Where to from here?

Media commentary is dominated by "experts" pontificating over climate change, cost of living, homelessness, gender politics, and the RBA. Politicians look seriously at cameras; but, have no answers to declining living standards confronting low to middle income groups saddled with rising food prices, mortgages, and rental costs. Meanwhile, Federal Parliament has launched the traditional "Inquiries" that will take months to complete. Recommendations from these Inquiries will then be subject to the political process that adopts some recommendations whilst ignoring others. In the meantime, the disadvantaged continue to survive as best they can whilst those advantaged capitalise upon income inequalities and political positioning.

In short, the contemporary policy debate has become confused and, in most instances, ill-informed. Contemporary debate concentrates upon social policy and monetary policy managed by the independent RBA. Distribution of income and effectiveness of Australia's industrial system are not on political or industry agendas. Whilst fiscal policy is focused upon government expenditure; it has become bogged down in political ideologies embedded in nineteenth century economics. The 1945 Full Employment White Paper introduced by the Curtin Labor Government and supported by the Menzies era Coalition has been long forgotten.

The major issue facing not only Australia, but also, most western economies, is the suitability of prevailing international monetary system that replaced the post World War II fixed exchange rate regime in 1971. Despite the development of elegant econometric modelling post the 1970's, dislocation following the outbreak of Covid, and international hostilities appears to have confounded the economic philosophies that underwrite the modern supply side global monetarist synthesis which now underwrites the international monetary system.

This short essay attempts to throw some light upon questions that have emerged post the GFC and Covid which questions policy reliant upon mathematical models. Meanwhile, as political utterances by politicians, industry leaders, and economic commentators have no answers to contemporary economic dislocation, this discussion looks at the development of underlying economic philosophy in an effort to shed some light on the way forward from problems confronting most western economies today.

Economic philosophy 1950's-1990's

Over the 1950's and 1960's a modern incarnation of global monetarism emerged. Leading proponents of global monetarism were Robert Mundell and Arthur Laffer who in the 1970's combined with Milton Friedman, Friedrich Hayek, and James Buchanan in development of supply side economics. Global monetarism believes that macroeconomic phenomena is best analysed in terms of the relationship between the demand for and supply of money within a world market considered a single integrated closed economy.

In 1958, Bill Phillips produced a negative statistical relationship between money wages and unemployment. Within the economics profession this relationship became known as the Phillips Curve. Economic researchers found supporting evidence over the post World War II era in major economies thereby embedding the Phillips Curve in serious economic literature. However, in 1960, eminent American economists Paul Samuelson and Robert Solow noted that no American study had confirmed a link between unemployment and inflation. They proceeded to undertake such a study. Samuelson and Solow concluded that for the US to enjoy zero inflation, unemployment would have to lie between 5% and 6%. For the USA to have unemployment at the then popular 3% rate, inflation would need to be between 4%-5%. Paul Ormerod asserts that Similar models could be constructed for most major western economies.

However, by the end of the 1960's, the original Phillips Curve relationship between unemployment and inflation appeared to break down. Milton Friedman and others wishing to reassert micro economic theory of competitive equilibrium over macroeconomics seized upon the breakdown of the Phillips Curve to discredit Keynesian economics. The key to their attack was a view that rational people learned from experience which taught them that as unemployment fell inflation rose. Consequently, there emerged the hypothesis of rational expectations which allowed free market orthodoxy to explain the breakdown of the Phillips Curve. The rational expectations Phillips Curve followed which asserts that at any point in time there is a unique level of unemployment at which inflation will neither accelerate nor decelerate It is believed that this level of unemployment is determined by supply side factors rather than Keynesian demand management policies. As Keynes had died in 1946, he was unable to defend his theories and philosophy.

This new view of economics passed from economic debate into the world of politics. In 1976, the then Labor Prime Minister of England told an annual party conference that whilst it was commonly believed that governments could spend their way out of a recession, that was no longer the case. On election of Margaret Thatcher in 1979 as British Prime Minister, supply side economics emerged in Britain and became known as Thatcherism. Supply side economics emerged as serious economics in the US as Reaganomics over the early 1980's.

In an online article, one early US advocate of supply side economics, Bruce Bartlett, states that the aim of supply side economics was to reaffirm the truth of Jean Baptiste Say's Law of Markets. Say argued back in 1803 that production of commodities is ultimately paid for with other commodities or supply creates demand. In 1927, Professor Pigou modernised Say's Law in terms of the labour market. Pigou argued that under perfect competition, wage rate adjustment would ensure that the demand for labour would always ensure full employment. It was this belief in Say's Law that underwrote the post War attack on Keynesian economics. Contemporary restatement of Say's Law can be observed in modern economic models that assume "all markets clear"; and in production functions that assume constant returns to scale.

Economic philosophy in Australia

The 1975 Australian Treasurers Budget speech reflected the inflationary expectations model developed by Friedman and Phelps over the late 1960's. According to this theory, sustained unemployment below the "natural rate" would simply lead to accelerating inflation. This view of an economy became known as the inflation augmented Phillips Curve underwritten by rational expectations.