Author: Chris Berg

Free Economies Will Choose Money Over The Gun

We live in an age of world peace. To be more specific: a ”neoliberal” age of world peace. Certainly it doesn’t seem like it. The 21st century opened with a terror attack that sparked wars in Iraq and Afghanistan. The latter seems to be getting more violent.

But the data is unambiguous. The world is fighting fewer wars. And the wars that are being fought are less deadly than at any time in living memory.

A Canadian non-profit, the Human Security Report Project, has been tracking the number and intensity of conflicts in the past 50 years. Between 1950 and 1959, there was an average of 6½ international conflicts per year – the vast bulk of them fought between states. In our decade, the average has been less than one, almost all civil wars.

Sure, after the fall of communism, internal conflicts sharply spiked, as a decaying Russia and disengaging United States withdrew support for many petty tyrannies in the Third World. But the number of conflicts has since resumed its long-term decline.

War is also becoming less deadly. In the 1950s, the average international conflict killed 20,000 people per year. The average conflict in the 2000s killed a 10th of that. You’d think this would be widely recognised and celebrated. But it’s entirely at odds with the impression of escalating global violence we get from the nightly news.

So, war is now rare. Take a moment to celebrate. Then think of the simple ideological narratives these observations upset.

Anti-capitalist intellectuals from Lenin to Naomi Klein have associated competition in the marketplace with competition on the battlefield. Yet while the world is more commercial and more globalised than at any time in history, it’s more peaceful too.

Foreign policy realists long claimed the post-Cold War world – without two superpowers holding the globe together under a threat of mutual nuclear destruction – could be unstable. But if anything conflict has declined faster in the past two decades.

So what accounts for all this world peace? If we want war to be even less common, we’d better figure out what’s causing its demise. Many people would credit democracy – if citizens are given a chance to vote, they’ll elect pacifists. But as American political scientist Patrick J. McDonald pointed out in his 2009 book The Invisible Hand of Peace, democracy is not immune to war mania.

McDonald finds that during the 19th century democratic states were more likely to go to war than autocratic ones.

This is not an academic question. If we want Middle East peace, focusing on democracy at the expense of everything else won’t succeed. And we shouldn’t pin our hopes for the peaceful rise of China solely on elections.

The other big theory on the causes of peace focuses on commerce. Nations that trade with each other don’t fight. War is bad for business. But this theory doesn’t quite work either. What about World War I? European commerce was booming early in the 20th century, but 37 million people still died.

McDonald argues it isn’t the volume of commerce or the extent of globalisation that creates peace. It’s the domestic institutions that promote commerce – that is, the ”neoliberal” policies of low trade barriers, limited government ownership, and private property – which eliminate the incentives for war.

By studying hundreds of interstate conflicts over the past two centuries, McDonald finds that only economic freedom is closely correlated with peace.

That’s because regulatory barriers to trade spark international political conflict, not co-operation. And businesses that enjoy trade protection like military conquests. It’s how they expand their markets.

These are general rules and it’s a messy world. America’s free markets and democracy did not stop it invading Iraq.

Yet a 2005 study by the Cato Institute, an American think tank, found ”economic freedom is about 50 times more effective than democracy in diminishing violent conflict”. If we want the age of world peace to last, that’s what we need to focus on.

Backwoods Policy Making

Released on the Friday after the federal budget, the Government’s Sustainable Population Strategy is for the most part just 88 pages of promotional guff and colour photos.

But it isn’t entirely meaningless.

Seemingly minor policies in the population strategy suggest a larger plan by federal and state governments to shift population growth and employment away from cities and to the regions.

You’ve probably heard about the migration changes already. As Julia Gillard said, “I don’t want the first port of call for migrants to our country to always be the growing suburbs of Sydney and Melbourne”. That’s the payoff of the 2010 election’s small Australia rhetoric. Skilled immigrants will be directed towards regions rather than urban areas.

But it’s not only about migrants – governments want existing urban residents to move to the regions too. The Promoting Regional Living Program funds rural areas to promote themselves to city dwellers.

And on top of these federal initiatives are the existing state incentives for people to move away from the big smoke. A number of states – Victoria and Queensland, for example – boost their first home owners grant if purchasers buy away from urban areas.

You can understand why governments want to take pressure off city growth. Trains and trams seem packed. Infrastructure has not kept up with demand – or, if it has, no voters seem to believe it.

Yet policy makers shouldn’t forget the basic reasons many people want to live and work in dense urban areas when they haven’t been induced to do otherwise.

The Harvard economist Edward Glaeser has described the city as humanity’s “greatest invention”. Policies which try to divert growth away from cities – shift activity and population away from where they would otherwise prefer to go – could create more problems than they solve.

After all, an urban population is a richer population. In his new book, Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier, Glaeser describes the “near-perfect correlation” between urbanisation and prosperity.

City dwellers aren’t only richer – they’re happier too. The more urban a nation, the higher that nation’s reported happiness, even after you factor in the happiness-boosting effect of income and education.

Successful cities, Glaeser uncontroversially says, are those which attract smart and creative people, and allow those people to interact in close proximity to each other.

That interaction sparks aggregate economic growth and individual economic opportunity for creative and non-creative alike.

And, of course, cities have amenities. It’s easier to provide services to dense communities, and provide a greater array of those services.

None of these benefits of city living are novel to anyone, of course. They’re why cities exist in the first place.

Tree and sea changes may be appealing, but regional and remote areas offer fewer ways to earn money – and fewer ways to spend it. A report in the Sunday Age in 2009 found a substantial proportion of people moving to quieter parts of the country regretted it – 90 per cent planned to leave within the next five years.

As one academic said at the time, “People bought the dream about the idealistic country life, then they moved there and were confronted by the reality: poor health care, poor road quality, fewer work opportunities, expensive food, lack of entertainment, obesity, lack of ethnic diversity, difficulty making friends, conservatism and narrow-mindedness. They expected to find an enjoyable life with less work and less traffic. But they found a lack of stability, lower pay and longer commutes.”

We’re all familiar with the cliché that small towns have a sense of community. But cities have networks of communities. Not only are there are more people in a city with whom relationships can be formed, but the greater diversity of interests allows niche communities to develop.

Each to their own, obviously.

But the well-known advantages of urban living should make you wonder about the wisdom of deliberately encouraging people to move away.

Do we really want migrants to settle outside the capital cities, where formal and informal support networks are smaller or absent? Migrants choose cities for the same reason everybody else does – services, employment, and social opportunity.

And do we really want to be subsidising first home buyers – people early in their career and family life – to move to areas with more limited prospects for personal and job development?

Sure, if people choose to move away from cities and to regional areas, that’s their business. But it’s a problem if government policy deliberately induces people to do so – to buy houses and find their feet in areas which, all else being equal, have fewer opportunities, fewer essential services and offer a potentially lower standard of living.

Public policy should not favour cities, certainly. But neither should it encourage people to leave them.

Middle Class Welfare: Not Happy Julia

Perhaps families earning $150,000 a year are “rich”. Perhaps they’re not.
 
But it’s intuitively obvious they shouldn’t receive welfare.
 
That’s because, deep down, we’re all small-l liberals. Welfare should be a safety net, not a web in which everybody is tangled.
 
The Gillard government’s reductions in family payments announced as part of last week’s federal budget are modest but welcome.
 
The income test on some payments will be frozen until 2014, as will the size of payments. Inflation will slowly erode eligibility and value. The teacup storm about cost of living pressures and what constitutes rich was inevitable.
 
But the thing is, direct welfare going to middle income earners in Australia is actually quite low, at least compared to the rest of the world. Our benefits are relatively well means-tested. The Rudd and Gillard governments have made them even more so – a much needed corrective to the Howard years.
 
Commentators rightly condemn the non-means tested benefits which remain. The tax-welfare churn is extremely inefficient.
 
But subsidising the middle class isn’t a strange perversion of the welfare state. It’s a key characteristic.
 
For decades we’ve been told we should emulate the big social democratic welfare states – it’d be the only progressive thing to do. Yet their full cradle-to-grave social support offers far more for middle earners than Australia does.
 
The prototypical Scandinavian welfare models were built on the concept of universalism. Everybody gets something. Their political support relies on that universalism. Middle income earners approve of those welfare states because they’re the beneficiaries.
 
Indeed, the Swedish economist Andreas Bergh has argued that redistribution of income from rich to poor is a relatively minor feature of the Scandinavian model – the whole system is structured to service the comfortable middle.
 
So if it is intuitively obvious to Australians that the middle class shouldn’t receive income support, that’s because we find the social democratic model of the welfare state objectionable.
 
The Australian conception of the proper role of welfare is a liberal one. Income support should be only given to those who need it – to those whose only alternative to Centrelink is poverty. Not to those who, facing money pressures, could reduce consumption or live in a smaller house or trade in a new car.
 
Even mainstream Australian social democrats argue against the social democratic model of the welfare state.
 
In the Weekend Australian, Tim Soutphommasane (of the progressive think tank Per Capita) said “Any fair and efficient system of welfare … should be guided by a principle of need.”
 
The past decade and a half has seen government extend its generosity to middle income earners, breaking the liberal compact.
 
Unfortunately the Gillard government hasn’t pitched its temporary freeze on family payments as a principled shift in welfare policy. In fact, quite the opposite: it has stubbornly insisted families deserve whatever they can get.
 
As Wayne Swan said late last month: “Australians who work hard, who get up every day, send their kids to school, come home, cook the tea, get up and do it again, whether they’re running a small business or working for wages, are deserving of some support for their children when they’re performing that vital role of bringing up the next generation of young Australians.”
 
This makes welfare less about need, and more like a reward given by the government for being responsible and virtuous. So it’s no surprise that there’s outcry when the government reduces that reward. After all, families haven’t stopped working hard – why is the government suddenly being so miserly?
 
The Howard government wrapped its middle income support in different rhetoric. For John Howard, middle class welfare was a deliberate program to achieve a specific social goal. Each side favours income support for “working families”, it’s just that they put the emphasis on different words.
 
Speaking to the conservative think tank the American Enterprise Institute after he left office, the former Prime Minister argued that:
 
“We should maintain a cultural bias in favour of traditional families … The taxation system should generously recognise the cost of raising children. This is not middle class welfare. It is merely a taxation system with some semblance of social vision.”
 
For Labor, middle class welfare is a reward. For the Coalition, it’s an incentive.
 
Howard was a conservative social democrat. Sure, sometimes he looked like a proponent of small government. More often (much more often) he did not.
 
The Liberal Prime Minister had a distinct pro-family, pro-procreation philosophy which, in his view, supported the expansion of family payments. For Howard, income testing those payments would be contrary to the purpose of the policy, and at odds with the philosophy. You might not agree with that philosophy of government – free marketeers shouldn’t, and didn’t – but it was a coherent one, and one which he often articulated.
 
By contrast, Labor appears to share Howard’s policy preferences, yet it cannot explain why.
 
Nevertheless, the end result of both approaches has been the development of a middle class entitlement culture – a culture that’s long been endemic in larger universal welfare states, and now seems to be growing in Australia.

Charade Must End, And Both Sides Of Politics Know It

Perhaps now Labor and the Coalition could come clean with voters. Both sides of politics intend to grow Australia with immigration – to continue the 200-year project of population expansion. This project is as important today as it was during the Victorian gold rush. They just don’t want to admit it.
 
Treasurer Wayne Swan announced in last week’s budget an increase in immigration of 16,000 people; three-quarters of those will be skilled migrants sent to regional areas.
 
That’s on top of the government’s new Enterprise Migration Agreements. The agreements allow large mining and infrastructure firms to negotiate tailored guest worker schemes for foreign labour, as long as they implement training programs for local workers too.
 
Sure, in the scheme of things, these changes will only modestly increase immigration levels.
 
But they’ve been announced by a government that spent the 2010 election talking about how they planned to slow population growth, blamed skilled migrants for undercutting wages, and promised to “take a breather” on immigration.
 
The increases have been embraced by an opposition that ran even harder against population during the campaign. Supporting the government’s migration increase last week, shadow treasurer Joe Hockey said it was necessary if we were to avoid inflation.
 
Last year Julia Gillard and Tony Abbott fell over each other trying to appeal to voters convinced that traffic jams and refugee boats were two sides of the same problem.
 
Labor announced an inquiry into sustainable population, plainly hoping it would calm those who hated Kevin Rudd’s ”Big Australia”.
 
The “stable population” types welcomed the opportunity to present their misanthropic views on closed borders and reduced birth rates. Green groups proposed population limits too, prioritising the Australian environment above the well-being of potential migrants.
 
But the government must have known that business lobbyists would call for higher migration during the inquiry. The likely final result would be an expansion, not a reduction, of foreign skilled migration.
 
The government released the inquiry’s report on Friday. It simply says that skilled migrants should be sent to targeted industries and regions, and that governments should plan better.
 
The ”small Australia” rhetoric of the 2010 election was just for show. So let’s give up the charade. Australia needs more migrants; our economy is begging for them.
 
The enormous mineral projects in Western Australia and the North need mass labour if we’re going to continue to rely on the resources boom to underpin growth. The Chinese demand, which Treasury hopes will save the federal budget, will only be met with new workers.
 
The National Farmers Federation reckons agriculture needs at least 100,000 more workers now that the drought has lifted.
 
Booming global demand for resources, and booming global demand for food – a government that did not make policy changes to meet those demands would be negligent.
 
Could we try to fill all these positions with existing Australian residents? Well, the unemployment rate is in the fours. There aren’t many Australians available.
 
But the more troubling answer to that question comes from another proposal in this budget – the $1700 bonus for apprentices if they complete their training. That seems perverse. Do we really have to bribe people to qualify for jobs that offer high wages?
 
There is, of course, a powerful moral argument for accepting more immigrants. Migrants do more than just help our economy. They travel here for work to support themselves and their families. That’s the moral dimension – people should be free to build a better life, as long as they don’t harm others in the process.
 
Migrants do not steal jobs from locals who want to work. The economic literature on that question is unambiguous.
 
Nor is infrastructure the problem immigration sceptics claim. Migrants pay taxes. Competent governments should be able to deploy those taxes for transport and services. When incompetent ones – read New South Wales – do not, that’s not immigrants’ fault.
 
All these points are as true for unskilled migrants as much as skilled ones. A far-sighted government would look at expand-ing the unskilled cohort. The economy could easily use them.
 
Immigration is overwhelmingly more effective than foreign aid at boosting development in the Third World. Migrants send money back home. Globally, the amount of cash remitted to the developing countries is more than total global spending on foreign aid. And it goes directly to those who need it.
 
So for Bob Brown to describe economic migrants this week as “queue jumpers” is obscene. The Greens’ support for humanitarian programs is laudable; their opposition to immigration in general is not.
 
Throughout Australian history, the “population problem” has been about how we will people the continent, not whether we should. And despite the aberration that was the 2010 election, it still is.

Ignoring The Deficit: Disappointingly Predictable

Is there any less edifying event in Australian politics than The Budget?

Each year the Treasurer offers a seemingly arbitrary smattering of policy adjustments and spending programs.

This year the Family Tax Benefit A has been extended. Small businesses will be able to write-off $5,000 of new car costs. Free set top boxes for pensioners. Trades apprentices get a $1,700 bonus on completion. Former prisoners of war get another $500 a fortnight.

Check them off: families, small businesses, pensioners, apprentices, Our Boys.

Some of these have obvious merit, some obviously not.

In his mind, Wayne Swan is the government’s hard man. But giveaways do not bring to mind the toughness he wants to project.

In 2010, a tough and “no frills” budget included a 50 per cent tax discount for the first $1,000 of interest earned on savings. The low income tax offset was increased to $1,500. Government superannuation top ups for people earning $37,000 or less. Small business write-offs for assets worth less than $5,000. More money for veterans. More money for renewable energy, skills, and rail. More money for elite sport.

No frills there.

In 2009, another “tough budget”: Tax concessions on super contribution reduced from $50,000 to $25,000 a year. The small business tax break on assets increased 50 per cent. First home grants boosted for another six months. Pension payment increases. Supplements for carer payment recipients. More money for pretty much everything.

In 2008, a “tough but fair budget”… anyway, you get it.

It’s a bit rich to describe a budget as tough if it includes free electronics.

Nevertheless, the budget process itself encourages uncoordinated and haphazard policymaking.

After all, the budget is not just an annual restatement of the government’s financial health. It is the centre of the policy process. It is clearly unsuited for this role. The budget is not a great frame in which to develop public policy.

Government departments submit ambit claims, ministers push hard for programs which could demonstrate they’ve achieved something, and everything gets filtered through a political mesh, packaged into “deliverables” and rolled out in leaks.

Then the Treasurer tries to teeter between generosity and hardheadedness, prepare a speech, and try to place himself at the symbolic heart of the government.

Any substantial policy reform gets quickly subsumed into the budget spectacle – one thing must be offset by another, and spending reductions become only justifications for further spending in other areas. The only purpose of savings is for more spending.

Take the government’s dignity-of-work welfare changes, which are as much about savings as they are about reform.

As Alan Kohler pointed out on Tuesday night, $21.7 billion worth of savings in this budget was matched with $18.9 billion in new spending. Cuts made while spending added; programs expanded while other programs reduced. That’s policy churn – the sort of fiddling which makes the tax code blossom and keeps accountants in business.

At its best the budget process results in incremental approaches to policy issues. At its worst, a ballooning of under-resourced and utterly ineffective programs. $34 million dollars to help manufacturers supply resource projects? This is surely too low a figure to achieve its ambitious goal, yet too high to be dismissed as trivial.

No wonder budgets marketed as tough come off as indecisive.

The pressures of budget time are not conducive to coherent policy. But on the other side, the budget spectacle – the May policy dump – has made it hard to strongly confront fiscal problems when they arise.

2011-12 is yet another budget in the expanding shadow of the global financial crisis. The decisions made by Kevin Rudd, Wayne Swan, Lindsay Tanner, and Ken Henry in a few critical months still dominate the fiscal landscape. (Julia Gillard may have been in the famous “kitchen cabinet”, but according to Lenore Taylor and David Uren in Shitstorm, she was in the outer kitchen cabinet.)

Three out of those four – Rudd, Henry, and Tanner – have now left the economic policy stage. Swan is now the sole custodian of the government’s crisis legacy, and the man who has to live with its consequences.

The Treasurer has not seriously attempted to tackle the stubbornly growing budget imbalance which resulted from his decisions nearly three years ago. Instead, he’s relied on Treasury forecasts about a possible revenue surge in the future. That surge keeps being postponed while the target to return to surplus gets closer and closer.

The government is playing chicken with the economy, hoping revenue will catch spending before the self-imposed 2013 wall.

It may – perhaps Treasury’s projections are right this time – but would you really want to bet on it?

Our economy faces the world. What happens in China, or the United States, or Europe, makes a big difference to our terms of trade, our dollar, and ultimately the government’s revenue. And the last few years have been some of the most volatile in the global economy in the last few decades.

In this environment, Wayne Swan cannot be comfortable gambling his reputation on the reliability of Treasury projections.

We could shout ourselves hoarse asking Swan to put those projections aside and to take positive measures to reduce the deficit. The Treasurer might, if he wanted to, cut spending deep and hard – a good idea whether the budget is in the red or the black. But there’s no real demand for an Australian age of bureaucratic austerity.

So the government’s reluctance to face its deficit is predictable, if disappointing.

Without the support of his crisis co-conspirators, Swan appears to be hoping the budget will just fix itself.

The Nanny State Is Coming…For Your Democratic Soul

Is saying “nanny state” just a cheap slur?

The term was coined in The Spectator in 1965 and clearly bears the marks of that publication and that era.

I have in my collection half a dozen academic papers published in public health journals decrying its use: “The nanny state fallacy”; “No need for nanny”; “Nanny or Steward?” “Medical police and the nanny state: Public health or private autonomy?” and so on.

One, co-written by a prominent member of the Rudd government’s Preventative Health Taskforce, Mike Daube, compares “nanny state” to the phrase “health Nazi”. Daube and his colleagues argue the latter is needlessly offensive and the former is “an easy phrase in the same tradition”.

Daube’s artless comparison reminds us that one can protest too much. The problem some in the public health community have with the nanny state appellation isn’t that it’s unfair. It’s that it resonates with the public.

And we rely on “nanny state” because it describes something very specific – an observable and concrete change in the way government relates to individuals. It has no obvious or elegant alternative.

Where more “traditional” regulatory interventions try to protect individuals against the adverse consequences of the decisions of others, the nanny state primarily seeks to protect individuals from themselves. As with all public policy, supporters deploy a wide variety of justifications, but this is what makes nanny unique.

And the attitude which underpins such paternalistic policy has implications far beyond alcohol and fast food. It is, in a very real way, profoundly undemocratic.

If we can’t trust people to choose their poison, then how can we trust them with a vote?

That question may sound glib. But democratic legitimacy rests on a positive belief that while not all citizens may be equally intelligent or informed, they are equally sovereign, and as a consequence have the right to have a say about the country’s future. In their own small way.

The systematic chipping away by nanny state activists of these assumptions – that people should be assumed to be competent to make such portentous choices themselves – presents more of a challenge to democratic legitimacy than the public health community may recognise.

Nobody is suggesting a cadre of experts should guide citizens to make the correct political choices. They never will. (The public health community would no doubt be horrified at the thought.) But it is just as hard to see not, given this paternalist philosophical stance.

After all, we have undermined the notion of individual responsibility to such a degree that some government advisors no longer even trust people to, say, manage their own food serving size (the Preventative Health Taskforce suggested regulators standardise portions in restaurants).

Basic notions of political equality should compel us to leave those food portion decisions in the hands of individuals, not state-appointed experts. We cannot pretend to have a legitimate democracy if the government operates under a presumption that voters are idiots.

So dismissing individual responsibility has consequences. Once you’ve accepted that the government should not treat people as autonomous, all sorts of authoritarian policy results.

The increasing centrality of income management for welfare recipients is driven by the same philosophy. To support nanny regulations yet oppose income management is incoherent.

That’s a hypocrisy found on the left. On the right, drug-warriors against the nanny state are just as contradictory.

This is why the strongest objections to nanny interventions have always been philosophical, not practical or economic. The nanny state is a radical reworking of the relationship between individual and state.

Certainly, some nanny interventions have been going on for a long time, and, in retrospect, few find them are objectionable.  Seatbelt laws protect people from the consequences of their own decisions and potentially the behaviour of others.

The difference is of degree, not kind. But there is a difference nonetheless.

Where we can isolate one or two regulations of the past with similar purpose, the nanny state of the 21st century is expansive and insatiable. It’s a volume thing.

The Preventative Health Taskforce proposed 122 separate recommendations to clamp down on alcohol, tobacco, and weight-gain. It recommended seven entirely new bureaucracies be set up. It suggested twenty-six new laws and regulations.

Some critics have begun to describe paternalist interventions as indicative of a “bully state” mentality; a graduation from nudging to shoving. While this is true for some new and proposed regulations, it’s not clear that, say, imposing new, simplified food labeling laws is really bullying.

The Nobel-winning economist James Buchanan tried to rename the nanny state “parental socialism”. Buchanan’s alternative has an appeal, but its second word is louder than the first. And nanny is the better metaphor. In a democratic system, government is the hired help who we delegate to perform collective tasks – not actually our progenitors or superiors.

We could invent other phrases.

Public health activists are clearly frustrated by the nanny state critique. So they should be. They do not understand how substantial a challenge their ideas are to the philosophical assumptions which underpin liberal democracy.

Underdevelopment in the Middle East

Address to the Rotary Club of Central Melbourne

If, 1000 years ago, you had been asked which civilisation would likely dominant the next millennium, Islam would have been a fair bet.

Our best estimates of historical global income suggest that the Middle East was richer than Europe. Islamic trade networks spidered across the world – certainly, much further than the trade networks of Christendom.

Fast forward to 2011, and the Arab world is impoverished, at least compared to the liberal West. The 22 states of the Arab League have an average income less than a third of that of the Western world.

The Arab world is deeply unfree. Its states are almost uniformly illiberal. Its economies are highly regulated, bureaucratic, and its governments are corrupt.

The Arab Spring – the rolling waves of revolts and revolutions which have swept the Middle East since the start of the Tunisian uprising in December last year – should demonstrate clearly the widespread dissatisfaction with this status quo. The citizens of the Arab world want to be free and democratic, and it want to equally successful as the now dominant West.

This raises two questions. How did the Arab world slip so far behind the West on the metrics which we would consider the indicators of social progress – prosperity, liberalism, and democracy?

And does the answer to that question tell us anything about the capacity for the Arab world to catch up – in other words, is whatever held the Middle East back destined to hold it back forever?

The obvious topic here is Islam – both Islam as a religion, and as an organising principle of political economy. Is Arabic underdevelopment Islam’s fault?

No – the fault, according to a comprehensive study by the Turkish institutional economist Timur Kuran, lies not with Islam, per se, but with the development of Islamic law.

A legal system, as we all intuitively know, sets the framework in which capitalist and market development can occur. The laws governing shareholder liability, for instance, or what is allowed in banking, or bankruptcy, can either enhance market efficiency or impede it.

One should be careful interpreting another’s religion for them, but Islam started as a very market-friendly religion.

Mecca was a thriving trading community, a strategic hub between Byzantium and India. It is hard to overestimate how central trade and commerce was to Islam’s theological birth. Muhammad himself was a caravan trader and a business manager. As one historian has written, to ignore the role of commerce and markets in the development of Islam and the life of its founder, is like ignoring the role of oil in contemporary Saudi Arabia.

No wonder then that the Qu’ran is steeped with the din of markets. It defends the institutions of private property, contract law, and profit through trade. “Let there be amoungst you traffic and trade by mutual consent,” speaks one passage. One liberal Muslim scholar argues that the Qu’ran provides a strong foundation for limited government, decentralisation, and restraints on the private sector.

The Islamic pilgrimage was as much a religious event as a commercial one – the Qu’rans call for pilgrimage is followed immediately by this passage “It is no sin for you to seek the bounty of your Lord by trading”, and pilgrims would receive this blessing: “May Allah accept your pilgrimage, condone your sins, and let you find a good market for your wares”. Timur Kuran argues that the pilgrimage to Mecca was the Islamic world’s “leading commercial event” well up until the 19th century.

Islamic society – early Islam at least – was a highly commercial social society. One study suggests that 75 per cent of religious scholars and jurists earned their living from business ventures.

Muslims were among the world’s greatest entrepreneurs and explorers. When the city of Canton on the Chinese coast was captured by bandits in 878 AD, they found 100,000 Middle Eastern traders there. Indeed, the first age of exploration was a Muslim age of exploration.

During the 15th century, Muslim merchants were sailing from Morocco to Southeast Asia, entirely unimpeded. The Western explorers that followed found Muslim communities almost everywhere they went.

So how did such a commercial, entrepreneurial society slip behind the West? Timur Kuran argues that the institutions of Islamic law which had well served it in the first half-dozen centuries failed to encourage and support the forms of capitalist organisation which quickly spread in Europe from the fifteenth century onwards.

While Islamic commercial law was rich and strong nearly two centuries before Europe had even developed its vaunted “law merchant”, it failed to develop as innovatively in the centuries to come.

Indeed, the centuries where Islamic trade was at its height were also the centuries when Europe was experimenting with different institutions for commerce.

For instance, the joint stock company. Islamic law supported a form of incorporation, the partnership. But that partnership was fragile. It could be dissolved at any time, according to the preferences of just one of the partners. And if one of them died. The risk of that partnership obviously increased as the number of partners increased. As a consequence, partnerships were small, and usually temporary. For every new venture – say, for example, a trading mission – partnerships had to be reformed.

Compare this to Europe.

The Medici enterprise was an extraordinary complex, and extraordinarily long-lasting commercial organisation – a series of subsidiary partnerships, inter-city networks, and accounting innovations meant that the Medici enterprise lasted a massive 97 years, from 1397 to 1494. Its model, and the lessons from that model’s management, were replicated widely.

Then the joint stock company, facilitated by changes in European law which smoothed the process of reorganisation as shares were traded. Early join stock companies included the English Levant Company, and the East India Companies – Dutch, French, and English.

The importance of corporate institutional innovation for the development of the European economy has been well-recognised by economic historians. Timur Kuran identifies a number of barriers to the development of the company in Islamic law, for example, polygamy – which, combined with generous inheritance laws, undermined the formation of large amounts of capital. If inheritance only goes to the first born in a monogamous marriage, wealth remains intact. If it is split between numerous children and numerous wives, any wealth formed disappears after a generation.

Islamic law did not encourage new forms of corporate development, but that doesn’t mean Islam is inherently hostile to the corporation. It has been widely embraced from the 19th century onwards. Fundamentalist Islam does not campaign against the shareholder enterprise.

But the Islamic world’s delayed embrace of sophisticated forms of capitalist development have held it back considerably.

And it a brief survey of the contemporary Arab world suggests that it is hardly complete.

The Arab World lacks the economic freedom necessary for prosperity. By economic freedom, I’m going to adopt the classical definition – a political economy where people are free to acquire and use their property as they see fit, as long as they do not impede the identical rights of others.

We can measure economic freedom along a wide range of indices – some direct measures, and some indirect. For example, we can look at relative tax rates, size of government, security of property rights, regulatory impediments to forming business, efficiency of contract enforcement, tariff levels, and so on.

These measures are highly correlated with economic growth, individual prosperity, and a whole host of other beneficial social indicators. Certainly, low levels of economic freedom are closely connected to negative consequences – such as inequality and poverty. This is particularly the case in emerging nations. Economic freedom creates a climate conducive to investment and entrepreneurship, an intuitive argument that has been confirmed empirically, and repeatedly.

The Arab World fills out the bottom ranks on many of measures of economic freedom. This is a substantial backward step from the past – as one Arab scholar has pointed out, in many ways the Arab World was the most open, economically engaged region on the globe for most of its history.

Is culture to blame?

I hope I’ve convinced you that the dominant religion of the region does not have sufficient explanatory power to account for the underdevelopment of the Arab World. Could the problem it be cultural, rather than just religious? It could very well be that centuries of slipping behind the West has encouraged a culture antithetical to the sources of Western success.

Development economists are starting to seriously engage with questions of culture, as it is clear that many of economic history’s greatest questions cannot be answered without recourse to cultural matters.

A paper in the journal of Public Choice earlier this year clarifies that question. It looks at the World Values Survey, the largest and most comprehensive database we have on cultural attitudes around the world.

The paper finds that culture matters – to a degree. While a nation lacks economic freedom, culture is all important. Without formal legal institutions – or when those legal institutions are untrustworthy or unreliably – cultural issues like trust are extremely important.

But the authors of this paper found that as a nation becomes more economically free, the importance of culture declines substantially. The “peace, easy taxes, and tolerable administration of justice” described by Adam Smith is culture-neutral – it does not require, for example, any particular religious belief to function well.

The consequences of this finding for not just Arab development, but also the operation of a pluralistic democracy like Australia, should be obvious.

Let us return now to the Arab Spring, and its relationship to the question of economic freedom and development.

The Arab Spring is above all a democratic revolt. Many in the West have been sceptical about the prospects of Arab democracy because of a fear that the regimes which are elected could be illiberal.

I think this fear is somewhat misplaced, and most certainly unfair. Somewhat misplaced because one of the most striking things about the Arab Spring so far is how Islamist organisations have been united in their call for democratic institutions. This is a substantial change from the past, where revolutionary Islam was more interested in theocratic hierarchy.  We are a long way from the Iranian revolution.

It is worth noting that the loudest proponents of this argument have been the dictatorships themselves – no Middle East autocrat has failed to claim that they’re the only thing holding back the Muslim Brotherhood.

Certainly, it is true that any democracy has embedded in it the risk that it could lead to suboptimal outcomes. We can all name historical examples of democratic failure along those lines.

Yet this is a burden which is unfair to place on societies which are struggling to lift themselves out of tyranny. Yes – revolutions sometimes, even often fail. But that is not a case for the status quo, it is an argument for caution, and a reminder that a tyranny has great costs – including the hollowing out of civil society, the rise of underground extremism, and the political isolation. We cannot rhetorically condemn nations to political servitude if we are weary about the consequences of them escaping that servitude.

Let me raise a serious objection to my argument for economic freedom in the Middle East.

Nevertheless, some have claimed that the Arab spring is a revolt against not just tyranny, but economic liberalisation.

They have some evidence in their favour. Egypt has been liberalising substantially over the last decade. From holding a place at the bottom of the Economic Freedom in the Arab World report, it now occupies the middle. It reduced its average tariffs from 15 percent to just 5 percent. It dramatically lowered the corporate tax rate from 40 percent to 20 percent. Its maximum personal tax rate is now a tiny 20 per cent. It has privatised entire swathes of its government run corporations.

This was a successful program of liberalisation, economically. The average growth rate in Egypt increased from 3 per cent per year around the turn of the millennium to 7 per cent. Unemployment declined from 12 per cent to 9 per cent.

Egypt is still poor. But now it is less poor, and on a trajectory to becoming rich.

Nevertheless, with liberalisation comes great disruption. We know this from our experience in Australia. There was a great sense that this liberalisation was being imposed – as, indeed, it was – by a corrupt and self-serving government. The privatisations have been dogged by secrecy and constant allegations of corruption.

After all, the purpose of privatisation is not simply to sell off assets, it is to introduce market dynamics and competition into industries which have stagnated under government ownership. Consumers, not oligarchs, are the intended beneficiaries of privatisation. Under that criteria, much of Egypt’s privatisations have performed poorly.

Combined with a general view that the government is irredeemably corrupt – from the absolute top of the state apparatus to the bottom, at the level of the local police stations – the potential for revolution in Egypt has been long recognised.

I have argued that the Egyptian revolt against Mubarak helps illuminate one of the great chicken-and-egg questions – which comes first, political freedom or liberalism? The Egyptian example suggests you cannot have one without the other – they must develop together. A tyranny that imposes economic liberalisation will be resented.

Dictators can’t always have it both ways. They can’t reap the benefits of economic growth – their higher tax revenues and more luxuries to hand to political supporters – and maintain complete political control at the same time. No country can be both a police state and a market paradise.

An increase in GDP is no comfort for someone who has been tortured in custody just to fill an arrest quota.

So the push for economic freedom in the Arab world cannot be separated from the push for democracy and liberalism.

Fortunately, we don’t have to impose our own Western values for this to be successful.

They may be rarely spoken of, but Islam has had its fair share of liberal thinkers. I’ll highlight just one.

Khayr al-Din was a Tunisian statesman and author in the 19th century. He travelled widely in Europe, and his investigations there informed his 1867 treatise The Road Most Straight to Know the Conditions of the State.

In this book he reports back to his national compatriots what he understands to be the strengths of the West – in awe of Europe’s military and economic power, nineteenth century Arab nationalists and liberals sought ways to emulate, and eventually, surpass the West.

It wasn’t Christianity, Khayr al-Din argued, that made the West strong, otherwise the Holy See would be the most advanced state in Europe.

Instead, he argued it was Europe’s “political institutions based on justice and freedom” – its low taxes, growing democracy and antipathy to despotism. He argued for freedom of the press, freedom of association, and freedom of participation in government.

Rulers might be beneficent and omniscient, but it was best to assume that they were not. The source of their legitimacy was a fundamental power higher than they – justice. Rulers must be therefore constrained by the rule of law.

And he justified all these arguments on Islamic terms, by reference to the Qur’an.

If the Arab World is going to be rich, it will need to take the advice of Khayr al-Din.

Big Business In Full Flight Is The Clarion Cry Of Democracy

Is big business running rings around the government? That’s the view of an increasing number of commentators convinced the era of economic reform is over because business won’t play ball.
 
Their argument rests on the campaign by mining interests against the Rudd government’s resources tax last year, a campaign described by one journalist as ”thuggery, pure and simple”. In the Julia Gillard era, many say similar business thuggery will destroy any future reform. Put aside the implicit assumption businesses should meekly accept tax rises and new regulations.
 
In his Quarterly Essay, George Megalogenis wrote: ”The miners were seeking a veto no lobby is entitled to – to deny a government the right to set taxation rates.”
 
But that’s the nature of democracy. Individuals (and individuals in business) can aggressively criticise the actions of the government, to try to influence opinion, to make their case in public. Nobody was trying to strip the tax power from the Commonwealth, just saying that a particular new tax should be open for debate.
 
The anti-mining tax campaign will be the template for corporate activism for decades to come – like the attempt by Clubs Australia to drum up opposition to proposed pokies regulation with that turgid word ”un-Australian”.
 
But was the miners’ campaign really that strong? The ads weren’t that good. They were light on detail. Certainly they lacked the detail to be convincing. Voters are not so naive to take what a lobby group says on face value. Every single business facing new regulation or tax says they’ll be ruined. Australians aren’t stupid.
 
The success of the anti-mining tax campaign reflects nothing more than the weakness of the Rudd government. After watching Kevin Rudd launch policy after policy with little to show for it, voters were not convinced increasing the taxes on one of Australia’s most successful industries was really a pressing issue.
 
Still, it’s true that business seems to have given up quietly lobbying behind the scenes, and now makes its arguments in carefully scripted television spots.
 
That’s not a bad thing. Better that special business interests lobby against legislative change in public than in secret boardroom lunches with ministers.
 
Anyway, whatever influence business has in Australia, it’s dwarfed by Canberra’s influence. While the mining sector contributes about 6 per cent of our GDP, the federal government spends 23 per cent. While the miners spent $22 million on a one-off ad campaign, the Australian government spends about $100 million in advertising every year.
 
But most of all: business can’t impose new taxes or laws on everybody else. There’s definitely a power imbalance between business and government, but it isn’t business that has the upper hand.
 
The most intense campaign against a government policy in Australian history was the opposition to the Chifley government’s proposed nationalisation of banks between 1947 and 1949.
 
The private banks produced millions of pamphlets stating their case for private enterprise. They took out thousands of column inches of advertising. They sponsored anti-nationalisation ”interviews” on commercial radio. Town hall meetings against nationalisation were attended in the thousands. The nationalisation failed. Ben Chifley lost the 1949 election to Robert Menzies.
 
That campaign makes the anti-mining tax ads seem like an inaudible squeak. If such a campaign happened today, it would be dismissed as a ”billionaires’ revolt”. But the banks did us a favour by opposing Chifley’s plan.
 
Australian politics does not remember the bank campaign. Certainly not as romantically as it remembers the environmental campaigns in Tasmania, or anti-Vietnam War rallies, or Gough’s It’s Time slogan.
 
The fact that this story has been largely forgotten reveals a misplaced and deeply undemocratic hostility to business participating in public debate.
 
Business is no less justified in protesting policy than, say, the medical research community in protesting the rumoured reduction in funding this federal budget. An ad campaign isn’t thuggery. It’s argument.
 
Now business is speaking up again as the government prepares the carbon price. So be it.
 
To imagine business leaders should take every government impost on the chin is absurd. They have as much right to participate in democracy as everyone else.

Morality And Humanity In The Gambling Debate

Opposition to gambling has always been somewhat aesthetic and moralistic. The character of that moralising has, however, changed over time.

During the Middle Ages, betting was seen as unproductive and idle. Only knights, clergymen, and monarchs had sufficiently good character to be allowed to play dice for money.

A few hundred years later, Reformation era moralists saw gambling as sin. It was blasphemous to ask God to decide such trivial matters as dice throws.

Their Enlightenment descendants imagined gambling to be irrational; contrary to the spirit of the age of reason. The 19th century saw it as a social disorder; disruptive, inefficient, and, as a consequence, borderline criminal.

Anti-gambling activists of the early 20th century focused on class. The lower and upper orders played different games. Predictably and unfairly, working-class gambling was suppressed, and upper-class gambling left alone.

Today, the vast bulk of anti-gambling opinion has a medical hue. We now see gambling mostly through the prism of illness and addiction.

Mental health concerns are genuine and serious and do not deserve to be dismissed out of hand – regardless of whether we think the Government should step in to manage or override people’s choices.

But the aesthetic and moralistic critique of gambling has not disappeared.

Certainly it’s obvious that opposition to, for instance, poker machines, is not solely based on data revealing the relative incidence of problem gambling occurring on the pokies compared to other games.

A part of that opposition (we can disagree how big a part) is undeniably grounded on how the pokies look ‘sad’. Playing is solitary. Players appear joyless. A poker machine seems to be a mechanised and computerised tool of corporate manipulation; a metaphor of consumer capitalism made real. (‘People cannot seriously enjoy pokies, can they?’)

These impressions colour the debate over poker machine regulation.

Nick Xenophon’s weekend statements suggest much of the political push against the pokies is motivated not by a belief that the pokies are uniquely dangerous, but by a distaste for gambling in general.

The South Australian Senator is drafting a bill to crack down on online betting. And he’s upset about the very existence of sports wagers. In comments to The Age on Saturday, he said he wants to “ban commentators referring to the odds”, ban “odds being broadcast” and impose “restrictions on the maximum bets being able to be played”.

Xenophon would also like advertising of online gambling sites to be banned, having argued in the past gambling advertising should be regulated as heavily as tobacco advertising – in other words, regulated out of existence.

The reasons Xenophon offers for such restrictions are many and familiar. He argues gambling poses dangers to sport itself – match-fixing is inevitable in a world where sports betting is widespread.

‘Children – think of the children!’ could be normalised to gambling. This is left unexplored, but is presumably undesirable; the implicit argument being that sports betting, while not necessarily harmful itself, is a gateway drug to the RSL.

Then, of course, the aesthetic argument: “It’s a shame for the great game of cricket that it’s been reduced to just another event to have a punt on,” Xenophon said in 2008.

Whether gambling enhances “the great game” or undermines it, preserving the enjoyableness of sporting events should not be a central concern of parliament, let alone the Commonwealth Parliament.

As the social scientist Gerda Reith argued in her 1999 book The Age of Chance: Gambling in Western Culture, gambling is endemic, historically and in the modern world. And, as a consequence, has developed great cultural significance.

Through gambling, people engage both the mathematical concept of probability, and the metaphysical concept of chance. It’s a way to make light of risk; to tame uncertainty.

In other words, gambling is part of human nature.

Given gambling’s cultural centrality, it’s not clear why the Government should try to wall it off; to regulate gambling into an isolated and denigrated corner of the Australian consciousness.

Rather than treating gambling as alien and dangerous and not fit for children, why not treat it as a normal part of being and encourage it to be enjoyed responsibly?

Gambling is, after all, just a game.

Bookmakers are running odds on nearly every facet of the royal wedding: the first dance, the colour of the bride’s dress, the colour of Victoria Beckham’s dress, whether Prince Phillip will fall asleep during the ceremony, whether chicken tikka masala will be the main course, and whether Prince Harry will drop the ring and be too drunk to finish his speech (25-1, as of a few days ago). And, unsurprisingly, on the chances of divorce.

These bets do not detract from the wedding, which will be as painful as it would be in a world without wagers.

They do, however, make a game out of it – transforming the public from spectators to participants.

For moralist opponents of gambling like Nick Xenophon, such engagement only conjures up images of ruin.

But there is no need to be that pessimistic. The desire to play games of chance is a part of the human condition. Archaeologists have discovered four sided sticks – proto-dice – dating to 6000BC. In 2011, let’s try not be so scared of it.

Why Bad Policy Can Be Good Politics

Why would the Gillard government want to cut an unambiguously popular area of government spending – medical research? Because, perversely, it may be good politics.
The Prime Minister has promised to bring the budget back into surplus as quickly as possible. There is considerable political pressure on her to do so, and (as far as the budget deficit accords with a general perception of her government as hopelessly wasteful) considerable public pressure as well.
So the government needs to talk about tough choices. And nothing demonstrates toughness than cutting medical research.
The government is apparently considering slicing $400 million off the National Health and Medical Research Council. The Council looks at things like cancer treatment, trauma psychology, child allergies, cot-death, and genetic heart defects. It’s a pretty sympathetic Commonwealth body.
So if the rumours are true, the government is playing a familiar game. When cutting against your wishes, cut in the most painful place. Government bureaucracies do this all the time. Bureaucrats have a powerful incentive to make budget cuts hard for their political masters.
When in 2008 the Rudd government insisted the Australian Bureau of Statistics take a haircut of $20 million, the ABS’s immediate response was slice into two of its most necessary statistical functions – retail sales data and labour force numbers. The ABS couldn’t have picked more painful and sensitive things. If those figures aren’t reliable, then, for instance, the Reserve Bank would struggle to do its job at all.
Next the public sector union claimed that the census would be next on the chopping block; that the budget reductions meant the 2011 census would have to be exactly the same as the 2006 census, instead of being updated. Welfare agencies cut things like taxi trips for children with disabilities. Education departments close schools, instead of reducing the blossoming ranks of administrators, the paper-shufflers, and the lavish consultancies to friendly specialists in academia. School closures do not play well in the press.
In 2009, Hawaii’s education department was told to make savings. Instead of cutting jobs, it cancelled school on Fridays. Similarly, Julia Gillard and Wayne Swan have an incentive to make deficit reduction look as tough as possible.
To paraphrase American journalist and satirist HL Mencken, if the public wants cuts in government spending, they’re going to get them good and hard. And the louder the research community complains, the tougher the government looks.
The government has been accused of wasteful spending at every opportunity. Tony Abbott has made “the BER” and “pink batts” into all-purpose symbols of fiscal recklessness. So Julia Gillard probably welcomes the thought of having taxpayer-funded researchers rally across the country to protest her austerity measures.
There’s a very good chance the medical research cuts won’t be made. If the government follows this well-thumbed script, it will back down – “saving” research while simultaneously demonstrating an eagerness to make tough budget calls.
Still, the research cuts put Tony Abbott in a spot. The opposition leader prides himself on clarity of message. When opposing a government that cannot shake the impression of hopelessness, simplicity works. Cutting the debt was point one of the Coalition’s “Action Contract” in June last year. Ending the waste was point two.
Yet Abbott gets into trouble when he tries to fill in the detail of what, specifically, he would like to cut to bring the budget back to surplus Every government program has a vocal constituency certain that their funding is the difference between refined, advanced civilisation and a brutish Hobbesian state of nature.
Now he’s found himself opposing a reduction in government expenditure. The Coalition’s health spokesman, Peter Dutton, said over the weekend that “The Coalition is going to the barricades over this one. We won’t stand for hundreds of millions being ripped from research.” It muddies the Coalition’s otherwise simple and clear message about reducing spending – a side-effect which wouldn’t disappoint the government at all.
Of course, just because strategic budget cuts might be good politics don’t mean they’re good policy. The medical research community is quite upset. Yet its reaction does raise the question of whether there is such thing as an optimal amount of funds directed towards medical research.
Is all medical research spending the most efficient research spending? Or can funds only ever increase? Do we have the right mix of private and public? Are the incentives for private firms to develop new treatments the best they can be?
Or is it uncouth to ever ask such impertinent questions? Perhaps so.
Yet our deep reluctance to ask them is why these sorts of cuts are more politically clever than they first appear. The government wants to look tough on spending. And nothing’s tougher than cutting the development of new cancer treatments.