From any ethical perspective, the prime objective of economic theory, policy and practice needs to be the wellbeing of all individuals and households. That demands pursuance of 'the common good' whereby each and every person has the opportunity to achieve their potential.
Recent decades have witnessed the ascendancy of the neo-liberal or neo-conservative economic philosophy. It emphasises paramount principles of unfettered free markets, supremacy of the individual, self interest and the profit motive to maximise the common good.
It is claimed this approach will maximise production of goods and services and maximise national wealth for the benefit of all, so that and even the most disadvantaged will enjoy the benefits that will 'trickle down'.
This approach has been a major factor in spawning the current global financial crisis through the sub-prime debacle in the USA. A pure and unregulated profit motive driven by self-interest caused trillions of dollars to be loaned to often disadvantaged people who could not afford repayment.
Meanwhile, billion dollar corporations made huge profits, and their executives reaped multi-million dollar salaries and other rewards. Sensible and just regulation and oversight could have prevented this financial fiasco which should never have been permitted to develop.
While the 'trickle down' of wealth proclaimed by neo-liberalism is highly debatable, the hardships and problems of sub-prime activities descend on the disadvantaged with the speed and finesse of a freight train. Hence hundreds of thousands of low income Americans have lost their homes, many more are on the way to losing them, and millions of lower income Americans have seen their most important single asset decimated.
Millions of would be retirees have seen their forthcoming pensions wiped out or reduced to future welfare dependent levels. Credit has been severely restricted, affecting the production and sale of a wide range of goods and services. This in turn will have a wide and serious impact on employment levels.
Even in Australia there have been adverse impacts. Due to eagerness for short term profit and inadequately researched investment activities by some investment funds, hundreds of thousands of Australians face sharp declines in future superannuation benefits, particularly those on low incomes.
Some local councils in Australia have suffered losses from funds indirectly invested in the sub-prime debacle. In addition billions of dollars have been wiped off Australian share market values. This will cause financial institutions to demand the scaling down of existing company loans and strong restrictions on new loans, which will impact company activities such as training and education, workplace benefits, and donations to charities.
Governments in the developed world have poured billions of dollars into support of the financial sector in efforts to stem the crisis. This must in due course have an adverse impact on essential government expenditure and on levels of taxation. What will be the impact on transport, public housing, education, health and aged care?
Australia has one of the highest levels of consumer debt in the western world. It is far from the sub-prime debacle but may pose a serious problem depending on how many households can repay their debts. Yet TV advertising continuously promotes the purchase of goods for 'no deposit and no interest' for two to five years, with no mention that any glitch in repayments will result in a 30 per cent or more annual interest charge.
We need to ensure that Australia does not duplicate even on a much reduced scale the sorts of outcomes emanating from the sub-prime fiasco. The following are some suggestions worthy of consideration.
Disregard neo-liberal policy prescriptions: The self interested, profit seeking approach to almost all forms of economic activity is unlikely to promote national wellbeing. In the USA, the most conservative of world economies where neo-liberalism has prevailed, we have the spectre of the largest of government interventions and biggest nationalisation of private assets in western history in the name of 'the common good'.
Achieve a better balance between the free market and regulation: We need to bear in mind that unfettered free markets have severe drawbacks. They lack ethics, focus only on the short term, emphasise profitability whether it serves the community or not, and fail to address externalities whether they be dire health or environmental consequences of economic activity.
Restrict profit seeking: Undertake a comprehensive review of government policies as they relate to the finance sector to restrict or deter unproductive speculation. Already action is being taken to ban 'short selling'. There are numerous aspects of derivatives trading that should be banned or restricted and the taxation system could be used to greater advantage in restricting profit seeking activities that add little or nothing to national wellbeing.
Dump the all invasive but misleading GDP concept: In any macroeconomic analysis these days one can hardly miss the constant referral to GDP, its use to demonstrate gains, progress, benefits successful national governance and the like. In fact the GDP has so many fallacious aspects in the way it is used.
GDP is not, as so many proclaim, a clear indication of national advancement and wellbeing. Road deaths and injuries promote the GDP because of funerals, health services, motor repairs and the like, tobacco production increases the GDP but so does the costs of treating cancer patients. Damaging environmental outcomes which need to be rectified add to GDP. The faults in the concept and the way it is used go on and on.
For many years now, thinking economists have demanded a focus on concepts related to GDP but directed to data on the the production of goods and services that promote the common good, such as a 'general progress indicator', or GPI. It is not so much more difficult to calculate, but would remove negative aspects of the GDP to give a more realistic measure of real and beneficial economic progress.
It would have a major impact on forcing economic activity and government policies to focus on wellbeing.
John Wicks is a retired senior public servant who is voluntary advisor on social justice to the St Vincent De Paul National Council in Canberra. Read some of his papers here.