Challenging the Old Story

Perspectives

This morning I met with a local political leader who has been active in the Labor Party for some time. As we sat talking about the need for better organisational infrastructure for the Blue Mountains arts and culture sector, so that as part of Civil Society, they had a collective voice with which they could talk with all levels of government, the media, and business, she confessed to me:

Among the younger generation of Labor Party members and activists, when thinking about economic policy, they take for granted the legitimacy of neo-liberal economic theories as self evident.  They grew up with this being the prevailing orthodoxy that came to dominate public policy since the Thatcher-Reagan era, and which also influenced the Hawke-Keating Government.

This neo-liberal orthodoxy that took over economic thinking in the universities and think-tanks is part of a general attempt in the social sciences to re-invent themselves as ‘scientific’ based on mathematical modelling, behavioural statistics, and efficiency measurements.  The economy came to be seen through the peculiar lens of mathematical models based on criteria that could be measured, rather than what was actually going on in society and business.

Economics was invaded by the language of utilitarian thinking in the search for ‘scientific objectivity’ that belied its ideological or moral nature in the way resources were allocated and whose interests they served.  Despite mounting evidence of the failure of these ideas to deliver the outcomes they promised, this orthodoxy continues to dominate the political debate and the thinking of the mainstream commentariat and academy. This very language is what is so alienating to the mainstream and feeds their anger and sense of disenfranchisement, of being unheard.

It is why we see the populist Politics of Rage breaking out under the umbrella of a wide range of conspiracy theories and individuals frustrations.  Part of the psychological story of neo-liberal thinking is the shift to hyper-individualism and rights, away from community and responsibilities.  This conflict is highlighted in the new emphasis on community resilience in the face of pandemics and natural disasters which are expected to increase with climate change.  Thus the populist Politics of Rage expressed in globally coordinated anti-vaccination demonstrations show a strange combination of hyper-individualism (my individual rights to freedom) while at the same time the search for communities of shared value and experience created through social media.

Rather than riding this populist wave for political gain, our leaders need to be mindful that it is actually a result of the failure of conservative mainstream neo-liberal economic thinking, so they are feeding the very beast that is angry with them.  There are echoes here of Hitler’s brownshirts during a similar period of economic dislocation in Germany after WWI, and similarly among the fascist movement in Italy.

The Failure of the Intellectual Elites

Never has it been more important to understand the forces of failed orthodoxy that have beguiled some of the most highly educated members of our political, media, academic and business leaders.  It is why the populists and their followers carry such venom towards ‘elites’ and the idea of ‘draining the swamp’, and why they are so vulnerable to the likes of Trump and his ilk who seek to milk the rage for their personal gain in wealth and power.

This failure has also played out in the debate about domestic violence and opportunistic sexual abuse highlighted by Grace Tame and Brittany Higgins and the failure of male-dominated political, business and media elites to address this situation in meaningful actions.  As Grace Tame so succinctly put it, the much announced program of respect education among school children to help prevent the pervasive culture of abuse (of power) and misogyny that has existed for so long, amounts to 11 cents per child per year.  When set against the cost of submarines, or the extraordinary amount of money the Government is willing to spend on keeping asylum seekers who are wanting protection (the company behind Australia’s offshore processing regime on Nauru made a $101m profit last financial year – more than $500,000 for each of the fewer than 200 people held on the island) the distorted sense of priority and value is starkly revealed—so cynicism stalks the land.

The Impact on Creative Arts and Culture

Under the influence of neo-liberal economic orthodoxy, creative arts and culture has been re-badged as ‘creative industries’ and ‘entertainment’ progressively being shaped by what is being called the ‘attention economy’ in clickbait algorithms driven by advertising.  Public investment in creative arts and culture now must compete on the basis of performance and economic benefit to the economy, while the cost structure of education in these ‘unproductive’ fields is now structured to shift the subsidy to STEM (science, technology, engineering and mathematics) on the basis of their ability to drive commercialisation of knowledge into profitable products and services in the ‘knowledge economy’. Knowledge that contributes to social cohesion, cultural understanding and the creative arts is seen as ‘luxury’ in the fierce competition for research funding.  People working in the creative arts and culture sector have some of the lowest and most insecure incomes in the economy.

Challenging the Orthodoxy

Mariana Mazzucato, Professor in the Economics of Innovation and Public Value at University College London, is the Foundation Director of the Institute for Innovation and Public Purpose.

She is one of a new generation of female economists who are challenging these old orthodoxies and promoting new ways of thinking.  She argues that societies ought to abjure the tired ideologies that have so clearly failed to deliver on their promise, and embrace what she calls ‘mission’ thinking.  She argues we have to redesign Western market-led capitalism, because the years of privatising state-owned companies and outsourcing essential services have left governments unable to meet the challenges we face—leading to a crisis of not only capitalism, but of the liberal democracies that have triumphed since the end of WWII with their promise of delivering improved standards of living for their societies, and providing a safety net for the vulnerable. The rising accumulation of wealth among the 1% at the expense of the majority of the population now makes a mockery of this promise for an increasingly larger percentage of the population.

The following are excerpts from her 2020 book, Mission Economy, which follows her earlier books, The Entrepreneurial State: Debunking Public vs Private Sector Myths (2013) and The Value of Everything:Making and Taking in the Global Economy (2018).

Neo Liberal Economic Theory Orthodoxy and the Crisis of Capitalism

From global heating to biodiversity loss, human activity is eroding the conditions necessary for social and environmental stability. Rather than having a sustainable growth path, capitalism has built economies that inflated speculative bubbles, enriched the already immensely wealthy 1 per cent and are destroying the planet.

The profits to wages ratio has continued to rise. Between 1995 and 2013, real median wages in OECD countries grew at an annual average rate of 0.8 per cent versus 1.5 per cent growth in labour productivity. Thus the majority of productivity gains of labour were captured by profit not labour.

In the period 1979-2018 real wages for the 50th and 10th percentiles of the wage distribution stagnated: there was 6.1 per cent cumulative real wage change over the whole period for the 50th percentile, 1.6 per cent for the 10th percentile—versus 37.6 per cent for the 90th percentile. In rich countries, private wealth-to-income ratios increased from 200-300 per cent in 1970 to 400-600 per cent in 2010.

The COVID pandemic disruption to global supply chains has revealed how fragile capitalism is, with its reliance on attenuated global supply chains to cut costs and reduce the bargaining power of their on-site workers, proved to be an Achilles heel.

The Uber driver and Uber as a multinational corporation is deliberately designed to shift risk from company to worker. Yet it has been the low-paid and disregarded workers—garbage collectors, postal staff, hospital cleaners, care workers, bus drivers, warehouse staff, delivery drivers—upon whom society came to depend during the COVID crisis, not corporate bosses, financiers and residents of tax havens.

A deep sense of injustice, powerlessness and distrust of elites—especially business and political elites—has eroded faith in democratic institutions. The consequences of deeper forces at play through the neo-liberal economic orthodoxy that together have led to a dysfunctional form of capitalism:

  • The short-termism of the financial sector
  • The financialisation of business
  • The climate emergency that is destroying the conditions for human societies and other life forms
  • The slow or absence of government responsiveness.

The Four Key Sources of the Crisis of Capitalist Societies

1. Financialisation of Economy

—the finance sector is largely financing itself, with most money flows going to finance, insurance and real estate (FIRE) rather than productive uses. This is burning the foundations on which long-term economic growth rests.

In Advanced Economies:

In 1970, real estate lending comprised 35% of all bank lending

In 2007, real estate lending comprised 60% of all bank lending

2. Business has also been financialised

—with a greater share of corporate profits used to boost short-term gains in stock prices, aimed at maximising returns to shareholders and executives who take remuneration in the form of stock, not stakeholders. Many companies spend over 100% of their net income on a combination of buy-backs and dividend pay-outs thus raiding their capital reserves.

The chief culprit is a form of corporate governance obsessed with ‘maximisation of shareholder value’, essentially maximising stock prices. Thus financial structures benefit owners more than other stakeholders such as workers, suppliers and customers, let alone the wider community.

3. Global warming is the result of the financial sector supporting a fossil-fuel driven economy

—with subsidies to fossil-fuel companies estimated at $20bn in USA, and 55bn Euros. Of COVID recovery funding by G20 governments, 56% went to fossil-fuel projects, equivalent to $151bn

4. Governments, under neo-liberal economic thinking have seen themselves as fixers of market failure

—that capitalism works through ‘market mechanisms’ that are driven by the natural tendency for individuals (economic rational man) to pursue their own self-interests, each maximising his/her own objective functions: consumers maximise their utility, workers maximise their preferences between leisure and work and companies maximise their profits.

However markets are not outcomes of individual decision-making but of how each of the value-creating actors is governed, including government itself. Markets are embedded in rules, norms and contracts affecting organisational behaviour, interactions and institutional designs.

This includes decisions to reduce taxes on capital gains by allowing interest payments on debt to be offset against corporate taxes and by deregulation that socialises externalities, such as environmental degradation and increased unemployment, and privatises profit to individual owners and corporations (legal individuals).

The Five Myths that Impede Solutions

Neo-liberal economic theory became accepted as orthodoxy during the Thatcher-Reagan era.

Myth 1: Businesses create value and take risks; governments only de-risk and facilitate.

Government’s job is merely to set the rule of the game, regulate, redistribute and fix market failures. As a result public institutions have lost the capability to act.

The ideology of efficiency through privatisation and outsourcing has led to high costs, poor service, capture of government contracts by small numbers of firms and contracts that often leave taxpayers with risks they thought had been transferred to private firms. This policy socialises risks while privatising profit/reward.

However, evidence shows that nearly every other technology that makes our smart products smart was funded by public actors, including early stage investments made in the pharmaceutical industry by public actors like national institutes of health. Globally the actions of public agencies across the entire innovation chain have also been crucial, allowing innovation powerhouses to emerge – Taiwan, Israel, Japan, Singapore, Sth. Korea.

Only after the risk had been absorbed by the public sector did private businesses take advantage of the new opportunities created by the innovation.

Myth 2: The purpose of government is to fix market failure

Market Failure Theory (MFT) has its origins in neoclassical welfare economics – the so-called fundamental theorem FFT (Pareto) of welfare economics states that markets are the most efficient allocators of resources under three specific conditions:

  1. There is a complete set of markets so that all goods and services supplied and demanded are traded at publicly known prices
  2. All consumers and producers behave competitively
  3. An equilibrium exists (the forces of change in opposing directions are balanced).

MFT suggests that government intervene when the market fails due to positive externalities, negative externalities and information asymmetries.

An even more limited role for governments resulted from the development of public choice theory, which applied neoclassical welfare economics to political decision making. The axiom underlying this theory is that bureaucrats and politicians behave, like free market actors: they rationally seek to maximise their ‘utility’.

Myth 3: Government needs to run like a business

Public Choice Theory led to the development of new public Management (NPM) theory which introduced some equivalent of the profit motive into the public sector to improve performance – for eg efficiency targets and dividends and performance bonuses.

Another strategy has been contracting out, franchising or privatising government services. This was widely implements in the 1980s and 1990s in Australia, NZ and the UK. Thus hospital patients became ‘clients’, students became ‘customers’, transport passengers became customers – using ideas of value for money calculations and cost-benefit analysis for allocative or distributive efficiency to satisfy consumer preferences with the most efficient combinations of resources. One result has been the progressive corporatisation of universities, which in Australia have some of the highest staffing casualisation rates/insecure work of any industry.

Myth 4: Outsourcing saves taxpayer money and lowers risk

The impetus was to make the public sector as efficient as the private sector – leading to extensive privatisation, public-private ventures and outsourcing – in the health, transport, utilities, communications, housing, prisons, security and infrastructure sectors.

Evidence in the US shows that government approves service-contact billing rates, deemed fair and reasonable, that pay contractors 1.83 times MORE that government direct employees and more than twice the compensation paid in the private sector for comparable services.

Thus while public sector costs keep rising, the public sector has been continually cut through ‘efficiency dividends’.

The amount of public subsidy to contracting firms has more than doubled since privatisation, meaning that the profits made by private operators are ultimately underwritten by the taxpayers. One prime example if tollways. Big consultancy firms like McKinsey, Ernst & Young, KPMG, Deloitte and PWC have been the biggest winners seeing their profits rise by 20 percent between 2017 and 2019 in the UK, with expenditure rising from 77 sterling to 464 sterling. Governments have used outsourcing contracts to distance themselves from political consequences in conflicted areas like immigration, with contract details ‘commercial in confidence’.

Example: the company behind Australia’s offshore processing regime on Nauru  made a $101m profit last financial year – more than $500,000 for each of the fewer than 200 people held on the island. Rard No 3, the holding company for Canstruct International, which has the government contract to run the Nauru offshore processing centre, has more than $340m in cash and investments, according to its most recent accounts filed with the corporate regulator. When Canstruct International was initially awarded the Nauru contract in 2017 the company had $8 in assets.

Myth 5: Government shouldn’t pick winners

‘Picking winners’ refers to government efforts to steer the economy and stimulate activity by choosing and often supporting technologies, business and sectors it believes are important and will succeed. However during periods of technological shifts, government can play a critical role in coordinating industrial efforts and setting standards that create markets. Picking winners can be confused with state support for troubled industry, but support for innovations, sector and businesses of the future is quite different from this.

What governments need to do is to set a direction, and within that direction take a wide portfolio approach to foster and catalyse new collaborations across multiple sectors, with a key spillover being the growth of firms that engage with it.  The market of individual competitive actors cannot do this.

Value emerges from the interaction of the public and private sectors and civil society – government policy helps to shape markets as do other actors.

The Corruption of Democracy

As Robert Reich pointed out in an article in the Guardian on 14 February 2022, the foundations of stable liberal democratic governments, established after WWII as part of reconstruction efforts from the results of the war, have been progressively eroded under the neo-liberal economic orthodoxy.  They have now morphed into oligarchic systems, ruled by very wealthy elites ruthlessly pursuing their own interests.

America’s oligarchic wealth, meanwhile, has now reached levels rivaling or exceeding those of Russia and China. During the pandemic, America’s 745 billionaires increased their holdings by 70%, adding $2.1tn to their wealth in just over a year. As early as 2012, more than 40% of all money spent in federal elections came from the wealthiest of the wealthiest – not the top 1% or even the top tenth of the 1%, but from the top 1% of the 1%.

Capitalism is consistent with democracy only if democracy reduces the inequalities, insecurities, joblessness, and poverty that accompany unbridled profit-seeking.

This trend to oligarchy is starkly evident in the US, but also pervasive in the UK, and growing in Australia through the influence of political donations to political parties and the business lobby industry, particularly from the Gambling and Mining sectors.  At the same time in Australia, the present government has sought to curtail the capacity of civil society activist organisations to operate as tax deductible charities on behalf of environmental and welfare concerns.