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The Political Economy of Permanent Productivity Crisis

by Phillip Toner on April 20, 2015

The Department of Political Economy at the University of Sydney recently hosted a one-day conference on the Productivity Commission (PC). However, before proceeding to outline the activities, debates and interventions at the conference—with papers from the conference to be published, subject to peer review, in the journal Economic and Labour Relations Review later in the year and some of the direct papers available online HERE—some background on the PC is required.

The PC has undergone a number of institutional changes from its origins in the Tariff Board to its first separate existence as the Industry Assistance Commission in 1973. Over the last 4 decades the PC has performed the role of ‘advocate in chief’ for the government to apply neoclassical economics to public policy. Rarely, does the PC refer to its economic vision as neoclassical, preferring the neutral term ‘economic theory’, to identify its intellectual centre of gravity. This conveniently side-steps the thorny issue of multiple and often conflicting ‘economic theories’ which can form the basis of public policy. This neoclassical world-view, better known these days as ‘neoliberalism’, dominates Australian economic policy in terms of bipartisan support for reduced assistance to industry, privatisation, contracting-out government services and a general commitment to reduce the size of government. The PC has been instrumental in advocating these policies and establishing institutions which ensure their continuing propagation, notably, National Competition Policy and the Council of Australian Governments’ (COAG) ‘reform agenda’.

Productivity CommissionOver the decades the scope of the Commission’s work has greatly expanded from its traditional focus on industry assistance and deregulation to encompass reviews of industrial relations and social policy with recent reports on gambling, indigenous welfare, child care, aged care, vocational education and the national disability scheme.

Despite this territorial expansion in the work of the PC, reflecting the modern material conditions of private capital intruding ever more deeply into the lives of citizens and households, policy advice from the PC has remained invariant over the decades. The simplicity of its policy advice to government flows directly from its adherence to a simple neoclassical model of the world. Factor mobility and competition ensure all is for the best in the best of all possible worlds as unfettered markets guarantee resources are allocated to meet market demand and prices reflect their true opportunity cost. Ironically, these 3 core PC ideas, factor mobility and competition leading to a uniform rate of profit and wages, originate in eighteenth-century Classical economics. The Classicals, like Smith and Ricardo, also established the surplus approach to growth and distribution and the theory of exploitation based on the labour theory of value!

The PC is unaffected either by doubt arising from serious reflection on the outcomes of its policy advice or advances in orthodox economic theory which either undermine or heavily qualify its hardline position. Examples of the latter include behavioural economics which seeks to empirically test the core neoclassical assumptions of profit and utility maximisation and perfect information. It demonstrates both systematic biases in consumption and investment behavior and profound information processing limitations in people’s decision making. The economics of technical change also represents a substantial challenge to the core assumptions of the neoclassical growth model; more on this later. Adamantine adherence to the simple neoclassical parable is, however, a key source of strength for the PC. It also, though, gives rise to the derogatory alternative title for the organisation—the Congregation for the Propagation of the Faith.

Whilst it is difficult to draw a straight line between PC advice on particular subjects and subsequent government policy, it is the case that the Commission has advocated strongly for a range of policies which have had adverse or highly ambiguous effects. The following is a sample of outcomes from a variety of economic reforms advocated by the PC. These include, billions of  public funds wasted on private vocational education and training colleges; the ‘downsizing’ of public support for  innovation in the private sector (for example abolition of the highly successful Industry Connect programme); the highly mixed outcomes from electricity privatisation; the high prices and low quality of service at Sydney Airport (following privatisation of airports and the farcical suggestion that Sydney and Melbourne airports would compete for air traffic) and increased macro-economic instability due to increased reliance on mining and agricultural exports.

How can one explain the survival, and indeed flowering, of this simple messaging service? First, simplicity increases the chance that the message will cut through with governments. It is easier to explain to Ministers and their advisers and a simple message is easier to sell to the electorate. What government wants to hear from its public servants, ‘well, the issue is complex, and the results of various policy options are uncertain’? Second, the PC is primarily an advisory body and is not generally responsible for implementing its own advice. When problems emerge it rarely seems to be held accountable for the outcomes. Like neoclassical economics, this policy advice can never be falsified as adverse outcomes can be attributed to poor implementation and the mantra, ‘better regulation is required’, is always a useful fall-back. Not more regulation mind you, just better regulation. The most recent examples of this mantra being invoked include the response to scandals involving private VET colleges, soaring electricity prices and dodgy bank advisers. Third, in avoiding scrutiny for the outcomes of its advice it is assisted by a neoliberal media consensus favouring the PC’s deregulation agenda. The media pushes its own highly simplified ‘Hawke-Keating-Howard’ creation story. This is a simple tale of progress from the dark ages of the 1970s caused by high tariffs, government ownership of utilities and an award-based wages system to the sunny uplands of prosperity inspired by the floating dollar, deregulation of the labour market and finance sector, reduced industry assistance and privatisation. Put simply, an Orwellian economic theorem ‘public sector good, private sector better’.


The conference hosted at the University of Sydney attracted a wide range of academic disciplines, aside from political economy, reflecting, as noted above, the enhanced scope of the PCs work. These included law, history and industrial relations.

Evan Jones provided a history of the PC focusing especially, on the push led by Alf Rattigan within the Tariff Board in the late 1960s to shift the focus from industry development to maximising income per capita. The paper emphasised the key role of university based neoclassical economists, especially Professor Max Corden in providing intellectual support for the shift through econometric modeling notably, the ‘effective rate of assistance’. Roni Demirbag and Phillip Toner took this latter issue up in their criticism of PC modeling, especially Computable General Equilibrium models, which they argued are designed to maximise the cost of assistance to industry and minimize its benefits such as employment, regional development and technology spillovers. Tom Barnes used a recent report by the PC, which supported removal of assistance to the car industry, to also critically examine the PC modeling assumptions and highlighted the gap between empirical studies of car industry redundancies in Australia and the optimistic approach of the PC to unemployed auto workers finding jobs. Similarly, Chris Shiel provided a detailed analysis of the PC report into the stevedoring industry and highlighted the lack of understanding of the operation of the industry and the unsound empirical basis of its policy recommendations for the industry. David Wishart used a lawyer’s forensic examination of the evidence adduced by the PC to criticise its claims of large gains for the Australian economy from implementation of National Competition Policy. He also observed the very large bureaucratic and regulatory system imposed to realise the policy.

Labour lawyer John Howe reflected on the early rationale for industry assistance, especially the tariff, which was designed to share the gains of increased employment and output between capital and labour. He noted that this had changed over recent decades with fewer requirements on firms receiving assistance to maintain labour standards. Pat Ranald criticised the PCs approach to determining the effects of bilateral and multilateral trade agreements and concluded with reflections on the adverse effects of the Trans-Pacific Partnership Agreement. Rob Dalitz described how advances in the economics of technological change pose large challenges for the PCs simplified neoclassical growth model. Technological change is associated with economic features such as risk, uncertainty, monopolies, sunk costs, increasing returns and barriers to efficient flows of information that can restrain productivity. Critically, these features undermine the simple neoclassical parable. The PCs response is to regard these as discrete instances of ‘market failure’ which judicious, but strictly limited, government intervention can ‘correct’, returning the system to a new equilibrium point. By contrast the economics of technological change argues these features are not examples of market failing, rather they are just how markets work. The response of the PC is to insist on the idea of market failure and that only a very limited government response is required. Thus it supports public funding of basic science, given the obvious disincentives to the private sector undertaking this type of research but to argue for much less public support for innovation in the private sector. It is, the PC suggests, impossible to quantify both the scale of technological spillovers failure and additionality induced by public support. Industrial relations expert Anne Junor criticised the PC analysis of the industrial relations system and its advocacy for greater managerial prerogative in the determination of working conditions.

Phillip Toner
Phillip Toner is an Honorary Senior Research Fellow in the Department of Political Economy, University of Sydney. His research interests include industrial structure analysis and industry policy; the economics of technical change; national vocational skills formation systems and labour market analysis. He has undertaken research for organisations including the OECD; World Bank; Industry Canada; South African Human Sciences Research Council; Australian Research Council; National Centre for Vocational Education Research and Department of Innovation, Science and Research.

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