engagement, productivity and good management suggests that an emerging market in employee engagement could boost productivity generally. If so, it should be of interest to investors as a predictor of a firm’s future productivity and financial performance all of which would strengthen management quality.
None of what’s been mooted above to elicit better information on which reputations would be built need even be mandated. Simply establishing the machinery should, in principle be enough to entice the best to demonstrate their relative superiority. This gives them an incentive to participate in standard setting and pressures others to participate or become suspected laggards.
Surely talking, experimenting – working our way towards solutions beats barracking for “free markets” or “intervention.”
Plus ça change
Meanwhile, the internet is reconfiguring the ecology of public and private goods. While the “free-rider problem” justifies research subsidies and intellectual property protection, the “free-rider opportunity”, where existing ideas spread for everyone’s benefit, has always been more important. That the expression “free-rider opportunity” is counter-cultural illustrates how blinkered our economic commonsense has become.
Yet the internet has seen that opportunity burgeons with a slew of new public goods privately provided. This has occurred with open-source software, blogs and Wikipedia, but also more surprisingly for profit. The free-rider opportunity is so vast that Facebook and Google are far more profitable monetising a small fraction of the value they create as free public goods than they would be had they sought to capture a higher proportion of the much lower value they’d have created as private goods behind a paywall.
Our public policy thinking has been largely oblivious to the opportunities this throws up. I’ve suggested the establishment of a class of digital public goods delivered by public–private partnership. Thus for instance for those patients wishing it, a central health insurer or service deliverer – like Britain’s National Health Service or Australia’s or the US’s Medicare – could fund the partial genomic analyses now being sold on websites like 23andMe or more comprehensive analyses in return for the resulting genomic data which could then be used (and, where appropriate, anonymised) in research, population-based screening, diagnosis and pharmacovigilance – monitoring the effects of drugs after they have been licensed for use. The patients could then “port” their genome to any participating partner such as 23andMe.
I have presented this idea and many others in this paper to scores of officers, senior and junior, from the federal Departments of Innovation, Treasury and Communications. I also presented it to the then Ministers for Communications (Turnbull) and Health (Ley) in 2015. We’ve had a major innovation statement since then in which I participated, meeting twice with the Innovation Minister. No one disagreed with the ideas. Several found them exciting or inspiring. But they never took hold – even to be ultimately rejected. In the jaded discourse of our post-reform world, it seems they couldn’t rise above the status of innocent entertainment.
Meanwhile, Australia’s Productivity Commission was instructed to advise government on how to intensify competition in finance. My submission proposed a small “policy hack”. I proposed ideologically to “complete” the idea of “competitive neutrality”. As part of economic reform we’ve sensibly insisted that government agencies only compete with private firms on a “level playing field” by removing any unfair advantages they might enjoy such as immunities or tax exemptions. Shouldn’t we also consider the converse idea – that where governments already provide services to a select group, they should provide them on an unsubsidised basis to all comers?
Thus where governments provide pension plans to their employees, they’d open them up to all comers on an unsubsidised basis. It would also open up to the general public online, the utility banking products central banks provide to commercial banks like savings and payment accounts.
The commission hated the idea. Perhaps it was right. Policy is a difficult and uncertain game. But if we’re to get even a glimmering that we’re reasoning our way to a decision rather than having our prejudices do all the work, it needed to weigh the pros and cons conscientiously. But that’s not how the game has worked for a long while. Instead ideas going against the grain of deregulation are routinely dismissed often, as here, on flimsy grounds.
As Thomas Paine once observed: “We have it in our power to begin the world over again.” There’s certainly much to be thought about after the good, the bad and the ugly of thirty-odd years of reform in the context of the greatest revolution in our information economy since the printing press. What a pity those who are paid to do that thinking, in the academy, in the bureaucracy and in the commentariat are doing so little of it.