Global realist economics

Over the last thirty years all major industries have become dominated by a shrinking number of global firms. They in turn have a small number of key suppliers. Two companies have 100% of the large commercial aircraft market. Two have 55% of the athletic footwear market, ten have 77% of automobiles, two have 70% of carbonated drinks, and so on. Of suppliers, two make more than half of all car seats, three make 57% of all drink cans, and three make 87% of database software. The list goes on and on.

These dominant firms maintain their position by huge investment in Research and development. In 2008 100 top global firms spent a combined total of around $US300 billion on R&D, making them the powerhouses of change. The top five firms spent more than $US6 billion each, with Toyota outlaying almost $US10 billion.

All this means we live in an increasingly oligopolistic global economy, and challenging the leaders is virtually impossible due to their dominance of future developments. Markets aren't what they used to be, and government powers must adapt to the new realities.

3. As commodities approach peak production levels governments are intervening in new ways.

Let's just think briefly about food. As water shortages, land degradation and population growth bring us closer to peak food production many nations face food supply problems, particularly in times of crisis such as floods or droughts. In 2010 Russia banned grain exports to protect its own food supply. In 2008 five Asian nations, including China and India, restricted rice exports for the same reason.

Governments are also buying land in poor nations to grow crops for their home markets. Sudan has leased 1.5 million hectares of good farmland to the Gulf States, Egypt and South Korea. Kuwait has leased rice fields in Cambodia. China, Japan and others have taken up land across Africa. Ethiopia has handed over large areas of land despite being dependent on food imports for survival of its rapidly growing population.

At one level this is all good and market-driven. But what happens when shortages occur and locals see food that they desperately need being shipped off to the nations of its owners? The whole point of the investment is to ensure that market forces can be overcome when it is not possible for higher prices to drive more production. The impact will be far worse than that of profit shifting to avoid tax.

China is leading the way in markets for other critical commodities with moves to pre-empt future market crises. They are very realistic in doing so. Nations relying on markets to provide will pay extortionate prices or miss out on vital needs or both.

There are many other huge pressures building up. Population imbalances, environmental degradation (including climate change), the return of financial crisis, the end of cheap fuel and an impending wide range of commodity shortages all demand more realistic economics. And among all the problems are huge opportunities for those prepared to look for them.

Governments have an expanding role in leading national responses to the new realities. But there is a cost to change, either as taxes or through regulated controls, and forcing people to pay now for future benefits requires real leadership.

The old measure of success has been economic growth. The aim of Australian governments for two centuries has been to use more resources to raise the consumption levels of an expanding population. The new global realist aim is to raise the living standards of a stable population while reducing the consumption of unrenewable resources. That raises questions of quality replacing quantity, a major rebalancing of sectors of the economy, and a huge transition to new energy sources. The price mechanism can help achieve all that but strong government leadership will be required.

The market fundamentalists who deride all planning as "picking winners" and doomed to fail must be ignored. The challenge now is to make the planning as solid as possible, and to use market forces where possible. Not to plan, and not to act on planning, is to fail.

In terms of managing the financial crisis, global realist economics can accept the need for Keynesian deficit spending but absolutely rejects Keynes's idea that you could validly pay people to dig holes and then other people to fill them in. The point of such spending should be to specifically target it at achieving long-term goals such as improving productivity, generating new products or bringing forward necessary spending from the out-years when transition costs will be most onerous.

It's not about changing the settings and letting the system work its magic. It is about driving the system harder until a new stability can be achieved. The transition will take decades but we are already late in starting. It will be interesting to listen to the debates over coming weeks and see if there are any realist moments.