Around the world, finance is a major policy problem driven ultimately by the ease with which insiders can advantage themselves (sometimes illegally, but mostly legally) against outsiders - the mug punters who must pay for financial services. It's ironic that these problems have burgeoned in the wake of a generation of policy-making that putatively paid increasing deference to economic expertise.
Still, had we taken one principle from the economic reformers' playbook seriously, we'd have finessed lot of the problems we've encountered. Margins in two of our most inefficient industries - banking and wealth management - could be cut by at least a fifth, but probably more.
This would involve using the principle of competitive neutrality not just as a shield for business against unfair government competition, but as a sword, guaranteeing all-comers unsubsidised access to the financial services governments already provide a favoured few - as they provide central banking to banks and superannuation to public servants.
As the dust settles on economic reform, how much has been confined to 'stroke of the pen' reform - where we swept away the detritus of the political deal making of the Australian settlement - for instance in tariffs, the two airline policy, the regulation of shopping hours? We were also successful where a singular idea could be implemented with the stroke of a pen within existing systems - as in the case of HECS or the Child Support Agency.
Where we reformed government involvement in the economy that was there to solve inherent 'market failures' Australia has done much less well. In infrastructure and utilities, monopoly and asymmetric information problems abound, regulation remains inevitable and new rent-seeking political pathologies lie in wait for those unpicking the old ones. Here our reform efforts brought forth excessively priced energy, tollways, airports, desalination plants and financial tricks many of which saw governments paying more for what they already had, as occurred with the sale and lease-back of government offices. To this day, policy-making and private investment in energy, infrastructureand telecommunications are mired in short-termism, dysfunction and crisis.
There are also rich professional ecosystems in which governments play a major role as funders, regulators and/or service deliverers in health, education and legal and other human services. Has reform improved performance here? It's pretty unclear. And in areas like regulation and reducing red tape things seem to have deteriorated, notwithstanding three decades of 'regulation review'. It's unsurprising in such circumstances that the public's faith in the governing classes continues its long slide.
Then there's finance, which in many ways is a special case. Warming to his theme that the financial system is a "pyramid of promises", here's a purple passage from Financial Times correspondent, Martin Wolf:
[T]he purchasers of promises will know that the sellers normally know much more than they do about their prospects. The name for this is "asymmetric information." They will also know that those who have no intention of keeping their word will always make more attractive promises than those who do. This is "adverse selection." They will know that even those who are inclined to be honest may be tempted … not to keep their promises. The source of this is "moral hazard." The answer to adverse selection and moral hazard … is to collect more information. But this too has a drawback: "free-riding"… [T]hose who have made no investment in collecting [information] can benefit from the costly efforts of those who have.
…That will, in turn, reduce the incentive to invest in such information, thereby making markets subject to the vagaries of "rational ignorance." If the ignorant follow those they deem to be better informed, there will be "herding." Finally, where uncertainty is pervasive and inescapable - who, for example, knows the chances of nuclear terrorism or the economic impact of the internet? - the herds are likely both to blow and ultimately to burst "bubbles".
This brief tour de force continues with a new paragraph beginning "Finance is a jungle inhabited by wild beasts." Are you feeling lucky?
In such circumstances, crude favouritism for the private or the public sector has been what one might have expected - a recipe for failure. We should assume more humbly, that our task is to evolve institutions of the mixed economy in which the public and private, the competitive and the collaborative, play to their strengths and bolster the others' weaknesses to address the myriad issues they encounter more fully on their merits.
We've barely begun this process of articulating post-ideological reform. But embracing competitive neutrality as a sword, not just a shield, provides a powerful 'policy hack' with which to begin.
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