Jump off the policy pendulum

I like Americans. I have American friends, and I remember a trivial incident that endeared me to Americans forever. We were in a funicular going up one of the hills surrounding Lake Como in Italy, at close quarters with a group of Yanks.

They were joking and teasing each other in a way that struck my contact-deprived mind as very Australian.

But thanks to a great American institution, the Pew Research Centre, I now realise I think more like a European than an American on one of the central issues of economics and politics.

The centre's study of ''American exceptionalism'' asked samples of people in the US, Britain, Germany, France and Spain which was more important - being free to pursue your life's goals without interference from the state, or for the state to play an active role in society so as to guarantee that nobody was in need.

In the US, 58 per cent of respondents favoured individual freedom and 35 per cent favoured ensuring nobody was in need. In Europe, it was the other way round, with just 38 per cent of Brits favouring individual freedom and the proportion declining to 30 per cent by the time you got to the Spaniards.

A related question asked people if they agreed that ''success in life is pretty much determined by forces outside our control''. Only 36 per cent of Americans believed they had little control over their fate, compared with 50 per cent in Spain, 57 per cent in France and 72 per cent in Germany. Britain was the only European country surveyed where fewer than half (41 per cent) shared that view.

The joke of this is, despite the Americans' confident belief anyone can go from log cabin to White House if they try hard enough (the most recent proof positive being Barack Obama), studies show the US to have the lowest degree of social mobility - people actually making it from a poor start to a prosperous finish (or vice versa).

Individualism is very much a Western value (and, by the way, deeply embedded in the economists' conventional model of how economies work). I confess I've got a lot of the individualist in me. I like being free to do things my own way; I don't feel a compelling desire to be the same as other people.

At another level, however, I accept the need for the community to pull together towards common objectives, for us to be led by our elected leaders and for the better-off to be required to assist the less-well-off. I don't resent having the taxman redistribute a fair bit of my income to those less fortunate.

So I can see merit in both sides of the story. And one of the firmest conclusions I've come to about life and the economy is that the truth - and the right place to settle - is almost always to be found not at either extreme, but somewhere in the middle.

Just where in the middle is the hard part. We spend our lives searching it out - the more so because changes in the rest of the world probably cause it to shift over time.

The great temptation is to seek the simplicity and false certainty of either extreme - on this question of the ideal role of the state, libertarianism at one end and socialism at the other.

It's actually all the time I've spent hanging out with economists that's led me to the centre. Economics teaches that life's about optimising not maximising. We almost always face a range of desirable but conflicting, objectives. So all of one and nothing of the others is never the most desirable combination.

Economics is about trade-offs - about finding the particular combination of rival objectives that yields the most satisfaction. So life's about balance - ''equilibrium'' as economists say. Perhaps the modern term ''the sweet spot'' puts it better. We're searching for the place that gives us the best of all worlds - at least, the best available.

And yet our history shows us more inclined to swing from one extreme to the other. After World War II, people were dissatisfied with the way the economy was working. Particularly in Europe, they decided the answer was to nationalise all the key industries.

Flash forward to the 1980s of Maggie Thatcher and Ronald Reagan. People are dissatisfied with the way the economy is working so they decide the answer is to privatise all the key industries and deregulate the rest.

In the aftermath of the global financial crisis, the pendulum may be swinging back in favour of regulation.

The sweet spot in the middle is so hard to find. We keep falling for the simplicity and false certainty of extreme solutions.

The truth is the capitalist system does need to be protected from its own excesses, which could bring it - and us - crashing down. We were reminded of this truth in the recent crisis, from which the Europeans and Americans have yet to escape.

But, by the same token, we mustn't go to the opposite extreme of having the state attempt to solve all our problems and leave us imagining any remaining difficulties in our life must be the government's fault.

The truth is the government can't solve all our problems, and the more we abandon primary responsibility for fixing them ourselves, the more dysfunctional society becomes.

More than 70 per cent of Germans believe they have little control over their fate? It's all the fault of The System? They're just as misguided as all those Yanks believing hard work will get them to the top. As ever, the truth is a bit of both.

Ross Gittins is the economics editor.

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