A Social Democratic Alternative to 'Neo-Liberalism'? [2006
and 2009]


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2009 Introduction +

An Alternative to Market Fundamentalism (2006)

Introduction

In a 2006 address, an Opposition frontbencher (Mr Kevin Rudd) presented a case for social democracy as an alternative to what he then called 'market fundamentalism'  An outline of his argument and comments on it are below - see An Alternative to Market Fundamentalism?

Then in February 2009, as Australia's Prime Minister, he authored an essay on The Global Financial Crisis which presented apparently similar arguments and blamed what he then called 'neo-liberalism' for a global financial crisis (GFC) which had emerged in 2007 and had resulted in an increasingly severe economic crisis.

In brief the introduction to Mr Rudd's essay available online suggested that:
  • events of seismic significance occur from time to time in human history. Though they reflect major turning points their significance is often not recognised until later;
  •  neo-liberalism (a brand of free-market-fundamentalism, extreme capitalism and excessive greed that became economic orthodoxy) triumphed 30 years ago. But it  is now being changed by the GFC. The latter reflects the greatest regulatory failure in human history - which is systemically serious. The financial crisis, became a general economic crisis / employment crisis / social crisis / political crisis. It also has geopolitical implications for the strategic leverage of the West - and the US in particular. The crisis has called into question the prevailing neo-liberal economic orthodoxy;
  • social democrats now have to:
    • save capitalism from itself - to recognise the strengths of open competitive markets while rejecting extreme capitalism and unrestrained greed. Roosevelt rebuilt US capitalism after the Depression. US Democrats, influenced by Keynes, rebuilt demand after WWII and engineered the Marshall Plan in Europe. The state again needs to re-engineer properly regulated markets;
    • ensure that the strengths of open competitive markets are not eroded by a retreat into reliance on an all-providing state. Protectionism is emerging, and would be dangerous. The challenge is not just to repudiate the neo-liberalism that created the mess, but to establish the social democratic state as preserving the productive capacity of properly regulated markets. Social democracy seeks to balance private and public, profit and wages and the market and the state;
    • develop practical policy responses to the crisis, while devising new regulatory regimes;
    • succeed to avoid giving scope to the extreme Left or nationalistic Right;
  • a frank analysis of the role of neo-liberalism in the current crisis is vital, together with a social democratic view of domestic and cooperative global solutions;
  • the GFC has had a huge impact (on financial markets, the real economy, and government revenue). People are angry when this affects them. Executive pay has, however, continued to be unreasonably high.  

Though some positive reactions have emerged, many apparently-informed observers drew attention to defects in his arguments.

The present writer's impression is that the package of policies Mr Rudd labelled 'neo-liberalism' contains defects that have long required review - so starting a debate about this is constructive. Also his suggestions about the end of an era are probably valid (though several eras may be ending, and Mr Rudd's version of this may be inaccurate).

Rather than seeking practical solutions to the very complex problems he alluded to Mr Rudd's 2009 philosophical essay seems more focussed on blaming scapegoats (his political opponents) for economic problems he was apparently unable to foresee in early 2008, and perhaps positioning himself for a close working relationship with what some see to be the inevitably-dominant anti-liberal East Asian states in the face of Western decline.

Observer's Reactions

Observers' Reactions

Mr Rudd's essay soon generated a great deal of comment (see examples outlined below), and observers presented their views on what it meant and why it had been produced.

Observers interpreted Mr Rudd's argument along the following lines:
  • free markets are effective for generating wealth, but extreme adherence to the idea of small government has been used by the greedy to undermine sensible regulation - which led to the banking collapses that triggered the GFC [1];
  • a free-market ideology (variously called neo-liberalism, economic liberalism, economic fundamentalism, Thatcherism or the Washington consensus), which has held that government activity should be replaced by market forces, has been dominant for 30 years [1];
  • regulators failed to stop extreme capitalism [1];

  • neo-liberalism, and the free market fundamentalism it induced, were just greed dressed up as economic philosophy [1, 2];
  • neo-liberalism wants government to be replaced by market forces; dismisses social solidarity; and seeks to prevent governments investing in education, health and infrastructure [1]; it is anti-tax, anti-regulation and anti-government. It endorses unregulated financial markets, self-correcting markets, complete labour market deregulation and opposed investing in public goods.[1];

  • 'neo-liberalism' caused all current problems - and a return to social democratic, Keynesian policies of the 1970s is the solution  [1];

  • neo-liberalism has caused a mess, and the social-democratic state offers the best prospect of preserving the productive capacity of properly regulated competitive markets, while government is regulator; funder / provider of public goods; and committed to offsetting the inevitable inequalities markets generate [1]
  • the neo-liberals who changed the market system over recent decades brought about the GFC [1]. In particular, the policies of Thatcher, Reagan and Howard are to blame - as well as a lack of regulation under Bush. The repeal of the Glass Segal Act, which again allowed commercial banks to own investment banks, was significant [1, 2];
  • financial markets don't always self-correct [1];
  • liberalizing markets (which creates the possibility of large current account imbalances) must lead to disaster [1];
  • markets are not ends in themselves - but exists to serve society. Social equality is seen as a moral good, which is not surprising given Mr Rudd's earlier criticism of the 'brutopia' that follows slavish adherence to Hayek's ideas, and his admiration of the Christian socialism of Bonhoffer [1];
  • government should offset the inevitable inequalities of the market to ensure fairness for all [1];
  • neo-liberalism won the economic and moral arguments by showing that it could make people richer - even if less equal. But a lack of proper regulation and social inequality are now holding prosperity back (as illustrated by the GFC) [1];
  • neo-liberalism does not have all the answers [1];
  • it is time to modify the economic orthodoxy of laissez faire by restoring a stronger state regulatory role. This view is neither radical or new. It involves revival of the social market economic model (and the ordo-liberalism) that was successful in post-war Germany (ie social democrats accept the importance of the market, and conservatives accept that free markets alone can't solve all problems). [1]

  • the GFC will lead to a new era characterised by social democratic capitalism - an activist state and open markets. Social democrats must resurrect state power to regulate markets, strike a better balance between public and private interests, embrace Keynesian economics, correct for market failures (eg in financial system and climate change), invest more in education, health, unemployment insurance and retirement incomes - and support open markets against Left / Right attacks [1]
  • protectionism, signs of which are emerging in the US, would now be dangerous [1], though (by implication) Australia's Opposition is wrong to call for markets to set commercial property values - as these values should now be supported by government [1];
  • US President Obama is rightly more interested in whether government works than in its size [1]

It was suggested that the purpose of the essay was:

  • to turn the GFC into a decisive ideological event which fits Rudd's interventionist philosophy. Labor would be the party of ideological attack, while neo-liberalism would be the target. He wants to bury the Opposition in the failures of US laissez faire [1].
  • to label the opposition as neo-liberal, and also to call on world leaders to rescue capitalism from its excesses [1];
  • to put an intellectual framework around Rudd's social democrat centrist position. Despite its rhetoric it is politically designed to give voters a choice after a decade of almost identical policy. Calls now for the market to decide will be rejected [1]

Some observer's were supportive. They referred (for example) to Mr Rudd's contribution to social democrat's desire to demonstrate their relevance, and to making a case for government intervention.

Mr Rudd's philosophical contribution to political economic has been favourably viewed. For example:
  • one observer suggested that Social democrats were marginalised by the Reagan and Thatcher revolutions. While Clinton and Blair gained power they merely seemed 'Thatcher and Reagan' lite. While policies improved, they operated in a neo-liberal cage. Researchers have been tying to find ways to recapture the commanding heights with ideas about how governments work that would allow them to increase both prosperity and social equity. Rudd is contributing to this. He has a pragmatic bent, but can talk intelligently about modern philosophy. Publishing his essay in the Monthly demonstrates PM's commitment to the progressive intellectuals who made him [1];
  • PM sees the era of neo-liberalism ending and seeks to lead in the creation of a new social democratic era. This represents both political tactics and a strategic initiative to change his environment.  [1];
  • his essay might cause the Whitlam Government to be viewed more favourably. It is not wrong for governments to offset the inequalities of the market [1];
  • despite its glaring gaps (eg not everything comes down to extreme capitalism and greed) and lack of concrete solutions, it provides a case for government intervention that contrasts with Liberals 'free market' philosophy  [1]

  • it is not true (as one critic suggested) that Mr Rudd produced this essay purely for political reasons, or that he has no genuine interest in the world of ideas. The damage to world economy by Wall Street's predatory behaviour has left the Right with nothing constructive to say [1];

  • Rudd described the GFC as marking the end of the 'neo-liberal' era. Since WWII there have been two eras: (a) Keynesian ideas (which were discredited by stag-flation); (b) the contraction of the role of the state (led in by Thatcher and Regan) and global expansion of free markets when the spirit of Hayek and Freidman prevailed. Rudd labelled the latter 'neo-liberalism'. His essay sought to explain GFC, and show how better outcomes could be achieved. Neo-liberalism was founded on faith in free markets as source of order and prosperity. However this destroyed global economy. Rudd argued that neo-liberalism merely justified inequality and greed. He labelled the alternative: social democracy - which would restore the balance between state and market. This would be associated with global collaboration to manage global economy and reduce poverty. The first international priority would involve the creation of a new regulatory framework for financial markets (to avoid political outcomes like those in 1930s). Rudd's essay had weaknesses: (a) lack of attention relationship between GFC and other issues; and (b) exaggerating his differences with neo-liberalism. It was introduced in Australia without unravelling social-welfare state (as compared with US where governments cut taxes for wealthy and failed to balance their budgets). However Rudd's argument was fundamentally sound. [1]

Mr Rudd's essay was suggested by one observer to be correct in blaming the GFC on poor financial regulation and political attitudes to it in the US, while suggesting that Mr Rudd was wrong to have even mentioned other possible factors (see Avoiding Ongoing Global Crashes).

Another, Professor Steve Keen, suggested that Mr Rudd was correct because neo-liberalism involves the incorrect assumption that financial markets operate like ordinary markets for goods and services, and are thus stable [1] [Comment: this observer took the view that Mr Rudd's criticism of neo-liberalism related to the stability of financial markets, whereas most other observers seemed to believe that Mr' Rudd's critique related to political economy, and the influence of government within non-financial  markets for goods and services].

However most observers (only a few of whom were Mr Rudd's political opponents) were critical. Detractors referred to (for example): the uncertainty about what the 'neo-liberalism' Mr Rudd criticised means; errors of fact; the essay's apparently primarily political goals; the close alignment of Mr Rudd's proposals with mainstream economic opinion despite his claimed radical ideological difference; blaming the Opposition for neo-liberalism, when most such policies were introduced by the ALP; the reversal of Mr Rudd's earlier policy stance; and the limited actual influence of 'neo-liberal' policies in Australia.

Many observers saw Mr Rudd's arguments be weak. For example:
  • it is unclear what Rudd is referring to in criticising 'neo-liberalism', as this term is associated with most important recent trends in economics [1];
  • academics don't agree on what neo-liberalism means - and only those who despise it write about it [1]; 
  • 'neo-liberalism' is a term that was first used to describe a 'middle-way' between liberalism and socialism - ie involving a market economy and a strong state [1] [which appears to describe Mr Rudd's preferred approach].
  • there is no long term consistency in Rudd's philosophical position. He has strongly endorsed and benefited from neo-liberalism in the past, and changes his views to get political advantage. His approach can best be understood in terms of populism - which seeks support by playing on community fears and demonising external threats [1]
  • complex arguments were used in the essay to suggest that neo-liberalism explains all activities the over past 30 years [1], eg the monetary policies of the US Federal reserve under Greenspan were seen to be explained by the influence of Hayek [1], though both Hayek and von Mises opposed central bank activism [1];
  • a Chinese economist suggested that essay was shallow and crude. Keynesian-motivated economic intervention by the US Federal Reserve was a significant cause of the crisis - and Greenspan should not be regarded as supporting neo-liberal policies [1];
  • former PM (John Howard) suggests that: essay stretched facts to score political points, and that his position was contradictory and implausible. It ignored the fact that both sides of politics had pursued similar policies; that free trade and competitive capitalism succeeded. It suggested that Australia entered financial crisis in good shape, and yet declare the former government guilty of neo-liberal extremism. [1];

  • it is invalid (according to Opposition leader) for Rudd to claim that neo-liberalism was responsible for GFC when a severe sub-prime mortgage problem arose in US where that had been extensive government intervention in housing market, but was minor in Australia where government had merely taken a conventional regulatory supervision role and investment decisions had been left to banks [1]

  • most of the essay involves a rambling and selective economic history to support political prejudices (eg tax cuts, deregulation and privatisation were criticised unless done by Democrats; the role of market liberalism in Europe in parallel with the Marshall Plan was ignored; Roosevelt's 'New Deal' was admired, though it did not seem to work; the Hawke-Keating governments were praised for 'economic modernisation' - though Keating described this as 'deregulation of finance'  [1];

  • the essay covers decades of world events, but is purely for domestic consumption, seeking to score political points by tapping into community fears about the economic crisis. [1];
  • the essay is more a religious sermon than serious analysis. It expresses items of faith, not fact. All Rudd has done is claim moral superiority [1];

  • the essay merely criticised a 'straw man'. While this might be good politics, it was not good policy [1]; the 'neo-liberalism' Rudd describes has never existed except in extremist theories. [1]
  • the political wisdom of the essay was questionable because voters were more worried about union thugs than dead Austrian economists [1];
  • Mr Rudd was seeking ideological retribution rather than solutions to the crisis. His  neo-interventionism would be more dangerous that the neo-liberalism he attacked. [1];
  • there is a need for a sense of proportion about current difficulties, not visions of a new world order. The last 30 years have seen major increases in human prosperity. Downturns are inevitable, and current events are not unprecedented. Exposure to markets improve performance, and it unwise to pander to those who seek effortless gains through intrusive government [1];

  • the essay was marketed as being unique - but it closely parallels similar arguments by Krugman and Stiglitz - whose current prominence amongst economists disproves claims about the total dominance of free-market ideology [1]. Stiglitz has long proclaimed the end of neo-liberalism (ie of privatisation / liberalisation / independent central banks focussed on inflation) - policies that were based on the notion that markets are self-correcting' [1];
  • the remedies suggested were broadly in line with mainstream economists - and are thus not revolutionary - despite Mr Rudd's  claim that past economic orthodoxy is to blame for the crisis [1];
  • Keynesianism [ie using public spending to counter the business cycle] was re-evaluated by economists in the 1970s because of it didn't work (not because of neo-liberal prejudice). Greater emphasis on monetary policy thus emerged  [1];

  • the article does not reflect a good understanding of social democrats, as they originally favoured economically progressive policies, and opposed redistribution [1];
  • if social democracy is the answer, why is the UK (after a decade of 'third way' politics) in such trouble  [1];

  • pro-market reforms have benefited Australia [1, 2]. Likewise the Washington consensus, which was criticised as part of 'neo-liberalism', has also been beneficial [1];
  • the essay confuses financial deregulation (which has led to problems and needs reform) and economic deregulation - which has been beneficial [1];
  • the essay labels the federal Opposition as 'neo-liberals', though such reforms were mainly introduced in Australia by ALP governments [1]. Both sides of politics have implemented such policies. [1] ;
  • the essay reflects a reversal of Rudd's stance as a fiscal conservative who urged deregulation (and who took a 'me too' approach to John Howard's policies) [1]; During last election Rudd scoffed at the then Treasurer's warnings about a financial tsunami. but now proclaims a 'seismic event' [1];
  • the supposed 'dominance' of neo-liberalism is dis-proven by the fact that governments now remain as large as they were 30 years ago  [1];

  • pro-market reforms were limited in Australia. For example:
    • the Howard Government was the largest ever dispenser of passive welfare - which now creates difficulties [1];
    • Australia's former PM was often criticised for being a big government conservative  [1];

    • 'free-market fundamentalism' did not apply in Australia. Only labour markets are now less regulated than 20 years ago, and this had nothing to do with the crisis. Business regulation has in fact been increasing [1];
    • governments have encouraged market mechanisms, but have not reduced the size of government [1].
  • Australia has adopted neo-liberal policies extensively - and yet has held up well in the crisis [1]; Another federal minister recently argued that nothing went wrong in Australia as a result of deregulation [1];
  • Australia's financial regulation had been good under the coalition government (eg Australia largely avoided sub-prime lending) - in the Opposition's opinion [1]

Alternative to 'neo-liberalism' as explanations of the GFC were suggested including:

  • problems arose because the US failed to limit its budget and external deficits. Twin deficits were financed by low interest rates set by the Federal Reserve and a flood of money from East Asia - and this macroeconomic imbalance caused the crisis [1];
  • the inflow of money from China to US was also part of cause of GFC [1];
  • Australia's former PM (John Howard) rejected the claim that financial deregulation was responsible, and identified the Clinton administration and an earlier Congress as partly to blame [1]. He argues that (a) a malign economic philosophy was not responsible for GFC (b) market forces are best means for regulating banking system rather than government and that (c) the GFC results both from some regulatory failures and from some unwise government intervention [1];
  • governments must act when markets fail, but governments also fail - and this was also a factor in the GFC [1];
  • failures by central banks and government regulators are a better explanation of the GFC [1];
  • US regulatory negligence (not neo-liberalism) caused GFC [1] ;.

Observers' suggestions in relation to solutions include:

  • Australia needs to be presented as a well regulated market economy, noting its need for capital inflow [1];
  • there is a need for less government control of the financial system in China [1];
  • a stronger IMF is the key to a solution [1].
  • there is a need for: better prudential supervision of finance; removing the pro-cyclical elements of Basel 1 and 2; and central banks to lean against house price booms. [1]

CPDS Assessment

CPDS Assessment (Working Draft)

It will be suggested below that both Mr Rudd and his many detractors are partly correct.

The package of policies that Mr Rudd labelled 'neo-liberalism' contain real defects even though it has strengths - and sometimes defects have been glossed over by those seeking private gain or defending favoured theories. Moreover, as he suggested, the GFC reflects a systemic breakdown which will potentially have severe consequences, though perhaps not the ones he expects.

As Mr Rudd's critics point out, there are limitations in his analysis of 'neo-liberalism'. Other analyses by Mr Rudd appear to ascribe problems simply to others' moral failings, and thus to oversimplify complex problems (eg see Restoring 'Faith in Politics'). This symptom of political populism also applies to Mr Rudd's suggestion that the failings of 'neo-liberalism' come down to the fact that it was merely a front for corporate greed.

Arguably there is a bigger question than whether 'neo-liberal' policies work, namely 'How can democratic governments (social or otherwise) be effective in a complex world?'. Past 'neo-liberal' experiments (which increasingly left hard decisions to the market) merely avoided, rather than answering, that question.

Starting a public debate about 'neo-liberalism' will probably be constructive in the longer term, but this should have been initiated and incubated for a few years through a backroom policy group in government or an independent institute rather than presented as the basis for current government policy.

The Origin of Neo-Liberal Policies

Taking more than one point of view on 'neo-liberalism' (as one observer suggested that Mr Rudd has done [1]) is quite appropriate  - because what he is criticising is not just a single thing but rather a complex of policies intended to facilitate economic change and to increase government efficiency that have become confused. Commentators on Mr Rudd's essay, it can be noted, had many different views on what his essay had critiqued.

One pointed out that the term 'neo-liberalism' had originated in pre-war Germany as a 'middle-way' between liberalism and socialism (ie involving a market economy and a strong state) [1] an approach which Mr Rudd seems to favour.

One observer drew attention to Michael Foucault's view of the relationship between neo-liberalism and German ordo-liberalism in the post WWII era which distinguished this from US-style 'neo-liberalism' - the latter being seen to be seeking to bring social and other aspects of life within a market-like framework.[1],

"Foucault's view that ordoliberalism is the 'origin' of neoliberalism is supported by a longer tradition of scholarship. e.g. Carl Friedrich's review article in the American Political Science Review of 1955 v 49, n. 2, and two French PhD's from the 1960s. .... Foucault talks of the role of ... Hayek and von Mises in carrying neoliberalism from one to the other and he discusses Hayek's thesis on Rule of Law as a key example of ordoliberalism. There is quite a bit of Ordoliberal work in English, ....".

[The] key point is that neo-liberalism should not be treated as a ideology of capitalism, or a revival of laissez faire, but as a new way of thinking about governing - in the tradition of the arts of government. [personal communication]

The present writer's understanding is that because of its Roman Law heritage, 'Europe' (especially but not only Germany and France) had a lot of trouble with 'liberalism' generally long after such arrangements emerged in Britain (and thus in its Empire including what became the US). Ordo-liberalism:

  • seemed to be an attempt to mimic some of the economic advantages this gave in the Anglo-American world and also to reduce the risk of abuse of political power through state corporatist arrangements (ie where the private sector was treated as an extension of the state); and
  • involved the view that the state should control the nature of the economic / social order (as had been the Roman Law tradition), but that in the case of the economic order it was going to be taken as given that the state would establish a liberal order (ie one based on independent enterprise).

In Australia ALP governments were (as many observers have noted) primarily instrumental in importing 'neo-liberal' policies. Conservative governments were more (well) 'conservative'. Moreover the extensive transfer payments favoured by the former federal government (inadvertently?) reduced some of the inequalities arising from simple market-liberalization (a reduction that Mr Rudd's essay suggested that democratic socialists should now give priority to). However these transfers may now be unaffordable and future strategies for speeding economic adjustment with reduced risk of inequalities may now be the real challenge.

'Market liberalization' strategies (ie reducing political controls over economies) were introduced in order to speed economic change. This seemed to be first proposed in about 1970 by OECD analysts because of the economic difficulties (eg very high unemployment rates) that arose in Europe when intensive government intervention  in the face of emerging Asian competition in manufacturing, proved counter-productive because political involvement meant that intervention usually degenerated into efforts to protect existing industry when structural changes were needed.

The losses typically associated with nationalized industries (ie government owned enterprises operating in competitive markets) also encouraged their privatisation to eliminate political distortion of the market.

Pro-active industry policy (ie government efforts to accelerate productive economic change) had been discredited, because the Austrian economist (Hayek) had shown in the 1940s that it was impossible for central economic planners to acquire the dispersed, detailed information needed to make appropriate decisions (see The Industry Policy Debate, 1997). Furthermore consideration of industry policy in the US in the early 1980s as a potential response to Japanese competition ended abruptly, when the distorting effect of interest group politics on such a process was recognised.

More particularly liberal financial markets have proven able to facilitate economic change which is otherwise hard to arrange. For example investor pressure on companies to increase profits played a very significant role in the restructuring of the US economy during the 1990 - ie changes in enterprises from the hierarchical organisation that had suited mass production to the networked organisations that were able to acquire and exploit knowledge advantages to meet the challenge from Japanese competition that had seemed insurmountable in the 1980s (see New American Economy, 1997). The outcome could not have been anticipated or engineered by any political authority.

Market liberalization strategies were complicated by the parallel emergence of the (so called) 'New Right' view that governments were the problem and should be 'smaller'. This emerged, apparently, because during the oil-crisis-induced stagflation of the 1970s governments continued to grow at previous rates and took a larger share of GDP. To reduce the size of government, some functions were privatised within manufactured 'markets' and market-like mechanisms / commercial methods were increasingly sought within public sector functions in parallel with market-liberalization in the broader economy.

[[Washington consensus another part - origin ]]

In Australia, market liberalization strategies were adopted (mainly at the initiative of the Hawke / Keating Governments) as this was seen as the best option to diversify Australia's economy away from dependence on low-value added commodity exports - which was seen to have been associated with Australia's long term decline in international per capita income ranking. Market liberalization was give effect mainly by financial deregulation and reductions in tariffs - though the Howard Government introduced a 'Work Choices' scheme for labour market deregulation. Initiatives to reduce regulation in other areas were also launched by many governments, while market mechanisms were encouraged within governments under a National Competition Policy that was initiated by COAG in 1992. Though there were few government owned enterprises that had operated in truly competitive environments, such environments were at times engineered and functions were privatised or corporatised.

Australia's previous federal government was also heavily involved in transfer payments [1] - which included transfers to various regions as well as passive welfare to households. Though the question has never been formally studied, this seems likely to have played a significant role in compensating the losers from market liberalization strategies - and thus permitting a less politically-constrained approach to market liberalization than applied elsewhere. These transfers now create a financial headache for the present federal government [1]. This challenge is explored further in Australia's Future Tax System: The Cost of the Financial Crisis and the Opportunity to Fix Government .

Some Deficiencies in the 'Neo-Liberal' Package

There are defects in the complex of policies that Mr Rudd calls 'neo-liberalism', and some of these have been obvious for many years.

For example: liberal markets may counter-intuitively impose structural constraints on some participants' success; the strict fiscal discipline advocated as a response to debt-based economic crises under the 'Washington consensus' can exacerbate an economic crisis, and is not what US itself now practices; and trying to make governments market-responsive can make them much less effective in governing,

However, though the GFC also shows some limitations of market-liberalization (eg because free markets do not necessarily self-correct), the GFC is very complex and many other factors were involved.

Some deficiencies in the the overall 'neo-liberal' package that Mr Rudd criticises are apparent. In particular:

  • market liberalization makes it necessary for individuals / enterprises to compete, but it does not ensure that the capabilities to compete in high value-added activities actually exist (see Impact of Economic Liberalism in Australia). Many of the needed capabilities are systemic (eg good transport, innovation or legal systems), beyond individuals / enterprises to create and not necessarily self-generating (because of 'chicken and egg' constraints).  If such support systems are under-developed, overall economic growth will be constrained. Moreover inequalities can increase as pre-existing advantages / disadvantages that individuals, communities or regions face tend to be amplified - so political pressure for governments to 'help' increases;
  • other structural problems can apply to nations as a whole in a simple 'free-market' global economy - eg because of the adverse effects of external cooption of local political elites in nations that suffer a 'resources curse', as Australia does to some extent (see comments in Competing Civilizations); 
  • [[Washington consensus limitation - feedback; not what US did with its crisis; Malaysia;]]
  • the 'Washington Consensus" [1, 2] is widely criticised by opponents of economic globalization on the basis of the apparent contribution to crises in emerging economies by global institutions (eg IMF) operating largely under US control - because of the way they were established in the post-WWII era. The tough financial restraints on government imposed where countries encounter a balance-of-payments crisis associated heavily with public spending, is seen to exacerbate the situation and adversely affect spending on public functions (such as health and education) in particular. In responding the its own debt-induced economic crisis, the US chose a path quite different to that it had encouraged others to follow;
  • merely making governments smaller will not necessarily make them better (as US President Obama has reportedly recognised [1]). Moreover attempts to employ competition and commercial methods to promote efficiency within the public sector can frustrate its ability to perform its primary role of 'governing' - as explored further in Review of National Competition Reforms: A Commentary;

The global financial crisis (GFC) has now demonstrated further limitations of market liberalization. There are many reasons for this crisis, as suggested in Global Financial Crisis: The Second Test, and Mr Rudd's suggestion that 'neo-liberalism' is solely to blame is unrealistic.

For example, a lack of effective global financial regulation allowed East Asian societies to develop rapidly through economic strategies which were macroeconomically unsustainable (see also Structural Incompatibility Puts Global Growth at Risk ). Those models involve inbuilt demand deficits to protect weak financial institutions - and maintaining global growth thus depended on the ability of (mainly) the US to sustain high current account deficits, which ultimately could only be financed through rapid asset inflation induced by easy credit.

As noted in Are East Asian Economic Models Sustainable, those models are also likely to be ineffectual in future because they contain no apparent internal means to balance supply and demand (as this requires effective price mechanisms and profit sensitive producers).

The Bigger Problem: Effective Democratic Government in a Complex Environment

Democratic government, whereby power resides with a popularly-elected executive, has a history that goes back over 2000 years.

But in its modern form, it emerged primarily in the United Kingdom as bye-product of the industrial revolution. Governments who represented an increasingly broad electorate became feasible and proved socially valuable because they provided a means to promote wider sharing and public usage of the previously-unprecedented wealth that could be generated from capital investment (initially in mechanised technologies, and then in mass production from the early 20th century).

However from the 1970s East Asia's unexpected competition in previously-highly-productive capital intensive mass production eroded this source of wealth in developed economies and further increased the importance of specialized knowledge, team work and innovation. This created a requirement for economic change and made it ever harder for democratic governments to be involved in determining economic outcomes - both because of the influence of interest groups and the lack of leading edge specialized expertise within politically accountable entities (see Economic Solutions are Beyond Politics).  This was the origin of 'neo-liberal' experiments.

However the need to disengage from control of economic outcomes is only one of the difficulties that have increasingly plagued democratic governments in recent decades (eg because of difficulties of coping with an increasingly complex environment).

Explanation: An account of 'modern' defects in democratic government that have been emerging is presented in Australia's Governance Crisis

This first outlines indicators that have been emerging for years of increasing disillusion with the effectiveness of democratic government. Several causes are then suggested for these symptoms, such as

  • increasing complexity (ie interconnection) in the issues that governments address - which often defeats easy answers and obvious actions;
  • globalization which further adds to complexity;

As governments' challenges have become too complex for simple solutions to be identified, democratic societies have tended to support 'populists' who unrealistically promise such solutions and re-engineer (ie politicise) government machinery and other institutions to ensure that tame 'experts' tell them what they want to hear.

This tendency has been reinforced by the emergence of post-modern theories which suggest that knowledge is merely a social construct (ie one can validly believe anything one likes and it will be true enough).

The resulting erosion of real knowledge and experience within government organisations further compounds the difficulties that governments have in dealing with complexity.

These modern problems of democracy have received little attention - and what is arguably now required (because democratic government appears to be the best currently available option) is a solution to the whole problem of remaking effective democracy not just to review of the 'neo-liberal' package which attempted to deal with part of that problem.

Australia's fiscally unbalanced federal system (and other constraints on the effectiveness of state administrations) have further undermined the performance of government functions (eg see Fixing State Governments). For example, attempts to promote efficiency in service delivery have been counterproductive because no attention was paid to what was needed to perform governments' core role (ie 'governing') effectively.

Speculations about Solutions

Alternatives to simple neo-liberal policies to encourage productive economic change are probably available, as are methods to 'fix government' generally that are more realistic than those deployed in recent years.

Alternatives to simple neo-liberal policies to encourage productive economic change are probably available (ie methods which would not only encourage competition but promote the capabilities required for success). Developing a Regional Industry Cluster describes methods to accelerate 'learning' within the real economy without politically distorting it. These methods were the subject of preliminary experiments in the 1980s - and should be applicable to community development with appropriate adjustments. Defects in Economic Tactics, Strategy and Outcomes outlines the related theory.

Moreover they are unlikely to be appropriate when politically engineered (see Why government 'assistance' to firms is the opposite of economic development, and Economic solutions are beyond politics).

Methods to employ the suggested principles to enable Australian enterprises to more effectively innovate out of the 2009 downturn were suggested in A Case for Innovative Economic Leadership.

Likewise there are better ways to make governments function more effectively than those applied in recent decades (eg involving managerialism and attempts to apply competition and commercial methods to governments' fundamentally non-business-like functions) -  see Decay of Australian Public Administration. For example:

  • the size and cost of government could be restrained by focussing on its improving its core functions ('governing') rather than its 'service delivery' functions - because the latter focus dis-empowers those with the motive, skills and access needed to develop alternatives;
  • building on real knowledge and experience are the keys to practical success, because this is the only way to mobilize tacit knowledge of governments' very complex functions. Political bluster and high-sounding policy rhetoric can't overcome this (see below);
  • manifest defects in the operational and economic performance of state governments could be reduced by more adequate and diverse own-revenue sources (see Australia's Future Tax System: The Cost of the Financial Crisis and the Opportunity to Fix Government);
  • attention to modern challenges to Australia's system of government, that have been ignored in desperate politically-driven efforts to simply promote efficiency, could make a significant difference (see Australia's Governance Crisis). There is, for example, an increasing level of complexity in the issues that governments face and thus a case for: (a) decentralization of functions and apolitical processes for problem solving to reduce the complexity governments face and the consequent trend to mere populism in politics; and (b) stronger institutional supports to the political system.

Creating a new international economic order is not as simple as uniform global regulation to curb corporate greed (as Mr Rudd has periodically suggested [1]) - because there are so many different assumptions around the world about the fundamental nature of such a 'uniform' system (see Obstacles to Effective Regulation).

Mr Rudd's Philosophical Contributions

The present writer has, to date, not had access to Mr Rudd's latest philosophical critique of 'neo-liberalism' in full - and the accessible introduction of his 2009 paper does not provide the basis for any depth of comment.

However his 2006 address to the Centre for Independent Studies, which offered a critique of what he then simply called 'market-fundamentalism', seems, from published comments on his latest speculations, to have covered similar territory (see review in An Alternative to Market Fundamentalism?, November 2006). His 2006 address was (a) privately labelled 'hot air' by a prominent ALP supporter; and (b) appeared to the present writer to reflected a pseudo-intellectualism, whose main effect was to bluff those who had not studied these subjects with high-sounding words.

It seems that Mr Rudd's diagnosis of problems in 'neo-liberalism' may have left as much room for improvement as his enthusiastic earlier contribution to efforts to 'fix a state government'.

Moreover the new era that Mr Rudd prophesied my not be characterised by the triumph of democratic socialism - but rather might (for example) require a more sophisticated approach to market liberalization to facilitate structural change in Australia's economy in the face of failure by the export-oriented industrialization strategies that have permitted rapid development and growth in East Asia.

Also Mr Rudd's suggestion in other contexts that new international regulatory regimes are likely to provide a basis for a new global economic order seems likely to be overly simplistic. 

Regarding Mr Rudd's 2009 contribution it is suggested that:

  • there are significant limitations in the 'neo-liberalism' package that Mr Rudd criticises (see above), and in some respects his essay reflects leading edge international insights (eg  that financial markets may not tend towards equilibrium, and that the GFC probably marks a turning point in history);
  • Mr Rudd also seems correct in asserting that there are influential groups who advocate policies that undermine the role of government presumably to increase private profits without considering costs to the community (eg the view that the private sector is the 'solution' to what ails government is pervasive but simplistic). For example:
    • multinational and global companies, whose engagement with national political elites can prevent the emergence of effective economic leadership in resource rich economies, never seem to acknowledge this risk;
    • advocates of public private partnerships (PPPs) for infrastructure base their case on efficiency gains within individual projects, and don't address the probability that this can create problems in dealing with infrastructure systems as a whole and in dealing with government responsibilities generally;
    • one of the symptoms of the breakdown in government's ability to manage infrastructure systems is the confusion of public and private interests - which can give rise to patronage. There are, for example, signs of emergent crony-capitalism in Queensland;
    • the interface between market liberalization and interest group politics was often ignored. Private sector groups seemed to be encouraged in Queensland to suggest simplified regulations (on the assumption that this was a product of bureaucracy) and did so while tightening them to protect their particular interests;
    • privatisation of some monopoly assets has been advocated - thus creating impossible regulatory challenges that have led to infrastructure failure - as illustrated by the case of the Dalrymple Bay Coal Loader, where regulators seemed to be criticised for their inability to identify a fixed service price that would have the same effect as the varying prices that apply at different stages in an investment cycle;
    • private sector provision of non-core government functions has been suggested as the solution to what ails state governments, without considering what governing actually involves;
  • however it is ironic that Mr Rudd has been personally enriched partly as a by-product of such 'market fundamentalism' because his wife's employment services agency was able to expand significantly after Commonwealth Employment Services functions were privatised [1] by the Howard Government in 1998;
  • another mainstream observer has speculated that even Mr Rudd's view of the 'end of an era' may be too optimistic because the concept of 'self-regulation' (the 'Anglo-Saxon model which is the basis of the Basel I and II international regimes) may be inadequate - because it results in no regulation in the face of market euphoria [1];
  • the primarily critical reactions to Mr Rudd's essay made telling points against his argument, eg that the Keynesian approach to economic management that his essay endorsed can be counter-productive (see above) - but those reactions also showed that the significance of some strategic questions his essay mentioned  are poorly understood in the supposedly-informed community;
  • there seems good reason to accept the view of a Chinese economist that the US Federal Reserve had acted more in accord with Keynesian philosophies (rather than the neo-liberal orientation that Rudd's essay suggested) [1] Monetary policy was used as a tool for macroeconomic management (perhaps with a view to managing the global economy as a whole);
  • the GFC probably marks the end of an era (as Mr Rudd suggested). For example his allusion to the effect on the US's influence on world affairs seems valid. However other transitions may well be quite different to those he suggested. The new era may be characterised (for example) by the failure of the export-oriented industrialization that allowed rapid economic growth in East Asia over recent decades (see Are East Asia's Economic Models Sustainable?).  This would seem to present Australia with an environment in which a more sophisticated approach to market liberalization - to enable the economy to respond to the need for structural change with reduced adverse social impacts - would be far more necessary than strong state regulation and control;
  • Mr Rudd suggested that the state now needs to re-engineer properly functioning markets. However while properly functioning markets do need to be re-developed this can't be successfully controlled by democratic political institutions (ie those driven by interest-groups and policy idealists). Methods to accelerate market-oriented learning within economic systems are probably available, but are only likely to be constructive if orchestrated by market-focussed apolitical institutions. The probable outcome when political authoritarians attempt to 're-engineer' complex systems was illustrated by Queensland's Worst Government (the Goss administration in which Mr Rudd had a leading role) - which idealistically 're-engineered' the machinery of government to the point that it became unworkable and thus laid the foundations for a stream of subsequent public crisis in areas such as child protection; electricity distribution, hospitals, and water supplies (as well as a looming urban transport fiasco);
  • there is a need to look more deeply at the economic consequences of the 'liberty' implied by 'neo-liberalism' - because limits on rationality make effective economic decision making by central authorities likely to be dysfunctional in societies like Australia's. Political authoritarianism works elsewhere only because of entirely different approaches to exercising power and decision making (eg see comments on the cultural foundations of the 'Washington Consensus' compared with the 'Beijing Consensus');.
  • Mr Rudd's overall approach seems to be influenced by traditions and ideas which have Chinese / East Asian precedents. For example:
    • he claims the 'Mantle of Heaven' - ie claims moral superiority as the justification for strong state control of society and the economy;
    • he seeks to associate with intellectuals (noting the National Ideas Summit), and to be perceived as an intellectual (noting his philosophical essays). Under Chinese traditions elite intellectual bureaucrats exert behind-the-scenes power by influencing the way others think and understand the lessons of history (see East Asia);
    • his critique of neo-liberalism and the 'Washington consensus' closely parallels (eg in terms of the terminology used) the arguments developed by Asian nationalists as the basis of an alternative 'Beijing consensus' (see The Washington Consensus and Beijing Consensus); 
    • expectations of a change in the world order and of a decline by Western societies have been  prevalent amongst Asian nationalists - long before the GFC;
  • this (and Mr Rudd's emphasis on strict state regulation and control of the economy, as well as his lobbying on behalf of China [1] following meetings with senior Chinese officials [1]) would make sense if the ultimate impact of the GFC was to shift economic and political power towards East Asia at the expense of liberal Western traditions, so that Australia was obliged to conform to (say) China's expectations (eg see China as the Future of the World? regarding the character of such a world, and Creating a New 'Confucian' Economic World? regarding its possible emergence). Moreover the establishment of an entity to promote business links between Australia and China by Mr Rudd's brother [1] would be seen in China to conform to the 'Chinese' way of doing business (ie involving 'business' opportunities being allocated through cartels to families with political connections to the local regime);
  • Mr Rudd was wise to warn of the risk of 'throwing the [open market] baby out with the bathwater'. However the risk is not limited to open competitive markets, There is also a potential risk to open competitive politics. For example:
    • in the 1930s it was not only 'democratic' socialist who sought to cope with a crisis of capitalism. 'National' socialists also did so, and those in Germany pinned their faith in a great (pseudo-intellectual) leader, Adolf Hitler, who blamed all problems on the greed of his favoured scapegoats. Also Japan's ultranationalists took the opportunity to reinstall imperial rule and Japan's supposed 'soul of a samurai';
    • there are many nations now where the are real risks of similar authoritarian political reactions ....
  • in early 2008 Mr Rudd could not officially see the GFC emerging - nor was there any public mention of neo-liberalism as a factor in the then 'credit crunch'.

Comments on Observers' Contributions

Observers variously suggested that:
  • Australia's financial system is sound. [1] Unfortunately this is an overly optimistic view (see Defects in Financial Regulation and Monetary Policy). Property bubbles emerged - and will probably burst - as a result of importing cheap credit. It was not necessary to create it locally. There was no effective regulation of imported credit. Moreover complex financial engineering was practiced in relation to infrastructure - and this is potentially now an asset class with the same prospect of a bust as sub-prime mortgages in the US in 2007. Reasons for this are suggested in Airport Link: An Example of the Monster?
  • the US twin deficits (which had their origins in easy money policies by US Federal Reserve and in capital flows from East Asia) had a role in generating the GFC. At the World Economic Forum (in Davos) strengthening the IMF was being advocated as the solution [1]. However the issue is far more complex because:
    • East Asian societies can not succeed under Western financial rules because of cultural obstacles which Western observers generally (and economists in particular) have no basis for understanding - see The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems (1998);
    • this fact would have become obvious to Japan before 1990, and led to a shift in its 1980s's strategy for becoming #1. Japan clearly influenced the Fed under Greenspan in setting policies - ie he often referred to heading off the risk of deflation - though this was Japan's problem not the US's;
    • the economic models adopted in East Asia based on Japan's example have always contained macroeconomic defects (ie unsustainable demand deficits). Those models are able to generate industrial strength, but could never be macroeconomically sustainable on their own;
  • Australia needs to be presented as a well regulated market economy because of its need for capital inflow [1]. This would be less valid if it was assumed that capital will mainly come from Asia in future because (a) the US / Europe have 'had it' and (b) an independent financial and monetary regime operating under neo-Confucian principles is expected to emerge in East Asia - ill-liberal  - note Madrid arrangements which increase shift towards AMF
  • Mr Rudd's essay is laying the foundation for something like Germany's post-war social market model in Australia [1]. However that model could not be copied without recognising the difference between societies (such as Germany) based on Roman Law tradition whereby the state takes primacy over individuals and represents the society as a whole rather than sectional interests; and the British Law tradition (which applies in Australia) whereby individuals and the state are legally equal, and the state operates on a 'winner take all' sectional political basis.

Professor Robert Manne's defence of Mr Rudd's essay in particular raised a large number of issues that warrant elaboration or comment

  • the GFC was seen to have simply resulted from developments in the US financial sector, which served the interests of US elites. However this apparently-widespread assumption is dangerous. For example:
    • suspect financial tactics and regulatory arrangements in the US were only some of the complex array of factors that contributed to the GFC, and US elites were not the only beneficiaries. Another major cause of the GFC involved features of anything-but-free-market economies in East Asia - namely their large domestic demand deficits which make them macroeconomically unsustainable in Keynesian terms. It was only the asset bubble that emerged from developments in the US financial sector over two decades that sustained global growth and development by enabling US households (mainly) to provide the excess demand needed to compensate for those deficits (see Structural Obstacles);
    • a financial / economic crisis was unavoidable, not only because of undue faith in the stability of free markets, but also because macroeconomic imbalances were an intrinsic feature of East Asia's economic models (see Structural Incompatibility Puts Global Growth at Risk, 2003);
    • whether or not the GFC marks the end of the era of Western 'neo-liberalism', there seems little doubt that it will mark the end of an era East Asia's export-driven industrialization. Moreover those countries may have no readily available alternative (see Are East Asian Economic Models Sustainable?);
    • the G20 summit was unable to create a basis for sustainable economic recovery because participants did not understand aspects of the GFC that did not arise directly or indirectly from developments in the US financial sector (see Announcing 'Peace for our Time'?);
  • the potentially severe economic / social / environmental / political consequences of the GFC were identified - including the risk of aggressive authoritarian regimes gaining power as in the 1930s.  It can be further noted that:
    • ongoing economic deterioration appears to be possible because of; (a) uncertainties about recapitalizing financial institutions, and governments' ability to fund deficit spending; (b) severe financial system losses in Europe; and (c) the failure of East Asian economic models (see also Complications);
    • the risk of aggressive regimes emerging is not trivial. An article ('State Salvation') highlighted the growing role of 'state capitalism' as a reflection of distrust of democratic capitalism - and this has parallels with both the 'state corporatism' linked to European fascism in the 1930s and the mercantilism that characterised contests for power in Europe in the 18th century;
  • the role of derivatives in the GFC was stressed. Derivatives appear to be a major source of problems that has received received little public attention (presumably because it is both complex and very hard to fix);
  • the role of ALP governments in introducing 'neo-liberal' policies in Australia was acknowledged. In Queensland, for example, attempts to 'corporatize and commercialize' government functions to gain efficiency by making them more 'business like' were a major focus of the Goss Labor Government (in which Mr Rudd had a central role), and this (together with politicisation) contributed to the numerous crises which have plagued Queensland's public sector ever since (see Competent Support to Queensland's Political System). This arose from an apparent failure to appreciate that the functions of government are intrinsically unlike those business is involved in (see The Decay of Australian Public Administration);
  • the tendency to a 'provincial' approach to policy issues in Australia was criticised. Provincialism is nothing new. Consider, for example, the lack of any serious public debate about the geopolitical issues involved in the invasion of Iraq prior to a decision to commit troops - to support the US alliance (see Debating Iraq: A Nil All Draw). Many other examples of suspect policy prescriptions can also be identified - arguably as a result of the lack of the sort of support the political system needs to cope with increasingly complex issues (as noted in On Populism, and in Challenges to Australia's Democratic Institutions);
  • the unsafe financial and regulatory practices that were blamed for the GFC were described as a product of an ideological preference for free markets. However there were other factors involved including:
    • the need in Europe and North America to enable rapid economic change in response to intense competitive challenges to manufacturing from low-wage competition in East Asia in the 1960s and 1970s. Adjustment was recognised in the 1980s to be best facilitated by market liberalization;
    • the shift into knowledge intensive service industries (including finance) that resulted from market liberalization;
    • the search for innovations to further enhance the productivity of financial services - whose potential to generate systemic instability was not widely recognised; and
    • the development (by the US Fed in 1987) of new techniques of macroeconomic management which appeared to allow the risk of financial crises to be eliminated by boosting liquidity and thus made protections such as Glass Seagal Act seem superfluous.
  • market liberalization strategies were seen as risky because of potential financial instability. However they also generate difficulties because they increase pressure on individuals, enterprises and regions to compete without ensuring that they gain the ability to do so successfully (see Defects in Economic Tactics, Strategy and Outcomes, 2000 and Impact of Economic Liberalism in Australia, 2002);
  • the GFC was seen to spread globally because of derivatives. However the lending practices of banks in Europe arguably led to worse financial and economic consequences than in the US, though those problems appear as yet to have received less attention and remediation;
  • the development of new international financial regions was seen as an appropriate response to the GFC. However there are cultural obstacles to the development such a regime (see Obstacles to Effective Global Regulation);
  • state action was said to have been regarded with suspicion for 30 years. However this has not been the case in East Asia in recent decades, and this contributed to the GFC (see Impacting the Global Economy).
Published Comments
Outline of Published Comments on Mr Rudd's February 2009 Monthly Essay

PM denounced the unfettered capitalism of the past three decades and called for a new era of "social capitalism" featuring government intervention and regulation. He argued that neo-liberals who changed the market system since the 1970s, brought about the global financial crisis. "Neo-liberalism and the free-market fundamentalism it has produced has been revealed as little more than personal greed dressed up as an economic philosophy". He advocates reaching beyond the 70-year-old interventionist principles of Keynes. Open markets need to be regulated by activist states, that also intervene to the reduce inequalities competitive markets generate. Neo-liberals, he argues, are  now forced to rely on the state they despise to save financial markets from collapse". He commits to keeping budgets in surplus "over the cycle". Mr Rudd identifies Thatcherism and the former Howard government as culprits - and implied that Opposition calls for the free market to be allowed to dictate commercial property values were wrong and that Government should support them. In a message to the US, Mr Rudd advised against trade barriers - as this would turn recession into depression. (Coorey P., Time for a new world order: PM, SMH, 31/1/09)

Rudd's essay seeks to turn GFC into decisive ideological event which fits his interventionist philosophy. Labor would be the party of ideological attack, while neo-liberalism would be the target. He wants to bury Opposition in failures of US laissez faire. The neo-liberal philosophy he says was anti-tax, anti-regulation and anti-government. It believed in unregulated financial markets, self-correcting markets, complete labour market deregulation and opposed investing in public goods. Rudd suggests that new era will be characterised by social democratic capitalism - an activist state and open markets. Social democrats are urged to resurrect state power to regulate markets,, strike a better balance between public and private interests, embrace Keynesian economics, correct for market failures (eg in financial system and climate change), invest more in education, health, unemployment insurance and retirement incomes - and support open markets against Left / Right attacks (Kelly P., 'Rudd sees death of neo-liberalism', A, 31/1/09)

Rudd has produced philosophical manifesto in response to GFC to put intellectual framework around his social democrat centrist position. Despite its rhetoric it is politically designed to give voters a choice after a decade of almost identical policy. It has glaring gaps and no concrete solutions, but provides a case for government intervention that contrasts with Liberals 'free market' philosophy. Calls now for the market to decide will be rejected. Its not as simple as Rudd suggests - ie that everything comes down to extreme capitalism and greed (Shanahan D., 'Rudd's point is one of difference', A, 31/1/09)

PM's essay in The Monthly suggests that 'neo-liberalism (and the free market fundamentalism it has produced) has been revealed as little more than personal greed dressed up as an economic philosophy ... ironically it now falls to social democracy to prevent liberal capitalism from cannibalising itself'. He should beware because voters are more scared on union thugs than of dead Australian economists. The PM invokes Obama as advocating the need for government to work, rather than debating whether or not it is too big or too small. The Opposition argues that Australia did relatively well (ie avoided extensive sub-prime mortgages) because the financial system was well regulated by the Coalition (Kerr C., 'Rudd should spot the real villains', Australian, 2/2/09)

US regulatory negligence (not neo-liberalism) caused GFC. PM claims that neo-liberal experiment has failed - but it is unclear what this is supposed to mean - as 'neo-liberalism' is term associated with most important recent trends in economics. Stiglitz has long proclaimed the end of neo-liberalism (privatisation / liberalisation / independent central banks focussed on inflation) - based on the notion that markets are self-correcting' Both sides of politics have implemented such policies. Australia has adopted neo-liberal policies extensively - and yet has held up well in the crisis. Australia has a quite open economy, a largely deregulated financial system, and has low barriers to cross-border trade and investment. Governments have encouraged the RBA to give priority to containing inflation. Australia has a high CAD and high household debts and low savings. Rudd seems to be suggesting that liberalizing markets (which creates the possibility of large current account imbalances) must lead to disaster. The GFC can be seen as consequence of US regulatory negligence. Rudd is right to stress not throwing the baby out with the bathwater. There is a need for better prudential supervision of finance, removing the pro-cyclical elements of Basel 1 and 2, and central banks leaning against house price booms.  (Edwards J., 'Neo-liberal evils are exaggerated', AFR, 2/2/09)

The PM's latest essay on the impending doom of neo-liberalism seemed to reflect more than one point of view. Firstly it argues that the world has been in the grip of a messianic political philosophy since the 1970s - which has now brought society to the precipice. By a complex chain of argument this is seen also to explain all activities of global finance over the past 3 decades - ie the monetary policies of Fed under Greenspan are seen as consequence of philosophy of Hayek. This seems illogical because while governments have exposed economies to competition and encouraged capital flows, they have not reduced the size of government. The PM also takes a bureaucratic viewpoint concerned with the practical details of remedies. However those proposals are broadly in line with the views of mainstream economists - and are thus not radical. The PM also takes the role of a politician keen to label his opposition as 'neo-liberal - despite the fact that the Hawke-Keating governments were Australia's neo-liberal pioneers. In fact centre-left governments have been more prudent guardians of the public purse than conservatives - because the latter used their low tax instincts as the basis for tax cuts. And there is no doubt that the Howard Government was the largest dispenser ever of passive welfare - and the present federal Treasurer has faced considerable difficulties in getting the books back in order. Social democrats originally opposed redistribution as a sham, and sought public spending directed to economically-progressive policies (Burchell D., 'Too many authors get Rudd into a write mess', Australian, 2/2/09)

Mr Rudd complains about 'neo-liberalism. However 'free market fundamentalism' has seen government spending rising by 6% pa; increasing tax revenues; elimination of net government debts. Rudd has strange understanding of 'free market fundamentalism'. Only the labour market is now less regulated than two decades ago - and this has yielded low unemployment. Labour market deregulation had nothing to do with the crisis, yet the government now wants to regulate it again. Regulation of business is continually increasing.  When markets fail governments must act, but governments also fail and this was part of origin of GFC. Government regulation, ownership or control is not always the answer. Inflow of money from China was also part of the problem, and less government control of money in China needs to be part of the solution.  (Guest R., 'Wrong way, Mr Rudd', Courier Mail, 4/2/09)

There are many straw men in PM's manifesto about 'social democratic capitalism'. Presenting himself as the saviour of self-destructive capitalism, and the Opposition as embodiment of neo-liberalism seems good politics - but it not in the national interest to suggest that free market will be supplanted by government regulation. PM should argue that Australia is well-regulated market economy - noting its dependence on capital inflow. Australia's modern prosperity derives from pro-market reforms - mostly by ALP governments. More market reforms are needed in areas such as infrastructure, water health. PM suggests that current crisis is the result of 30 years policy dominance by what has been called neo-liberalism, market fundamentalism, economic liberalism, Thatcherism or the Washington Consensus. The Washington consensus emerged as IMF prescription for problems of Latin America (ie cease budget deficits, end wasteful subsidies and fund health and education itself, broaden tax base to reduce tax rates, eliminate controls on interest rates and DFI; end import protection; and privatise state-owned businesses). Latin America is now stronger. IMF solutions in Asia also strengthened some - such as Korea. Rudd claims that financial markets don't always self-correct - so governments must take responsibility for stability. While markets can be prone to bubbles, this is not Australia's problem. Banks stayed away from financial engineering. Regulators have been diligent. Washington consensus ran into trouble because US failed to limit budget and external deficits - and shirked responsibilities to maintain global systemic stability. US twin deficits were financed by low Fed interest rates and flood of money from East Asia. This macro-economic imbalance was the source of crisis. Strengthening the IMF is now being advocated (eg at Davos) as the solution  (Stuchbury M., 'PM's leftist manifesto a risky business pitch', Australian, 3/2/09)

Former PM, John Howard, rejected claims that neo-liberal financial deregulation and Bush administration were to blame for financial crisis. Rudd blames neo-liberalism, the policies of Thatcher and Reagan as well as Howard, and lack of regulation under Bush. Repeal of the Glass Seagal Act in the US was going too far - as this removed prohibition on commercial banks owning investment banks, Howard argues that others (eg Clinton administration and Congress of the time) are also to blame [1]

PM's neo-interventionism will be more dangerous that the neo-liberalism he attacks. In the middle of a crisis, he is seeking ideological retribution rather than solutions. All current problems are blamed on 'neo-liberalism' while return to social democratic, Keynesian policies of 1970s are the solution. Rudd's work is marketed as unique - but parallels similar arguments by Krugman and Stiglitz. He criticises the 30 year dominance of a free-market ideology (called variously neo-liberalism, economic liberalism, economic fundamentalism, Thatcherism or the Washington consensus) which has held that government activity should be replaced by market forces. The prominence of Krugman and Stiglitz disproves that claims about the hegemony of free-market ideology. Most of the essay involves a rambling and selective economic history. Tax cots by 'neo-liberals' are criticised, but not those of Democrats. The Marshall Plan in Europe is admired, but the parallel economic liberalist is ignored. Roosevelt's 'New Deal' intervention in the Great Depression is admired, though there is doubt about its effectiveness. Failures by central banks and government regulators are a better explanation of current crisis, than neo-liberalism. The Hawke-Keating governments were praised for 'economic modernisation' - though Keating described this 'deregulation of finance and the float of the currency'. Deregulation, privatisation, increased market competition are OK if undertaken by the ALP, but not by anyone else. The essay selectively uses economic history to support political prejudices. Keynesianism was not re-evaluated by economists in the 1970s because of neo-liberal prejudice but because of it didn't work - so there was a greater emphasis on monetary policy. Both Hayek and von Mises rejected central bank activism. The supposed 'success' of neo-liberalism is dis-proven by the fact that governments now remain as large as they were 30 years ago (Costa M., 'Rudd on a dangerous ill-informed crusade', The Australian, 6/2/09)

PM's essay shows that he is either confused or we are in more trouble than we think. It suggests that PM could take Australia down path to economic ruin. He has confused financial market deregulation with economic deregulation. He argues that neo-liberalism (whatever that means) has failed - so there is a need for more government intervention. While financial crisis reflects the failure of financial regulation - these is no evidence of failures elsewhere. Growth has been sustained for 18 years because of economic deregulation  (Hughes T., 'The way out of this crisis', CM, 7-8/2/09)

Rudd's stance as a fiscal conservative (who was derided for a 'me too' approach to John Howard's policies) and urged deregulation - and been replaced by an interventionist who is seeking to tap into community fears about the economic crisis. His essay covers decades of world events - but is written purely for domestic consumption to score political points against the Opposition by using the vague concept of neo-liberalism. Academics don't agree on what this means - and only those who despise it write about it. The federal government is considering much new regulation, and has taken a 'picking winners' approach to industry policy. (Crowe D. 'Rudd's new deal', AFR, 7-8/2/09)

Rudd's essay is pretentious and self-serving twaddle. Last 30 years have seen major increases in human prosperity. There is a need for a sense of proportion about current difficulties, not visions of a new world order. Exposure to markets improve performance, and it unwise to pander to those who seek effortless gains through intrusive government. Downturns are inevitable. Rudd has shifted without justification from economic conservative to socialist. The essay is more a religious sermon than serious analysis. It expresses three items of faith: that neo-liberalism has dominated for 30 years; that it has failed; and that social democracy is the solution. Rudd enemy is neo-liberalism (that brand of free market fundamentalism, extreme capitalism and excessive greed which became economic orthodoxy). He suggests that neo-liberalism wants government to be replaced by market forces; dismisses social solidarity; and seeks to prevent governments investing in education, health and infrastructure. However this has never existed except in extremist theories. The former PM was often criticised for being a big government conservative. During last election Rudd scoffed at then Treasurer's warnings about financial tsunami. but now proclaims a 'seismic event' Another federal minister recently argued that nothing went wrong in Australia as a result of deregulation. If social democracy is the answer, why in UK (after a decade of 'third way' politics) in such trouble. All Rudd has done is claim moral superiority   (Abbott T., 'Misguided, would-be messiah', Australian,  7-6/2/09)

PM sees era of neo-liberalism ending and seeks to lead in the creation of a new social democratic era. This represents both political tactics and strategy. Social democrats were marginalised by Reagan and Thatcher revolutions. While Clinton and Blair gained power they merely seemed 'Thatcher and Reagan' lite. While policies improved, they operated in a neo-liberal cage. Researchers have been tying to find new recapture the commanding heights with ideas about how governments work that would allow them to increase both prosperity and social equity. Rudd is contributing to this. He has a pragmatic bent, but can talk intelligently about modern philosophy. His essay espouses both (a) a belief in free markets for generating wealth (b) a view that extreme adherence to the idea of small government (neo-liberal-extremism) has been used by the greedy to undermine sensible regulation - which led to the banking collapses that triggered the GFC. He suggests that neo-liberalism has caused a mess, and social-democratic state offers the best prospect of preserving the productive capacity of properly regulated competitive markets, while government is regulator; funder / provider of public goods; and that government offsets inevitable inequalities of the market with a commitment to fairness for all. He does not believe that free market is an end in itself - but exists to serve society. Social equality is a moral good. This is not surprising given his earlier criticism of the 'brutopia' that follows slavish adherence to Hayek's ideas, and his admiration of the Christian socialism of Bonhoffer. Rudd recognises that neo-liberalism won the economic and moral arguments by showing that it could make people richer - even if less equal; and that a lack of proper regulation and social inequality are now holding prosperity back (as illustrated by the GFC).  Publishing his essay in the Monthly demonstrates Rudd's commitment to the progressive intellectuals who made him (Glover D., 'PM's pitch to the intelligentsia', Australian,  10/2/09)

Rudd's essay could cause the Whitlam Government to be viewed more favourably. He suggested that government should offset the inevitable inequalities of the market to ensure fairness for all. All that Rudd (like Whitlam) was saying was that neo-liberalism does not have all the answers [1]

Former PM (John Howard) suggests that Rudd stretched facts in essay to score political points. Hoard argues that malign economic philosophy is not responsible for GFC, and that market forces are best means for regulating banking system rather than government. Rudd had argued that regulators had failed to stop extreme capitalism. Howard argued that: Rudd's position is contradictory and implausible. It ignored the fact that both sides of politics had pursued similar policies; that free trade and competitive capitalism succeeded. It suggested that Australia entered financial crisis in good shape, and yet declare former government guilty on neo-liberal extremism. He suggests that the GFC results both from some regulatory failures and from some unwise government intervention [1]

Rudd argues that it is time to modify failed economic orthodoxy of laissez faire by restoring stronger state regulatory role. This view is neither radical or new. It was a call to world leaders to rescue capitalism from its excesses - by reviving social market economic model that was successful in post-war Germany. Rudd's motive and timing were political - to label the opposition as neo-liberal. His argument reflects the need for social democrats to accept importance of the market, and for conservatives to accept that free markets alone can't solve all problems. It parallels idea of Veblen, Keynes, Joan Robinson, Galbraith, Thurlow, Kuttner and Skidelsky. It was the basis of ordo-liberalism in post-war Germany. It was argued in Remaking Australia, (1993) by Hugh Emy. (Barker G., 'The social market returns', AFR, 16/2/09)

In October 2004 Rudd had favoured neo-liberal policies (ie deregulation and reduced state) and criticised Liberals for wasting the legacy of reforms by Hawke and Keating governments with high taxes and spending. In the early 1990s in Queensland cabinet office he was known as a hatchet-man - freely axing government programs and personnel. Later his wife created a business network from Howard Government's privatisation of labour market programs. In 2006 however, seeking wider political support, he argued that neo-liberalism had a corrosive influence, and advocated industry policy - the antithesis of pro-market beliefs. During the 2007 election campaign he took a small government line - giving electors no reason to suspect that he would deviate from Hawke, Keating, Howard line. Following the election he promised to govern as fiscal conservatives. Now the GFC has encouraged Rudd to change direction again and denounce free-market capitalism. These U-turns damage his credibility. Rudd must be understood through prism of populism - which involves a flexible mode of pursuasion that encourages public to think about their problems in an unstructured way. It seeks to play on the fears of a nation, demonising external threats to a vaguely defined 'common folk'.   (Latham M., 'A man for all seasons', AFR, 20-22/2/09)

PM's claims that neo-liberalism got us into a mess, and that social democracy is the way out. He is right in suggesting that world became more market oriented from 1970s. But this was not right wing ideology (eg China did the same, and in Western countries where reforms were made few conservative governments took the lead). This was a pragmatic response to stagflation, poor work incentives, inflexible labout markets and failed public enterprises. Also this did not lead to reduced role for state. This liberalization also allowed rapid global growth that benefited Australia. In terms of generating speculative bubbles it may be that excessive and inappropriate regulation was more significant than deregulation. Like Rudd, governments loosened fiscal and monetary policy when trouble brewed. Investor complacency increased because of belief that intervention would also increase. It is hard to know what Rudd means by social democracy. The latter may be no more than a set of values - a sentiment in favour of fairness and equality that defies definition. Its inadequacy was demonstrated by the failure of British new Labor - while equivalents in Scandanavia and Germany have been abandoned. This lack of precision suits Rudd - whose goal is to be all things to all people. There is a need for serious attention to ideas in dealing with crisis - not emotional sloganeering [1]

Janet Albrechtsen argued (Australian, 1/4/09) that Kevin Rudd's essay was purely politically motivated, as his attack on Hayekian neo-liberalism was merely to get Left support to get Labor leadership. However Mr Rudd had expressed related views in 1998. It was also incorrect to suggest that he is not genuinely interested in the world of ideas. Outside Australia, Rudd's essay has been well received - though it has been widely criticised by the Right in Australia. The interlocking crisis of climate change and financial meltdown (brought on by the predatory behaviour of Wall Street) has left the Right with nothing to say [1]

A global depression is approaching. The previous depression (in 1930s) produced huge misery and led to rise to power of Nazis and world war. Side effects of current crisis (eg on Millennium Development Goals or responding to global warming) are uncertain. Causes of crisis are clear - interconnected developments in US financial sector (eg development of derivatives which ultimately generated a $600tr market (compared with $15tr US GDP); ideological convictions and political acts to support this (eg ending CFTC's regulatory powers; repeal of Glass Seagal Act - which transformed the character of US banking culture); lowering of official interest rates after Dot-Com bubble - which made money free to banks; growth of subprime mortgage lending - and the creation of derivates from this). What amounted to financial gambling was possible because: (a) those who were supposed to evaluate these assets had conflicts of interest and (b) Alan Greenspan believed that invisible hand of market was superior to any form of regulation. He saw derivates as a useful way of transferring risk - though Warren Buffet saw them as 'financial weapons of mass destruction'. There arrangements served the interests of US affluent classes. By 2008 sub-prime and derivates markets crashed. When Lehman Bros failed without being rescued, financial markets froze. As derivates' market had been globalized (especially involving credit default swaps) so global markets also froze. Though $US13tr has been given to financial institutions to unfreeze markets, this has not happened and global economy faces major problems. Australia's PM (Kevin Rudd) described this event as marking the end of an era. Since WWII there have been two eras: (a) the first involved two compromises (between capital and labour and between state and market) under Keynesian ideas which seemed to solve underlying problems in capitalism; (b) the second (led in by Thatcher and Regan) involved contraction of the role of the state and global expansion of free markets. The spirit of Hayek and Freidman prevailed. Rudd labelled this era: 'neo-liberalism'. Just as stag-flation had killed Keynesian compromise, so Rudd argued that GFC would end the neo-liberal era. Rudd's essay sought to explain this, and show how better outcomes could be achieved. Neo-liberalism was founded on faith in free markets as source of order and prosperity. However this proved lethal, and destroyed much of global economy. Rudd argued that neo-liberalism could thus be seen as a flawed philosophy which merely justified inequality and greed. He labelled the alternative: social democracy - which would restore the balance between state and market. It would seek social justice (which neo-liberals, following Hayek, had sought to anathematise). This would be associated with global collaboration to manage global economy and reduce poverty. The first international priority would involve the creation of a new regulatory framework for financial markets (to avoid political outcomes like those in 1930s). Rudd's essay had weaknesses: (a) lack of attention to GFC impact on global warming issues; and (b) he exaggerated his differences with neo-liberalism - noting that most such policies were introduced in Australia by ALP governments. Neo-liberal impact has not been uniform around the world - having been diluted by national cultures. As it was introduced in Australia by Hawke and Keating governments it did not lead to unravelling of social-welfare state. In US however Republic governments cut taxes for wealthy and failed to balance their budgets. However Rudd's argument was fundamentally sound. State action had been regarded with suspicion for 30 years in favour of faith in markets. GFC proved this false. Thus a new era would emerge to balance state and markets and also economic efficiency and social justice. The response by commentators to Rudd's essay was negative and ill-informed (ie essay was described as being about Australian politics rather than global issues; and the significance of GFC was simply not understood by most commentators).  (Manne R., 'Neo-liberal meltdown', The Monthly, March 2009)

PM's essay proved that 'neo-liberalism' is a sloppily used word. It was invented in 1930s when it was believed that liberalism and capitalism had caused the economic crash, yet socialism was rejected. Neo-liberalism was proposed as the middle way by Alexander Rustow - involving a market economy and a strong state. Dietrich Bonhoeffer, whom Mr Rudd nominated as the person he most admires, was connected to the German neo-liberal movement [1]

 

2006 Commentary An Alternative to Market Fundamentalism?
Introduction +

In a 2006 address at the Centre for Independent Studies (arguably the leading advocates of liberal market economics in Australia),  a federal Opposition frontbencher (Keving Rudd) presented a case for social democracy as an alternative to what he called 'market fundamentalism' which was seen to be derived from Hayek's theories about society..

That address (of which a summary was later published [1]) suggested that:

  • Fredrick Hayek's ideas favouring unfettered markets and opposing state regulation have had a large effect on Western societies over the past few decades (eg in UK under Thatcher and US under Reagan);
  • Hayek argued that altruistic feelings that human beings have for one another in small tribes, are redundant in more complex societies - where markets produce better outcomes. Rational behaviour is not assumed as a precondition for markets, but as being forced on people by competition;
  • Hayek's ideas currently affect Australia in relation to, for example:
    • recent industrial relations reforms - which can adversely affect families;
    • failure to respond to climate change - which should have been recognised as a classic market failure requiring government intervention; and
    • failure of US and Australian neo-cons in Iraq - where nation building was rendered more difficult by Hayeks views about the minimalist state;
  • social democrats seek to support markets without discarding a social justice commitment. They draw inspiration from Adam Smith who saw human beings are both self-interested and altruistic;
  • Hayek regarded the market as an internally regulated system that maximizes individual liberty. Under this view, markets create a 'game' whose outcome is the only determinant of the just allocation of resources. Governments main role is to protect the market. Hayeks markets, unlike Smiths, should be detached from politics. Hayek concedes the existence of public goods, but does not define their extent. Hayek excludes families from his self generating order but does not explain why altruism in families would be any less primitive than in other social relationships;
  • social democrats reject Hayek's views because (a) altruism is not a primitive value - and can be market enhancing (b) all human beings have an equal intrinsic value (c) liberty and equality of opportunity are not mutually incompatible (d) education, health and the environment are public goods - though there can be a mixture of public and private provision (f) human relationships are incubators of human capital and (f) politics is needed to craft constituencies able to deliver market-friendly outcomes - tempered by social responsibility; and (g) tempering the market with such interventions does not lead to totalitarianism as Hayek had predicted it would (eg as shown by the Blair-ite enabling state);
  • social democracy is shaped by Smith not Marx - and has always respected the market while recognising a positive role for the state to prevent market capitalism tearing itself apart. There are many examples of markets not working perfectly. Social democrats favour an approach shaped by Smith, Keynes [who focused on monetary systems and the macroeconomic effects of public spending] and Samuelson [who made many contributions such as in neo-classical and mathematical economics], rather than Hayek and Friedman [who critiqued Keynes' ideas [1] and emphasised: the primacy of markets in allocating resources; individual responsibility [1]; and the need to control inflation through monetary policy [1, 2]]. Social justice is an essential component;
  • Hayeks world view is not only challenged by social democrats, but by many in the centre-right of politics. Hayeks attacked conservatives for a sentimental commitment to tradition, and no commitment to markets. The moderate / social justice stream in Australia's Liberal Party is extinct;
  • market fundamentalism is incompatible with protecting community life. Moreover, while collectivism can be anti-democratic, free competition can create a greater tyranny for most.

Unfortunately the address reflected a pseudo-intellectualism, whose main effect seemed to be to bluff those who have not studied these subjects with high-sounding words.  In brief it will be suggested that:

  • while Hayek had a major influence on the emergence of market liberalization strategies, this arose from his work which discredited state economic planning - and his theories about social relationships appear to have had no practical impact. Thus, while there are difficulties associated with market liberalization strategies as they have been applied in Australia, Hayek's social ideas have nothing to do with this;
  • the address touched on many important issues - but did so in a fairly superficial way. For example: altruism (which Hayek devalued) is not only socially significant when practised by governments; altruistic government is not the key to correcting the specific problem areas that were identified or the difficulties that have come to affect governments generally; and a lack of individual altruism now apparently causes many social problems, and this requires 'church' (not 'state') initiative; and
  • more realistic options to overcome difficulties associated with a heavy reliance on market mechanisms were identified two decades ago.
Hayek's Influence

Hayek's Influence

The address advocated 'social democracy' as a better political option for Australia. This appears similar to the (so called) 'third way' approach to politics developed in the UK, which has previously been suggested (eg by Mark Latham) as a basis for reform in Australia.

However the case for this was rationalized primarily by mentioning contentious issues (industrial relations reforms, Iraq and climate change) and arguing that adherence to Hayek's ideas about reliance on markets as the primary means for organising society are the cause of those problems.

There is little doubt that Hayek's ideas have been significant in relation to discrediting government economic planning. In 'The Use of Knowledge in Society' (1945) Hayek demolished the credibility of state economic planning by pointing out that the information required to develop such a plan was dispersed throughout society and could not be assembled by any central 'planner'. This contribution to economics has parallels in:

However the address focused only an obscure aspect of Hayek's ideas which has not, as far as can be detected, had any material impact on public policy in Australia or anywhere else (eg the present writer had never seen Hayek's views about altruism mentioned or advocated by anyone, and the Wikipedia article on Hayek does not mention that aspect of his ideas).

Neither do Hayek's ideas on such matters seem to have affected public policies in Australia - as:

  • government spending on public goods and services has increased rapidly, as have equalizing social transfers by the federal government (though the increases have not focussed only on those who are worst off);
  • the prime minister was seen (a) as anything but a free-market fundamentalist (eg considering support for Medicare, and redistribution through family payments) [1]; and unlikely to have been well thought of by Hayek who opposed all monopolies [1];
  • the National Competition Policy specifically recognised that governments might choose to seek outcomes in the public interest that were different to those emerging through a competitive market;
  • the next stage of COAG's national reform agenda accepted in February 2006 has been focussed on boosting human capital.

Overall it appears that 'social democracy' has been alive and well.

Thus, though real problems have emerged as side-effects of the market liberalization that has been emphasised since the 1980s to promote faster economic adjustment (eg Defects in Economic Tactics, Strategy and Outcomes and Review of National Competition Reforms: A Commentary), the above-mentioned critique of Hayek's social theory seems pedantic and of relevance only to an extremely limited range of specialists.

An aside: the present writer is by no means an expert on Hayek's work and based the above comments on the assumption that Rudd's address correctly described Hayek's social theories. However another observer suggested that he had not done so [1].

Substantive Issues

Substantive Issues

The address touched on many important issues - but unfortunately seemed to do so in a superficial way. For example:

First, there are certainly good reasons for disputing Hayek's belief that altruism towards others should be regarded as a 'primitive' value.

For example, it seems (from the practices adopted by non-Western societies) to be believed to be socially irresponsible to create legal and governance systems which assume individual liberty in the absence of internally-driven altruism towards others by individuals. Moreover because of the limits to rationality that affect complex systems, individual liberty is vital for rationality to be able to be used as an effective method for economic problem solving in the simplified local economic space created by markets and legal systems (see Cultural Foundations of Western Dominance).

However altruism has different implications for a society as a whole - because (quite apart from the distorting impact of interest group politics) governments deal with complex systems in which:

  • it can be very difficult to correctly perceive cause / effect relationships; and
  • counter-intuitive responses are common [such as the phenomenon of welfare dependency].

Thus, while altruism is relevant to good government, there are constraints on governments' ability to be altruistic - as shown by the problems that arose as a consequence of the 'great society' experiments in the 1970s (in the US under Johnson and in Australia under the Whitlam administration).

Second, the specific current issues identified in the address as prime examples of the inadequacy of a Hayekian approach to society are all far more complex: In particular:

  • while the 'Work Choices' industrial relations system based on individual contracts is likely to prove inadequate, business is just as likely as families to find it unsatisfactory, because (a) the system requires heavy federal regulation and (b) individual contracts will probably not ensure the teamwork required to enhance productivity through flexible change (see Is 'Work choices' a Good Choice for Work?);
  • while attempts at nation-building in Iraq have been anything but a sparkling success partly due to idealistic attempts to develop a liberal market economy, the problem was not simply the economic model.  Rather the bigger problem seemed to be neglect of the fact that there are many cultural and institutional preconditions that must be in place for such models to work - an oversight that applied also to attempts to create a democratic political regime (see Fatal Flaws);
  • climate change seems much more complex than the agenda which is now griping the public mind (and the attention of political populists).

In none of these cases does it seem likely that the adoption of a more 'altruistic' approach by social democrats would lead to better solutions. Rather what seems to be required is a great deal more hard and technically difficult work.

Third, there are far more significant challenges to effective government than can be addressed by (social democratic) politicians being more 'altruistic'.

Contrary to suggestions in the address, governments in Australia have been anything but reluctant to spend money on public goods.

In fact spending on health and education has exploded - but been ineffective because it has not been capably used.

For example, in the case of Queensland's hospital system (and the many other public functions in Queensland that have suffered crises in recent years) it seemed that highly politicised and centralized government machinery, which had been established by the Goss administration, was a primary cause of the problem (see Queensland's Worst Government?; Intended Submission to Health System Royal Commission).

Politicisation eliminated relevant knowledge, skills and experience, while centralization reduced access to practical considerations - and gave rise to the (so called) Queensland Effect - where an initially popular government suffers a huge electoral backlash because it has become out-of-touch and is seen to be autocratic. 

This problem is not confined to Queensland (see Decay of Australian Public Administration: A Diagnosis). The latter highlights the unresolved difficulties embedded in the naive implication in the address that it is a trivial matter to arrange for public goods and services to be 'provided by a mixture of public and private entities' (see also Neglected Side Effects of National Competition Policy).

Moreover, quite apart from the loss of competent support for elected governments, there seem to be many other challenges to effective government that will not be reduced simply by a more altruistic (populist?) attitude by political leaders. Australias Governance Crisis identifies issues such as:

  • declining practical potency of democratic institutions (eg because the increased complexity of the issues they are having to deal with renders individual understanding and public debate less effective, and makes unintended side-effects more likely);
  • federal - state financial imbalances that for decades has led to irresponsibility, buck passing, duplication and complexity - problems that are now being compounded by the federal government's efforts to centralize control in many new areas;
  • attempts to politicize the head of state - whose apolitical character has been the foundation of the constitution by holding all executive powers and making them available to elected governments without using them to pursue any independent political agenda;
  • erosion of the moral foundations needed for a legal system that assumes individual liberty  (apparently as a result of the radical individualism of the me / baby-boomer generation).

Finally, as discussed in relation to the latter point, many current social ills seem to reflect an inadequate individual ethical basis for interpersonal morality (and a consequent lack of individual altruism).

Thus the challenge of correcting many current social dysfunctions has to be met mainly by the 'church', as attempts to impose values on individuals through the 'state' would have serious adverse side effects. 

A Real Alternative

What Could Be Done

Methods which could have enhanced the effectiveness of market liberalization and reduced the adverse social and environmental consequences were suggested in Queensland by the present author in the 1980s and published in the early 1990s. In some respects this appeared to reflect an important breakthrough in understanding the central role which knowledge plays in economic development and growth.

There would be benefits in establishing apolitical mechanisms (operating on democratically endorsed protocols) to accelerate economic and community development . Such methods would:

  • accelerate learning within industry clusters about systemic changes that might enhance overall productive performance (eg see Developing a Regional Industry Cluster).  Despite claims about Australia's 'miracle' economy, performance remains in need of improvement (eg see Impact of Economic Liberalism in Australia and The Need to Do Better) and the new 'national reform agenda' is most unlikely to be adequate (see Comments on new National Reform Agenda);
  • strengthen non-governmental community and economic systems that would better enable disadvantaged regions and groups to prosper. The quality of support from social contacts, business as well as civil and economic institutions is often likely to be more constructive in creating sustainable gains for the disadvantaged than direct state support; and
  • facilitate systemic changes within the community itself. This might, for example, be relevant in relation to encouraging a shift in behaviour to give priority to prevention rather than struggling to meet the exploding tax and insurance costs of medical care (see Commentary on Directions for Health Reform in Australia).

In some respects this would be similar to the core intent of the 'enabling state' as envisaged in the UK (which has attracted its share of criticism), but would overcome the constraints that exist on the democratic state itself - ie that it must struggle to 'enable' citizens and business to become independent rather than more dependant (see Economic Solutions appear to be beyond Politics; and Public Service Champions for Aboriginal Communities?). 

An earlier interview suggested that Rudd expected the civic entrepreneurship role in an 'enabling state' in Australia to be taken by members of parliament [1], whereas it seems likely that such persons are the least least well equipped to carry out such a role, because:

  • they carry the baggage of government (ie the ability to call upon government resources to a greater or lesser extent) which must usually distort (eg create dependency in) any community structures they seek to create; and
  • to be constructive entrepreneurship of any sort must involve doing something new / risky, and the political system is always obliged (by the electoral process and the need for public support) to conform to what 'everyone' (ie > 50% of community) already knows about (eg climate change) rather than venturing outside this as real entrepreneurs would do (eg see Economic Solutions appear to be beyond Politics which examined why politically endorsed economic strategies in a democratic system must always be economically unproductive). 
Feedback

In response to the above:

A prominent ALP supporter indicated agreement, and further suggested that: 'Rudd's critique of the right is just hot air'; and that what matters is what political leaders do not what they say.

However the practice of autocratically enforcing their 'hot air' (ie half-baked ideas) has been the primary failing of many disastrous  governments (see The Decay of Australian Public Administration).