A.S. Holmes, “The Good Fight,” Giblin Memorial Lecture delivered at the 50th ANZAAS Congress, Adelaide, 14 May 1980.
Subsequently published in revised form in Economic Record, 57, 156, (March 1981), pp. 1-11; and The Good Fight: Essays in honour of Austin Stewart Holmes (1924-1986), edited by Chris Ulyatt (Perth: The Australian Institute for Public Policy, 1989), pp. 20-37.
1. Introduction [Table of Contents]
It is both a great and a daunting honour to be asked to give a Giblin Lecture.
One of my regrets is that I never met Giblin; in fact the only associations I can claim are quite second-hand and through two people who treated me with a kindness which might not have been warranted with proper foresight. One was my tutor at Cambridge, Brian Reddaway. As a young man, his career was touched by the generosity which seems to have been characteristic of Giblin — for example, the post of Research Fellow in Economics at Melbourne University, which Reddaway occupied in 1936 and 1937, was established by Giblin’s agreement to divert fees due to him after he became a member of the Commonwealth Bank Board in 1935.
My other highly indirect connection with Giblin was through my first boss in the Commonwealth Bank. On Giblin as a man of affairs, Peter Garland wrote of the need, in connection with the Premier’s Plan, “to detect, if possible, the pungency of Giblin’s gin in Copland’s cocktail.”1 On Giblin as a scholar, I recall Pete’s story of how “Giblin used to read pages of statistics like other people read novels.” Giblin also read his share of novels but the man we commemorate in this lecture has a great curiosity and a great regard for facts.
I have called this paper “The Good Fight” — a title prompted by a hymn which some of the older among us would have heard when we were young. The people I heard singing it went along with its author in the importance he put on serving God’s will but they had little trouble in accommodating within that will, and within the good fight, efforts to get a higher price for wheat. Without pretending to know much about God’s will, the good fight to which I refer is the struggle to get good sense (economic rationality if you like) into our economic affairs and, more specifically, into the economic policies which influence those affairs.
The precepts of comparative advantage seem to suggest that I should spend more time on description than on analysis. In any case, things have turned out this way. The headings used in the course of the paper are reproduced below; this may help readers to get a broad view of the topics to be discussed.
II. The Setting
— administrative feasibility
— electoral cycles
— ideology of the party in power
— pressure groups
— public opinion
— time lags
— the need for efficiency
V. What Next?
VII. End Piece
Section II discusses various factors which I think have an important bearing on policy-making. The division of Actors into Advisers and The Advised should be clear enough. Much of the paper concerns problems of allocation but Section IV looks briefly at the problems of unemployment and inflation. Section V is a little speculative and seeks to look at how things like opinion might change with or without drastic changes in policies. Section VI offers a few words of advice to advisers. Section VII may seem the traditional piece of piety but I mean what I say.
II. The Setting [back to Table of Contents]
Administrative feasibility [back to Table of Contents]
Let me start on those background factors with a look at difficulties in administration. I sometimes think no economist should be allowed to advocate intervention until he has rubbed his nose for a while in some of the problems of drafting legislation and, subsequently, of administering it. One economist who became Secretary of the US Treasury has spoken feelingly of the “frustration of the economist [as] the essence of a tax question moves swiftly from general principle to the excruciating detail of legal distinctions between potential cases.”2
Similar examples could be spelt out in their thousands. From my own background:
- The prevention of certain types of transactions through use of exchange controls may seem a fairly simple matter but some of my colleagues spend a lot of time deciding which rules apply to particular practices and to particular transactors.
- I once had to think about whether or not pharmaceutical benefits could be confined to drugs which could save lives or curtail severe suffering. I soon came up against drugs like tetracycline which can be used in the treatment of one disease as lethal as bacterial pneumonia and of another, acne, which was rarely painful but could be either disfiguring or quite benign. In this case, what might have seemed a simple scheme requiring only a classification of medicaments would have ended up with having to inquire into the condition of each person for whom particular drugs were prescribed; it would also have required a view about where psychological discomfort of varying degrees stood in the scale of pain.
All in all, many proposals which at first sight look as if they involve only simple programmes can come to require appreciable intellectual resources if bugs are to be ironed out, and very considerable clerical resources for their administration.3
Electoral cycles [back to Table of Contents]
Let me move on to electoral cycles. The dates set for elections are often blamed for desires to distribute goodies at particular times and for the harsh timetables imposed on the grasping of nettles. One common suggestion is to lengthen the life of parliaments, though the more whimsical sometimes wonder if the real or alleged problems could not be more effectively minimised by setting the life of parliament so short that at each election both the goodies distributed and the results of grasping nettles were equally prominent in the memories of voters. It may be that some mixture of experience and sophistication among electors is reducing the temptations once inherent in this cycle.
Ideology of the party in power [back to Table of Contents]
The next item on my map of the environment within which policies must be decided is the ideology of the party in power. Strictly, the term, ideology, probably only covers pure values but there is a grey area in which experiences and values (themselves not entirely independent) influence judgements about facts which we do not properly understand.
Even what a strictly values comes in many permutations and combinations but, in the political field, there seems to be some sort of polarisation around issues such as:
- the role of economic equality and economic security in promoting a good life;
- the preferences involved in deciding how much redistribution now one would be prepared to trade for how much loss of product in later periods;
- views about proper relationships between the individual and the state.
At least in countries in which governments still face voters from time to time, it is the job of advisers to give the best advice they can on possible ways of achieving whatever ultimate goals a government may have — or find another job. Advisers sometimes encounter issues which in principle could be settled by a resort to facts but in which either facts are uncertain or the conclusions drawn from there are less than fully established; the final rub is encountered when belief remains impervious to either facts or conclusions. None of us is completely clean on this front but the areas in which we are least clean vary a good deal with upbringing, other training and other experiences in life. This sometimes draws a line between bureaucrats and politicians. In the end, ministers have to do their best to assess and deploy advisers and advisers have to deal tactfully with beliefs that profits do not matter or than any expansion can be led by investment.
Ideology probably matters most in the run up to elections. Promises made during election campaigns often matter most in the early days of a government. Later on, the facts of life (including fresh events) require more and more effort to be devoted merely to keeping the show on the road.4
Inequality [back to Table of Contents]
The next item on my list involves questions of inequality and/or equity. These questions probably create the most confusion and most heat. Some people rally under egalitarian banners when their concern is reduction in inequalities of income. Others seek equality of access to services such as education or health while some seem to want to move towards an equalisation of capacities to face and enjoy life. Still others think there is inequity if skill or effort do not receive particular premiums and sometimes we encounter those who wish to treat, say, education as an investment in human capital with allocation decided in a fashion which would equalise at the margin returns somehow defined.
Even if we eschew aspects as fascinating as those of educational doctrine and confine ourselves to the issues more usually dealt with when governments seek to alter the distribution of purchasing power from that which would be allocated by markets, we face not only genuine differences in values but all those questions of trade-offs, principally with future outputs, which are so difficult to settle — partly because full adjustment takes so long but partly also because judgements on facts are so easily coloured by beliefs.
Nor can one spend long in this field without encountering various ideas of a fair shake in which views on who deserves help are only derived vaguely, if at all, from the facts of relative incomes. A good many people, for example, want to classify the poor as either deserving or undeserving. Others think that the impact of location on the cost of providing services should be offset.
The most expensive manifestations of ideas on a fair shake come, however, when it is believed that neither changes in policies nor changes in economic conditions should be allowed to make anyone worse off. Sometimes these two sorts of changes intertwine, for example, when changes in demand or technology make it sensible but leave it difficult to close down a railway line, a hospital or an institution for tertiary education.
It might be easier to change policies which are leading to waste if it were not for the fact that change would often bring hardship to those who had entered various industries in good faith. Here, there is at least a question of equity. There are also lessons about the design of future policies but no one has come up with equitable and workable schemes for returning to sanity in areas where damage is already being done.
Changes in demand, technology or the weather can always make some people worse off. I grant a need to decide how much we want in the way of safety nets and how they should be designed to do least damage to efficiency. When forced beyond this we stare into some very nasty cans of worms. Not least, there cannot be much left for the fellow who picks the right horse when all unsuccessful punters have to get their money back.
Instability [back to Table of Contents]
My next considerable fact of economic life in instability. I have touched just now on changes in technology and demand and, later, I will spend some time on questions of unemployment and inflation. For the moment, therefore, let me merely observe that a fair bit of instability is the product of governmental intervention. As examples:
- Monetary growth has often been affected by attitudes to interest rates and the size of budget deficits.
- Dams erected by interventionist policies sometimes break: the consequences often discredit markets when they should discredit the dam builders.
Even without any breached dams, the side effects of one set of policies sometimes beget demands for other action as, for example, in flirtations with the idea of tariff compensation for primary industry.
Interdependence [back to Table of Contents]
Interdependence, in conjunction with scarcity, generates many of the conundrums of economic life. Interdependence fascinates economists and frustrates some others. You will all know, for example, that rent controls can create a queue for housing, reduce mobility, reduce willingness to build for rent, discourage repairs and therefore encourage slums, and encourage key money in ways which discriminate against the poor and implant a disrespect for law.
It is interdependence which often makes the identification of opportunity costs so difficult. A feel for this phenomenon sometimes gives economists some advantage over competitive suppliers of advice such as sociologists and lawyers. But preaching that you cannot eat your cake and have it too sometimes gets economists some sort of reputation as conservatives and knockers.5
Pressure groups [back to Table of Contents]
Let me turn now to pressure groups. Some rather elementary economics should lead us to expect that those seeking favours from governments would lobby and dispense “free” lunches or other favours until, at the margin, private benefits just meet these costs of persuasion. The ubiquity of such activities is enhanced by the way in which the costs of meeting self-interested requests are usually so much more diffused than the benefits that it is often not worth anyone’s while to campaign against this or that request. The scope in reasonably pluralist and democratic societies for various groups to try various forms of pressure also plays a part.
Potential rewards accrue to anyone who can withhold supplies or influence patterns of voting. Strikes are the most obvious case in which supplies are withheld but there are also restraints on supplies whenever a law society enforces a monopoly in conveyancing, businessmen succeed in getting a quota placed on imports, or academics or public servants take particular advantages of their tenured positions. The economic significance of pressure groups is probably greatest at present in the battle to limit inflation and unemployment. In this connection, the capacity of restrictive monetary and fiscal policies to limit inflation is constrained (though I think not completely eliminated) by those able and willing to take the actions they rightly or wrongly deem necessary for the protection of their real incomes. Governments facing such action may:
- persist with restraints while knowing that the battle has been made longer but in the hope that they will win before unemployment can lose them an election;
- back off while knowing that the resulting inflation could also help to lose an election;
- try to curtail the powers of certain groups — or seek broader support for resisting special interests;
- seek some sort of accommodation with the relevant pressure groups.
Much ink has been spilt on the broad macro-economics involved here. For the moment let me observe only that:
- Something has to give in a conflict in which determination to preserve real incomes confronts a need to correct past aberrations or a deterioration in the terms of trade (which, incidentally, faces most large importers of energy at present).
- I hope we will not get involved in authoritarian attempts to control pressure groups. Even programmes to make conditions more competitive could involve serious upheavals and I do not know if the possible virtues of an Hayekian world would outweigh the consequences of the bitterness which might be implanted by the battles necessary for its establishment.
- The alternative of accommodation with pressure groups also entails risks. One is that the listening posts or bargaining units set up by governments soon add to the number of registered complaints and demands. Another risk is that we reach situations in which favours are traded between a few powerful groups. The wheelers and dealers involved can make promises which are extremely difficult to keep, for example, there may be unfortunate implications for wage structures, incentives to invest or monetary and fiscal policies. The people for whom the dealers speak can also come to feel alienated and, where dissent is not repressed, to act rebelliously. Richard Blandy has pointed to a connected risk that bargainers will encroach progressively on issues more appropriately handled by parliaments.6
Public opinion [back to Table of Contents]
The next item on my list of background problems is public opinion. What that opinion accepts or refuses to accept often frustrates those who like to preach their economics in fairly pure form. As examples:
- Sentiment in favour of low interest rates can survive a great deal of lecturing about effective ways of clearing markets and a great many observations that the rich often borrow and the poor often hold interest-bearing assets.
- Though Australia once had such a tax, who now thinks whatever the principles of equity or efficiency indicate, that you could sell a programme to tax imputed rents?7
Whatever Arrow’s famous theorem really says, my complaint is not with the rights of voters to select whatever objectives take their democratic fancy. My concern is confined to the consequences of possible cases in which people of governments seem less than realistic in their appraisal of what pursuit of one objective will cost in terms of lesser fulfilment of some other objective and in sometimes laying down constraints on the means to be used in pursuing particular objectives.
One basic issue here is popular views of what markets can and cannot achieve. With apologies to David Friedman, it still seems unlikely to me that people could even individually purchase the amount of, say, defence which they thought prudent. For many goods however, competition for profits can go a fair way towards getting people what they most want, a fair way towards directing agents of production to where they will add most to the value of output and a fair way towards producing at minimal costs in resources. Markets can also economise on hard-to-get information. Failure to understand these elements generates paternalism, coercion, endless requests for information and a good many demands for comprehensive policies, energy czars, brotherly love or whatever.
That even efficiently working markets may leave us with a certain amount of instability, and distributions of income which do not accord with particular ideas of justice or equity, is conceded but I have taken up elsewhere in this paper questions of stability and the need to decide how much redistribution we want after we have selected the method(s) which will do least harm to efficiency.
For those of you who may wish to raise more technical aspects of market failure I concede the need for vigilance but content myself for now with assertions that:
- Governmental action creates at least as many monopolies as it helps to control (constraints on trade and the behaviour of regulatory agencies are good examples).
- Attempts to cure externalities often, though not always, create fresh inefficiencies (emission controls on vehicles in the bush are a clear, even if minor, example).
For those of you seeking a little more assurance, let me suggest that whatever our problems in getting, say, the cars buyers want, it is the highly planned economies which have the greater problems in producing what consumers want — as evidenced by unsold stocks of some goods and queues for others. It is also these same highly planned economies which have the greater problems in co-ordinating production, for example, in ensuring there is enough steel to produce the planned number of tractors, bridges, etc. Finally, that for which people pay is in some ways a better test of what they want than that for which they will vote: This is because buying exhausts purchasing power but voting for one item often does not reduce propensities to vote for others.
Uncertainty [back to Table of Contents]
Another of my great facts of economic life is uncertainty. Guesses, often presented as forecasts, can require foresight into things as inherently unknowable as the nature and consequences of future changes in knowledge. People, of course, feel dissatisfied with economists as forecasters for reasons other than their inability to predict technical change. I lack the stamina to stay long in the rarefied atmosphere of methodology but I think our uncertainties have something to do with the fact that controlled experiments in social affairs are usually ruled out by consideration for the individual. Even if experiments were possible, they would require sophisticated design to yield information which would be useful in areas where the subjects of investigation or consequent policies might learn from these experiences and subsequently modify their behaviour. More generally, large systems subject to less than complete control present social problems even where there is a good deal of basic knowledge, for example:
- the physics of weather formation is pretty well understood but forecasts are still less than completely reliable;
- guesses about the future behaviour of ecological systems remain imperfect.
For these sorts of reasons, even in the area of relationships between variables which most people would regard as pretty strictly economic, economists are forced back towards:
- deductions from general considerations;
- the uncertain results of statistical inference;
- tentative conclusions drawn from what might or might not properly be analogues elsewhere in the world.
In the end, it is not surprising that the man who worries most about unemployment often has the lowest forecast for real GDP and that the man worried about inflation has the highest. Samuelson puts this down to what he called apprehensive thinking rather than to deceitfulness.8 In many cases I think he is right.
Time lags [back to Table of Contents]
My next fact is time lags. All policies take time to work and some important ones may require a great deal of this scare commodity. All those problems of statistical inference make the estimation of lags difficult and, in any case, there is a likelihood that they will be altered, say, by technical changes in communication or as a result of the experiences of actors on the economic scene. The great need is to maintain a few sensible policies long enough for them to work. Against this is the great need governments often feel to be seen to be doing something. Again the mot juste comes from George Schultz. He said that “an economist’s lag may be a politician’s catastrophe.”9 Some other economist is alleged to have advised President Eisenhower, “Don’t just do something. Stand there.”
The need for efficiency [back to Table of Contents]
The last item on my list of background factors concerns attitudes to efficiency. Much of what I have to say could have been included under the heading of “Public opinion” and perhaps all of what I have to say on this topic should have been said much earlier.
One of the unfortunate facts of life is that the world can consume only the goods it produces and enjoy only the leisure it can afford. Broadly, economic efficiency is that arrangement of our affairs which can maximise the present value of preferred combinations of future real income and leisure.10
One common refrain is that we have plenty of goods already. To those who argue in this way, I say first that I hope society will make as free as possible their choice between their own income and leisure; I also offer the observation that the behaviour of those who seek to reduce their tax bills or raise their income is prima facie evidence that a good many people would like to increase their capacity to spend or save.
Some people worry about conservation and, more generally, about the environment. An ANZAAS concerned with a sustainable society should include in its deliberations a look at the ways in which free markets can encourage substitution in production and consumption, and searches for additional resources; it might also look at what capital markets could do to encourage the conservation of resources who relative prices were expected to rise. While on this issue of conservation, I suggest also that, though production sometimes damages the environment, it is often the better-off societies which develop the inclination and capacity to prevent or repair such damage.11
Lastly, some people think that our problems are ones of distribution rather than ones set by constraints on our capacity to produce. Though it is not the whole answer, I present to you an informative calculation of the sort Giblin once presented to John Smith. If, in 1978-79, the marginal rate of tax had been raised to 100 per cent on all incomes above $30,000 p.a., the addition to the yield from personal income tax would have come only to a little less than $400 million even if the 100 per cent tax resulted in no further discouragement to earning. This amount would allow the Commonwealth Government to pay each taxpayer earning less than $30,000 p.a. about $1.25 per week — or raise its total spending (including grants to the States) by something less than 1.5 per cent.12
III. The Actors [back to Table of Contents]
So much for what I have called the setting in which decisions are taken. Let me now turn to some of the protagonists in battles over economic policies. Much of the immediate action involves official advisers and ministers but people from the media, academics and others all participate in struggles in a wider market place in ideas.
a. Advisers [back to Table of Contents]
On its supply side, many aspects of the market in advice resemble those in, say, cabbages; for example, entry is rather easy and there is a sizeable fringe of subsistence growers. One difference, however, concerns the number of voluntary workers. Another, I suspect, concerns the number of differentiations in product.
Officials [back to Table of Contents]
Even on generous definitions, only a small proportion even of professional advisers can be said to be economically literate. Few issues can be settled on economic grounds alone and on problems in health one mixes with doctors, in transport with engineers, and so on. Such people bring knowledge to which one should usually listen. They often also bring with them some rather homespun economic theories. Less excusably, so do some economists.
The Media [back to Table of Contents]
People from the media fill various roles including those of unpaid advisers. Officials and politicians spend a lot of time trying to read between the lines. The press probably counts for most with officials, politicians and certain areas of business (particularly, perhaps, in capital markets). Radio and TV probably have the greater impact on general public opinion.
Efforts from the media range all the way from serious articles on fiscal policies or tariffs to that interviewer who says “Minister, there is a shortage of binder twine in Boggabilla. Why haven’t you done something about it?” I suspect that both the writers of serious articles and those aggressive but unperceptive interviewers are, whatever their short-term influence, mainly meeting demand and that the real issues concern what, in the longer term, generates demands for this or that type of writing and interviewing.13
Academics [back to Table of Contents]
Let me turn briefly towards academics. Though some officials did once go to university and though some of us have watched the academic joys and sufferings of our children, the chief glimpses we get of academics as teachers come when we hire graduates. The greatest economic fact is interdependence. To test for appreciation of it, I once asked various graduate applicants for jobs how a subsidy on exports of butter would affect our balance of payments. Almost everyone thought effects would be confined to the item containing exports of butter and few thought what might happen as some producers switched from earning, say, $100 in foreign exchange for beef to earning $90 in foreign exchange and $20 in subsidy for butter. None, as far as I remember, speculated about the effects of possible methods of financing, or not financing, the subsidy. Perhaps I expected too much but the point is not trivial. I have also been struck by the degree to which students are influenced by the particular and often eccentric hobby-horses of their teachers; in substantial degree, this may be a symptom of the current disarray in macro-economics.
Officials of course seek not only recruits but also, occasionally, the results of research. I, for one, would not want to specify the directions it should take or regret overly much those results which sink without trace. But I do wonder if it is possible to improve the quality and quantity of research on questions of public policy. Lack of information can, in a few cases, present problems but this argument is advanced far too often. The very good work (e.g. of Max Corden on protection) seems to require persistence, good theory and a certain detachment from the swirls and eddies of political tides.
b. The Advised [back to Table of Contents]
It is time I turned to the demand side of the market in economic advice. Unlike the supply side, it seems completely uncabbage-like. For a start, one fairly common feature is a degree of ignorance about what the various products on offer can and cannot do for their purchasers. In medicine or the law, a corresponding ignorance has led to the development of codes of professional ethics. Economists however, rarely enjoy the unquestioned rights to prescribe which are often conferred on doctors.14
Ministers, for their part, have two main problems. One is to tell good advice from bad. The other is to get their babies through Cabinet. Telling good advice from bad is not always an enviable task but perhaps it has similarities with the problems lay people have in choosing a doctor or selecting a car. Most politicians have a keen ear for the leaders of their party, the party room and what is said on the media and in their electorates.
In all this, it is a mistake to think of even single-party government as monolithic. There is clearly a tendency for particular individuals or groups in government to appeal to particular interest groups and to seek to get their hands on particular levers. One suspects a certain amount of horse-trading/consensus-seeking goes on and that from time to time various groups get thrown various bones.15
Whatever the ultimate concern of government — e.g., to forward particular ideologies — such institutions need to worry about votes and therefore about public opinion. Such opinion is not dominated by a single-minded pursuit of economic efficiency however defined. It should, therefore, come as no surprise that governments show some instinct for the timely gesture, some feeling for what will be regarded as fair and some sensitivity to the capacity of pressure groups to make themselves felt.
It is not unknown for bureaucrats, and sundry others, to affect some rather disdainful attitudes towards politicians. Some politicians, of course, are more capable than others but I have rarely felt disdain for politics as the art of producing some modus vivendi from a bewildering mishmash of interests and opinions.
The role of leadership in moulding public opinion is also important, but one to which I can do less than justice. Times of real risk (e.g., war) seem sometimes to throw up leaders who tell it like it is. Is economic adversity having somewhat similar effects? There is also a fine line to be trodden by officials in their annual reports and occasional appearances on rostrums.
IV. Our Current Position [back to Table of Contents]
Much of what I have said so far concerns micro-economic problems. This is appropriate given the sums involved in social services, assistance to industry and so on. But the great issues of public concern at present include inflation and unemployment. Employment is now much more difficult to control than once seemed to be the case. This is, in my view, mainly because of uncertainties and instabilities created by the inflationary shocks of the 1970s. Precisely how conventional employment-creating policies have become less effective is a matter for considerable dispute. A key factor is, however, the way in which changes in understanding and expectations mean that what are intended as expansionary policies do more to increase prices than to raise output.
What are perceived as failures of governments have sometimes led to more frequent changes in policy (and, in some places, in governments). This increased variability of policies can itself worsen the “trade-off” between employment and inflation since people begin to calculate not on the basis of existing rates of taxation, interest etc. but on the rates they expect in the future. The relevant expectations can be volatile. Indeed, unstable policies can produce a cynicism and a propensity to expect the worst which administers, finally, the coup de grace to fine-tuning. In short, and as is not unknown in other fields, one episode of impotence can help to beget others.
Even if it is agreed that the stabilisation of expectations requires persistence with a few well-understood policies, we still have to decide what those policies should be. A good many people want this or that change before setting down to run stable policies; in one respect they are like that alcoholic who is going to have one last drink before he goes on the wagon. In contrast, the nature of those last drinks matters when they involve a range of potions as wide as the ways in which we conduct monetary policies, fiscal policies and international commercial policies.
V. What Next? [back to Table of Contents]
The most important determinant of the way we get out of these and other problems will be public opinion. If I can be forgiven some extremely potted history:
- People once put most of their faith in God.
- Some time after Adam Smith, we came to rely more on markets.
- Experience of the Great Depression led to demands for intervention on the employment front.
- Suffering in the Depression and sentiments about a more just world after World War II gave rise to demands for action on fronts such as the distribution of income and equality of opportunity.
- We are now at the stage where the continued existence of crime, poverty, inflation or other ills is encouraging suspicions that big government is, at the least, not a simple answer to our aspirations.16
Discontent with results of course could lead to any number of reactions including demands for pretty drastic changes to the political system, for changes in the policy content of big government, or for fewer and simpler policies.
I have failed to acquire many of the insights vouchsafes to political scientists and do not want to spend long on possible demands for fairly basic changes to the political system. It would indeed be fighting a good fight to resist the more paranoid elements at each end of the political spectrum if either or both of them seemed to be gaining any notable support be selecting scapegoats and promising to bash heads together.
So much for demands for change to the political system. My second possible reaction to discontent was demands for change in the way big government is conducted. Sometimes the demand is for even bigger government. As a recent example: large deficits added to inflation; that inflation then created uncertainty and this uncertainty produced unemployment; that unemployment was then deemed by some to signify a need for even bigger deficits!
The poor old lay person can be excused for being a bit confused in the face of such issues. As suggested earlier, I think changes in expectations and public understanding have slowly but greatly diminished the scope for Keynesian-style policies. By looking around the world I think it can also be seen that the more Spartan policies have been the more successful, but I have given my views on this elsewhere.17 For the moment let me opine that those who have had to face more directly the things which have gone wrong, have learned fastest. This group includes bond-holders and bureaucrats. Other main purveyors of advice (academics and journalists) have, in a good many cases, remained closer to older views.
Changes in public opinion are often the result of learning from experience. Sometimes the page of change leaves opinion best prepared to fight the last war but often it comes to positions more sensible than those occupied by many of its besiegers, by they politicians, academics, media men or other assorted propagandists.
On more specific pieces of intervention, it is easy to see how, in a system which parties trade promises for votes, governments come to promise many things to many men, particularly when the returns to promises come in before costs are met and long before they are commonly recognised. This vicious circle has been aided by the readiness with which great numbers of people assumed that intervention could be both effective and almost costless. Two factors may have some effect on the readiness with which governments make future promises. One is a growing restiveness among taxpayers — probably itself a result of disillusion on this and that. The other is cases in which action has spectacularly failed, be it ground-nut schemes, Concorde or the way in which some of those regulatory agencies established to forward consumer interests finished up protecting existing producers from competition.18
VI. A Recipe or Two [back to Table of Contents]
I began by referring to the struggle to establish rational policies as the good fight. A fair part of my time so far has been devoted to outlining constraints. It is time for a few prescriptions.
Officials (again) [back to Table of Contents]
The first thing a good official can contribute to orderly and sensible policy-making is that careful presentation of facts which can confine debate to the clearly problematic. This may sound trite but it is often important. Economists are sometimes better than officials of other stripes in sensing what is relevant and then at marshalling material; I suspect this goes back to having some framework of general interdependence as a touchstone. Economists as well as others can, of course, try to bluff the inexpert and argue at length about inferences.19
The next problem is to wrestle with uncertainty. Even in strictly economic affairs, the response of some advisers is to say “On the one hand this, on the other hand that.”20 I believe anyone concerned to fight the good fight as an economic adviser should be frank on uncertainties, then state his best guesses and next do his best to state the main risks and the costs of being wrong in either direction.21
One result of uncertainty is that ministers (who, after all, have to answer for results) get interested in what could otherwise be left to technical experts; this has to be lived with — indeed it helps in getting across messages about risks. Another result of uncertainty is to induce in some degree a tendency among advisers to agree on a line before fronting up to their masters; you are subsequently going to be deemed to have been wrong in a number of cases and this is a lonely feeling when you have previously taken an independent line. But the tendency to agree on lines is limited by perspectives and/or loyalties to departments or particular ministers; there are also risk-seekers and simple souls.
In some of these processes, some economists begin to worry about their purity as specialists. Some who cannot stand the heat should, of course, stay out of the kitchen but there seem to be two types who stay in that room. Those who become a little impure in order to save a very scarce commodity, a minister’s time, have my sympathy; I also feel a little for those who become extra-economic because their ministers require them to. I have less compassion for those who take on a courtier style, become more political than their masters, neglect the verities, or use some reputation for expertise to support positions not warranted by that expertness.
Allied to much of this is the fact that the adviser who takes no account of political and bureaucratic factors will soon be excluded from decision-making processes. I am not sure of all the tools a proper political economist should have in his kit but they would include some concept of political opportunity costs to set beside the more conventional economic ones and some views on the interdependencies of demand in which a sop thrown to one group is likely to stimulate demands from others.22
Economic advisers have a tendency to plump for economic efficiency without looking for the least damaging trade-offs with considerations such as equity. There is nothing in Marshall or the scriptures which says that this should be so. Those who go all out for efficiency can also lose audiences; but none of this should stop good fighters from stating to the best of their ability what they know of the opportunity costs of this or that course. This sometimes requires tact but tact should not extend to judging too readily what will be accepted; the man who does this sometimes misses chances.23
Preaching opportunity costs is relatively easy; in fact it is the job economists do best. They probably now do worst on the subject of stabilisation. This, of course, is a change from views which have have been proffered during the Keynesian high noon. I have given some reasons for thinking that this reflects a change in objective circumstances and not just in opinion. If I am right, the biggest of the good fights ahead should seek to establish a few sensible and durable rules and then seek to steel nerves while we wait for a restructuring of expectations et al. My special ire is reserved for certain slow learners who fail to realise that the world has changed from the one which their models were estimated and still believe that those models can tell them how to fiddle a tax rate here and an interest rate there in order to fix both inflation and unemployment.
Academics and the media (again) [back to Table of Contents]
People with messages sometimes seek to berate or beguile those who can help to mould opinion. I do not intend to go far down this track tonight. I hope competition or whatever will spur academics to continue to contribute ideas in the field of economic policy. Occasionally, I wish there were the odd Sam Brittan in Australia but, basically, I hope press men will call the shots as they see them. Whether or not they do this, two factors will help to keep me, as an official, circumspect. One is that capacity of some journalists to magnify conflict or other alleged shortcomings. The other is that all reports of the demise of the Westminster system seem to have been exaggerated.
VII. End Piece [back to Table of Contents]
If one could design a society from scratch, it might be fun to decide what was to be influenced by governments and what would be left pretty much untrammelled; but society would soon start to modify the decisions of its founding fathers. I hope that public opinion will come to see the need for persistence with a few stable and sensible economic policies but the most essential thing (which I hope will not require struggle) will be to maintain a society in which, when people so want, policies can be reversed and even governments can be changed.
For the rest we do well to recognise that the single-minded pursuit of economic efficiency is not always consistent with the preservation of social equilibria. Those of us concerned with economic efficiency, however, should always preach about what is possible and even show some moderate ingenuity about ways of getting there. But I hope that in all these processes we will remain good democrats.
- J.M. Garland, “Giblin and John Smith,” in D. Copland (ed.), Giblin, The Scholar and the Man, Cheshire, Melbourne, 1960, p. 218. ↩
- G.P. Schultz and K.W. Dam, Economic Policy beyond the Headlines, Norton, New York, 1977, p. 43. ↩
- Nazi Germany is said to have had 30,000 exchange controllers. See F. Hirsch, Money International, Allen Lane, London, 1967, p. 187. ↩
- For an interesting account of life cycles in economic policy see W. Keegan and R. Pennant-Rea, Who Runs the Economy? Control and Influence in British Economic Policy, Maurice Temple Smith, London, 1979, Chapter 3. ↩
- This tends to generate an interest in techniques of persuasion. Quite often, persuasiveness seems to be a matter of personality and of who is deemed to have been reliable in the past. ↩
- R.J. Blandy, “The Political Economy of Incomes Policy,” paper prepared for a seminar on incomes policy, National Institute of Labour Studies, Flinders University of South Australia, forthcoming in K. Hancock (ed.), Incomes Policy in Australia, 1979, p. 12. ↩
- Though administrative infeasibility might not come high on a list of objections by the general public, those who plead it against the taxation of imputed rents make a considerable point. ↩
- P.A. Samuelson, “Policy Advising in Economics,” Challenge, 21, 1, (1978), pp. 37-38. ↩
- G.P. Schultz, “Reflections on Politics and Economics,” Economic Impact, No 7, (1974), p. 14. ↩
- I well remember the young Harry Robinson proclaiming equally condensed propositions and then leaning over his lectern with a “Think that one out fellers.” ↩
- It is also often those with interests in conservation who think that many of our problems involve the size of population. I, for one, would not want constraints on the knowledge which can help people to determine the size of families but, perhaps with some qualifications about migration, I think humane societies must live with whatever populations they find they have acquired. ↩
- If the 100 per cent tax had started at $25,00 p.a. instead of $30.000 as there were still no effects on incentives, tax revenues in a full year might have been raised by around $600 million. In each case, the government would face (and might need to supplement) a noticeable reduction in private savings. ↩
- Might I add that those who have to be instant experts on many things (e.g., journalists and politicians) have my sympathy. ↩
- One result is that professional economic advisers tend to feel OK if their advice is taken about one time in five. In contrast, I have heard it whispered, some of those volunteer workers (e.g., from academia or the press) get miffed each time their advice falls on deaf ears. ↩
- See A.T. Peacock, “Giving Economic Advice in Difficult Times,” Three Banks Review, 113, (1977), pp. 3-23. ↩
- In Why is Britain Becoming Harder to Govern?, British Broadcasting Commission, London, 1976, p. 15, Anthony King has given a somewhat similar account of the shift in faith from God to markets to governments. He thought one of the difference between God and governments was that God could say no without fearing retribution at the next election. ↩
- See A.S. Holmes, “What Do We Now Know?,” Australian Economic Review, 45, 1, (1979), pp. 81-87. ↩
- For examples of the latter see A.E. Kahn, “Applications of economics to an Imperfect World,” American Economic Review, 69, 2, (1979), pp. 1-13 and E. Sieper, “Consumer Protection — Boom or Bane?,” paper presented to Centre for Independent Studies Conference, What price intervention? Government and the economy, Macquarie University, Sydney, 1978. Some people will tell me that private ventures also sometimes fail. This is true and it sometimes generates demands for intervention. The difference between failure which remains private and public failure is the location of the resulting burdens. ↩
- On balance, competition between advisers probably reduces the number of attempts at bluff but distends arguments over inferences. ↩
- The responding prayer “God, please give me a one-armed economist” has been attributed to various people including President Truman. ↩
- Margins of error are usually large enough to justify neglect of all sorts of minor contingencies; the man who spells them all out will lose audiences pretty rapidly. ↩
- This last point is probably only a specific case of some general tendency for action today to constrain action tomorrow. A good adviser would explain this in a convincing way but his task will often be compounded by that propensity already referred to which will make his employers wish to appear active. ↩
- Some of the points made in the last two paragraphs owe something to an article by George Shultz, op. cit., pp. 13-17. See also C.E. Schultze, The Politics and Economics of Public Spending, The Brookings Institute, Washington, 1968. ↩
- Public needs protection from industry protection
- Maxwell Newton chapter of Clyde Packer's No Return Ticket (1984)
- Austin Holmes' "The Good Fight"