Monday, October 7, 2013

Restraint: a good oil in short supply

Even when we're confident of not getting caught, almost all of us refrain from doing those things because we don't believe they're the right thing to do.

Even when we're confident of not getting caught, almost all of us refrain from doing those things because we don't believe they're the right thing to do.

There's a paradox at the heart of modern capitalist economies: if they really worked the way economists think they work, they wouldn't work for long, they'd seize up. And as the Yanks have been busy demonstrating, it's a similar story for modern democracies.

Economists believe the motivating force driving market economies is self-interest: businesses and consumers do what they do purely for their own benefit. But the ''invisible hand'' of market forces transforms all this selfishness into a system by which everyone benefits.

Although most economists prefer the euphemism ''self-interest'', Professor Paul Frijters, of Queensland University, prefers to call it ''greed'' in his path-breaking book written with Dr Gigi Foster, of the University of NSW, An Economic Theory of Greed, Love, Groups and Networks.

Frijters argues that a variety of ''institutions'' is required to ensure individuals' greed doesn't prevent the operation of free markets. If people will do anything to increase their material wealth, as implied by the Homo Economicus view of humanity, why would they simply pay the prices traders wanted to charge? Frijters asks.


''Why would they not, for example, steal products or production technology, kill competitors, or in some other way seek a market advantage through dishonest or immoral behaviour?'' he asks.

Because of the existence of formal and informal institutions. Formal institutions include parliaments that pass laws prohibiting certain behaviour and police and courts that enforce those laws.

But ask yourself this: is your knowledge that it's illegal and that you risk being punished the only reason you don't steal from shops, your employer or your neighbours? Do you adhere to contracts only to avoid having to defend your behaviour in a court case with the other side?

Of course not. Even where we're confident of not getting caught, almost all of us refrain from doing those things because we don't believe they're the right thing to do. And there is any number of perfectly legal things we could do, but choose not to. So our behaviour in the marketplace - or in politics - is also constrained by a host of informal institutions, such as notions of fairness, conventions, customs, rules we've internalised and other norms of socially acceptable behaviour.

''Formal and informal institutions in combination are important in the running of societies, as together they form the rules of the game to which people adhere. They constrain the possibilities for opportunistic behaviour in human interactions,'' Frijters says.

This isn't the first time the US Congress has refused to pass the budget and thus shut down the US government, but it's rare. The Financial Times' Martin Wolf, doyen of the world's economics editors, observes that if President Obama's political opponents are prepared to inflict such damage on their own country, ''the restraint that makes democracy work has gone''.

Dr Chris Caton, of BT Financial Group adds: ''Thank god that couldn't ever happen in Australia!'' Not half.

Just as we need social norms to restrain our instinctive selfishness and so keep the economy functioning smoothly, we need restraint among the players in the political game to ensure we don't descend into impasse and policy impotence. But as the Americans' appalling predicament reminds us, restraint isn't a given, and can't be taken for granted. Our selfishness does propel the economy onward and upward, but when voluntary restraint breaks down - almost always egged on by competition - we can end up with greedy bankers causing the devastation of the global financial crisis.

Similarly, we need our adversarial two-party system of democracy to keep a check on the corruption and incompetence of governments, but when personal ambition and party rivalry become unrestrained, government suffers.

The sweeping economic reforms of the Hawke-Keating era were made possible by John Howard's principled restraint in providing bipartisan support. But bipartisanship in the interests of good government ended with Labor's opportunistic scare campaign against Howard's GST.

Tony Abbott returned the favour with his ruthlessly dishonest scare campaigns against the carbon tax and the mining tax. Now how do you think Labor will react should Abbott propose a controversial reform in this term or the next?

The self-seeking, short-sighted, rivalry-fanned lapse in restraint by both sides makes further major economic reform highly unlikely until, by some hard to imagine means, the former norms of acceptable political behaviour are restored.

But don't blame it all on the politicians. That's too easy. As Professor Ross Garnaut observed in May, the past dozen years have seen ''interest groups'' - I'd say industry lobby groups - become less inhibited in pursuing private interests at the expense of the wider public interest, ferociously resistant to reform proposals involving private costs to them, and willing to pursue their private interests by costly ad campaigns and party donations.

Less restraint, less reform.
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