Trends, Issues and Community - Essay Example

Trends, Issues and Community Copyright Australian policymakers have long been impressed with the Northeast Asian success stories which they have chosen to see through a prism of neoclassical economic theory. The previously mentioned fact coupled with the reality of limited economic resources renders it impossible for any government to continue to stimulate demand in order to generate growth as required by the Keynesian economic approach. Thus, neoclassical thinking has become infused into Australian policymaking even though such neoclassical thinking goes contrary to traditional Australian values. However, neoclassical approaches are also not without their flaws and thus practical policymaking ought to be about ensuring that the government is driven hard to deliver that which is the best from available resources. This brief essay presents a discussion about the neoclassical and the Keynesian or the welfare state approaches to policy making and presents an examination of the impact of neoclassical approaches to policymaking in Australia. Declaration I certify that, except where cited in the text, this work is the result of research carried out by the author of this study. The main content of the study which has been presented contains work that has not previously been reported anywhere. _____________________________________________ Name and Signature of Author September 2008 This write - up is presented in fulfilment for the requirements related to an essay on Trends, Issues and Community. Biographical Sketch Acknowledgements Contents Introduction 1 Keynesian and Neoclassical Approaches to Economics 2 A Neoclassical Shift in Policymaking in Australia 9 Conclusion 13 Bibliography/ References 15 (This page intentionally blank) Introduction Individuals and communities in Australia and in other developed nations are often perplexed at the demise of the so called welfare state which had done far more to try to look after the individual than what is often observed today. Thus, government policies are now forcing individual citizens to take on far more responsibility in nearly everything, ranging from welfare, education to health despite a certain lack of satisfaction with this approach from the citizens (Centre for Policy Development, 2008, “Real World Economics”). The new policymaking is explained in terms of the limited ability of the community to care for the individual due to resource constraints and a shift from the Keynesian / Welfare state approach to the neoclassical or the new right approaches that are designed not only to provide but also to alter individual behaviour in a manner that is likely to be less of a burden to the society at large. The change that is now observed is often disturbing for those who had seen far better days when government really cared and help was always available in difficult times. Thus, it makes sense to try to understand what guides the new policymaking that has had an impact on nearly all facets of individual’s existence within the community and why Australians and others who had been used to living in the welfare state are now being forced to change. This brief essay presents a discussion about the neoclassical / new right approaches and the Keynesian or the welfare state thinking about policymaking, with an emphasis on Australia. Besides presenting a discussion of the old and the new approaches to policymaking, this essay also examines what the new right or neoclassical approaches to policymaking have meant for the Australian community in terms of health, education and welfare. The next section presents a discussion about the Keynesian and the neoclassical economic thinking. Keynesian and Neoclassical Approaches to Economics Classical economics was developed by Adam Smith, David Ricardo, Thomas Robert Malthus, John Stuart Mill and Carl Marx and a general consensus had emerged about classical economics by the middle of the nineteenth century (Weintraub, 2002, “Neoclassical Economics”). However, although classical economics had tried to explain the value of a corn of bushel in terms of the sum of costs that had to be incurred in producing the bushel of corn and the broad allocation of the output or product of an economy amongst groups in accordance with the costs that were born by various groups in producing this output, such explanations were difficult to reconcile with the realities that were to be observed in the market. Thus, a process of investigation and rethinking had to be sustained and Keynesian economics was an important breakthrough because Keynesian thinking introduced the concept of utility of work and market demand for production. A model of effective demand is important in Keynesian economics and it is thought that consumption expenditures, investment expenditures, and government expenditures can stimulate the economic conditions. Although Keynesian economists advocate containing the effects of the business cycle, they are often more concerned with providing employment rather than containing inflation. Thus, it was thought that active demand management by government adopting suitable policies could result in strong economic growth and full employment (Gates, 2007, Pp. 335 – 337). Fiscal and monetary policies were considered as being instrumental in stimulating demand conditions for specific products and for the economy as a whole. Change in the supply side were considered as being important in the long run and thus a lot of scope was considered as being available for government intervention to stimulate demand. Thus, the Keynesians argued that it is investment which responds to variations in interest rates and market expectations that is the dynamic factor which determines economic activity and that it is possible for government to alter demand for goods and services by appropriately changing its taxation and public expenditure policies. Governments that had been pursuing Keynesian policies at the time when this economic theory was in vogue had tried to influence economic conditions by increasing government spending, varying taxation policies and generally trying to stimulate demand so that unemployment could be kept within acceptable limits (Screpanti, 2005, Chapter 7). An attempt was made to try to provide the population with better services so that employment and demand could be generated and revenue from taxation or borrowing was used for the public good. However, it was noted that such government expenditure often resulted in heavy debt and the resources that were required for debt servicing were often excessive and difficult to sustain. The core ingredients of the neoclassical school of economics include methodological individualism, rationality, equilibrium and the importance of the price mechanism (Screpanti, 2005, Chapter 10) and (Weintraub, 2002, “Neoclassical Economics”). Methodological individualism tries to explain all economic phenomena in terms of the actions, characteristics and behaviour of individuals and neoclassical economic thought asserts that the way in which economy runs depends on the manner in which individuals within it behave. Thus, individual tastes are an important consideration in the neoclassical economic thought and such characteristics are either considered as being fixed and unchanging. Any changes in individual preferences are considered as being exogenous or outside the economic field of enquiry. Margaret Thatcher claimed that there is no such thing as society, only individuals and families. However, it has to be understood that human behaviour is often influenced by the environment in which they exist and this is pointed out as being a weakness of the neoclassical approach. The concept of rationality in neoclassical economics makes the assumption that individuals are rational beings and that they make choices that are in their best interest (Screpanti, 2005, Chapter 10) and (Weintraub, 2002, “Neoclassical Economics”). Individuals are assumed to have well defined goals and they pursue these goals in a most efficient and effective way. Thus, individuals will want to maximise the pleasure that they can get for a price and also save to pay for healthcare if government assistance for this service in a society is reduced. However, it has to be understood that individuals can be given goals that are imposed on them by creating an economic environment and they may not want such goals out of their own choice, preferring to act out of habit, a sense of obligation or a desire for status etc. The analysis of equilibrium, or when an economy is at rest, is the focus of neoclassical economics. Thus, an equilibrium price is when all sellers can sell all that they want to and all buyers can buy as much as they want at the price that has been established in equilibrium. The important thing in neoclassical economics is to understand the conditions under which equilibrium is established and often it is of interest to understand the difference between two equilibrium settings in order to better understand the economic forces that are at work. Thus, equilibrium in which nothing changes is not of much interest in neoclassical economics. Often the thrust in neoclassical economic policymaking is to try to change conditions in a manner that will bring about a desired equilibrium as a result of the rational action of individuals to imposed conditions and governments often fiddle with spending on welfare, education or healthcare to try to achieve certain equilibrium for what can be spent (Screpanti, 2005, Chapter 10) and (Weintraub, 2002, “Neoclassical Economics”). Thus, the tightening of requirements for eligibility to receive welfare in Australia and the lowered spending on health and education are as much an attempt to modify the behaviours of the individual as it is a response to the restricted ability of the government to continue to spend by building up budget deficits. Neoclassical economic thought considers the price mechanism as being the most important in connecting economic agents within an economy or a market (Screpanti, 2005, Chapter 10). Thus, if the price is right then the sales can be maximised provided that the tastes of individuals lean towards a certain acquisition or service. However, the neoclassical approach considers price as being all the information that is available to buyers and sellers and it is price alone that determines if agents will buy, sell or produce. However, this is an oversimplification of the way in which the real world works because as an example, an employer may not be aware of how well an employee is likely to work and thus they may want to limit the risks that they are willing to accept by paying a low wage initially, or a person who is addicted to chocolate or cigarette may be willing to pay higher prices despite the taxes that have been imposed in an attempt to modify their behaviour. Also, in the real world transaction costs are often important and these costs have to be incurred as a result of the desire of agents to seek more information about items of interest before deciding about price and a specific economic decision. Thus, neoclassical economic policymakers are likely to be less inclined to consider wider societal values such as traditions or norms. Apart from the previously mentioned core ingredients of neoclassical economics, other matters that have been a reason for contention between neoclassical economists and their opponents include the ability of agents to compete in a market and the level of knowledge that agents are endowed with. Markets can be influenced by financially strong actors and those with asymmetric knowledge. Thus, some actors have a greater capacity for influencing a market as compared to the others (Screpanti, 2005, Chapter 10). Unlike Keynesian economic approaches to policymaking which advocate that governments should try to improve demand, neoclassical approaches regard government intervention as only being justified when a market failure occurs. Market imperfection or failure can arise as a result of the tendency of actors to try and make maximum short term profits. Thus, neoclassical approaches to policymaking do include attempts to monitor the market and for government to intervene if fair market action is being threatened, but otherwise governments are expected to try to generate economic growth by attracting capital or investment, investing in technology and skills and trying to conduct strategic trade etc (Hunt, 2007, Pp. 274 – 277). However, the teachings of the church do add a moral dimension to the relatively harsh realities that are associated with neoclassical non-interventionist approaches (Finnegan, 1995, Pp. 17 – 28). Economic policymakers are not totally devoid of any considerations arising out of socially accepted moral obligations when deciding about economic policy and this has had a tendency for checking the harshness that is being gradually incorporated into government policies that have an impact on community. Thus, despite the neoclassical onslaught, welfare economics is still alive and well (Gowdy, 2005, Pp. 924 – 935). Other considerations, such as those related to sustainability also influence economic policymaking and this means that in reality pure neoclassical economics is not the only consideration that is taken into account when economic policy is presented (Aguirre, 2002, Pp. 929 – 938). Critics of neoclassical approaches to policymaking do exist and it has been suggested that the behavioural foundations of neoclassical economics cannot withstand the empirical evidence and mathematical reasoning that is becoming available and it is not possible to expect that the entire human race or even a nation will subscribe to the laws of conduct of a single individual (Gowdy, 2005, Pp. 930 – 935). Thus, it is clear that neoclassical economics is also flawed and not the entire truth which should be taken as the gospel when formulating economic policies that affect the community. The next section takes a brief look at the policymaking in Australia within the recent past and how a shift has been observed from the welfare state approaches to a more neoclassical approach. A Neoclassical Shift in Policymaking in Australia From what can be seen in regard to the policymaking for health, welfare and education on (Centre for Policy Development, 2008, “Health”, “Education” and “Work and Family Care”) it is clear that new policies have presented a neoclassical shift. However, it is also clear that the welfare state approach has also not been abandoned altogether. Australians are unhappy with the basics that are being provided by the public healthcare system, even though private healthcare system can provide more for a price. Parents are unhappy with the care that is being afforded to their wards in public schools and the indifference of teachers who are said to be provided a pittance during training, even though the government has a scheme in place to provide a generous scholarship and allowance for those who are willing to serve in the rural areas for five years. The welfare policy is said to point a finger at the disadvantaged and suggest that there is something intrinsically wrong about their behaviour when they expect public assistance. However, it has to be said that Australia is still far more generous as compared to many other nations and the Australian public has the correct attitude towards criticising its government for failing to live up to traditional values that were made possible by abundance and a small population. Such attitudes do keep the public servants and the politicians trying to strive for more so that standards within the community can be maintained. It has to be understood that if the public servants and the political masters somehow fail to try to achieve the best then a danger exists that the people can become powerless in front of the might of their government which is required to serve and that Australia will be converted into a state in which those who govern are deaf to the wishes and the plight of those who are governed. The state can sink into one in which the governing classes have everything, but those who are governed have nothing. Many Asian nations which have provided a model for neoclassical thinking to the Australian policymakers also provide an example of government apathy and it is important that the people are able to retain power over those who serve them. Thus, both the public servants and the politicians should be accountable to the people and capable of being removed if their conduct and performance is unsatisfactory. Unfortunately, the distribution of power in many Asian nations makes this impossible, with entrenched political dynasties and public servants who are not picked on the basis of their ability, but on the basis of their connections. In the case of welfare, the government in Australia has tried to formulate policies that will continue to assist those that are genuinely in need of public assistance. Canberra has now tried to adapt a carrot and stick approach to welfare and the government has tried to ensure that individuals who are in need of assistance do not indulge in acts of self destruction and use the hand that is being extended in a constructive manner. In his article entitled “White welfare gets some tough love”, which was published in The Australian newspaper of Saturday September 15, 2007, Mr. Faulkner presents a news story about a white single mother of three children living in Adelaide’s depressed “Peachy Belt” – a small cluster of hard luck suburbs in the city’s north (Faulkner, 2007, “White welfare gets some tough love”). Although, the author is sympathetic to the plight of a single mother, who is likely to be subjected to Canberra’s “carrot and stick” approach to paying welfare, he is also aware of the fact that Canberra is getting tough and that Aborigines in the Northern Territory were recently provided welfare in a manner that will make it difficult for them to squander what they received on alcohol, drugs and gambling. Australians have always favoured giving a hand to those who are in need, rather than a handout. However, giving a hand instead of a handout means that that it is also important to somehow ensure that individuals who are in need of assistance do not indulge in acts of self destruction and use the hand that is being extended in a constructive manner. Thus, an attempt has been made by the government to try to modify behaviours and to assist when such assistance is needed. A neoclassical approach on all fronts of Australian government policymaking has tried to modify the ills of the days of plenty by making it desirable that any assistance is used in a beneficial manner and that individuals try to assume more responsibility for their welfare instead of depending on generous public assistance to indulge in acts of self-destruction. However, a neoclassical shift has not meant that the welfare state concept has been totally abandoned. Apart from welfare, the health and education policies appear to be saying the same thing. The welfare state will provide a basic minimum, but if the real luxuries are desired then the individual will have to assume a greater responsibility for earning and saving to provide for such luxuries. Unfortunately, in many Asian countries even the basic minimum is just not available to individuals in need and this is only because the society has a value system that is based on retaining power that is never beneficially used to assist citizens. Many Asian nations can put into place better and more caring policies, but the will is just not there. Thus, neither the neoclassical economic thinking nor the Keynesian approach is the most suited to progress and development. Public resources have to be used in a manner that will provide the best returns and this means that the best is somewhere between the two extremes. Spending to care more or to make a community attractive only makes people to want to care also and to work for the welfare of their communities. If Australia had not been an attractive place to live in, it is unlikely that anyone will have wanted to invest in this country or to want to migrate to this land and this will have resulted in a failure to attract capital for growth. Thus, Australia policymaking should be about delivering the best that can be delivered instead of neoclassical or any other variants of economic thought. Unfortunately, many corrupted Asian lands never think about this when making their policy which is almost always about distributing the public wealth amongst the chosen few and not doing anything for the vast majority who are so powerless that they cannot even have their voices heard, let alone bring about a change. Conclusion From the previous discussion it is clear that economic policymaking in Australia and many other developed nations has been influenced by neoclassical economic thinking. However, the neoclassical approach is not without flaws and in reality it is what is available and the public expectations that force governments to deliver. Thus, Australians are only right in expecting that their government delivers the best that can possible be delivered or leave the job to others. It is this attitude, more than anything else that is likely to maintain standards and ensure that a healthy nation is preserved. (This page intentionally blank) Bibliography/ References 1. Aguirre, Maria Sophia. 2002. Sustainable Development: Why Focus on Population? International Journal of Social Economics, Volume 29, No. 12, 2002, Pp. 923 – 945. Retrieved: September 5, 2008. From: http://www.emeraldinsight.com 2. Beresford Q. 2000. Governments, Markets and Globalisation. Allan & Unwin. 3. Centre for Policy Development, Australia. 2008. Welcome to the CPD. Centre for Policy Development, Australia. Retrieved: September 5, 2008. From: http://cpd.org.au/ 4. Faulkner, Andrew. 2007. 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