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(June 1999) [Printed in "Reality Module No.10" under the title "Democratic Humanism (2) - Know Your Dragon."]

Democratic Humanism (3) -
Know Your Dragon

What is Economic Rationalism?
An Aside - Snippets of History
Problems With Economic Rationalism
What Are Governments For?
Economic Rationalism and Democratic Humanism

Related Works
Feedback and Discussions


"I am truly becoming tired of people blaming economic rationalism for societal problems. Economic rationalism is a response; it is an attempt to deal with massive changes wrought by technological change and how high speed communication has rendered political boundaries obsolete for economic policy. Economic rationalism may not be THE answer but at least it is an attempt to come up with AN answer. Better that than to retreat to a world of the past which doesn't exist anymore and never will again."
Smith, Gerald. Ramblings 10. April 1999. p.5.

Your statements deserve an intelligent response, Gerald. To help me do this I have been reading about economics and, despite my expectations, I have found it to be a very interesting subject - especially where it intersects with politics and sociology.

The first question that needs to be answered is:

What Is Economic Rationalism?

It took a bit of searching to get a straight answer to this question. (There are so many extreme left & extreme right viewpoints online about Economic Rationalism - essays where the underlying assumptions have mutated to the status of unquestionable dogma - whole rationals fossilised, logic threads impossible to extract, and all cloaked and coloured by rhetoric.)

Gregory Whithall's essay "What is economic rationalism?" [1] is balanced and factual however. It provides many of the answers.

In Economic Rationalism the "unregulated capitalist economy is assumed to have an inherent tendency towards equilibrium: a situation in which demand [for goods and services] and supply [of goods and services] are in balance. the system is believed to be self- correcting."

This is a variation on the 'invisible hand of the marketplace' idea - the belief that if an economic system is not interfered with, it will achieve a natural balance.

"Movement towards equilibrium is brought about by changes in relative prices. (Prices include not just the prices of goods and services but wages and interest rates.) If there is persistent unemployment, then that is believed to be caused primarily by institutions (trade union pressure, minimum wage legislation, and so on) which prevent the price of labour-wages from moving to a level in which the demand and supply of labour is brought into balance and full employment achieved."

(The idea here *may* relate to the view of John Stuart Mill (1806-1873) that there is a "strict limit to the total funds available for wages" [2] - a Wage Fund - which is determined by other factors in the economy. Briefly - there is a limit to the amount of money available for wages in any economic system, if wages are too high there will not be enough money to pay wages to everybody, and some unemployment will inevitable result. Like much of Classical Economics, in my view, this idea results from an over-simplified model of the economy.)

"For economic rationalists greater efficiency is a sacred goal. Increased competition and the unlocking of market forces are the key means to obtain it. Economic rationalists are highly suspicious of government intervention. They believe that the central aim of [government] policy should be the establishment of a framework in which the efficacy of market forces is maximised and hence where resources can be allocated as efficiently as possible. Policies should therefore concentrate on improving the dissemination of information, improving the mobility of labour [i.e. both multiskilling, and the flexible contract workforce] and other resources, discouraging restrictive practices and...trying to encourage as competitive a system as possible."

Why the obsession with efficiency? This directly relates to an awareness that for a firm to be successful in a competitive market, it must produce its products at the lowest cost it can in order to maximise profits - ie. to make the most efficient use of resources and labour. Efficient industries are more profitable, and profitable industries add up to a strong economy, and a strong economy will bring material benefits for you and me - allegedly.

"Economic rationalists believe that the source of capitalist drive, the inherent vitality of the capitalist system, resides in the private sector...."

"Economic rationalists insist that the public sector tends by nature to be inefficient, in part because it is not subject to the market disciplines which the private sector faces. Despite the problems, the public sector needs to model itself wherever possible on the private [sector]. And where public sector activities can be or are being done in the private sector, then the public sector should surrender these activities. the result will be an increase in net economic welfare: the economy will become more dynamic and scarce resources will be allocated more efficiently."

To be brief Economic Rationalism has these features:

  1. A drive for economic efficiency -ie. the maximum result/profit for the least amount of expenditure.

  2. A push to widescale privatisation of former Publically Owned assets - as a result of the belief that Private enterprises will be run with more economic efficiency than Public enterprises could ever be.

  3. A belief that goverment should be kept small, and that it should undertake minimal interference in business affairs. (An excess of government rules and regulations will prevent the natural equilbrium of the marketplace being attained, and will prevent businesses achieving their maximum efficiency and profitability - and a golden age of economic prosperity will be denied to us.)

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An Aside - Snippets of History

Classical Economics (which began with Adam Smith (1723-1790)) features economic models which imply a sort of natural dynamic equilbrium in an economy. Their diagrams seem to be filled with cycles and things in balance with each other.

Karl Marx (1818-1883) realised (among other things) that capitalism is inherently unstable and that when left to its own devices: "The long term tendency is for some capitalists to expand at the expense of others and a centralisation and concentration of capital to occur in the hands of the more successful ones." (We will end up with fewer and more powerful companies in some areas and problems of monopoly power will occur. In these situations no 'Natural' equilibrium will exist and without government intervention the monopolists will be free to make their own rules. It is like the adage: "To every man who has something more will be given, and he will have more than enough; while for he who has nothing, even what little he has will be taken from him." (Matthew 25:29) ) This is an undesirable state of affairs.

Alfred Marshall (1842-1924) came up with a model of a self-regulating economy, but his model was incapable of explaining the economic slump of the 1930s. (The economic system had been knocked out of equilibrium.)

John Maynard Keynes (1883-1946) was the major economic figure after the war. He came up with the idea of stimulating the economy and creating employment after World War II by investing heavily in public works programs. (The notion of spending your way out of a recession.) [2]

Keynesian economics worked pretty well from 1946 until the 1970s. Then things went wrong: "What started as inflation after the Vietnam war and the 1973 OPEC price hikes developed into stagflation. Unemployment soared and inflation got worse as recessions got longer and hit the economy more frequently." [3]

The economists could not agree on what to do: "Compare the routes chosen by American President Ronald Reagan and French President Mitterrand...One called for a hard turn to the right; the other, a hard veer to the left. Reagan lowered taxes on the rich, while Mitterrand did the opposite. Mitterrand expanded the social safety net; Reagan did the opposite. Reagan deregulated the economy, Mitterrand embarked on a program of nationalisation. Reagan opted for a monetarist expansion, Mitterrand for a Keynesian expansion...[but] after two years; both programs have to be pronounced failures." [3]

My point in this? Our economists' knowledge of the economy (in 1999) is imperfect, and in addition they have to cope with new factors like technology and globalisation and a whole economy which is more complex than ever before. This is why we still have economic problems.

A couple of definitions:

*MONETARISM - The practice of using control over the supply of money in an economy to (indirectly) influence the level of expenditure (and thus of inflation) within that economy. [Based on [4] ]

*GLOBALISATION - The growing integration of national economies and societies, so that no society is isolated or remote from changes and developments in other societies. [5]

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Problems With Economic Rationalism

There is no doubt that Australian governments have pursued Economic Rationalist policies since the 1980s.

We have seen drives for economic efficiency in both the Private and Public sectors, a continuing orgy of privatisation, a contraction of government services, and the deregulation of many industries.

The drive for economic efficiency has resulted in Australian enterprises becoming more efficient and becoming more competitive with overseas competitors. But the 'downsizing' of enterprises and the public service has also increased the numbers of the unemployed - and has also resulted in poorer quality services in many areas, and as a result decreased our quality of life.

Privatisation continues - whether it is appropriate or not.

"Left entirely to the free market there are some goods and services which would be too costly to provide and would not yield a profit. Such items are education, defence, justice [and prisons], public transport, [postal services,] and collective goods such as roads, dams and reservoirs which provide a service to the whole community. The market mechanism alone does not provide these goods....Therefore in our economy we look to the government to provide community and welfare goods and services." [6]

The government has privatised most of our utilities, and is planning to privatise public transport. Many of the services to be privatised are, by their nature, unprofitable and the new enterprise owners [e.g. tram operators] will be subsidised by the government. If they raise their prices - it will decrease our standard of living, but I really ask - 'Why bother privatising industries which can never be profitable?' (I suspect it is a case of ideology outshining common sense.)

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What Are Governments For?

In short - Governments are there to look after the big picture. They are there to help provide for the needs of the whole community. As stated above they: "provide community and welfare goods and services."

Private Enterprise will never provide for all these needs - private enterprise is about profit, market share, its small private picture.

A government should provide a development structure and a social policy for the whole community. Its aim should be to improve the quality of life for all of us - and not just to keep the economy in shape.

And like there are laws to curb the excesses of human action, there is a need for laws to curb the excesses of the capitalist system.

In these days of rapid change and economic uncertainties governments are more important than ever before.

The question we could ask is: Are they doing their job properly?

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Economic Rationalism and Democratic Humanism

These philosophies are not really opposites - they are just focussed in very different directions.

Economic Rationalism is about economic efficiency, dollars and profitability; not men, women and the quality of life. It is economics first.

Democratic Humanism is primarily about satisfying human needs and improving the quality of life. It is people first.

Obviously the economy needs to be in pretty good shape, or we won't have access to the finances to be able to properly satisfy human needs.

In the real world economic principles will be essential tools for the fashioning of Democratic Humanism.

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[1] Whitwell, Gregory. What is economic rationalism? at: http://www.abc.net.au/money/currency/features/feat11.htm

[2] Caravan, Bernard. Economists for Beginners. Oxford : Oxford University Press, 1982. [ISBN 0 906495 52 0]

[3] Jackson, John & Campbell R. McConnell. Economics. (3rd Ed). Sydney, NSW : McGraw-Hill, 1988. (p.329). [ISBN 0 07 452578 6]

[4] Pennant-Bea, Rupert & Bill Emmott. The Pocket Economist. Oxford : Martin Robinson & Co., 1983. [ISBN 0 85520 632 2]

[5] FitzRoy,Peter. Living with globalisation at: http://www.abc.net.au/money/currency/features/feat8.htm

[6] Anzarut, Daphne. Introducing Economics. (2nd Ed). South Melbourne : MacMillan, 1986. (p.42). [ISBN 0 333 41532 9]

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Related Works

- Origins of these ideas -
Future Imperfect - Part 1 - Gathering the Threads (February 1998)
Future Imperfect - Part 2 - Weaving the Tapestry (April 1998)

- In This Series -
Democratic Humanism (1) - What Are Genuine Human Needs? (February 1999)
Democratic Humanism (2) (April 1999)
Democratic Humanism (3) - Know Your Dragon (June 1999)
Democratic Humanism (4) - Maslow Meets the Economic Rationalists (August 2000)
Democratic Humanism (5) - Fostering Change From Within (June 2001)
Democratic Humanism (6) - The Getting of Wisdom (December 2001)


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Copyright © 1999 by Michael F. Green. All rights reserved.


Last Updated: 28 August 2003