In the late 1960s, western economies were stuck in stagflation, a combination of high inflation, high unemployment and low economic growth. Governments responded by raising interest rates to record levels. Many of us remember paying 18 per cent interest on housing loans.
This reduced inflation but did not increase employment or economic growth. Some economists attributed this failure to excessive government regulation, commodity shortages and the oil price crisis of the early 1970s. They argued that economic recovery would come when governments removed impediments to business.
This economic policy prescription has prevailed from the 1980s. Governments have sold assets, deregulated financial, product and labour markets, and subsidised business.
This ‘free market’, ‘neo-liberal’ or ‘economic rationalist’ approach has increased inequality in income and social provision, shifted income from labour to capital, radically reduced employment security and had devastating environmental effects.
It has also produced perpetual economic crisis: recession in the early 1980s; bank, asset and stock market crashes in the mid to late 1980s; recessions and financial crises across the world in the 1990s; the US dot-com bubble and recession of 2000-2002.
Even more concerning is the endless stream of data tracking and the destruction of the natural world that resources and sustains the human economy.
Economic rationalism has also generated global economic and political stagnation across the world, economies are stuck in a pattern of stagnant productivity, wages and spending.
So far, government attempts to break out of this bind have been ineffective. Trade protectionism, wage suppression, the casualisation of work, tax reductions, further deregulation and privatisation, all have had little effect.
The underlying problem is that economic policy continues to be conceived within a bankrupt policy framework. Despite some dissent and debate, after 50 years, politicians and their advisers keep pursuing ‘solutions’ proven to fail.
Urban planning is an example. Faced with urban sprawl, transport gridlock and escalating property prices, Australian federal and state governments have – through taxation, zoning changes and contractual arrangements – supported privately-provided denser housing and transport infrastructure (toll roads, heavy and light rail lines).
Despite much talk of ‘evidence-based’ policy-making, politicians, bureaucrats, lobbyists and the media are stuck in a flawed intellectual framework.
Neo-liberal economics rest on a false assumption that participants in markets have equal information and influence. They do not. Compare the knowledge and power of a supermarket CEO with that of the average shopper.
Or consider what the banking royal commission is telling us daily about the relative influence of bankers and their customers.
A sounder economic first principle is that a modern economy requires planning and regulation. Think, for example, how much more effective our education and health systems would be if they were linked to workforce planning targets.
In globalised capitalism, markets are not free. They are rigged in favour of capital. It is time that policy making reflected this reality.