The concept of free-market economics is ageless. In practical terms it goes back to the work of Adam Smith. ‘Economic rationalism’ is a concept that goes back to the 1980s. The idea of ‘economic rationalism’ is that government bodies should be ‘privatised’, that is instead of government doing a bad job running them, some company (usually from overseas) will be hired to do a bad job running them, supposedly to bring the consumer the benefits of competition. It is macro-economic and government-overseen, whereas free-market economics is micro-economic, and independent of the government. Free-market economics is best exemplified by the Austrian School of economic theory.

It also comes about because economic rationalism didn’t achieve much. The tariff review program took 20 years and cost the economy billions. There is no evidence whatsoever of new manufacturing industries with outward-looking, internationally competitive processes and strategies arising from the ashes of the manufacturing bonfire. There is evidence that we stunted our own manufacturing growth.

In an advanced economy the proportion of economic activity given to manufacturing has always declined. A high percentage of an economy given over to manufacturing is a sign of a less advanced, but rapidly growing economy, such as that of China. Free-market economics makes no promises except that the people will be permitted to trade freely with whoever they choose, and will not be stopped from doing so by government bureaucrats.

The single strategy proposed by the free-market economists is to increase our productivity and make goods and services more efficiently. This will lower prices and increase demand. Consumers will clamour to consume more. The gross domestic product of the economy will obediently grow.

If that is their strategy then they are not free-market economists. A genuine free-market economist knows that you cannot, and should not, regulate human choices. GDP is not a measure of the creation of wealth. It is production, and not consumption, that is the engine of increased wealth accumulation and future prosperity. Despite what governments might think, hosting the Olympic Games does not make a country richer.

According to the free-market adherents, productivity improvements occur only when there is no government intrusion in the marketplace. Businesses are left to compete and only the most efficient survive. They then altruistically give their efficiency gains to consumers to grow the market.

The first sentence is correct: governments have certainly never increased business productivity. The last sentence, apart from the grammatical idiocy of “grow the market”, again shows a misunderstanding of what free-market economics actually says. If a business becomes more efficient it can either lower prices or increase its unit profit margin, whichever it thinks will be more advantageous to the business.

If it is making higher profits then a portion of those will be invested in new capital equipment (or genuine research and development) to make the business even more efficient. Whichever way, the consumer will ultimately benefit.

The trouble with the theory is that it is demonstrably simplistic and inadequate. The Australian economy grows for a number of other reasons. These include the creation of new industries and new products such as information technology, computer games, the internet and the mobile phone.

Devil’s Dictionary time: simplistic = that which works in actual practice. EXAMPLE: “I think that teaching children to read by the alphabetic method demonstrates a very simplistic idea of the learning process.”

The economy also grows because of the economic activity of hundreds of thousands of new small and medium-sized businesses that add to gross domestic product.

Existing industries such as gaming, entertainment, child care, retail, restaurants and so on are also growing to reflect a radical difference in our lifestyle.

Precisely. An advanced, wealthy economy tends more towards service and entertainment industries than manufacturing. Of course these are all consumption industries, and do not make us any richer. However Australia does have plenty of production industries which do increase our wealth base. What is worrying Martin Feil is factory closures. But factory closures should not be a cause for worry. As explained above, they are a sign of a very advanced ‘post-industrial’ economy.

Finally, gross domestic product is growing because we are saving less and are increasing consumption. Productivity improvements, particularly in the manufacture of goods, would run a poor last to these factors as a means of increasing Australian gross domestic product.

The second error in free-market theory is that it assumes a level of altruism that large companies simply do not possess. The experience of the past 20 years in the finance sector proves this point. The banks have cut costs to the bone and have had the benefit of extremely low rates for overseas borrowing. Where they compete and are subject to the beady eye of government (in, for example, the home loan sector) they have structured rates that closely follow rate movements by the Reserve Bank.

In other bank-lending areas, particularly credit card lending, they are enjoying the double-digit rates of 15 years ago.

Free-market theory certainly doesn’t assume that businesses are altruistic(!) As Adam Smith wrote:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.

Feil continued with:

This behaviour is not confined to banks. Thirty years of watching the retail price of imports not fall in response to reductions in tariff barriers and the removal of import quotas has convinced me that the consumer is the last person to benefit from a reduction in either production or logistics costs.

Suppliers charge what the market will bear. That price generally has little to do with production costs. Economic models are virtually always static. Economic reality is dynamic. Exporters will often bear a cost reversal today to stay in a market for the long run. They are not shy about recovering their losses from events such as irreversible, adverse exchange rate movements. I remember when the yen was 350 to the Australian dollar in the early '80s. At the present level, Japan shouldn't be exporting to Australia at all.

Of course sellers charge the price that will bring them the highest profit. That is basic economics. The profits are then invested in better plant to increase future profits, and also act as a signal for other businesses to enter that field of production. Free-market economists do not employ economic models. They employ reasoning applied to ever-changing economic reality; therefore they are doing just what Martin Feil wants.

Free-market economists also seem to ignore the economic theory that deals with the behaviour of monopolies, duopolies and oligopolies. They will take windfall gains if they are allowed to by governments. The Australian Competition and Consumer Commission exists to act against misusers of market power and to destroy cartels.

Free-market economists would call for the closure of the Australian Competition and Consumer Commission. A monopoly which is not legally protected by the state (as most of them are) can only remain a monopoly by brilliant business performance and constant innovation. ALCOA is a good example. There is nothing wrong with a business keeping a windfall gain. If Martin Freil won $5 million in Tattslotto would he give it all to the Australian Taxation Office?

Many large companies operate in industries where they are either dominant or occupy a market niche. It is unusual to see them engage in head-to-head price competition with other major companies. Product differentiation is regarded as preferable to price competition.

Of course its unusual. Businesses don’t want to compete. They would much rather have a nice comfortable state-protected monopoly. But a free economy gives them no choice, unless they can form a price-fixing cartel, but such cartels have never lasted for long, because there always seem to be new businesses entering the market, or cartel members breaking away and not playing by the agreement.

Productivity improvements to make the production of goods more efficient is irrelevant in Australia. Our expiring manufacturing sector is rapidly being confined to products with low value to size or weight ratios that make them impossible to compete internationally.

I cannot think of a major domestic consumer goods market with no non-tariff barriers in which we are still competing successfully against imports. The rise and rise of China as the global manufacturer was the final nail in the coffin.

He is saying that we are suffering because China is providing us with cheap, high quality goods, allowing us to concentrate on the trade advantages we have, such as coal and wheat. The advantage of free trade, and absolute and comparative advantage, are the only things in economics which are mathematically demonstrable. I bet Martin Feil doesn’t complain about our exports, even though those exports are presumably nailing down the coffins of other unfortunate countries.

Martin Feil’s interpretation is a common error. The United States imports far more from China than it exports, and this has caused a Mercantilist response from American politicians and some economists that the deficit with China threatens the United States’ future in some unspecified way.

A question: What is the most racist sign that you have seen in Australia in the last twenty years? There is a very low degree of racism in Australia, so you might find it difficult to think of any. My choice would be a car sticker distributed by the trade unions in the 1980s which showed an Australian flag and the message BUY AUSTRALIAN.

If we want to help the people of the poor countries of Asia the very best thing we can do is buy their products. Let’s flood the country with cheap imports; it’s good for them, and good for us as well. No country has ever been helped to much effect by foreign aid. But every country has been greatly helped by foreign trade.

The idea that a country is better off exporting more, and importing less, is a long-standing economic fallacy. P.J. O’Rourke wryly comments, “Maybe the Chinese will be more successful than the Japanese in their attempt to make us poor by giving us things.”

It is amazing that such narrow economic strategies can be earnestly put forward by senior academics and major strategic consultancies. They need to get out into the economy more often. I suppose the real issue is about their response to change.

Government interventionists always believe that they are the ones who are progressive and flexible enough to adapt to change. In fact ‘change’ is one of the favourite words in their vocabulary. Observation shows that the opposite is true: compare how a free market economy like Hong Kong was able to adapt to constantly changing economic conditions with how well the Soviet Union adapted to those conditions. Government economic control is always wooden and inflexible.

We are all trying to deal with major shifts in society, demographics and the world economy. It would be comforting to pretend that the changes and complexity weren't there. Free-market economists are applying a very comfortable, single solution to a difficult dilemma. It is grating when they also insist that anyone who doesn't swallow their theoretical aspirin doesn't have sufficient intellect to grasp the issues.

Martin Gardner once compared Milton Freidman to an osteopath; a crank who always had the same treatment for any malady. Martin Feil makes the same mistake when he writes, “Free-market economists are applying a very comfortable, single solution to a difficult dilemma.”

Free-market economists are not offering the same solution to every economic problem. What they are asking for is the conditions which will allow millions of economic solutions to be created in response to millions of individual economic problems. The planning of a free economy is far more flexible, detailed, and complex than the planning of a centrally regulated economy, but it is not coercive government planning. That’s why Martin Feil is unable to perceive it as individual planning at all.

The last sentence of Martin Freil’s article reveals the hidden agenda of his article. Somebody has had a go at him, and this is his response.

“Martin Feil is a tax and industry policy consultant”.

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