Dr Doug Cocks
3 David St
O,Connor ACT
2602
(02) 62421741

ARGY'S WAY

Doug Cocks

The holiday season, for many, is a chance to catch up on that reading backlog. For me the challenge was to read and understand Fred Argy's recent little book presenting the case for 'progressive' economic liberalism (managed capitalism) and the case against 'hard' liberalism (neo-liberalism, economic rationalism) as the basis for economic policy.* It's a work that deserves more than the standard two weeks of post-publication interest that even the best of serious new books can just command nowadays.

Argy converges on his two 'realistic' options for an Australian socio-economic management strategy by quickly dismissing the statist option---based on public ownership and trade protection---as a third contender; a bit of a straw man some would say.

In words which those with but a modest knowledge of economics can understand, Argy explains, absolutely fairly, the six targets of the hard liberal agenda--strong productivity growth, price stability, small government, external balance, sound public finance and healthy investment-inducing profit levels. He then describes the policy instruments which hard liberals would direct to achieving those targets---microeconomic, monetary, fiscal, wages and welfare policies---and hence to achieving their ultimate goal of high GDP growth.

From there, Argy's argument goes two ways. Even if GDP and efficiency are all you care about, hard and pure liberal policies may not be maximally effective. Second, for the price of some policy softening, it should be possible to substantially improve equity and employment aspects of policy outcomes without sacrificing much efficiency (GDP growth). Putting that the other way about, the gains from hard reforms tend to be unacceptably small relative to the social costs. This is the essence of progressive liberal thinking. It is a value judgement and, as such, contrasts with the hard liberal's judgement that such social costs are temporary adjustment costs to be borne on the way to ultimately higher incomes all round.

Progressive liberals, says Argy, would like to pluck people from poverty now, provide equality of opportunity now and protect working and living environments now. But if these goals cannot be achieved, their fallback target is to ensure that these quality of life measures do not worsen in the short term. What then are some of the specific differences from hard liberal policies? One is that macroeconomic policy should be as concerned for employment as for inflation. In part this means bolder estimates of the non-accelerating inflation rate of unemployment (NAIRU) and intervening to lower the NAIRU. Progressive liberals are prepared to look at both international and domestic intervention for managing capital markets--stricter prudential supervision, transaction taxes and variable deposit requirements for example. Fiscal policy, they say, could and should play a larger role in demand management through the business cycle. The progressives' tax policies aim to tilt factor use towards labour and away from capital, but in a less socially divisive way than through wage deregulation, the hard liberal preference. Moves to asset-based taxes and away from taxes on labour and overly-generous depreciation allowances would be pursued. Active labour market programs have a definite role to play too.

For progressive liberals, industry policy does not lessen the need for sensible micro-economic reform. Like hard liberals, they see good returns from removing regulatory, tax, price, saving and investment distortions which impede the efficient operations of markets. Progressive industry policy perceives and seeks to exploit diverse externalities which can accrue to government intervention---externalities which hard liberals, steeped in orthodox economics, have difficulty in taking seriously. Drawing on developments in new growth theory and strategic trade theory for intellectual clout, progressives believe appropriate government programs and activities can improve skill levels and innovation rates, attract 'seeds' of multi-national investment and foster an export culture. One macro-economic benefit should be a less-constraining current account deficit. There is no quarrel here with trade liberalisation as such, just an unwillingness to see it as sufficient in itself for achieving optimal resource allocation.

Overall, progressive liberalism in today's Australia is a mixture of rejecting foreshadowed hard liberal 'reforms' in favour of the status quo and proactively intervening to improve the social, economic and employment outcomes associated with change.

Why is Argy's book so important? First, he has to be taken seriously. He is a former head of the Economic Planning and Advisory Commission (the body crippled by Keating and dispatched by Howard) and knows what he is talking about. He is professionally respected---a former president of the Economic Society---albeit long seen as a bit soft by his fellow econocrats. Argy is quite clear about where he is coming from and progressive liberals could not hope for a more reputable and knowledgeable advocate. In his own words, it is vital to ensure a level playing field in the market for ideas and progressive liberals have been kicking up hill for the last 15 years against a strong team of bureaucrats, business and commentators. The Financial Review is often mentioned as the voice of hard liberalism, as is The Economist. Hard liberal views are sourced to organisations such as Treasury and the Reserve Bank but, interestingly, no academic economists are explicitly fingered as followers. Even if you suspect you are a hard liberal sympathiser, comprehensive expositions of that worldview are uncommon enough to suggest that you could do worse than look to Argy's book for inspiration. Obversely, academics whose views are quoted in support of progressive liberal positions include John Nevile, John Quiggin, Bob Gregory and Bruce Chapman.

Second, Argy brings his overviews of the hard and progressive agendas together in a way that allows them to be compared. For too long it has been been too difficult for most punters to fully understand the alternatives they are supposed to be choosing between, and why. This book is so patently honest that you know you are getting the cases for and against both sorts of liberalism without smoke and mirrors. No selective facts, no loaded language, no mantras, no part arguments. Just clear outlines of the anticipated consequences of alternative policies (who wins, who loses) and Argy's preferences. How much easier it would be to understand what is going on if the pollies felt able to tell us just where they stood along the Argy spectrum and admit who the winners and losers from their proposals might be; and identifed the costs and benefits of compensating the losers.

Argy's book stands up well against Mark Latham's Civilising Global Capital, which, despite its name, is about how Australian capitalism must adapt (there is no other way) to the ways of the global economy. Where Latham is simply intolerant and dismissive of contrary views, Argy explains them and how his values lead him to particular choices---there is always another way. Argy is not consumed by the fears which hard liberals like to invoke. For example, the interest-rate penalty for bucking the global finance markets in pursuit of higher employment levels may not be all that horrendous. The Australian economy is basically in good shape and has been for some time if you look beyond the rhetoric of black holes and foreign ownership and CAD blowouts.

Argy closes by speculating on how the ongoing battle between hard and progressive liberalism in Australia might unfold. One factor which he under-recognises here is that hard liberalism is a doctrine with the virtue of simplicity. Its essence is self-regulated capitalism and a nightwatchman state. Progressive liberalism is much messier, with no such clear-cut agenda. As Argy sees it, the hardies have their powerful advocates in place but the progressive liberal cause still needs to fashion a coalition of disparate groups with a common commitment to a decent and cohesive society.

Let me not be too generous. There are emerging ideas on socio-economic organisation and issues which Argy, the practical policy man, seems unaware of. Like Latham, environmental problems for Argy are externalities to be dealt with on a case-by-case basis, not evidence of pervasive system failure. The evolutionary economists' useful concepts for understanding the changing economy as a non-equilibrium system in search of profits from innovation are only recognised in a roundabout way. Similarly, pathological social relations are largely a byproduct of unemployment rather than the fate of a society deficient in collaborative and participatory institutions.

* Argy F. 1998, Australia at the crossroads: Radical free market or progressive liberalism? Allen and Unwin, Sydney.