Everything is going to be all right. The nasty people have gone. The good people are now in charge. Young, handsome, wise, thoughtful, caring Jim Chalmers is here to reassure you.
It is all in The Monthly - a left-wing magazine with an advertisement for a Rolex watch on the back cover. The Rolex is described as “soothing, moving, empowering.” Just like Jim Chalmers.
Chalmers entitles his essay “Capitalism after the Crises.”
He begins with some Greek philosophy: “No man ever steps into the same river twice. For it’s not the same river, and he’s not the same man.”
It was the German Historical School, supporters of national socialism, who proposed the now discredited theory that economics varied with time and place and culture. We can assume that is not what Mr Chalmers is proposing.
It is time for action. It is time to address the vulnerabilities that have been neglected so long. We must make up for lost time. The old theories failed. We need new ones for a new age. He calls for “new beginnings”, “ending a wasted decade”, and a “change of mindset”. He promises an end to the systematic inequities that lock out disadvantaged and disenfranchised communities.
Chalmers defines the three crises: the Global Financial Crisis (GFC) of 2008; the COVID pandemic of 2020; and the supply chain pressures caused by the war in Ukraine.
The common thread is vulnerability. “In each case, our communities, economies, budgets, environment, financial and energy markets, international relationships, and our politics – already fragile enough – became more so.” He attributes the problems to government policies – and policy vacuums.
He is so right. Yet not for the reasons he lists. The primary cause of the current predicament is that governments throughout the world have spent more, much more, than they have raised in taxes. The difference has been made up by their collaborating central banks who have increased the money supply. Easy credit has encouraged malinvestments. Citizens have been paid when not working; lockdowns have restricted the creation of goods and services; prices have risen as cashed-up consumers vie for fewer products. Inflation is high; money is not worth what it used to be. Private and public debt levels are unsupportable.
Unfortunately, changes that might have been made after the GFC were not. “The entrenched systems and institutions that dictate and drive public and private spending are so complex and vast, and powerful economic interests have so much at stake in keeping them in place.”
Chalmers is not attracted to a solution of limiting government spending to what it can afford – to cutting your coat according to your cloth. His solution is carefully constructed markets built in partnership through the efforts of business, unions and government. For him, this is an ideal approach as it enables government to leverage its power to achieve results without adversely affecting its budget.
His plan is to encourage values-based investment. “By failing to put values at the forefront of how our economies work, we also leave behind reams of wasted talent, a degraded environment and social dislocation.” He explains that “if we could design markets for investment in social purposes, based on common metrics of performance, many more well-run ‘for purpose’ organisations could get much more of the growth capital they need.”
The branch of economics that deals with values is Austrian Economics.
"The concepts of scarcity and choice lie at the heart of Austrian economics. Man is constantly faced with a wide array of choices. Every action implies forgone alternatives or costs. And every action, by definition, is designed to improve the actor’s lot from his point of view. Moreover, every actor in the economy has a different set of values and preferences, different needs and desires, and different time schedules for the goals he intends to reach.
The needs, tastes, desires, and time schedules of different people cannot be added to or subtracted from other people’s. It is not possible to collapse tastes or time schedules onto one curve and call it consumer preference. Why? Because economic value is subjective to the individual." [1]
But this is not what Chalmers has in mind. He is not concerned with the values of the individual. He believes it is the role of government to select the values of the economy. In the immediate term these are: “introducing cleaner, cheaper, more reliable and increasingly renewable energy, and adopting practices and technologies that reduce our emissions; developing a more resilient and adaptable economy in the face of climate, geopolitical and cyber risks, unreliable supply chains, and pressures on budgets from an ageing population; and growth that puts equality and equal opportunity at the centre.”
Chalmers seeks to create a new, values-based capitalism for Australia by reimagining and redesigning markets – “seeking value and impact, strengthening safeguards and guardrails in areas of unchecked risk and with coordination and co-investment – recognising that government, business, philanthropic and investor interests and objectives are increasingly aligned and intertwined.”
But is this idea feasible? Would it work in practice?
In the thirties, Franklin Delano Roosevelt (FDR) introduced the New Deal as a set of policies to ameliorate the Great Depression. It was very popular, but counterproductive.
"The New Deal … included quasi-fascist schemes to regiment industry and agriculture; public works and regional pork barrel spending to reward the New Deal coalition; price support and production control schemes to levitate farm prices; work relief and social programs to relieve the immense destitution and suffering among the unemployed; and endless special interest legislation sought by unions, the housing industry, and other organized lobbies.
Some of these programs provided humanitarian relief and a safety net. Most either retarded recovery or were abandoned before they could do much harm. And a few – like the industrial union legislation, universal social insurance, Fannie Mae, bank deposit insurance, and farm price supports – lived on to cast a heavy and debilitating shadow over the distant future.
But FDR’s opening blow was devastating and long lasting. He outright abolished the basis for sound money at home and personally blocked the revival abroad of stable exchange rates and common international money; that is, currencies redeemable in gold." [2]
In 1933, when Roosevelt took over from Hoover, he took charge of all the country’s gold. Everyone was forced to convert their physical gold to fiat currency and the gold redemption clause in private and government contracts was declared invalid. Banks were directed to deliver their gold to the Federal Reserve. Once this was complete, the government devalued the dollar by about forty per cent, making a profit of about $2.8 billion on the gold it had confiscated. The government had defrauded its own people. It had taken their capital and was now in total control of the nation’s money and how it should be spent.
The National Recovery Act (NRA) set out to control prices, rates and wages by industry. Within six months, industrial production fell twenty-five per cent. The minimum wage laws of the NRA priced the marginal worker out of a job; they were particularly harmful to the inexperienced and the elderly and forced half a million African Americans onto relief in 1934.
Late in 1937 the weary economy collapsed once again. In a nine-month period in 1937 and 1938 industrial production dropped 34%. Roosevelt’s advisors demonstrated that they had learned little from the grim experience of the previous years. Unemployment in 1938 stood at ten million, higher than it had been in 1931. They resorted again to the panaceas of pump-priming, deficit spending and inflation.[3]
So a recession that had begun as a result of government intervention into the money supply was sustained by more of the same, plus tariffs, controls over wages and prices, and subsidies to farmers.
"Policy measures like Fannie Mae, deposit insurance, social insurance, The Wagner Act, the farm programs, and monetary activism share a common disability. They fail to recognise that the state bears an inherent flaw that dwarfs the imperfections purported to afflict the free market; namely, that policies undertaken in the name of the public good inexorably become captured by special interests and crony capitalists who appropriate resources from society’s commons for their own private ends." [4]
We would need to be careful that the friendly, well-meaning collaboration that Chalmers proposes between industry, unions, venture capitalists, superannuation firms and government does not lead to crony capitalism. There is a real and ever-present risk that the chosen groups may act in their own interest rather than that of the general public. Moreover, firms may find it desirable to support government policy in other areas in order to win government favours. Chalmers hints that he wants to alter the role of the Reserve Bank, but he is not specific about his plans. Let us hope his assault on our money is not as devastating as FDR’s.
It is worth noting that the areas of our economy that are least efficient are the ones that are either highly regulated or are run by government. For example, education and health care are among the few things that cost more in terms of hours worked now than they did sixty years ago. They suffer from a lack of innovation, from a lack of entrepreneurial input.
In fact, the glaring omission in Chalmers’ paper is that there is no mention of the role of the entrepreneur.
The more we diversify as consumers and specialise as producers, the more prosperous we become as individuals and nations. It is the entrepreneurs who drive this economic process. They back their judgement and risk their time and their capital to create the goods and services that they perceive consumers want.
Entrepreneurship is not a role that can be played by government and bureaucrats. Nor can it work if it is stifled by regulations, controls and special favours.
What Chalmers is proposing is to move economic decisions from the business sphere to the political sphere. He and his party will select what they deem as valuable for us and they will then work with a few experts – bureaucrats, CEOs of our larger companies, union leaders, heads of superannuation funds, etc. – to guide our economy in the direction of their choosing.
The trouble is that these experts do not have the knowledge, in fact cannot ever have the knowledge, to undertake this task optimally. This was explained brilliantly by F.A. Hayek in his essay, The Use of Knowledge in Society, [5] which addresses the generic problem of how to make rational economic decisions.
Hayek based his analysis on three profound concepts:
First, that not all knowledge is scientific; there is also the knowledge of time and place;
Second, that knowledge of time and place is held by millions of people;
Third, data that is aggregated loses nuance.
Hayek explained that sound economic decisions cannot be made centrally by experts or bureaucrats because they can never have all the knowledge needed. Moreover, they lack transient information about people, local conditions and special circumstances - that is, the knowledge of time and place. That knowledge is held by the public, and the price mechanism enables them to use that knowledge effectively in economic decisions.
Free markets optimise the economy for the benefit of free people.
The philosophers of the Enlightenment told us that liberty works and that prosperity flows from it. Two hundred years of history has shown us that this is true – that it works in practice. Moreover, it applies, not just in the Anglosphere or in the developed world. The concepts are valid universally.
Societies which have embraced liberal democratic principles – individual rights, private property, the rule of law, and representative government – have thrived. Now everyone can live happy, prosperous and meaningful lives if they and their leaders choose to build their societies on these principles.
Let us hope that Jim Chalmers allows us to set our own values, resists the temptation to impose his own, and allows the free market to continue to deliver prosperity.
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[1] Lewellyn H. Rockwell, Jr., Why Austrian Economics Matters. [2] David A. Stockman, The Great Deformation [3] Brown et al, The Incredible Bread Machine [4] David A Stockman, The Great Deformation
[5] See The Fortunate Ch.3
All other quotes are from Jim Chalmers' essay in The Monthly, Feb. 2023.
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This essay was published in the March 2023 edition of Quadrant.
Peter Fenwick is the author of
The Fortunate: Ten great writers highlight how we created free and affluent societies.
It was published by Connor Court in June 2022.
A review by Gary Furnell appeared in the Jan-Feb 2023 edition of Quadrant.
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Jim Chalmers’ essay, Capitalism after the Crises, was based on the theories of the populist Keynesian economist Mariana Mazzucato. I have subsequently discovered a witty rebuttal of Mazzucato’s work. I recommend Deirdre McCloskey’s The Myth of the Entrepreneurial State. 24 Mar 2023
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