Where did I go wrong in writing about the greatest threat to human flourishing?

Chapter 8 of my book Free to Flourish, published in 2012, is entitled “The Greatest Threat to Progress”.

The concluding paragraph of that chapter now seems like an exercise in wishful thinking:

“There is an urgent need for innovations to promote a better balance between the responsibilities and effectiveness of government. The best hope is that, as more people perceive the threats that democracy is facing, they will unite to foster the development of better norms of political behaviour."

Do you perceive that a growing proportion of voters in your nation are using politics opportunistically to obtain benefits for themselves at the expense of others? If so, do you perceive that such behaviour is a threat to the democratic political system? Are you willing to commit to promoting mutual benefits for all citizens in your participation in political discussions and in casting your vote?

If you answered “yes” to all those questions, how much time and energy are you prepared to invest in encouraging others to unite with you in fostering restoration of better norms of political behaviour?

I still think it is commendable for individuals to foster better norms of political behaviour, for example in their activities on social media. However, the idea that citizens might unite to restore better norms of political behaviour now seems excessively optimistic.

Where did I go wrong?

I haven’t changed my view that the failure of democratic governments to cope with their expanding responsibilities is the greatest threat to human progress – the ongoing expansion of opportunities for human flourishing - in coming decades. Democratic failure seems likely to be particularly traumatic for people who have become heavily dependent on government.

My analysis in Chapter 8 of what determines whether democracies can cope still looks sound. The democratic governments that are highly effective in raising revenue and managing provision of services with little corruption (e.g. Sweden) are able to cope with greater responsibilities than can governments that are less effective in performing those functions (e.g. Greece). The ability of democratic governments to cope depends on the balance between responsibilities and effectiveness.

It still seems correct to argue that there is an inherent tendency in democracies for the size of government to expand and for the effectiveness of government to falter. That is a natural consequence of unrestrained politicking by interest groups.

I still think Joseph Schumpeter and Bryan Caplan were correct to argue that citizens are prone to irrational prejudice in political matters. My empirical work helps illustrate the nature of the problem. It shows that the percentage people who seek an expanded role for government is higher among citizens who claim to have little confidence in the civil service and no interest in politics.

My argument that democracy has survived because it has been constrained by constitutions, rule of law and federal systems of government still looks ok. If writing the chapter now I would also emphasise that norms of reciprocity have helped to restrain interest group opportunism in the past.

I think my discussion of changes in democracy brought about by increased citizen involvement through talk shows, social media etc reached the correct conclusion. The changing political environment seems to have provided greater incentives for political parties to become involved in identity politics, and to seen to be doing more to deal with all the problems of modern life:

"The realm of personal responsibility has shrunk as more personal problems have become transformed into social problems. The net result in most high income countries has been an aggravation of the tendency for governments to take on more responsibilities than they can cope with effectively. Yet governments are constantly pressured and tempted to accept additional responsibilities."

That quote from Free to Flourish is followed immediately by the heading: “A basis for hope”. That is the section in which I made a valiant attempt to persuade myself that citizens might unite to foster the development of better norms of political behaviour.

There was nothing wrong with looking for a basis for hope. In retrospect, I was just looking in the wrong place.

Developments over the last few years suggest that there is a basis for hope in two different directions.

First, it looks to me as though the consequences of democratic failure might not be quite as dire as I had envisaged in 2012. At that time it seemed to me as though democratic institutions were coming under threat in some countries of southern Europe because of increased public disorder associated with government debt crises and resistance to government spending restraint. I was concerned about democratic governments being replaced by authoritarian regimes, as has occurred under similar in the past in Europe and Latin America.

What has happened is that democratically elected leaders have remained in place to administer the austerity that was imposed by the European Central Bank. The failure of democratically elected governments to control government spending resulted in external imposition of constraints on fiscal policy. This has been accompanied by a great deal of economic misery in the countries affected, but outcomes have been better than I had expected.  

As discussed in a recent post, I expect that in most OECD countries the failure of democratic governments to restrain the growth of government spending is likely to cause debt servicing to become a more widespread problem in the decades ahead. Perhaps there are grounds for hope that when they see the writing on the wall, a sufficient proportion of voters in most wealthy countries will be supportive of political parties proposing economic reforms, rather than waiting until they are imposed by creditors (or institutions such as the ECB and IMF).

Second, there is now a stronger basis for hope that the faltering institutions of representative government could one day be replaced by superior institutions. I was sceptical about that possibility at the time of writing Free to Flourish. Since then, however, it has become evident that blockchain technology and smart contracts may have potential to enable people to act together to produce some public goods cooperatively without central government involvement. I became enthusiastic about the potential for that to occur a few months ago when reading The Social Singularity, by Max Borders.  I have learned a little more about blockchain and smart contracts since then, and am still enthusiastic about the potential it offers.

A transition from government to cooperative provision of services cannot be expected to prevent the human misery likely to occur as a result of failure to constrain government spending before debt servicing problems become acute. Over the longer term, however, it may become possible for people to enter voluntarily into real social contracts that offer better opportunities for human flourishing than the hypothetical social contracts of political theory.

Perhaps it would have been better for Chapter 8 of Free to Flourish to have concluded by focusing on ways in which individuals might be able to protect themselves and their families from the consequences of democratic failure.

The most obvious way for people to protect themselves and their families is to avoid becoming heavily dependent on government. I acknowledge that for many people that is easier said than done. Few people choose to become heavily dependent on government. Hopefully, safety nets will continue to be available for those who need them most.  Nevertheless, self-reliance and voluntary cooperation for mutual benefit will provide most individuals the best hope for economic security in the years ahead.

Which of the western democracies will be able to cope with future growth in government health spending?

The chart shows that those OECD countries with the greatest burden of debt servicing a decade ago have subsequently had the lowest growth in government spending. It isn’t hard to understand how that might happen when we think about the consequences of accumulating debt in our personal lives. If we go heavily into debt, a higher proportion of our income must be devoted to servicing debt and less is available for other spending. Our creditors are likely to be reluctant to extend further credit if they become concerned about our ability to service existing debt.

At a national level, there are additional complications including the potential for governments to inflate away the real value of debt denominated in local currency and possible ‘bailouts’ by the IMF and ECU. Nevertheless, governments that become poor credit risks must pay a higher risk premium than is normal for government bonds, in order to obtain access to additional credit.

There is evidence that rising government debt to GDP ratios are associated with lower economic growth, which in turn, leads to lower growth in government revenue. That obviously has potential to further squeeze non-interest government spending. The results of a recent study published by the Dallas Fed (‘Rising Public Debt to GDP Can Harm Economic Growth’, by Alexander Chudik, Kamiar Mohaddes, M. Hashem Pesaran and Mehdi Raissi) suggest that over the longer term persistent accumulation in debt as a percentage of GDP at an annual rate of 3 percent is eventually associated with annual GDP growth outcomes that are 0.2 to 0.3 percentage points lower on average. To put that in perspective, the average growth rate of OECD countries has been about 1.5 percent per annum over the last decade. Causality could run both ways. Lower GDP growth can lead to higher debt levels, which, in turn, can lead to lower economic growth.

You might be wondering why I think the chart shown above has much relevance for western democracies other than Greece, Italy and Portugal, which had high government debt servicing burdens a decade ago. The relevance stems partly from the continued increase in government debt as a percentage of GDP in most OECD countries over the last decade. On average, net financial liabilities of those countries have risen by around 23 percentage points of GDP over the last decade to around 67% of GDP in 2018.

Those looking for reasons to be complacent can obtain some reassurance from low world interest rates. With interest rates paid by governments lower than the rate of economic growth in most OECD countries, debt servicing is not yet a widespread problem. At current interest rates, it would be possible for the debt to GDP ratio to decline in most OECD countries, even if governments pay interest on their debts by borrowing additional funds.

How likely is it that world interest rates will remain at low levels over the next few decades? In their recent OECD paper, The Long View: Scenarios for the World Economy to 2060, Yvan Guillemette and David Turner suggest that relatively low growth in investment is likely to keep downward pressure on world interest rates, even though population ageing is likely to reduce savings rates. Nevertheless, they note evidence that reversals of the relationship between world interest rates and economic growth rates have been “fairly common” in the past. They warn that a sustained rise in interest rates relative to growth “could eventually make large debt stocks costly to service and unsustainable”.  Their projections suggest that some decline in economic growth rates is likely to occur in most parts of the world over the next 40 years.

My concerns about the potential for debt stocks to become costly to service in many more OECD countries are related to the implications for government spending of the ongoing increase in the proportion of elderly people in the populations of these countries. The implications of demographic change have been much talked about over the last few years, but the magnitude of the likely impact on government spending doesn’t yet seem to be widely appreciated. The study by Guillemette and Turner projects an increase in annual public health and pension spending of about 5 percentage points of GDP for the median OECD country between 2018 and 2060. The bulk of that increase is for public health spending, which is projected to continue to be pushed up by technological change and government health policies, as well as demographic factors.

The methodology used by Guillemette and Turner produces estimates of the increase in the revenue to GDP ratio needed to pay for projected government spending increases without any further increase in debt to GDP ratios. An increase in revenue as a percentage of GDP of 6.5 percentage points of GDP is projected to be required for the median OECD country over the period to 2060. A much larger increase is projected to be required in some countries. For example, the required increase in revenue for the U.S. is projected to be 10 percentage points of GDP.

I think the baseline scenario presented by Guillemette and Turner is too optimistic because their modelling takes no account of the disincentive effects of higher taxation on GDP growth. The possible magnitude of this excess burden of taxation is discussed in an Australian context in an article posted on this blog a few years ago.

Leaving that aside, it seems to me that ongoing increases in debt to GDP ratios - and hence substantial increases in government interest payments as a percentage of GDP - are a much more likely outcome in most OECD countries than tax increases in the years ahead. In those countries where debt servicing isn’t yet a problem, there seems likely to be much less political opposition to further increases in public debt than to tax increases. That suggests to me that over the next few decades most OECD countries are likely to increase their debt to GDP ratios until debt servicing does become a more widespread problem.

Guillemette and Turner present scenarios that would require smaller increases in government revenues than in the baseline (no-change) policy scenario, but those scenarios involve health policy and labour market reforms that have been difficult to achieve in the past. I don’t think we can expect voters to be any more supportive of reforms that could damage their short-term interests than they have been in the past. The best we can hope for is that when they see the writing on the wall, a sufficient proportion of voters in most countries will be supportive of political parties proposing economic reforms, rather than waiting until they are imposed by creditors (or institutions such as the ECB and IMF). In 2013 I wrote something here contrasting the responses of Sweden and Greece to fiscal crises, that illustrates the choices available.

The transition may be traumatic, but it seems likely that technological advances will provide options superior to government provision of many services in coming decades. What I have in mind particularly is the potential for blockchain to enhance opportunities to seek mutual benefit in voluntary cooperative enterprises, as previously discussed on this blog. That may create potential for functions to be transferred from the public sector to cooperative enterprises that can perform the functions more efficiently.

During the next few decades most of the western democracies seem likely to experience ongoing difficulty in coping with the additional government spending required to meet the health needs of the elderly.  The most likely outcome seems to me to be an increase in debt to GDP ratios that will result in more widespread debt servicing problems. It seems inevitable that debt servicing problems will lead to a lower rate of growth in government spending in many OECD countries, possibly accompanied by the transfer of some functions to voluntary cooperative enterprises.

That leaves the difficult question of identifying which of the western democracies are more likely to be able to implement those reforms through normal democratic processes in order to avoid having austerity imposed upon them by creditors and international agencies.

Will blockchain enhance our opportunities to seek mutual benefit in cooperative enterprises?

As noted in my review of The Community of Advantage, Robert Sugden suggests that it is appropriate for people to adopt the principle of mutual benfit in participating in voluntary interactions with others. The principle requires individuals to meet normal expectations concerning the consequences of the interaction of those with whom they are interacting, unless their behaviour indicates that they can’t be trusted. It may be seen as an alternative to seeking only personal benefit. It does not preclude seeking to benefit other people in some interactions.

Sugden suggests that the principle of mutual benefit is relevant to market exchange and many other forms of voluntary interaction. I want to focus here on the relevance of the principle to individuals participating in cooperatives and self-governing communities.

Governing the commons

Elinor Ostrom’s research on management of common pool resources illustrates how the principle of mutual benefit has been applied in some cooperative enterprises. In Governing the Commons: The Evolution of Institutions for Collective Action, which I have previously discussed in different contexts here and here, Ostrom suggests that individual participants have been willing to make a contingent self-commitment of the following type:

“I commit myself to follow the set of rules we have devised in all instances except dire emergencies if the rest of those affected make a similar commitment and act accordingly”.

In making such commitments people expect that governance rules will be effective in producing greater joint benefits, and that monitoring (including their own) will protect them against being suckered. Ostrom adds:

“Once appropriators have made contingent self-commitments, they are then motivated to monitor other people’s behaviors, at least from time to time, in order to assure themselves that others are following the rules most of the time. Contingent self-commitments and mutual monitoring reinforce one another, especially when appropriators have devised rules that tend to reduce monitoring costs."

That contingent self-commitment strikes me as an adaptation of the principle of mutual benefit to a cooperative enterprise.

Self-governing communities

The principle of mutual benefit also has potential to play a role in democratic government. I am personally willing to commit to participating in the political process in ways that will promote mutual benefits for us all, and to refrain from using politics opportunistically to obtain benefits for myself and my family at the expense of others, provided the behaviour of most other people indicates that they have made a similar commitment.

However, from my observation of national and state politics, it is obvious that few other people behave as though they have made a such a commitment. So why would anyone? Norms of reciprocity have been lost to democracy at a national and state level. Most voters now seem to view the taxing and borrowing powers of government as a common pool resource to be used for their own personal benefit. Rather than improving the opportunities available to the ‘average citizen’, the outcomes of politics often diminish incentives for productive activity and constrain the opportunities available to all (except perhaps those most adept at rent seeking). 

We have learned from Elinor Ostrom that Garret Hardin’s “tragedy of the commons” story – impoverishment through over-use of common property resources – is fiction when boundaries are clearly defined, and participants voluntarily commit to follow appropriate norms of behaviour. Rather than a tragedy of the commons, wealthy societies are now experiencing a tragedy of democracy at a national and state level.

In his book, The Meaning of Democracy and the Vulnerability of Democracies, Vincent Ostrom set as an ideal the re-establishment of self-organizing and self-governing communities in which each person “is first his or her own governor and is then responsible for fashioning mutually productive relationships with others”. Such communities would be characterised by “mutual understandings grounded in common knowledge, agreeable patterns of accountability, and mutual trust”. As discussed in my review of his book, Vincent Ostrom wrote of re-establishment because American society in the 19^th century was observed by Alexis de Tocqueville to have many of the characteristics of self-organizing and self-governing communities. They were the kinds of communities in which those seeking mutual benefit were more than likely to be rewarded personally and collectively.

Blockchain technology

Does blockchain technology offer potential for the principle of mutual benefit to be exercised to a greater extent in cooperative enterprises and local communities? A few months ago, while reading The Social Singularity, by Max Borders, I became enthusiastic about the potential for blockchain and smart contracts to enable people to act together to produce some public goods cooperatively without involving central government. Since then, I have learned a little more about blockchain and am still enthusiastic about the potential it offers.

There are good basic explanations of blockchain on sites such Upfolio. For present purposes, all you need to know is that blockchain technology is designed to let people safely undertake transactions without the need for trust, or middlemen to check transactions. It offers a new mechanism to manage opportunistic behaviour once property has been given a digital identity. Smart contracts are self-enforcing. They require no external authority for enforcement because all conditions of the contract are managed on-chain.

In a recent paper, Sinclair Davidson, Primavera De Filippi and Jason Potts make a strong case for blockchain to be viewed as a new form of economic institution. They define a Decentralized Collaborative Organization (DCO) thus:

“A DCO is a self-governing organization with the coordination properties of a market, the governance properties of a commons, and the constitutional, legal, and monetary properties of a nation state. It is an organization, but it is not hierarchical. It has the coordination properties of a market through the token systems that coordinate distributed action, but it is not a market because the predominant activity is production, not exchange. And it has the unanimous constitutional properties of a rule-of-law governed nation state, by complicit agreement of all “citizens” who opt-in to such a Decentralized Collaborative Organization, and the automatic execution of the rules of that DCO through smart contract enforcement” (“Blockchains and the economic institutions of capitalism”).

Transactions are likely to occur in blockchains, rather than in firms or markets, when blockchains offer the prospect of reducing transactions costs, e.g. by reducing costs of monitoring managers to ensure that they are acting in the interests of owners. Blockchain organisations can be expected to be carved out of those parts of firms in which they lower transactions costs.

My understanding is that the transfer of transactions to blockchains has the potential to reduce transactions costs in all forms of enterprises – whether they are owned by investors, producers, consumers or governments.

As with markets and firms, blockchain systems offer people the opportunity of being able to get what they want by helping others to get what they want, even though the self-enforcing nature of the blockchain itself means that those who seek mutual benefit will gain no additional advantage by appearing to be trustworthy.

It is worth noting, however, that when using smart contracts to facilitate governance, trust is transferred to the code that defines them, and to those who write the code. That point has been made by David Rozas, Antonio Tenorio-Fornés, Silvia Díaz-Molin and Samer Hassan in a recent paper (“When Ostrom Meets Blockchain: Exploring the Potentials of Blockchain for Commons Governance”)

Who will you trust to write the code? I imagine that smart contracts would be no easier for a layperson to read and understand than the intellectual property agreements that we all have to claim to have read and understood before we can update our computer programs.

It seems to me that some of Henry Hansmann’s comments about the benefits of ownership of enterprises are relevant to the question of whose code is trustworthy. Even though the owners of an enterprise may have limited ability to reduce transactions costs by monitoring managers, ownership provides them with some assurance that managers are not serving interests that may be opposed to their interests (Henry Hansmann, The Ownership of Enterprise, 1996, p 48). Similarly, producers, consumers and investors could each be expected to place most trust in code written by technicians whom they perceive to be serving their respective interests. In many instances, distrust of code will be less of problem and transactions costs will be lower if multi-purpose DCO architecture can be purchased off-the shelf.

Backfeed, an experimental operating system for decentralized organizations, may well turn out to be a good example of blockchain technology which enhances opportunities for those seeking mutual benefit in cooperative endeavours. Its inventors claim that it enables “massive open-source collaboration without central coordination”. Backfeed’s governance system enables a decentralized network of peers to reach consensus about the perceived value of any contribution within the network, and reward it accordingly. Those participants who feel that their contributions are not adequately valued by their peers have an opportunity to fork-off into different communities that might be more appreciative.

Backfeed may or may not succeed but, one way or another, it does seem likely that blockchain will enhance our opportunities to seek mutual benefit in cooperative enterprises.

When can economists adopt a contractarian approach to provision of policy advice?

Cartoon by Peter Nicholson: from this site

Robert Sugden explains his use of the term ‘contractarian’ thus:

 “the most fundamental characteristic of this perspective is that a recommendation is addressed to a set of individuals, showing those individuals how they can coordinate their behaviour to achieve mutual benefit."

This post is prompted by my reading of his book, The Community of Advantage, reviewed on this blog a few weeks ago.  

Sugden’s adoption of a contractarian approach was inspired by the work of James Buchanan, in which social arrangements are assessed from the several viewpoints of individual members of society considered as potential parties to a social contract.

Contractarian reasoning implies a baseline of non-agreement from which benefit is measured. For agreement to occur, each party to a potential agreement must recognize that, for all the parties severally, agreement is more beneficial than the status quo.

Contractarian reasoning is readily applied in considering adoption of general rules. When individuals consider adoption of a general rule, a veil of uncertainty about future circumstances often makes it difficult for them to assess where their interests might lie. They become more likely to identify as an “average” citizen than a member of a narrow interest group.

Sugden contrasts the model of contractarian reasoning with two other approaches to normative economics, the model of the benevolent autocrat and the model of public reasoning. He suggests that each of these different approaches to provision of public policy advice, may be appropriate, depending on the circumstances.

When economists employ the benevolent autocrat model, they are providing executive decision-makers with their best judgements about what should be done. In stylized terms, Sugden suggests that they are implicitly saying: “If I were an impartially benevolent autocrat, this is what I would do”. In my experience, when economic advisors employed by governments are striving to be their best selves, they tailor their advice to the values and priorities of the governments they are serving. That doesn’t mean that bureaucrats should attempt to ‘second-guess’ political reactions in providing advice. As Roger Kerr pointed out, soon after leaving the New Zealand Treasury to become executive director of the New Zealand Business Roundtable, attempts to second-guess political reactions “can lead to a narrowing of policy options” and does less than justice to those politicians who are prepared “to tell the story like it is”. Roger explained:

“Economists of all people should be conscious that the performance of bureaucrats in trying to pick winners and losers in the policy-advice market is likely to be as unimpressive as in the industrial domain – and for much the same reasons, namely the lack of information and incentives. Perceived political constraints are not always immutable. They can be shifted by reasoned analysis and well-constructed strategies for policy change, developed by interaction between political managers and technical advisers” (Roger Kerr, ‘Ideas, interests, experience and the economic adviser’, World Economy, 10 (2) June 1987).

The model of public reasoning provides a stylized view of politics as an arena for debate about the public good, where the participants strive to deploy impartial and reasoned argument. By contrast, in the real world, many participants in public debate on economic policy strive to deploy arguments to advance their own interests. Members of the economics profession who participate in such debates have potential to play an important role in ensuring that the merits and demerits of the arguments advanced are subjected to appropriate public scrutiny. That role has been made part of the public policy advisory process in Australia by being embodied in the public inquiry system of the Productivity Commission and its predecessor organisations.

My mention of the ‘economics profession’ brings to mind some provocative comments of Ludwig von Mises, an eminent Austrian economist, about professional economists:

“By virtue of their connection with definite parties and pressure groups, eager to acquire special privileges, they become one-sided. They shut their eyes to the remoter consequences of the policies they are advocating. With them nothing counts but the short-run concerns of the group they are serving. The ultimate aim of their efforts is to their clients prosper at the expense of other people. They are intent upon convincing themselves that the fate of mankind coincides with the short-run interests of their group. They try to sell this idea to the public …” (Human Action, fourth revised edition 1996, p 869).

I disagree with Mises description of such conduct as professional. It is unprofessional for economists to sell their souls to interest groups. It doesn’t matter how much knowledge of economics they might have, those who sell their souls are not behaving like members of an honourable profession.

Improving policy transparency

Some people with institutional expertise in public policy development have suggested that the advisory role of economists should be more akin to provision of information than normative advice. Bill Carmichael, a former chairman of the Industries Assistance Commission (a predecessor organisation to Australia’s Productivity Commission) argued for greater efforts to improve ‘policy transparency’ – to improve public understanding of the economic effects of policies that assist particular groups at the expense of the broader community. With reference to trade protection policies, he argued:

“Public availability of information about the effects, on national welfare, of responses which avert adjustment to economic change would improve domestic understanding and narrow the range of disagreement about what policy responses are appropriate. While it would not eliminate resistance to change by those who will be adversely affected, it would enable the grounds for such resistance to be weighed against the community-wide effects” (W B Carmichael, ‘National Interest and International Trade Negotiations’, The World Economy, 9 (4) December 1986).

Bill’s reference to ‘national welfare’ might raise tangential issues in the minds of some readers about the impossibility of aggregating, or averaging, the welfare of different individuals in a meaningful way, and the value judgements that are involved in using per capita GDP, or any other measure of income, as an indicator of welfare. In order to avoid getting bogged down in such issues, I interpret ‘national welfare’ as code for ‘the opportunities available, individually and collectively, to members of the community’.

When economists view their role as providing information publicly on the impact of policy change on opportunities available to various groups in a community, it seems to me that they are adopting something close to a contractarian approach to provision of policy advice. Such information enables the various groups affected to obtain a better understanding of how they are likely to be affected by policy change. Nevertheless, a public policy process of weighing the interests of those adversely affected by change against the interests of broader groups is likely to fall short of the ideal of a contractarian negotiation because the outcomes are unlikely to receive unanimous support. Unanimity is rarely possible since those adversely affected by change often have a strategic interest in withholding their support in the hope of obtaining a better outcome from the process. Perhaps the most that can be hoped for is that by the time policy decisions are made, the process will have persuaded those adversely affected by change that they are unlikely to benefit from lobbying to have the decisions reversed.

Compensation

Robert Sugden suggests that contractarian advisors have a better chance of achieving unanimous support for policy change if they give attention to compensation. When a policy proposal imposes significant harms on a group of individuals, the addition of compensation payments may have potential to make it mutually beneficial.  Unfortunately, Sugden doesn’t discuss the potential for those opposed to change to negotiate strategically in a context where policy outcomes are likely to be strongly influenced by the political muscle of narrow interest groups. When governments seek to negotiate compensation packages with powerful interest groups, they risk putting the rest of the community in a position somewhat akin to seeking to negotiate a settlement with an extortionist. The above cartoon relating to negotiations for deregulation of the Australian sugar industry illustrates the problem. After receiving substantial adjustment assistance to gain acceptance for deregulation about a decade ago, the industry has since been re-regulated.

Nevertheless, it is possible to cite instances where compensation payments do seem to have enabled better policy outcomes to be achieved in contractarian policy negotiations. In an article published a couple of years ago, reviewing literature on agricultural adjustment in Australia, Geoff Edwards, and I expressed the view that “economists advocating adjustment assistance during the 1970s helped shift the focus of agricultural policy in Australia away from price support and input subsidies, leading to greater acceptance of policies to facilitate adjustment rather than to impede it”.  We concluded that “adjustment assistance can sometimes enable less efficient and less equitable forms of assistance to be avoided” (Geoff Edwards and Winton Bates, ‘Antipodean agricultural and resource economics at 60: agricultural adjustment’, Australian Journal of Agricultural and Resource Economics, 60, pp 573-589).

Conclusions

So, when can economists adopt a contractarian approach to provision of public policy advice? My experience leads me to think that a contractarian approach has been used effectively in considering changes in the ‘rules of the game’ relating to economic policy in some countries. During the 1980s and 90’s, some economists in Australia and New Zealand adopted important elements of a contractarian approach in successfully proposing trade liberalisation, privatisation of public enterprises, regulatory reforms and government spending restraint. The focus of analysis was the potential for changes in the ‘rules of the game’ to improve the opportunities generally available to community members. Reports were published with a view to obtaining broad community support for changes in the rules. Many influential opinion leaders were receptive to the view that the rules of the game needed to be changed in order to avert looming economic disaster.

For reasons expressed elsewhere on this blog (for example here and here) I think the democratic political processes of western countries have been corrupted so much over the last few decades that in the event of a future economic crisis it is unlikely to be possible to implement reforms to prevent emergence of widespread economic misery. I doubt whether use of a contractarian approach to policy advice will help much in this context, but such an approach is still more likely to be successful than the alternatives available. The best contractarian advice I can offer to individuals is to reduce your dependence on government as far as possible, and to seek out opportunities for mutually beneficial interactions that do not involve governments.

Over the next few decades, I expect that economists adopting a contractarian approach will play an increasingly important role in helping people to use new technology to negotiate mutually beneficial agreements to obtain what they want without government involvement. I will write more about that later.