Debunking the Liberal Party 'better economic managers' myth

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Professor Barry Hindess analyses the myth that economic management is better under conservative governments when history has shown they pursue appalling policies.

THE MYTH that conservatives are "better" economic managers than their political opponents is not supported by Australia's recent history, as discussed by IA's Ingrid Matthews in 'The Lies Turnbull's Liberals spin'.

Are the Tories simply lying, or do they believe it? Probably a bit of each: many, confronted with contrary evidence, hold the faith; others simply lie through their teeth.

How do the believers convince themselves? The short answer lies in the default conservative belief that, other things being equal, the best way for any government to manage the economy is to do nothing: left to themselves, markets in goods, labour and services will ensure the optimal use of resources. If outside forces leave the economy alone, there will be no unemployment because wages will always adjust to economic conditions.

The other side of the Tory default, "let it be", is the belief that non-conservative parties and unions cannot leave the economy alone — they want to protect the environment, or employment in threatened industries and regions, to establish a more egalitarian distribution of income, universal health care, or free public education and so on.

Tony Crosland, a leading revisionist in the British Labour Party during the 1950s, argued that governments could use tax and welfare policies to produce whatever distribution of income they chose, thereby encouraging economic interference by his own and other vaguely social democratic parties. Worse, on this Tory view, powerful unions generate unemployment by conspiring to protect their members' jobs and incomes against changing economic conditions, thereby preventing wages from adapting.

Taken together, the conservative preference, other things being equal, for letting markets be and their belief that other's default position is to interfere, help us to understand why conservatives believe that, in principle, they will always be better economic managers – because their default position is to let the economy be and other's default is to interfere – and why this belief has nothing to do with the evidence.

In practice, of course, conservative governments can hardly bear to do nothing. Their default excuse is that other things are rarely equal and that they have to deal with the effects of their predecessor's interference and with the influence of powerful unions. Even as Australia's deficit rises on their watch, Tory ministers repeatedly blame the problem on earlier Labor Governments attempting to live beyond their means. And they blame unemployment and inflation on unions who refuse to let wages adjust to market conditions, or insist on an unreasonably high minimum wage.

This default Tory view of economic management dominated English-language economic policy prescriptions up to and throughout most of the Great 1930s Depression. It was often presented in terms of homespun economic nostrums predicated on misleading parallels between households and national economies. Nostrums like “you can't spend the same money twice” or, as British Tories said during the recent UK election campaign, “there is no magic money tree” (the Australian equivalent is "no magic pudding"). Tell these to the banks that make a fortune out of lending out the same deposits many times over and whose customers are their "money trees". Parties of the Left held different views about economic management (and sometimes lost their nerve upon gaining office), as did European communist and fascist movements.

The most influential attack on this conservative orthodoxy by a recognised economist came from the English economist John Maynard Keynes, whose views underlay Crosland's claim, noted above, that government could have any influence it liked on the distribution of income and who argued that, left to itself, a national economy could easily settle into a condition of persistent unemployment — for example, if businesses chose to hold their profits in cash rather than reinvest them by buying goods and services, and employing more workers. When this happens, the government should step in with its own investments – public works programs, for example – perhaps going into short-term deficit to fund them.

I introduce Keynes at this point, not to suggest that his is the definitive response to the Tory default, but simply to show that the Tory default approach to economic management is not the only view to be found among economists. Keynes was no socialist – he was more concerned with preserving capitalism than overthrowing it – and he was no friend of the unions, following the default view of them as causing the stickiness of wages.

On the Tory side, the right-wing Austrian economist F.A. Hayek, founder of the reactionary international Mont Pelerin Society, defended the default position against Keynes' onslaught, arguing that markets were spontaneous social orders and that they operated through the self-interested decisions of market participants. Since there was no way, in his view, that governments could accumulate and grasp all the knowledge that informed their decisions, they could not hope to manage markets more successfully than they managed themselves. The best governments could do was to leave market participants to act in their own interests in response to the signals contained in prices, wages and so on. Hayek also argued that political freedom depended on economic freedom so that any attempt to restrict the latter – through planning, for example – would be a step on what his most influential book called, The Road to Serfdom.

Since Hayek fancied himself as a political theorist, the Tories now had a certified intellectual to fight their corner. Yet his view of markets as spontaneous social orders was never more than an idealisation. Historically, markets have been the outcomes of both government action and individual enterprise. Markets in medieval Europe were licensed by kings, lesser lords or the church and those in our own time invariably rely on legislation and state regulation. There would be no stock markets if states did not allow limited liability companies. Nor is it plausible to imagine that workers, employers, merchants and their customers are rational economic agents, simply pursuing their own self-interest.

To conclude, the default Tory view of economic management is supported by neither historical evidence nor rigorous argument. Tories believe it mainly because their "let it be" default view that economies do better if governments leave them alone makes it feel right. The important question for the rest of us is: how do the Tories get away with it? It's not hard to notice that there are striking differences between national economies and households. We all know, for example, that not many households are able to issue their own money. We also know that, while individuals and households can only spend their money once, national economies are not constrained in the same way — but they do face their own, rather different, constraints.

The question that remains is why do so few mainstream media commentators take the Tory claims to pieces? Ignorant and lazy journos are not the answer. Of course, there are ignorant, lazy journos out there. Yet, even if 99 per cent of journos have given the rest a bad name, we have to wonder what the remaining one per cent are doing.

The problem we face in the area of economic management is not so different from the problem we face in other policy areas: Tories pursue appalling policies, too often with Labor support — and our mainstream media, for the most part, let them get away with it. There is no short answer to this one.

Barry Hindess is an emeritus professor at Australian National University’s School of Politics and International Relations. You can follow him on Twitter @barryhindess.

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