Answers are in economic history

Internationally, contemporary worldwide economic dislocation is obvious across major western economies. Commentators across industry, media, academia, and politics have no answer to major shortcomings of contemporary economics which is characterised by maldistribution of income and wealth, rising inflation, and supply constraints emanating from Covid and Ukraine dislocations. In Australia, the recent Commonwealth election and Victorian state election have made commentators across the full spectrum look amateurish and unable to understand the decline in electoral support for traditional political parties. Answers to both questions lie in understanding economic history and changing electoral demography.

The short answer is that the structural reforms brought about by post 1980's adoption of Thatcherism by the "baby boomer" generation are now being rejected by changed values of Gen Z or millennial generation. Inevitably changing generational values have exposed past "progressive" thinking of the "baby boomer" generation unacceptable to contemporary values. Political parties still dominated by the values of the baby boomers are unable to come to terms with the changed values of the millennials. Similarly, economic policies acceptable to structural reformers are now unable to deliver outcomes acceptable to modern millennials.

Nowhere is criticism more concentrated than modern monetary policy administered by independent central banks. Independent central banking was a distinguishing characteristic of modern monetarism over the closing decades of last century. This short discussion examines modern monetary policy.

Contemporary Economic debate

There is much discussion and debate over the parlous state of the world economy. What is obvious to ordinary people is that contemporary commentators, have no answers except to regurgitate the failed market economics of past generations. For example, amongst leading business people, academics and politicians of the 1930's, the solution to similar economic dislocation was "Above all we must balance the budget". The contemporary version, heard almost daily, is that "Budgets must be brought into balance and expenditure constrained". Meanwhile, modern monetarism places its trust in the 1970's inflation augmented Phillips Curve to manage inflationary expectations

Economic philosophy that underwrote post 1983 structural reforms has lost relevance to changing generational values of contemporary society. There is a need to revisit the economic philosophy inherent in Australia's Constitution to understand why the philosophy of the baby boomer "progressive thinkers" is now unacceptable to contemporary society.

The Australian Constitution a Brief Background

"TheConstitution provides the foundation of and framework for government. It is 'the document in which are set out the rules governing the composition, powers, and methods of operation of the main institutions of government'. These rules have the status of supreme law" Hugh. Emy

The Australian Constitution was written in a period dominated by unfettered classical/ neoclassical philosophy. Between 1872 and 1896, three severe depressions damaged belief in classical/ neoclassical theories. Marx and Engels had published work advocating benefits of communism. This political climate generated an interest in protectionism which ultimately underwrote the mixed capitalist economic system that emerged following federation. Consequently, the Australian Constitution was framed in an environment favourable to government intervention in management of the economy.

In 1890 there had begun a major worldwide depression which subsequently spread to the Australian colonies. Between 1891 and 1900 gross national product declined 13% per head of population across the Colonies. The decline in GNP resulted from, drought, depressed pastoral sector, decline in new railway construction, and cessation of residential and office construction. Under such economic contraction industrial unrest erupted. In 1890, the infamous Maritime Strike occurred which flowed into the shearing industry finishing up in Queensland with unionists being jailed in 1891.Industrial conflict finally came to rest in the Queensland shearing industry in 1894. The prevailing economic system collapsed reducing both investors and speculators to poverty. This environment of depression and industrial unrest was the background to the writing of the Australian Constitution.

Consequently, politics of the time was divided between trade union protectionism and free market capitalism. Even the Labor movement itself was similarly divided between protectionists and free traders. However, by 1894, NSW Labor adopted a unified protectionist philosophy. At the colonial level, NSW favored free trade whilst Victoria with a small manufacturing base, preferred protectionism. Consequently, therein lies the rationale for Section 92 of the Australian Constitution.

Inevitably, against such a background of industrial dislocation, deep economic depression, and political discontent, social justice reform as well as industrial reform became necessary. As the Constitution was written in troubled times, it is a protectionist document providing policy instruments to manage the undesirable features of unfettered capitalism. The Constitutional framework represents progressive thinking of the time necessary to counter growing interest in the Marx/ Engle's challenge to capitalism. The final version of the Constitution provided the framework for the mixed capitalist economic system that remained until structural reformers emerged post 1983. Indeed, the original Constitution fitted neatly with the economic theories of J.M. Keynes which were to emerge some three decades later.

The rise of Central Banking

The origin of Australian central banking began in 1911 with the establishment of the Commonwealth Bank as a trading and savings bank in competition with private sector banking. Between 1914 and 1918, the Commonwealth Bank raised loans to fund the First World War, and later, resettlement, training, and housing programs for returned servicemen. As well, the responsibility for banknote issue was transferred from Treasury to the Commonwealth Bank. Central banking responsibilities would begin in 1924 controlled by a Board whose membership would remain politically uncontaminated. Central bank duties were to "control" banking policy, assume the issue of printed notes, and provide accounts for the private banks which comprised part of their cash reserves, and settlement of interbank transaction.

The Commonwealth Bank Act and Banking Act of 1945 consolidated the central bank role of the Commonwealth Bank. Central bank powers conferred upon the Commonwealth Bank were to regulate activities of trading banks; control foreign reserves, protect depositor accounts; and control interest rates both offered and paid by the banks. In 1959, The Reserve Bank Act was passed which separated central bank roles from commercial activities.

In 1960, the Reserve Bank of Australia began operations. An appointed Reserve Bank Board chaired by the RBA Governor became responsible for conducting monetary and banking policy that contributed to the stability of the currency, full employment, economic prosperity, and welfare of the Australian people. Whilst monetary policy was set by the Commonwealth treasurer in the annual Budget, the RBA became officially the center of applied monetary policy in Australia on a day-by-day basis

Modern Monetary Policy

Structural Change to applied monetary policy began in 1983 with the floating of the Australian currency. Whilst the Government continued to set monetary policy direction and stance in the Budget, the role of the RBA remained central to both applied monetary policy and exchange rate policy on a day-to-day basis. In 1996, the RBA and its unelected Board were officially granted independence to determine and manage monetary policy and the value of the currency.

The goals of monetary policy require the RBA Board to conduct monetary policy outlined in the 1996 Statement Conduct of Monetary Policy. The framework allows the RBA Board to focus on price stability (currency) considered critical for long term economic growth and employment whilst recognizing policy impact upon short term levels of employment. Both the Government and RBA agreed on the importance of low and stable employment. The medium-term policy objective was to be an inflation target of between 2%-3% movement in the CPI. The key to inflation management then became inflationary expectations and disciplined fiscal policy.

Inflationary Expectations

Determination of policy direction and stance to manage inflationary expectations requires the RBA to achieve the lowest rate of unemployment without fueling wage growth sufficiently to stimulate inflation. This measure of unemployment known as NAIRU or "non-accelerating inflation rate of unemployment" is similar to monetarism's natural rate of unemployment.

The inflation augmented Phillips Curve underwrites both the natural rate of unemployment and NAIRU. Over the long run there is no trade-off between unemployment and inflation. However, over the short term, wage demands driven by expectations of inflation drive wage demands which are assumed to flow into current cost driven inflation. Estimating the divergence between NAIRU and the actual unemployment rate then becomes central to policy direction and stance. Economic modelling provides the necessary estimate of the short run Phillips Curve relationship between actual unemployment and the assumed NAIRU.

Education and training become an important fiscal policy strategy that supports RBA inflation targeting. The fiscal policy strategy assumes that under a flexible labour market, appropriately trained labour will continually lower the natural rate of unemployment. Full employment of the labour force becomes possible then through skills enhancement of the labour force. This is of course simply a reaffirmation of Professor Pigou's 1927 modern restatement of Say's Law of Markets[xi]. More importantly, fiscal policy applied to training of the labour force to support inflation targeting means monetary policy effectively captures fiscal policy.

Structural Reform

Following the collapse of the Bretton Woods international monetary system in 1971, a belief in the market mechanism returned. Whilst associated with monetarism, these features were prominent

• No industry policy which required withdrawal of constraints and subsidies, privatisation, and abolition of controls

• Withdrawal of government involvement in wage determination
• Curb on trade union power.

The model became known as Thatcherism in Britain which Hawke and Keating brought to Australia. Clearly, the historic written protectionist Australian Constitution was a stumbling block to implementation of globalised market theories. However, successive Governments: Hawke, Keating, Howard, supported by commentators across industry, media, and academia successfully sold the return to nineteenth century capitalism as supply side structural reform complete with the underlying assumption that the world is one single market i.e. globalisation.

The baby boomer and Gen Z generations willingly bought the return to the economic philosophy of pre-Federation. Market capitalism replaced the mixed economic system implicit in the Australian Constitution. The social justice preamble to Section 51 of the Constitution became meaningless as clever politics stepped around the interventionist Constitution by signing international treaties which were in turn used to render inoperative the protectionist provision deliberately included in the Constitution.

Conclusions

The problem now is generational change. The millennium generation concerned with climate change will require government intervention and support for industries, regions, business, and employment. Political parties tied to entrenched baby boomer economic philosophy of market theory must continue to fare badly at the hands of voters.

What emerges in this discussion is that the withdrawal of government from economic management is now a political liability. The message is that baby boomer political philosophy must accept change and return economic policy arms to Government. The written Australian Constitution will accommodate such a change in political philosophy.