Ross Gittins swings at reform, misses, falls flat.

Ross Gittins has just published an article making a case against the reform obsession that grips the current political class.

I like Gittins and I’m always interested in a smack-down of a new religion, so I started reading eagerly.

But Gittins was unable to deliver a smackdown. Unable to deliver much at all.

See if you can spot the fallacy here:

“Simple statistical theory should be telling economists that a protracted period of below-average growth is most likely to be followed by a period of above-average growth.”

Whew, that’s embarrassing.

The nicest thing I can think of to say about it is there are economic models suggesting poorer countries grow faster than richer ones. They imply a degree of catch-up – perhaps those were the theories Mr Gittins was fumbling for?

But the problems with the article go beyond just one dodgy paragraph. His whole case against “reform” depends on the idea that the economy will grow just fine without it.

That’s certainly possible. I actually think the economy might well be about to bounce back a bit. But that doesn’t make a case against reform.

Economists know you get growth from adding more people and machines, and then you get extra growth for free via productivity gains. Productivity gains are the really good gains because they come without real trade-offs. You don’t need more ingredients, just a better recipe.

Productivity gains can come from two main sources.

  1. Better ways of doing business (innovative ways of combining inputs inside the firm), and
  2. Better-functioning markets (innovative ways of combining inputs outside the firm).

Why do we obsess over the latter one? It’s where we have our hands on the lever. Governments can’t really control innovation at the firm level. Not in the short-term at least. They do control market regulation.

So “reform,” that buzzword that’s as popular as a buzzard, refers to this latter issue. Making markets work better.

Sometimes they work better with less regulation (economists arguing against the taxi cartel, for example) sometimes they need more regulation (economists arguing for a carbon tax or higher capital requirements for banks.)

Whether or not you get the first kind of productivity improvement, there’s a chance you can bring growth into existence by focusing on the latter.

Growth matters.

The desire for growth is not about the hope of self-enrichment. The sad fact is growth remains the only way we know to ensure full employment. Unemployment is horrible. It hurts people and ruins lives long-term. Meanwhile higher growth can bring better standards of medical care, lower infant mortality, safer foods, more opportunities to work in satisfying jobs. So the hunt for growth is a humanist pursuit. Obsessing over it is a risk-averse social scientist’s way of trying to maximise human happiness.

Gittins seems to think gambling on future growth is a great idea.

When you convince yourself, as many economists have, that the only way we’ll see faster growth and further productivity improvement is for governments to engage in extensive reform, you’ve convinced yourself our economy is deeply dysfunctional.

Optimism is an endearing quality in a friend, not an economic policy-maker.

The great thing about market reform is it should work whether or not we’re getting the other kind of productivity inside firms. It’s additive. If Mr Gittins’ optimism is rewarded and we see a great surge of firm-level productivity unleashed, it won’t be a mistake to have unleashed market-level reform too.

There are strong arguments against reform. Arguments about the extent of economic encroachment into our lives. About materialism and reification. About market power. About whether we can shape economic growth in ways that brings us more of the good and less of the bad. These are good arguments we should all be engaging in.

It’s a shame those column inches didn’t attempt such an engagement.

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Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

6 thoughts on “Ross Gittins swings at reform, misses, falls flat.”

  1. Have you read “Obliquity”, by the finance economist John Kay? He makes a good case for pursuing aims other than pure profit. Reform is a loaded term that is practically a by-word for short-term cost cutting and market liberalisation at the cost of existing employees wages and conditions. The most likely driver of productivity is technology, much of which is not intentional or developed with it’s end use in mind. Policies that improve education and research will yield long term improvements in economic well-being, but that is far too boring and long-term for anyone to get serious about because unlike “reform” it is a short-term cost for a long-term payoff that can’t be easily captured as profit except through a well functioning tax system.

    Liked by 1 person

  2. I have not but I will add it to my reading list (currently part way through Piketty’s capital – why did nobody warn me it was so dry?!). I agree that technological change is, in the long-term, almost everything.


  3. Could Gittins have been clumsily alluding to regression to the mean? That would support the view that a period of far below average growth will likely be followed by a period of closer to average growth.


  4. Jason,

    Is there no way that reform can help productivity inside the firm as well? Such as changing the tax mix to encourage certain business investments?


    1. Good question. It can help. For example, cutting payroll tax might encourage firms to hire more people instead of using machines. That might get them a more productive set of inputs.

      (The definitions I implicitly used above are pretty theoretical – the idea being that all ‘transactions’ inside a firm are non-market and therefore untaxed. That breaks down when it comes to hiring decisions. (Is the employee an inside-firm entity or an external one? depends.))


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