Bad economics (letter)by Chris HilderNews Weekly
, December 8, 2007
I agree with Jeffry Babb (News Weekly
, November 24, 2007) that "the Liberal Party has simply lost the plot" - however, not for the reason he gives: "that the economy is important - but it is not everything".
In one of political life's great ironies I think it is "bad economics" that is the core problem.
Economics, correctly understood, is about the efficient and effective allocation of resources via the operating mechanism of free and fair
markets. It appears the Coalition has been conned by economic rationalists and big business into overemphasising free markets at the expense of fair markets. Here are six examples of unfair or failed markets:
1) Agriculture markets where domestic farmers are exposed to competition from subsidised overseas farmers. Compounding this unfairness farmers also have to sell into domestic markets in which one or very few buyers effectively set the price. This turns farmers into price-takers. It is ironic that, under WorkChoices, employees get a minimum wage safety-net, but farmers in monopsony-type markets do not.
2) The labour market under WorkChoices.
3) The retail market power of Coles and Woolworths which negates the only supposed benefit to consumers from (1), i.e., cheaper prices.
4) The market power of the oil companies and distributors which prevents the widespread introduction of competing products such as ethanol and bio-diesel.
5) The federal Murray-Darling Basin Water Plan which ignores that water is both a public and private good that requires value judgements that cannot be left to the market, and the distorting affects of Managed Investment Schemes (MIS) which are tax-driven rather than market-driven.
6) The housing affordability crisis which has predominantly been driven by excessive investment in the existing housing stock as a result of excessive taxes on the construction of new dwellings and the disincentives to investing in other non-housing asset classes, combined with failures in responsible lending by financial institutions.
Fundamentally, fairness in market economics boils down to ensuring that no buyers or sellers have such market power as to be able to manipulate prices to their advantage or to prevent new competition. However, in an unregulated free market this is exactly what individual players (and in particular, big business) strive to achieve. Therefore, the role of government is to ensure that competition in free markets remains fair by appropriately regulating markets to prevent price manipulation or the minimising of competition.
The lack of skill and attention by the Coalition in recognising and regulating unfair markets and market failure is the core reason, I believe, why the Coalition lost the election despite aggregate economic growth.
They have failed to remember the Australian sense of a "fair go", that hard work will be rewarded with a fair share of economic growth, and not taken away by the big players in markets who manage to distort the system in their favour.Chris Hilder,