Welcome to Finance and Fury. Jim Chalmers, the treasurer of Australia recently wrote and published an article. Saw a lot of people freaking out about it – wanted to have a look and see if there is anything to the concerns

  1. This was a 6000+ word essay – titled capitalism after the crises – I read it so that you don’t have to – but feel free to read – too much to fully cover, but in this episode we will be looking at sections that in my view are of the greatest importance – those that argues for the government to have more active involvement in the economy and financial markets, describing it as “values-based capitalism” – with the aim to better promote the government’s social and environmental priorities
    1. This is nothing new – Similar to proposals have been made others that I have covered, such as stakeholder capitalism, or the SDG’s by the UN – this one is just close to home – title of one episode two years ago – What is stakeholder theory and what does it mean for capital markets and investments?
    2. There are no policy proposals mentioned – it is more of an ideologically driven piece

To start breaking this down – roughly the first half of the article discusses the opportunity that comes out of a crisis –

  1. He talks about how when the became treasurer, the “global economy was beginning a third crisis in 15 years, one which will play out more substantially in 2023”
  2. He states – “The crises are defined by their differences but have a common thread: vulnerability. In each case our communities, economies, budgets, environment, financial and energy markets, international relationships, and our politics – already fragile enough – became more so.”
  3. Because of this, he states – “Our mission is to redefine and reform our economy and institutions in ways that make our people and communities more resilient, and our society and democracy stronger as well.”
    1. Trying to make people and communities more resilient is a noble goal – but it comes back to the definitions of what resilient means and how you go about it
      1. Resilient could be simply to destroy the free market and have everyone on UBI – that way the economy could be in the toilet but everyone is resilient, as their incomes are not reliant on the economy but on the government handing out a payment each fortnight – a stronger democracy is also an interesting idea – what does this mean? I’ll be honest, I have no idea – In governmental terms, when this has been used in political rhetoric, is has not boded well for those under the democracy – as a stronger democracy is one that evolves into autocracy
      2. The other issues with a crisis – that in times of stress or panic, we as humans become more malleable – there is no better time to try and influence or alter policy than when people are stressed and worried – a politician can often get their way by promising a way to alleviate this stress or concerns – even if it never comes to pass
    2. However, in Jim’s opinion – “Being a good policymaker begins with having the right information and mental models for how the world works. It’s these mental models that John Maynard Keynes was thinking of when he wrote: “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Keynes insisted that economic ideas – “both when they are right, and when they are wrong” – are almost uniquely stubborn. The entrenched systems and institutions that dictate and drive public and private spending are so complex and vast, and powerful economic interests have so much at stake in keeping them in place. It’s clear now that the problem wasn’t so much more markets as poorly designed ones. Carefully constructed markets are a positive and powerful tool.”
      1. There is a lot to unpack here – The first statement about being a good policymaker – the concept of having the “right information and mental models” is the train of thought of those inclined towards centrally planned economic systems – the very requirement for handful of policy makers to believe that they can have ‘the right information’ i.e. the information required to implement policy to dictate an outcome for millions of people, often comes at the cost of those they are trying to benefit, not based around theory, but the actual outcome of government policy over the last 100 years – the central planning mindset that is the basis of this article becomes even more evident with the thought that the problem isn’t with having more markets, but those markets are poorly designed
      2. The thing about a market is that nobody really designs one – a market is an organic entity that is created through people making voluntary transactions – it can be a composition of systems, institutions, procedures, social relations – but in the end it is where parties engage in exchange – trying to control a market has never worked for the betterment of those participants in a market – you can help facilitate a market through providing the infrastructure – for example, create a space to house a farmers market to bring farmers and buyers together, or create the infrastructure for a share market, to bring buyers and sellers together – markets evolve and grow and change over time – to meet existing demand – the most efficient markets are those that are helped to facilitate – but when you try to redesign a market, it is like adding sand to oil – it starts to destroy the machine
        1. Say that you have a farmers market – and they provide a space to come to sell your wares and charge a simple fixed fee to do to – as long as the fixed cost isn’t too exprobrate to justify setting up shop – then this can be a good deal – people will come through and it brings in additional demands – now, imagine that the facilitators of this market start to try and control the market – where they implement policies based around their own values – say they don’t like vegetables and only meat – they may ban those selling vegetables, or over charge them to sell vegetables – all of a sudden you do not have an organic market, as many of the producers who sell vegetables will simply not participate, which leaves a shortage in supply and an unfulfilled demand – this is not an efficient market – due to the intervention of a third party, that has nothing to do with the relationship between the buyer and seller
      3. In this view – and what Jim goes on about, he states – “Having fewer markets and those more heavily designed”, which is another word for tightly controlled ones is a form of economic system close to monopolies, or communism – but in essence, the state and governments come together to decide what should be sold, how much should be sold and at what price – in every instance of this, the consumer is worse off – government and the select few companies that are in bed with the government, these companies start to act as monopolies and continue to grow at the cost of small to medium size business and the consumer – the benefactors are always the largest companies and governments
      4. This is similar to economic system under which the world operated for a few hundred prior to the last 200 years – where a few got very wealthy and everyone else was poor – no real middle class the way we know it today – form of mercantilisms that saw the rise of the Dutch east India company – which was more powerful than Apple, Google and FB combined
      5. I’ve covered this train of thought in greater depth in a pervious episode, where government policy makers believe that they can solve economic problems if only they were given greater levels of control over the economy – Previous episode title was “The bane of economic growth” back in October last year if you want to learn about this further.
    3. The article goes on – to start focusing on the political system
      1. Jim states: “People sincerely committed to democracy all share an unease at the rise of anti-democratic trends in developed countries. In well-functioning democracies, leaders listen or lose power. Autocracies have no such mechanism. Dictators exist in an echo chamber, with sycophants reinforcing existing biases and judgements in ways that can only lead to mistakes, instability and economic stagnation. In the wider world, the contest between democracies and autocracies is economic as well as military. Despite deep disquiet about our own economic models, the reality is that democracies largely work. As of 2021, GDP per capita is around 60 per cent higher in democracies than in autocracies – and the gap isn’t closing. Even through a period of slow growth, comparing all democracies to all autocracies other than China, we see a democratic edge – measured at 1.3 percentage points per year in GDP per capita growth over the past decade.”
      2. The point being missed here is not so much the political system, but the economic one, by conflating democracy and a free market. Why China is more of a stand out
        1. It just happens to be that most nations with property rights and freer markets happen to be democratic in nature
      3. This moves on to ideas of capital allocations – He states “While capital allocation in traditional markets is obviously not perfect, it is based on common metrics of performance. Government spending has too often been characterised by a “spray and pray” approach. If we could redesign markets for investment in social purposes, based on common metrics of performance, many more well-run “for purpose” organisations could get much more of the growth capital they need.”
        1. There are two key components here – the first that traditional markets are not perfect on common metrics of performance – this is because common metrics of performance are undefined in this instance – this is now laid out in the article – so there is nothing to really critique here, but my assumption is that it comes form a government point of view, and not your best interests in the form of increasing your standards of living
        2. The second is that government spending has been characterised by a spray and pray approach – I would agree with this – but this admission is the essence of the problem – changing the approach to instead start shooting at targets in the hopes that the money is better spent is naive – spending more money on one problem has never worked – the last 100 years of governance has proven this, as whilst the government spending per capita on services has increased, the level of service has not
      4. How will this all be implemented – He states that “This relies on at least three objectives.”
        1. “First, an orderly energy and climate transition, with implications for living costs, employment, where and how we live, the commercialisation of technology, and the trajectory of our economic development. This means introducing cleaner, cheaper, more reliable and increasingly renewable energy, and adopting practices and technologies that limit our emissions.”
        2. “Second, a more resilient and adaptable economy in the face of climate, geopolitical and cyber risks, unreliable supply chains, and pressures on budgets from an ageing population.”
        3. “Third, growth that puts equality and equal opportunity at the centre. This is not only fair, it’s good economic policy. As an example, gender equality is not only desperately overdue in its own right, the failure to make meaningful progress remains one of the biggest handbrakes on our economic potential. This is wilful neglect, with economic and social consequences.”
        4. How does he plan this to take place – “By strengthening our institutions and our capacity, with a focus on the intersection of prosperity and wellbeing, on evidence, on place and community, on collaboration and cooperation.”
          1. This is just a rhetoric statement with no substance
        5. However – he states that “This is critical to guide how we design markets, facilitate flows of capital into priority areas, and ultimately make progress on our collective problems and purpose. So, it’s not just our economic institutions that need renewing and restructuring, but the way our markets allocate and arrange capital as well.”
          1. This very thinking is a major problem – ‘the way our markets allocate and arrange capital’ – free markets manager to arrange capital in a way that best services those that participate in the market – otherwise no market would exist – a market in its base form is a combination of a number of individuals conducting voluntary transactions – so for a government to try and rearrange this means that efficiency and the best outcome for participants in a market will start to decline – regardless of the intended outcome that the government states
          2. Imagine that I was the treasurer for a minute and I came out with the following statement – “everyone in Australia will be better off under my rule and you will not have to worry about being poor” – sounds good – but if this is achieved by reducing the average income and making everyone poor under current measurements, meaning that nobody is comparatively poor – I have achieved my goal and fulfilled on my promise, but you are all worse off
        6. Some of the final statements to the article are as follows: “2023 will be the year we build a better capitalism, uniquely Australian – more confident and forward-thinking; more aligned with our values; based more on evidence and integrity; more capable of building resilience, not just building buffers.”
          1. More aligned with whose values? This is where this can all come apart – we all have different values –
          2. Needs to implement authoritarian system to force one set of values on all and the economy – for a lot of talk about a democracy, the values of the government do not align with the people most of the time – certainly not all people

In summary – Most of this article is fluff – but there are some lines that if implemented in full could hurt our economy and your individual capacity to generate wealth

  1. Notice that nothing in here talks about increasing your standard of living – Or increasing free markets and your ability to choose – it is all about how the government policy makers need to steer the ship for you
  2. I know the intention may be good – but if you read the autobiography of Kim Jong-Ill – every change to the North Korean economy he and his father made was for the good of the people and their shared values – what were referred to as Juche system – didn’t work out for them so well
    1. The same goes for Mao, or Lenin and Stalin, or Pal Pot – if you read some of their translated works, there is an ire similarity in the types of phrases used – the looking forward, similar shared values, and to build a better system for the people
    2. But at its core – This is an idea that more of what hasn’t been working might mean that it will work this time – the current state of corporatism with a fascist style of economics, with a union of governments and giant multinational companies who receive special treatments due to political donations is not a free market – but the idea to solve this problem, rather than focusing on removing the influence that governments and companies have on one another is to intensify this
  3. Whether any of this gets implemented is anyone’s guess – or it could be something that the treasury department may seriously consider implementing
  4. Don’t be fooled or disheartened by this – focus on what you need to do – government will always be trying to encroach, it is the nature of the beast, their need to grow, like any organism and increase their reach to justify their increasing size –
  5. As long as property rights remain in place – it is not the end of the world – as long as you are not dependent on the government – this is where independence is important – financial, food and fuel

https://financeandfury.com.au/the-bane-of-economic-growth/

https://financeandfury.com.au/can-investing-using-environmental-social-and-governance-scores-help-to-outperform-the-market/

https://financeandfury.com.au/what-is-stakeholder-theory-and-what-does-it-mean-for-capital-markets-and-investments/

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