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.

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 (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).