First Friday Economics Speech

First Friday Economics Speech

PM&C
Friday, 08 March 2019

Dr Martin Parkinson AC PSM

Speech to The Economic Society of Australia (ACT)  - First Friday Economics

Friday 08 March 2019

Image of Dr Martin Parkinson AC PSM

Let me start by acknowledging the traditional owners of the land on which we meet. 

Dhawra nguna, dhawra Ngunawal.

Yanggu gulanyin ngalawiri, dhunayi, Ngunawal dhawra.

Wanggarali-ji-nyin mariny balan bugarabang

In the language of the traditional owners, this means:

This is Ngunnawal Country. Today we are all meeting together on this Ngunnawal Country. We acknowledge and pay our respects to the Elders.

The first mission

Thanks for inviting me to this event. I’ve been asked to reflect on what economics in Canberra means to me, and the role of economists in public policy.

Bruce tells me this is the inaugural meeting, which is Canberra‑speak for ‘the first’. Or as economists might put it, a ‘single point estimate hopefully indicative of a future trend’.

I want to start by applauding the ambition of the organisers. During my career I have worked on many contentious policy issues, such as climate change and tax reform, but there is nothing harder than organising a successful ‘social’ event for economists.

It’s like that old joke about the woman with only six months to live who gets told by her doctor to marry an economist, just to make it seem like a lifetime.

I only have 15 minutes – so proportionately this speech should only feel to you like 42.5 days[1] (based on average life expectancy of 35-year-old woman in the ACT using ABS statistics).

So this is actually the first thing I want to say about being an economist in Canberra. Be analytical. Economics gives you insights into the way the world works that other professions cannot.

Economists see things that others cannot see. Sometimes that is because they have incentives not to see them. As Upton Sinclair famously said “It is difficult to get a man to understand something, when his salary depends on his not understanding it”.[2] I guess it is the same for women too.

But it is also the core tenet of the profession. Economists are trained to see opportunity cost. This underlies everything we do. We look for the shadow prices of resources. This leads us to positions that are often counter-intuitive and unpopular – but are right.

One of the earliest economists hit upon this role with his fable ‘That which is seen and that which is not seen’.[3] In his essay from 1850, Frédéric Bastiat tells the story of a boy who carelessly breaks a pane of glass. Rather than calling for the boy to be punished, the gathered crowd quickly succumb to collective false economic logic. They console the shopkeeper by telling him how much better off the glazier will be now with this new work, and then how other businesses will benefit when the glazier spends his new found wealth.

Everyone goes away happy.

Of course the hidden cost is the reduction in comfort from having a window with no glass in it.

The ‘parable of the broken glass’ is sometimes used to rebut the idea that war is good for the economy. Just because employment is up does not mean the economy is producing things people necessarily want or need.

We might very well need such deep analytical thinking right now more than ever before in our modern history. 

For the first time our largest economic partner has a security establishment inconsistent with our core constitutional beliefs. How we bring together our economic, security and foreign policy interests may well be the most important issue facing this country over the next fifty years – and while economists cannot afford to just follow the crowd, one message I want to leave you with is, ‘Do not stay in your own lane’. If you do, you do your fellow citizens and the world a disservice!

It is hard to go against the mob. This is the second thing I wanted to encourage you to be in your careers here in Canberra – fearless.

That said, I am the first to acknowledge that economists need to be fearless because they rarely have friends. Again this is a consequence of professional training, not an assessment of your individual personality.

Economists are not ‘for capital’ or ‘for labour’. We see the king or queen as functional, not fundamental. We do not see the world through constructs of power or identity, even though we see the importance of them.

We are ‘for’ individual well-being regardless of race, gender, sexual orientation or capabilities. Because of this we are often against entrenched interests and for those without a seat at the decision table. Economists view the past as ‘sunk’ and argue for decisions about the future to be made free of sentiment and in opposition to special interests. Now this is in sharp contrast to the incentives in our political system, which favour producer interests over that of consumers.

Take just one example – competition policy. Today we tend to define a competitive market by the degree of the threat of entry. If the barriers to entry are low then the incumbents will work hard and innovate to stay ahead of the latent competition. Economists want policy that favour businesses that don’t even exist yet, at the expense of those who do.

Well to the average person this is the equivalent of having someone threatening to tip your hammock on a lazy beach every time you nod off.

Or another way of thinking about it, economists are the ones telling you not to have the beer and instead to go for the run, because your future self will benefit. The problem is that your future self is not there to argue with your friends who want the current you to go to the pub.

This of course makes economists quite unpopular at times – believe me, I know.

Central bankers are famous for being the ones tasked with taking the punch bowl away just as the party gets started. As a former RBA Board member, I’ve sometimes thought about how remarkable it is that someone actually lets us into the party in the first place.

Which brings me to the last of my missives – be persuasive.

If you are right and fearless, but no one listens, you will remain a Cassandra – cursed to see the future but unable to change it. Unfortunately, many of my economist friends fall into this category. It’s great being right, or being able to say ‘I told you so’, but other than ego gratification, so what! Australia needs economists engaged in practical policy debates.

But universities are woeful at recognising contributions to policy – luckily ANU, with its proximity to Government, its potential for cross-fertilisation and its history, has the chance to be different. But let me be blunt – it’s a chance not a prerogative.

Some economists tend to equate persuasive skills with marketing skills – and not in a good way.

But they forget where we come from. The study of economics comes from the ancient Greek study of rhetoric – the ability to convince others. Economists – particularly those involved in policy – need to get better at selling ideas.

Our track record is not that good.

Alan Blinder recently lamented ‘why after 200 years can’t economists sell free trade’?[4]

Free trade was right there in our founding documents written by Adam Smith and David Ricardo. Today few, if any, economists oppose the logic of comparative advantage or dispute the evidence of over fifty years of growth in our region.

Yet remarkably large parts of the global community remain unconvinced.

Newtonian physics is not that much older in the scheme of things, but no one seems to question gravity.

Physicists just seem to have been better at making their case than economists. Both children of the enlightenment, one seems to be shining a bit more than the other right now.

I still wonder about how to make the case for economic reform more compelling.  Increasingly, economics is becoming the language of public policy. But to move past the dictionary and debate to policy influence, we need to be more persuasive. This means understanding our limitations, incorporating insights from other disciplines and putting forward real world experiences that are meaningful to people.

The Nobel Prize winner Jean Tirole says making this world a better world is the first mission of economists.[5] I couldn’t agree more.

Welcome to Canberra, and hopefully to policy debates now and into the future!

 

[1] “3302.0.55.001 – Life Tables, States, Territories, and Australia, 2015-2017”, Australian Bureau of Statistics, retrieved 18 February 2019,  http://www.abs.gov.au/ausstats/abs@.nsf/latestProducts/3302.0.55.001Media%20Release12015-2017

[2] Sinclair, U. I, Candidate for Governor: And How I Got Licked, University of California Press (1994) p.109.

[3] “That Which is Seen, and That Which is Not Seen”, Bastiat.org, retrieved 18 February 2019, http://bastiat.org/en/twisatwins.html

[4] “Why, After 200 Years, Can’t Economists Sell Free Trade?”, Peterson Institute for International Economics, retrieved February 18 2019,  https://piie.com/newsroom/short-videos/why-after-200-years-cant-economists-sell-free-trade

[5] Tirole, J. Economics for the Common Good, Princeton University Press (2016)