Economic Rationalism
Through the 1980’s the economic focus was on trying to untangle the combination of high inflation and high unemployment. It was a combination that earlier economic theories had said was not possible. High unemployment was thought to be deflationary and subsequently it took some time for various governments to uncover the right combination of government and fiscal policy to address the issue. Unfortunately for more than a decade many countries suffered through the pain of economic rationalism, or as the British would know it Thatcher-ism.
Economic Rationalism is loosely aligned to running a country as though it is a business. Inspired by powerful business interests that were strongly opposed to what they saw as government excess and inefficiency, economic rationalism set about rationalising government institutions.
In most countries the initial targets of economic rationalism were the productive functions of government such as transport, energy, communication and water. These services were natural monopolies that had required considerable community investment in infrastructure to establish them. However, compared to private organisations, they had considerable more employees and were regarded as inefficient. Economic rationalist believed that converting these government organisations to private companies they would make them more efficient and therefore enable them to reduce the cost of the service they charged to the community.
The other benefit to the government of the day was that the transfer of ownership would provide governments with a source of revenue. This was particularly attractive at the time as high inflation was making government debt expensive, and high unemployment had dramatically increased the cost of social security. This lured many governments into selling prize community assets to private institutions for bargain prizes to get the deal done quickly.
Governments also had to wrestle with the fact that they were handing over natural monopolies and so would need to find a way to protect the consumer from price manipulation and profiteering. Some choose to keep pricing in government control, others choose to introduce competitive forces. The first approach restricted the level of benefit the consumer received from any efficiency gains achieved by privatisation. The second approach introduced functional inefficiencies into natural monopolies.
Once in private hands, the rationalisation of the organisations quickly resulted in widespread reduction in the workforce. This inevitable added to the level of unemployment and cost of government social security. The promised cost reductions generally took longer to eventuate, particularly as many of the sales had been made on the basis that existing price structures would be maintained, some were even pegged to CPI.
Subsequently economic rationalist find it easy to show examples of institutional transformation and functional efficiency gains, but harder to identify clear examples where the governments constituents have clearly benefited.
Recap
- Reward for effort – economic rationalists considered government jobs to be flawed as they did not relate reward to effort/output
- Value is relative – functional efficiency does not directly translate to community value
- Trade requires difference in value – governments value assets and income differently to private enterprise, facilitating the sale of future revenue for the price of current assets.
- Money is a catalyst – governments sought money in the present in exchange for future income
- Trade creates economic ecosystems – by selling natural monopolies the government was required to create artificial markets to protect the participants
- Economic measurements are incomplete – by isolating the functional efficiency from the total economy, economic rationalist were able to justify significant transfer of economic power into private hands.