Public ideas
Why it’s useful to understand a little economics
Many of those who identify themselves as “progressive” or “left” are dismissive of economics, and are inclined to believe that public policy involves some trade-off between social and economic objectives. As a result they can find themselves sidelined in debates on economic policy.
More generally, the public’s lack of economic literacy can allow political populists to promote economic policies serving the interest of a privileged class rather than the broader public interest. As an example, successive governments and partisan media in Australia have conveyed the impression that small government and balanced cash budgets are the only meaningful objectives of economic management, while ignoring the basic economic issue of efficient and equitable allocation of resources.
Two staff of the Reserve Bank, Madeleine McCowage and Jacqui Dwyer, have addressed the general issue of economic literacy in a paper Economic literacy: what is it and why is it important?, published in the RBA Bulletin. They list the many concepts that an engaged citizen may encounter – interest rates, market failure, inflation and 18 others – with pithy explanations of what understanding each concept would entail. For example, an understanding of “trade” would involve at least an appreciation that restraints to trade, such as tariffs, have costs that may outweigh their benefits.
They come down to a working definition of economic literacy, naming seven core topics of which people need some understanding – scarcity, economic behaviour, the ways in which goods and services are allocated, the structure and operation of markets, the use of factors of production, core macroeconomic variables and features of a business cycle, and the role of government and economic institutions in influencing economic outcomes.
They stress that there is a key difference between economic literacy and financial literacy:
Financial literacy is focused on the capability of someone to understand their own situation. Economic literacy is focused on the capability of someone to understand their own situation, its broader economic context and thereby the situation of others.
We don’t all have to sit through university lectures watching lecturers draw those funny freehand curves on a whiteboard, but we do all need a basic understanding of economics if we are not to be misled by simplistic and flawed ideas, such as the unquestioned benefits of small government and privatization.
Curtin and Chifley on full employment
“Full employment” is an elusive concept. Economists look back on the 1950s and 1960s, when Australia’s unemployment rate hovered between 1 and 3 percent with low inflation, and wonder why it is so hard to get back to those conditions.
But they were different times. Few women were in the paid workforce, and men either had a full-time job or were unemployed. Now, by basically the same measures as were used in the 1950s, we have an unemployment rate of 3.5 percent and high inflation. And we have an underemployment rate (people with some work but looking for more) of 6.1 percent.
For a long time economists have grappled with a supposed trade-off between unemployment and inflation. They refer to the “Phillips Curve”, which models a trade-off between inflation and unemployment, but that trade-off, if it exists, seems to be getting worse every year.
Liam Byrne of the Chifley Research Centre has written a short piece on The Curtin government and full employment, with particular reference to the Curtin government’s 1945 White paper on full employment, essentially a macroeconomic plan for postwar reconstruction.
In 1945, emerging from the Pacific War and before that the 1930s Depression, Australia faced a task of economic reconstruction. Caryn Coatney of the University of Southern Queensland writes about how Curtin guided Australians through the hardship of wartime sacrifice and the work of postwar reconstruction in her Conversation article: The future of work: how John Curtin was calling for a new cooperative work ethic 80 years ago.
Now, emerging from a pandemic and nine years of economic neglect under Coalition governments, and facing the challenge of climate change, we have to undertake another task of economic reconstruction.
Byrne notes the ways Australia has changed since 1945, but the principles guiding Curtin’s and Chifley’s economic policies are the same.
Curtin understood something fundamental about full employment that retains its direct relevance today. Full employment means the government shaping conditions in which workers can craft meaningful and dignified working lives. It means recognising the social value of work – the essential nature of our collective toil.
Treasury is now preparing an Employment White Paper. Unfortunately it’s missing the adjective “full”, but surely full employment, however expressed, is a worthy aspiration of public policy.
Byrne is author of Becoming John Curtin and James Scullin, a biography of two Australian prime ministers.