Effect of Economic Rationalism on Australian Consumers - Case Study Example

Summative Academic Essay Name: Tutor: Course: Date: Introduction Economic rationalism policies were promoted in Australia in the name of public interest, economic growth and the free markets (Beder, 2006b). In the 1980s, Hawke/Keating governments adopted this concept that was also continued in the 1990s by the Howard government. Garnaut (1994, p. 53) concurs that numerous efforts were made to lower import restrictions and reduce tariffs, reduce taxation for high-income earners and government deficits, as well as deregulation of financial institutions. These efforts affect the ability of consumers to obtain goods and services. The aim of this essay is to find out the effect of economic rationalism on Australian consumers. Economic rationalism and Australian consumers Beder (2006a) defines economic rationalism as the replacement of Australian government services and functions operating in the market with those provided by private profit-seeking firms. These changes gave rise to privatization, reduced spending, regulation and taxes, and deregulation of financial and labor markets, smaller government, free trade, and deregulation of business activities. Pusey (1991) argued that economic rationalism was a dogma in which money and markets were believed to outdo functions of law, bureaucracies and governments. According to the author, there was no need for endless political debate since this topic generates more insoluble conflicts. However, Stone (1992) was optimistic about economic rationalism in the sense that markets provide more satisfying answers to questions regarding consumer choices and preferences. Total well-being is rapidly advancing due to market forces that actual influence of controllers, bureaucrats or politicians. Beder (2006b, p. 65) observes that the floating of the dollar, business deregulation, and privatization were structural reforms intended to enhance industrial competitiveness, productivity and economic efficiency. According to Whitwell (1994), to begin with, economic rationalism draws on neoclassical economic theory. Neoclassical vision is the underlying ‘vision’ of the economy (ibid). The author assumes that the unregulated capitalist economy has an inherent tendency of moving towards the equilibrium where supply and demand are in balance. However, Blandy (1993) argues that though the system is self-correcting, there are ‘distortions’ and ‘rigidities’ that hinders the attainment of equilibrium. Edwards (1993) agrees that in moving towards equilibrium, there are inherent changes in relative prices that will affect consumers. The author also acknowledges that prices change not only affect prices of services and good but also interest rates and wages. In Australia, the neoliberal policies engendered by economic rationalism caused a massive consumer demand that was not at pace with production capacities. Consequently, economic growth slowed as profits from investing in production declined. Neo-liberalism precluded the possibility of governments feeding demand through government spending. For example, consumer demand increased the availability of bank credit to consumers (Torbat, 2008). This positive change temporarily ensured improved consumer spending and economic growth in Australia. In order to sustain economic growth, Gupta (2008) observes that the US had to cut interest rates to promote consumer borrowing. Kelsey (1995) argues based on the neo-liberal theory that markets are the most moral and efficient way of providing services and goods in society when freed from state interference. However, current neo-liberals admit that the role for the state in providing a ‘safety net’ and enforcing the rule of law is limited (Edwards, 1993). Consequently, there will be a dismantling of regulations limiting corporate powers and severe reduction in provision of services by the state in sectors such as health care and education. Brennan (1993) observes that through marketization, deregulation, and privatization, consumers will have a choice and businesses will be more prosperous, even though, the society will not be more equal. The author concurs that the size of government should be reduced and not its scope in order to cut state spending. Moreover, Beder (2009) was more optimistic of economic rationalism on consumer well-being. The author noted that the rise in house prices led to an oversupply of housing and a building boom that burst the housing price bubble. However, Gupta (2008) argues that oversupply was detrimental to consumers since the increase in interest rates locked out hundreds of thousands of people in the real estate and house ownership. Many saw their houses back onto the market as they could no longer afford their mortgage payments. For example, there was a reduction in the net worth of mortgages for owners of CDOs and MBSs and companies like Bear Stearns, Freddie Mac, and Fannie Mae. As a result, Bello (2008) notes that companies that had incurred these losses were threatened with bankruptcy. Beder (2009) admits that major financial institutions as a result of economic rationalism or neo-liberalism led to a collapse or near collapse triggering series of panics in the Australian stock markets and markets around the world. Bank consumers lost trillions of dollars due to losses in the value of the stock. Elsewhere, the fall in share prices alongside unavailability of bank credit led to a loss of consumer confidence and decline in business. Besides, lowered economic growth and slump in consumer demand increased recession and levels of unemployment (ibid). According to Rudd (2009), the immediate response of the Australian government and others around the world was in stimulating the economy. While arguing for more international financial regulation, Kevin Rudd’s economic policies were largely based on faith in markets. Stokes (2009) agrees that the Rudd government stimulus packages proposed infrastructure investment that promoted the well-being and confidence of consumers. This was based on the assumption that people will spend the money in ways that will stimulate the economy. However, Nevile (1997) is a critic of economic rationalism where government enterprises and icons of pride in public assets shifted ownership to the Australian private sector including overseas buyers. For example, Qantas a publicly owned airline, state banks helping rural Australia, and the Commonwealth Bank were put on the line for partial privatization. Tariffs were drastically reduced in the name of macroeconomic reform alongside continued discussion on taxation reforms. With the introduction of major changes such as capital gains tax, fringe benefits tax, and dividend imputation consumers felt the pinch even painful. Enterprise bargaining was encouraged, and the wage fixing process shifted from center stage in the award system. By illuminating a specific sector, Damien and Beder (2005) examined the dynamics of neoliberalism in practice during the process of electricity privatization in Australia. The authors argued that to secure freedoms for capital the state legislates the mode of regulation that supports neo-liberalism. Their examination found that by privatizing electricity corporations became the main beneficiaries putting consumers in a worse off situation. As observed in News Weekly (2000), financial system deregulation was expected to lead to lower charges to consumers and interest rates. It was also anticipated that foreign capital investment could raise the standard of living of Australian citizens and boost economic growth. To the surprise of many, neither result happened. For example, the deregulated banks are only investment houses prioritizing in lending to and managing the funds of premium class consumers. Instead, the banks slashed services to the small customer and reduced their staff alongside a whole range of new increased charges and fees. The expectations of consumers were that the effective interest rate inclusive of charges and fees on loans to small businesses and family farmers were between 9.5 percent and 13 percent. Meanwhile, manufacturing and agriculture has not been boosted by the deregulated financial system. Manufacturing industry has contracted, and so is the buying power of consumers since the industry in much involved in speculation and purchase of imported goods. Today we import over $57 billion worth of manufactured goods more than we export. Uhr and Walter (2014) argue that on the rationalist account, Australia drifted from the few restrictions on international trade (open economy) of the 1870s to a closed one with tariff protection and other numerous barriers. According to Anderson and Garnaut (1986) protectionism when compared to other less protectionist economies in Australia brought less economic growth. The authors drawing on historical evidence found that Australia had declined from 3rd in GDP per capita in 1950 to 14th in 1980 in its world ranking. High rates of protectionism were to blame for the decline (ibid). For example, in 1984 particularly in the trade of manufactures, when most other major economies were becoming more open, the Australian economy had become less open to foreign trade. As Australia experienced decreased the share of world trade, and trade in manufactures, the purchasing power of consumers and people’s living standards had declined to 15th globally (Stone, 1990). This indicates that Australian consumers have been negatively affected by economic rationalism or neo-liberalism. Conclusion Australia economic rationalists say little explicitly about the identity of consumers of the services and goods that are produced and about income distribution. With increased deregulations and tariffs, wages to workers should be fixed by market forces while purchasing power of consumers becomes eroded (Beder, 2006a). The market determines the argument to solution on economic rationalism to the distribution and allocation of goods and services. The arguments above have also shown that economic rationalism has promoted conditions and situations that do not favor the average Australian consumer. Therefore, the essay concludes that economic rationalism has made Australian consumers worse off. Reference list Anderson, K & Garnaut, R 1986, Australia: Political economy of manufacturing protection. In C. Findlay and R. Garnaut eds. The political economy of manufacturing protection: Experiences of ASEAN and Australia. Sydney: Allen & Unwin. Beder, S 2006a, Free Market Missionaries: The Corporate Manipulation of Community Values. London: Earthscan. Beder, S 2006b, Suiting Themselves: How Corporations Drive the Global Agenda. London: Earthscan. Beder, S 2009, Neoliberalism and the Global Financial Crisis, Social Alternatives, Vol. 28, no. 1, pp. 17-21. Blandy, R 1993, Economic rationalism and prosperity, paper presented to the ‘Economic Rationalism?: economic policies for the 1990s’ conference, mimeo., University of Melbourne. Brennan, G 1993, Economic rationalism: What does economics really say?’ in King and Lloyd (eds), Economic rationalism; Dead end or way forward, Allen and Unwin, St. Leonards, NSW. Damien, C & Beder, S 2005, Regulating the power shift: the state, capital and electricity privatisation in Australia, Journal of Australian Political Economy 55, , pp. 5-22. Edwards, J 1993, Economic history and economic policy: assessing Paul Keating’s eight years as Treasurer, Australian Economic History Review, Vol.2, pp. 29-41. Garnaut, R 1994, Australia in the Political Economy of Policy Reform. Washington, DC: Institute for International Economics. Gupta, A 2008, How to Wreck the Economy. The Independent. 3 October. URL:http://www.indypendent.org/2008/10/02/how-to-wreck-the-economy/. Kelsey, J 1995, Economic Fundamentalism. London: Pluto Press. Nevile, JW 1997, Economic rationalism Social philosophy masquerading as economic science, Background Paper No. 7, Lyneham, The Australia Institute. 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Uhr, J & Walter, R 2014, The rise and fall of economic rationalism, ANU Press, The Australian National University, Canberra, Australia In Stokes, G, Studies in Australian Political Rhetoric, Vol. 4, pp. 195-213. Whitwell, G 1994, The power of economic ideas? Explaining the adoption of Keynesian economic policies in postwar Australia’, in B. Head and S. Bell, State and economy: Australian essays, pp. 119-140. Read More