Beware of economic fundamentalism (or what makes a good policy adviser?)

Fred Argy

I have spent most of my working life as a government policy adviser in Canberra. But policy advice is no longer something confined to the public service. Today, economists in all walks of life are often asked to play a national policy role in one capacity or another. So what makes a good policy adviser?

Good training and full, reliable information is of course essential. But so too is professional integrity. Sadly, integrity is not always evident in the daily outpourings of policy commentary in the media. There are too many false prophets in our profession—the kind who like to assert policy opinions in black-and-white terms, such as ‘there is only one right way’ and ‘no other way will do’.

This is what I like to call ‘economic fundamentalism’. And I believe it is wrong on all counts.

Economics does not lend itself to doctrinaire policy assertions.

For one thing, economics does not lend itself to doctrinaire policy assertions. The technical complexities are too great, the behavioural reaction of human beings too changeable and unpredictable, and the market subject to many imperfections. For example, will the privatisation or outsourcing of a key government service lead to an effective increase in competition, or merely transfer monopoly power from the government sector to the private sector? Are competitive markets desirable where there are major information asymmetries, and high transaction costs in collecting and evaluating information (as in health)? Will a cut in income taxes have a marked positive effect on people’s incentives to work and save, and enhance economic growth? These kinds of questions do not lend themselves to definitive answers. The honest economist can make an ‘on balance’ judgment, but should also acknowledge the uncertainties and the merits of alternative positions.

Another reason why doctrinaire policy positions are unwarranted is that much of the day-to-day policy debate is not simply about economic choices. It is about normative values—the appropriate weight society should give to conflicting goals, such as freedom of choice, individual responsibility and self-reliance, equality of opportunity (what Australians call ‘a fair go for all’), protection of the environment, and a sense of community.

Frankly, we economists have no special wisdom to offer on what should be the right balance between such goals. We can point to the economic costs and benefits of each option, but to go further and assert that one option is indisputably superior to all others is presumptuous. For example, will wage deregulation and welfare cuts have a big or small impact on employment, and how much pain will it inflict on low wage earners? Can the same employment outcomes be achieved through labour market programs such as wage and training subsidies, without the regressive effect on low wage earners? Again, will tax cuts have a more positive impact on community wellbeing than an increase in government spending? These are questions that are hard for economists to resolve because the alternatives being offered have very different distributional effects.

True professionalism requires economists to spell out the distributional as well as economic effects of each policy option, and then leave it to politicians to choose between them in the light of community preferences. If we do express a personal view, we need to always make our underlying value judgments transparent. This general obligation certainly applies to the ‘in-house’ advice of public servants to their ministers. But it applies equally to the public commentaries of independent economists (when they are not just acting as hired guns or advocates for a particular interest group).

One major risk of economic fundamentalism is that, like other forms of fundamentalism, it often breeds policy extremism. We saw in the 1960s and 1970s how the work of John Maynard Keynes was vulgarised by many of his followers, and used to justify the most extreme forms of government intervention. And in the 1980s and 1990s we saw how monetarism, public choice theory and neo-classical economics have been misused by some to justify simplistic small government policies.

Economists do not have very different values from the rest of the community.

Another risk posed by economic fundamentalism—for example, the advocacy of wholesale labour market deregulation as the only feasible option—is that it tends to widen the already large gulf between economists and the wider community. It encourages our critics to say that we are so obsessed with efficient markets that we have become insensitive to social and environmental concerns. Yet we all know this is a false and distorted image of our profession. Countless international and Australian surveys (for example, Argy 2001) have found that economists do not have a very different set of values from the rest of the community in which they live.

This is hardly surprising. When economists seek market-based solutions, they are discussing better means to given ends. Economic liberalism is consistent with a wide spectrum of ethical and philosophical values, and a wide range of distributional outcomes. So we need not be apologetic about our faith in competitive markets as instruments of allocation (where these are sustainable and do not involve disproportionate externalities). It is our critics who have got it wrong. Unfortunately, when some of our fellow economists seek to change society while masquerading as market economists, they give our profession a bad name.

To sum up, we have a proud and honourable profession. We need to defend it against external critics (on both the Left and Right) who attack our devotion to competitive markets without really understanding what we are on about. But equally, we should be vigilant in exposing the small but vocal band of extremists within our profession who take doctrinaire economic positions or, worse still, who push their own values under the false guise of economics. This is particularly evident in the current policy debate on labour market deregulation and welfare reform. The famous British economist Joan Robinson saw the danger clearly. She said that ‘the purpose of studying economics is to learn how to avoid being deceived by other economists’.

So my advice to budding economic policy advisers is this: by all means be decisive in your day to day work, but when discussing policy don’t be afraid to be called a two-handed economist—‘on the one hand this, and on the other hand that’. Wear it as a badge of honour.


Argy, F. 2001, ‘Economic rationalism in Australia: Survey of members of the Economic Society of Australia, ACT branch’, Economic Papers, vol. 20, no. 1, pp. 1–14.

Fred Argy, a retired federal public servant, has advised governments from Menzies to Keating, and occasionally runs policy workshops at the Australian National University. His new book Where to from here? Australian Egalitarianism Under Threat will be published by Allen and Unwin in April. This article is a revised, expanded version of a graduation address delivered on 21 March 2003 on the occasion of his admission to the honorary degree of Doctor of Science in Economics, The University of Sydney.

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