This post began as a comment on Paul’s last comment on my “Mainstream Radical Centrists: Where are they?” column. Paul boiled down his response to this:
If you want to have a serious debate about reforms, go to countries that are hurting and that see the need for it. Like the UK. Though even there, I think that the City of London is far too powerful to let a mere 8-year lull in growth upset the banking apple-cart.
I kind of agree with what he’s said – that is I can see the sense in it – yet I think it’s one dimensional. I also think it’s part of the problem I was trying to address.
First, what’s true. Where rent-seeking is the main driver of some problem and where community suffering leads it to greater intolerance of this rent seeking and where there’s sufficient leadership in the governing class (which includes the media), then the suffering might turn up worthwhile reform, or at least, remove roadblocks to it. Occasionally nations rise to extraordinarily worthwhile departures from the norm when faced with sufficient difficulties.
But
But, but, but …
VerySeriousPersononomics
This idea is also a major staple of Very Serious Person talk. Indeed, it has been for a literally centuries. “What we need is a really good war. What ho?” Really big problems sometimes get a community to gird its loins and do something difficult which turns out also to be something good. But during such periods, the rhetoric of ‘no-pain-no-gain’ usually acquires a life of its own – enough to beget lots of “all-pain-no-gain” reform – why I can almost imagine that that’s what’s going on right now with austerity busting budgets in the major developed countries producing more austerity. Problems sometimes just beget more and often bigger problems. Look at the Middle East or South America. The last prolonged depression we had (the 1930s) didn’t produce a noticeable uptick in the quality of governance. Right now one of the major political parties in the most powerful country in the world has well and truly jumped the shark. It began with Ronald Reagan who came to power in a recession and got a new shot in the arm as George W. Bush addressed the adversity of 2001. Now a big downturn with slow growth for the bottom 80% of incomes is amping up the freak show.
Further, though the VSPs go on about reform – how we need more of it – many of the ‘reforms’ we’re after are things we often don’t know how to do. They’re becoming more and more refined. We’ve done most of the important stroke of a pen reform. We’ve been pretty poor in many areas where ‘reform’ requires rebuilding institutions. While HECS, the Child Support Agency and some other areas (AIDS strategy) we were world leaders (and were stroke of the pen kind of reform in their own way – policies that could be dreamt up at head office and then implemented via legislation and computer programs), ‘reform’ has produced all sorts of snafus. Not just the occasional monumental ones like VET FEE-HELP, but some seriously bad ones that are large and go on and on – like PPPs and electricity reform for instance.
Tough times can sometimes reset the switch against rent seeking, but rent seeking is used too much as a cover all explanation for bad policy. VET FEE-HELP didn’t come about because of the heroic lobbying efforts of private education providers (though no doubt they provided some important resources and energy). It came about because of credulous, ideological policy making. Ditto electricity ‘reform’ though I’d agree that with PPPs rent seeking is a major part of the story. In each case the normal ‘antibodies’ of the system were slow to react because the gatekeepers of the orthodoxy of reform liked the look of such policies – after all, they were more ‘market friendly’ weren’t they?
Momentum: success begets success
I do know that there are times when, to paraphrase Heckman on social capital, success begets success. As we succeed it generates a social and economic dividend that is available to be reinvested and success also establishes a new culture – of not just making ‘tough’ decisions in the normal sense of that term but in also forging new frontiers of reform.
I last saw this in the last ten years of the ‘reform period’ – 1983-2001. I certainly remember working in the Keating Government in the early 1990s, that reform was just what governments did. Dream up and do reform, manage the politics, enjoy the self-importance and the VIP flights. That was pretty much it. When Howard got in, he looked like he didn’t know what he was doing and, in fact, panicked himself (on my reading) into the GST. It was gruelling politics but, at least, established him, after his lucky escape from the electoral consequences of reform roulette, as a ‘doer’. Then Howard’s dark side became more and more integral to his political success (even though I am at least as sympathetic to his side of the ‘culture wars’ as to his opponents) and the country has never recovered.
Reform requires finesse
Further, the ‘reforms’ we need to master are typically in areas that require a new kind of finesse as Conrad suggests in one of his comments on my last post. And going through a prolonged recession isn’t a particularly good preparation for such reform. Because that kind of reform must be built through the gradual development of skills and institutions. Look at the countries that are emerging – at least according to PISA as having the best education. Finland, Singapore, Shanghai, Canada? Did this come about through prolonged depression?
And I think it’s these kinds of reforms that are increasingly more important. As I argued in a Fin Review column a while back:
Economists have identified a “middle-income trap” into which many countries have fallen like most in South America. Industrialisation gives them the institutional ‘arteries’ of a functioning modern political economy, but not the ‘capillaries’ if you will – traditions of social trust, peaceable dispute resolution, property rights, competent, non-partisan officials and strong anti-corruption institutions. Perhaps we’re in our own trap in which we can’t escape the mental world of the glory days of 1980s reform.
In some cases, we have only glimmerings of the answers to some of the questions posed above. But that’s what finding one’s way to the future is always like. And building on those glimmerings is our only way to build on our proud legacy as a standard bearer for neoliberal reform – by moving beyond it. 1
The high road and the low road: discovering and building a place for the better angels of our nature
One pattern I think is discernible from history is that often, at least looking back, we might characterise progress as moving from a low – low trust, low morale, low cooperation – state to a higher state. The most compelling example is Adam Smith’s idea that slavery looks like the cheapest form of labour but is, in fact, the most expensive (because the slave has no interest in his or her own productivity).
Professional services likewise are best delivered in a high trust state because there are so many opportunities for asymmetric information to degrade efficacy if the professionals don’t buy into the mission – and low trust cultures encourage gaming and crowd out intrinsic motivation. (This goes some way to explaining how, beyond some point, larger medical and financial sectors tend not only not to improve financial or physical health but may actually harm them).
Recent discoveries in the same vein as Adam Smith’s discovery that slavery wasn’t even good for the slaveholders – the Toyota production system and peer production – introduced a new high trust state into more menial tasks to the great benefit of all – and the glory of God (in the hope – admittedly increasingly tenuous – that he exists).
And surely there are more discoveries to be made: More filling in of the ‘how’ when we’ve got some inklings of what we need to do. I think the methodologies we’re pursuing at The Australian Centre for Social Innovation (TACSI) offer such hope. And they too are built around the idea that there’s a high road. Of course, the ‘high road’ can be narrow. And we’re often put off the scent by moralising.
Of course, the ‘high road’ can be narrow. And we’re often put off the scent by moralising. Left-leaning moralising sentimentalises the whole issue. It keeps pointing to the unfairness of the system towards the poor and the powerless. And, true enough, the system is unfair. But simply pointing to unfairness and to inefficiencies therefrom can substitute self-righteous impatience for actually making things better. Systems that appeal to the better angels of our nature are a marvel when they come off. But who’s to say that just because an existing system has problems that there’s a better one.
But right-leaning rhetoric – in which I include the ‘no-pain-no-gain’ malarky – puts us off the scent more comprehensively – because it is predicated upon there being no such ‘high road’, or at least to the idea that that high road can be reached using the usual adversarial tactics. And if there is a high road (an important caveat) it’s unlikely to be found using the normal adversarial method. That’s not how Toyota developed its production system or Linus Torvalds or Jimmy Wales got their production revolutions going. It’s not how TACSI built Family by Family.
To illustrate these things by an example, I’m sure the government funded system of job-placement is too oriented for its own or anyone else’s sake around penalties for job seekers not meeting their obligations to search for jobs. But that doesn’t get us far in designing a scheme that appeals to the better angels of job-seekers’ natures which, I expect, at least until we sign on to guaranteed minimum incomes, will always contain sanctions for not complying with a requirement that unemployment benefits are only received by those actively seeking work.
Postscript: The interview below was intended to be a riff on this post, but I started talking about what I called in this column, the ‘high income trap’ and a fair bit of the interview developed that idea – which is OK.
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Hi Nick,
good of you to pick up the gauntlet! A few thoughts:
– It is no doubt true that today in Australia, many good initiatives are underway to reduce rent-seeking and to try out new innovations left, right, and center without any sense of crisis. As an example of anti-rent seeking, I can mention the recent increase in the number of medical places and the increased import of overseas medics, all without a sense of crisis to fuel the change. On the ‘blue sky innovation’ government side, I can mention the experiment in e-health, the experiment in NDIS, the moves to introduce a national curriculum, and Gov 2.0 initiatives (though I might mention that the forces of rent-seeking are well and truly drowning out that initiative!). One might quibble with whether these innovations are done well and how they could be done better (which is an important debate to have, clearly!), but at least there is movement.
– So yes, there is a high road to reform and innovation. Indeed, one generally expects more innovation to come from a company and a country already doing well than one doing badly. The winners’ mentality, one might call it, or a belief in oneself.
– Even without a crisis, our societies indeed have quite a few self-cleansing mechanisms to get rid of rent-seeking groups. Regulators, internal affairs departments, auditors, etc. I would argue these are particularly ineffective in Australia at the moment, but their mere presence is still likely to deter a lot of bad stuff that would otherwise happen.
– Definitely agreed on the idea that a crisis can lead to worse outcomes than before. The 1930s leading to WW2 via the rise of the fascists is a good case in point. Crises make it easier to think the previously unthinkable, but the ‘imagined solution’ is itself a bitterly fought contest in which the old elites will be very active.
– Sometimes it takes several crises and attempts to really get movement. One might include the Napoleontic wars of 1790-1813 in this, which lead at first to a counter-reaction that restored the previous monarchies, but after 1848 eventually lead to the more modern nations we see now. Another good example is the one you gave, for you say: “The last prolonged depression we had (the 1930s) didn’t produce a noticeable uptick in the quality of governance. ” No, but the ensuing WW2 arguably did in many places (though clearly not all!).
– I disagree that talking about rent-seeking as a description of many problems necessarily blinds one to other forms of reform. That is simply not true. What talking about rent-seeking does do is to force the audience into an uncomfortable for-them-or-against-them attitude regarding the current beneficiaries of a particular rent-seeking racket. While I do see the political expediency advantages of shying away from that choice, I don’t think an economist has that luxury.
– The example in your previous post of course was of a classic rent-seeking issue, ie banking.
– I actually think there are quite few areas today in Australia that are of the classic rent-seeking variety and where reform is relatively easy. I do include banking in that, but also the system we now have to over-pay foreign pharmaceutical companies for their medicines (cash-strapped European countries have quickly reduced their contribution to that scam in recent years, whilst here the fear of negative media from the entrenched interest group prevents movement). I similarly think easy gains are possible in property markets, superannuation, mining, and various other sectors. It does not take great genius to see what should be done, but it does need political will and whilst the general economy is doing so well, I don’t see where that will come from.
– I do think you under-estimate how even in supposedly blue sky government reforms, there are always entrenched groups to overcome who benefit from the current situation. Remember your Machiavelli who warned against the problems that would-be reformers face, having only lukewarm friends in those who might benefit from the change but bitter enemies in everyone who currently benefits. He even went so far as to say that every real problem boils down to fights between groups (otherwise it simply doesnt qualify as a real problem). I suspect the problem with Gov 2.0 is in part a failure to face up to this reality, as if pretending it is not there will make the problem less.
Thanks for your generous response Paul,
And thanks for all the corroborating ammo you gave me in your reply. Rather better than my own list – which doesn’t surprise me. Always good to debate people who are better educated than oneself.
On your latter points, I think you set up a false dichotomy – or think I am doing so. I don’t think you’ll find me saying that rent-seeking is unimportant. I just tire of it being seen as the key. Economists are proud of their rent-seeking theory of the way the world works – and rightly so. It’s such a powerful key to what’s going on.
But it also works – like free trade – as a badge of tribal identity and that’s where it starts getting out of hand. I’d be happy to say that if you want one key to interpreting the way economic institutions work, look for the rent-seeking explanation.
But there are at least two big problems with overreliance on the idea.
1. It may describe the texture of the politics of some problems well enough. The surgeons really don’t want more surgeons mostly because they – or their union – are thinking of their hip pocket. But even here the surgeons as a group really do relate to doing surgery well (even though, like most unions they often regard it as their solemn duty to make the world safe for their mediocre colleagues). More generally, when teachers are lobbying about education then they really are representing their care of students. Nurses of patients. Social workers of their clients. (And yes, they routinely sell those interests down the river when they come up against what Warren Buffett in a different context calls ‘the institutional imperative.) So it’s important to acknowledge that both because it’s a better description of reality and because it’s necessary when seeking to understand people’s motivations with a view to moving them towards becoming part of the solution rather than the problem.
2 Relatedly, especially where things can’t just be fixed with the stroke of a pen, explaining what is wrong with the current situation as driven by rent-seeking may not take you very far towards what the best solution should look like. This is something that economists have typically disregarded, because their emotions are stirred by battling rent seeking, but improving things is a trickier business.
“Reform” is one of the most prostituted words in an era when so much of the language dwells in a house of ill repute run by politicians. Goering should have used “reform” instead of “culture” when talking about things that made him reach for his revolver (though of course “culture” is hardly an unsullied maiden of a word either).
For a start, while the positive statement that “reform happens only when there are big problems” is fine in itself, it can be easily seduced into “we need big problems so we can do reform” or even fully debauched into “we need reform therefore we must create big problems”. And reform should be a neutral term anyway – a reform may or may not make the world better, just different.
More and more as I get older I think I’m a small-c conservative in the Bourkean sense – which leads me to positions very far from modern big-C Conservatives.
Here’s to small ‘c’ conservatism. Perhaps I should call it big B conservatism (for Bourke who was right about more things than pretty much any of his contemporaries). Of all the centrist ‘creeds’ (in which I include conservatism, liberalism and social democracy) I actually love conservatism in the hands of Bourke the most. But it’s not ‘conservatism’ as in right wing. The lovely thing about the style of political thinking that Bourke inaugurated is that, in its subtlety and humanity it can be a vehicle for left or right wing thinking. Alisdair Macintyre is surely a conservative in this sense, even if I think he has described himself a Marxist of sorts – and may still do.
The idea that the mainstream Republicans are in the spirit of Bourke is a hoot!
I don’t know if this is on topic or not.
I have always thought everyone has an agenda (and I mean 99.9% (recurring)) of everyone. The agenda can be hidden, partly exposed, fully exposed or disguised (misrepresented) in some way. Generally the agenda is disguised.
Imagine if you would, that medical science invents a pill – let’s call it the “300 year pill”.
The pill gives the consumer 300 years of perfect health – no diseases, no aches, no pains, no coughs/ colds, no arthritis, perfect vision, perfect teeth, a biological age of 28 throughout the 300 years, cuts and scratches heal within minutes, sawmill operators can put their severed fingers back on and it knits within minutes, and at 299 years and 11 months, it sends a signal to the consumer that he/ she will die a peaceful death in the next month, and also advises the consumer to prepare a will and last testament.
Imagine also that doctors, dentists, undertakers going to their receptionist on Monday morning and saying “Well Narelle, we have to close down – no one is sick/ dying/ has dental caries. I will prepare your final pay and have it to you tomorrow. Do hope you can find something else.”
So while your doctor wants you to be cured/ relieved of your ailments, he does not want the 300 year pill to be used. He does have a vested interest in disease and his bank account (and who does not ?).
And so it is, I believe, with everyone.
Panel beaters have a vested interest in car smashes, and accountants have a vested interest in a crappy set of books.
The point of this is that there are rent seekers everywhere, and we should beware of them.
[…] Postscript: This interview was intended to be on this post, but spent at least as much of its time on the ‘high income trap’ mentioned […]
[…] This interview was intended to be on this post, but spent at least as much of its time on the ‘high income trap’ mentioned […]