Chalmers offers Australia a New Deal

Late in 1937 the weary economy collapsed once again. In a nine-month period in 1937 and 1938 industrial production dropped 34%. Roosevelt's advisors demonstrated that they had learned little from the grim experience of the previous years. Unemployment in 1938 stood at ten million, higher than it had been in 1931. They resorted again to the panaceas of pump-priming, deficit spending and inflation.

So a recession that had begun as a result of government intervention into the money supply was sustained by more of the same, plus tariffs, controls over wages and prices, and subsidies to farmers.

"Policy measures like Fannie Mae, deposit insurance, social insurance, The Wagner Act, the farm programs, and monetary activism share a common disability. They fail to recognise that the state bears an inherent flaw that dwarfs the imperfections purported to afflict the free market; namely, that policies undertaken in the name of the public good inexorably become captured by special interests and crony capitalists who appropriate resources from society's commons for their own private ends."

We would need to be careful that the friendly, well-meaning collaboration that Chalmers proposes between industry, unions, venture capitalists, superannuation firms and government does not lead to crony capitalism. There is a real and ever-present risk that the chosen groups may act in their own interest rather than that of the general public. Moreover, firms may find it desirable to support government policy in other areas in order to win government favours. Chalmers hints that he wants to alter the role of the Reserve Bank, but he is not specific about his plans. Let us hope his assault on our money is not as devastating as FDR's.

It is worth noting that the areas of our economy that are least efficient are the ones that are either highly regulated or are run by government. For example, education and health care are among the few things that cost more in terms of hours worked now than they did sixty years ago. They suffer from a lack of innovation, from a lack of entrepreneurial input.

In fact, the glaring omission in Chalmers' paper is that there is no mention of the role of the entrepreneur.

The more we diversify as consumers and specialise as producers, the more prosperous we become as individuals and nations. It is the entrepreneurs who drive this economic process. They back their judgement and risk their time and their capital to create the goods and services that they perceive consumers want.

Entrepreneurship is not a role that can be played by government and bureaucrats. Nor can it work if it is stifled by regulations, controls and special favours.

What Chalmers is proposing is to move economic decisions from the business sphere to the political sphere. He and his party will select what they deem as valuable for us and they will then work with a few experts – bureaucrats, CEOs of our larger companies, union leaders, heads of superannuation funds, etc. – to guide our economy in the direction of their choosing.

The trouble is that these experts do not have the knowledge, in fact cannot ever have the knowledge, to undertake this task optimally. This was explained brilliantly by F.A. Hayek in his essay, The Use of Knowledge in Society, [5] which addresses the generic problem of how to make rational economic decisions.

Hayek based his analysis on three profound concepts:

• First, that not all knowledge is scientific; there is also the knowledge of time and place.

• Second, that knowledge of time and place is held by millions of individuals.

• Third, data that is aggregated loses nuance.