Economic complexity beyond rational management

We have been told that the main rationale of the past few decades of economic reform was to structurally change the Australian economy so that it was not so reliant upon our primary resources. Yet the previous period of economic growth was largely attributable to a debt-fuelled housing bubble and the resources boom. We are now on the cusp of a recession precisely because of the fall in commodity prices, and the bursting of the housing bubble.

Paul Kelly in The Australian had informed us that "prosperity abounds" yet now household wealth is declining with the declining real estate market. One hesitates to use a phrase adopted by the Nazi's during the Weimar Republic, but any measure of household wealth that is largely based on an asset price bubble is a form of "sham prosperity".

The resources boom, as revealed by a Reserve Bank study, was fuelled by a form of demand push commodity price inflation. It was not a case of our resource companies increasing the volume of exports through greater capital investment and exploration. Chip Goodyear, when CEO of BHP-Billiton, reckoned that the resources boom was a long-term prospect. Boy was he wrong.

Australia still, to a large degree, is at the mercy of the commodity price cycle much like a third world economy.

The long-term response to the economic crisis is clear. We need to re-structure the economy towards more value added industries, especially through the development of what has been called "the knowledge economy". A knowledge economy does not arise upon the basis of free-markets. Knowledge economies depend upon a dynamic public sector.

This is because of externalities, in this case positive externalities. If we in Australia fail to develop a knowledge economy then we might call this a form of market failure.

We also need to achieve a measure of de-coupling to develop a buffer against exogenous shocks. Both the knowledge economy and de-coupling can be achieved by instituting publicly supported strategic industry policies. This means overcoming the free-trade mantra and developing a more fuel efficient car industry, investing in the development of alternative energy systems, providing support for biotechnology and greatly increasing investment in science, innovation and the tertiary education sector.

The extinction of Homo sapiens may well turn out to be the greatest market failure of all time. The economic crisis will engender great human suffering and misery but we would do well as a species if we at least manage to see the crisis as almost a divinely inspired warning and reverse our three decade-old mania for what has amounted to something very much akin to Polanyi's stark utopia.