Monday, August 08, 2011

Yet another great Gittins column

A great column by Ross Gittins in today's SMH.

Today he takes solid aim at people clamouring for more "micro-economic reform" but rightly points out that such reform has never provided enduring changes to productivity improvement rates. What does that is technology and innovation, a subject standard economists still treat as "exogenous" to their models.

What I loved though is his very simple explanation for how it is that economists (and business people) who have unbounded faith in markets are forever calling for some kind of government action. Partly paraphrased he wrote;

We need to remind ourselves that governments don't actually run the economy, business people do. So if businesses aren't generating much productivity improvement, the obvious place to look is at the behaviour of business people.

Conventional economics' foundation assumption that economic actors are always and everywhere rational [and] as a general rule markets get it right.

It follows that, if the market isn't delivering satisfactory outcomes, it could be a case of ''market failure'', but it's much more likely to be a case of ''government failure''. It must be something the government's doing that's stuffing things up. Thus does every problem in the private sector become the government's fault.


Beautiful when you think about it. As he says this is the complete rationale for "micro-economic reform" which is coded as "government does less".

I would note one deviation from the Gittins position. He notes that the only exception to the rule that reform is less regulation is in the area of market power (basically monopolies and collusion).

It is interesting to note that in the 1980s and 1990s all of Australia's big businesses were clamouring for competition in some other sector, the banks wanted competition in airlines, the airlines wanted competition in banks, while everyone wanted competition in telecommunications. But by the 21st century big business - as largely represented by the BCA - took the position that Australia's small economy needed these firms of big size to achieve scale efficiencies.

And this is (as Gittins notes) the dirty little secret of technological advance - it increases economies of scale - big firms get bigger.

It will be nice when echnocrats and business writers start getting it that the challenges of the new economy are much different to simply getting less government intervention.



Novae Meridianae Demetae Dexter delenda est

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