Regular readers will know that I have spent quite a lot of time reading the…
Latest Productivity Commission report – relies on and exploits our ignorance – to undermine our well-being
I had a sense of déjà vu this week when I read the latest release from Australia’s Productivity Commission – Advancing Prosperity – which was released on March 17, 2023 and is a five-yearly exercise conducted by the Commission on behalf of the Australian government. Frankly, if the government was looking to cut spending while advancing material well-being in the community, they could simply tell the Commission to cease doing this work and instruct the staff involved to get real jobs and do something that matters. We just get a regurgitation of GIGO, that well-practiced art of pretending to have something authoritative to say while one is grabbing money out of the till at a rate of knots to advance self-interest! The problem is that the ordinary citizen is ill-equipped to understand any of the technical hoopla that attempts to shroud these types of Report in ‘credibility’, and so is at a disadvantage when trying to determine whether they should support it through the ballot box. Neoliberalism relies on and exploits our ignorance.
As background reading you might like to consult:
1. A continuum of infinitely lived agents normalized to one – GIGO Part 3 (February 6, 2012).
2. OECD – GIGO Part 2 (July 27, 2010).
3. GIGO … (October 7, 2009).
The – Productivity Commission – is a neo-liberal, pro-market agency in Australia that examines big microeconomic issues.
Its origins come from the old Tariff Board, which was founded by the federal government in 1921 as part of the strategy to develop a manufacturing industry behind a tariff wall, using the – infant industry – justification.
In 1974, as the use of tariffs to protect industry were becoming maligned (by the free traders who basically wanted open slather), the government changed the name to the Industries Assistance Commission, which then became the Industry Commission in 1990 and was folded into the Productivity Commission in 1998, along iwth two research bureaus – the Bureau of Industry Economics (BIE) and the Economic Planning Advisory Commission (EPAC).
So, starting out as a body that administered the trade protection policy of the Federal government in the C20t, it has morphed into its current guise, which is to give advice to government on how to deregulate, privatise, outsource and other trash the conditions of workers.
It evolution reflects the way in which the economics profession has evolved over the time span involved.
The sense of déjà vu that I experienced is because I haven’t really thought about the tools and techniques it uses for some time, whereas, when I was a graduate student and a young academic, developing modelling and statistical skills, I was forced to deal with these issues on an almost daily basis.
Indeed, I did my Masters’ degree at Monash University, which at the time was one of the leaders in the field of – Computable General Equilibrium (CGE) – modelling and so I was confronted with it on a daily basis while I studied and taught (as a tutor) in that Department.
CGE models exemplify GIGO.
1. Start with a stack of equations that pretend to be representing the real world.
2. So, the assumed human behaviour bears no resemblance to any human behaviour observed.
3. Further, because complexity predicates against mathematical solutions, the models have to assume just one human (who behaves not like any human) which is called the ‘representative agent’.
4. Same for firms, too much detail is bad, so assume a ‘representative firm’ that behaves like no firm we really observe.
5. Impose a whole lot of numerical parameters on the behaviour of the agents which just reflect the conclusion that you want to reach anyway – so, you believe that real wage increases reduce employment and increase unemployment, so there will be a large negative coefficient (number) assigned to the real wage term in the demand for labour equation.
Simple – GIGO.
6. Change some variable – like a policy parameter – and then trace through the impacts through the input-output industrial structure of the model.
But remember, the trace is totally dependent on the numbers imposed which ‘model’ the responses of different parts of the economy. They just reflect the dominant neoclassical view, so you get out what you put in.
7. Some CGE models are ‘static’ which means they cannot tell us anything about adjustment processes as a result of the shock introduced. They just suddenly take us from one market-clearing equilibrium to the next with no intelligence provided as to how we get there or how long it might take.
Which means all the interesting aspects of policy design are silent.
I recall a quote from Post Keynesian economist Paul Davidson [in the book by Bell and Kristol The Crisis in Economic Theory, Basic Books, 1981, p.157] which describes how mainstream economics uses methods and approaches that renders it unable to embrace real world problems.
It is very applicable to CGE models:
There are certain purely imaginary intellectual problems for which general equilibrium models are well designed to provide precise answers (if anything really could). But this is much the same as saying that if one insists on analyzing a problem which has no real world equivalent or solution, it may be appropriate to use a model which has no real-world application. By the same token, if a model is designed specifically to deal with real-world situations it may not be able to handle purely imaginary problems.
Post Keynesian models are designed specifically to deal with real-world problems. Hence they may not be very useful in resolving imaginary problems that are often raised by general equilibrium theorists. Post Keynesians cannot specify in advance the optimal allocation of resources over time into the uncertain, unpredictable future; nor are they able to determine how many angels can dance on the head of a pin. On the other hand, models designed to provide answers to questions of the angel-pinhead variety, or imaginary problems involving specifying in advance the optional-allocation path over time, will be unsuitable for resolving practical, real-world economic problems.
I should also emphasise that I am not against simplified (abstract) modelling. Clearly, it is essential if you want to gain some traction on a real-world problem that is complex.
But when the abstraction level makes it impossible to gain any understanding of how the real world operates and/or the results are totally dependent on the assumptions that you start with, so that final output tells us nothing meaningful and just validatesof the original ideological position, then I consider the exercise to be pointless from a scientific or academic perspective.
You may as well just say you want workers to have lower real wages because you want capital to get higher profits rather than go through all the equation diversion that tries to justify that desire in a smokescreen of technique that barely anyone can understand or contest.
Latest Productivity Commission Report
Reading the latest 5-year review from the Commission brought all that back to me – unfortunately.
It demonstrates that my profession has made very little intellectual progress in the face of the massive empirical dissonance that has become obvious to most people over the last 15 years or so.
Most people don’t know why the economics profession is failing to deal with the real world and why their predictions are always so wrong, they just know something is very wrong.
But, I know why because I know what these techniques are and how they work and why these exercises are GIGO.
The latest Productivity Commission report – Advancing Prosperity – released March 17, 2023 is a nine-volume effort, which leaves me frustrated as to why such bright people and many of them, are occupied producing such nonsense instead of being employed to advance humanity.
Of course, that is not the way they see it.
They are so locked in Groupthink that they actually think they are doing good work.
The final report is so full of ideology (free market, market clearing, etc) and neoclassical economic folly that a ‘burning the books’ strategy would be the best way for government to deal with it.
The Commission has a track record in pressuring the federal government to privatise, outsource, pare back government services, marketise anything moves and then some, and advancing the notion that if there is not profit to be earned in an activity then the activity is not worth thinking about.
Major policy initiatives over the last decades reflect the bias towards this sort of thinking to the point that we now have major areas of what should be ‘public space’ being managed and profit-gouged by private entrepreneurs.
Think about vocational education and training which has been forced into the private-for-profit, competitive market – where hosts of parasitic corporations and fly-by-nighters extract millions from government and produce hardly any effective outcomes.
There have been many notable private training provider collapses in recent years where the operator has been paid massive amounts by government to provide training but then becomes insolvent, leaving stranded students everywhere, and a safe nest egg of public money squirrelled away and untouchable by any liquidation process.
Think about the scandal of aged care where the federal government sold off or outsourced this crucial care function to fly-by-nighters.
There was a reason that there were very high death rates in the privately-run federal aged care homes during the early period of Covid while those under state government ownership and control had very low death rates.
Think about the job services sectors – which emerged out of the privatised Commonwealth Employment Service.
In making that shift, the government created a new industry – the unemployment industry – and pays millions to profit-seekers who alledgely are tasked with preparing the unemployed they case manage for work.
There have been constant scandals, rorting, fraud in this sector – and then constant cries of ‘skill shortages’ from business when there is mass unemployment – which raises the question what the millions being paid out doing?
We know what – lining the pockets of these private providers who do as little as possible to extract the largesse of the government.
All of these scandals and dysfunctions are the result of the sort of work the Productivity Commission does and uses to pressure the government.
We learn that there are “five key reform pillars” if Australia is to advance prosperity, one of which is:
Building an adaptable workforce to supply the skilled workers for Australia’s future economy, through education reform, skilled migration and modern, fit-for-purpose labour market regulations.
Cut through the jargon and you arrive at the conclusion that this means:
1. Cutting job security provisions – making it easier to sack workers.
2. Dumbing down education standards.
3. Bringing in low-cost labour to pressure local workers into accepting low wage rises and real wage cuts.
4. Cutting non-standard hours penalty rates and overtime payments.
5. Forcing more expenses onto workers.
All standard Productivity Commission suggestions.
When the employers started their campaign which has achieved some success to date to get rid of penalty rates at weekends they promised, based on Productivity Commission research, that there would be a boom in employment in the services sector, in particular the hospitality areas.
Some years into that experiment what have we seen – higher profits, lower wage outcomes, real wage cuts and no discernable increase in employment.
It was a policy designed to add another dimension to the ongoing strategy to redistribute income from workers’ wages to profits.
And in that context, it has worked a treat.
It is just that the rationale for the changes were always lies.
Another of those “pillars” is:
Lifting productivity in the non-market sector to deliver high quality services at the lowest cost, by changing incentives and culture.
Which means forcing workers to work harder, longer for less pay and security.
More of the same.
The problem for the nation is that when the government ratifies this sort of ideological nonsense by designing policy that reflects it, the outcomes actually undermine the stated objective.
The profit-sector uses the government as its pawn and through funding rules, lobbying and all the rest of it, the state becomes an agent for capital.
So the politicians tell the nation that these shifts will achieve A or B, which sounds good for all, when in fact, the actual motivation is to improve profits by undermining the capacity of workers to defend their interests.
The question then is why would workers go along with any of that when they realise – often after the fact and when the damage is entrenched – that they have been dudded.
As I note in my quarterly national accounts updates, the wage share has been falling dramatically over the decades when all this neoliberal nonsense has been dominant.
There is no longer any credibility in these sorts of ‘reform’ exercises.
In other words, the very group that is needed to advance new ways of doing things to improve output per unit of input becomes alienated from the process because they cannot trust the underlying motivations.
The Commission is big on rhetoric about education – yet our public education system has been degraded by austerity cuts and so-called ‘efficiency dividends’, while increasing volumes of government money goes to advancing new sporting fields in private schools that serve the very rich and few.
To see how nonsensical all this you might consult the technical chapter – 5-year Productivity Inquiry: Whole-of-economy modelling – which provides the detail of the assumptions and the structure of the CGE model.
This is where the déjà vu really hits.
1. Capital is mobile and flexible – which means machines etc can move without cost between uses. I would love to see that.
2. Investment in capital stock is arithmetically determined by the size of the capital stock – one goes up the other goes up. There is no place for uncertainty and flights of fancy, which psychologists will tell you really drives the investment cycle in the real world.
3. Foreign investment is “not affected by domestic variables or policies” – try understanding that if you are Russia at present!
4. “Government spending is assumed to have no effect on the model’s productivity parameters” – yet education is claimed to be a clear productivity-augmenting activity.
In 2022, 65 per cent of students were enrolled in government schools (Source).
5. “Government tax rates are exogenous, except for household income tax rates that endogenously adjust to balance the government budget” – so there are no fiscal surpluses or deficits. The currency-issuer has no net spending effect on the economy.
6. “Wage rates are determined through market clearing of individual group labour supply decisions (via a utility maximisation process) and industry labour demand decisions (via a cost minimisation process). Any type of labour supplied can be used across any industry (that is, labour is perfectly mobile)” – so no unemployment (there is always market clearing) and excess labour supply can move anywhere, anytime to new sectors, firms, regions.
Believe that and I will sell you the Sydney Harbour Bridge! E-mail me for a good price.
7. “The primary model simulations assume that there is no unemployment, and that labour markets fully clear” – as above.
They do some simulations based on wages being set above the ‘clearing floor’ – that is, they consider real wages and employment move inversely – the typically neoclassical approach, which, however, fails to accord with reality.
The problem is twofold:
1. These reports are a massive waste of the resources that go into creating them.
2. They have a disproportionate influence on government policy which have led to growing policy disasters that beset our country – and reflect similar policy failures right around the globe.
The other problem is that the ordinary citizen is ill-equipped to understand any of this and so is at a disadvantage when trying to determine whether they should support it through the ballot box.
Neoliberalism relies on and exploits our ignorance.
That is why it has prevailed.
That is enough for today!
(c) Copyright 2023 William Mitchell. All Rights Reserved.
This Post Has 11 Comments
My own lack of ability frustrates me no end. But not as much as seeing others with the skills and intelligence I lack throw it all away to advance neo-liberalism.
“Frankly, if the government was looking to cut spending while advancing material well-being in the community, they could simply tell the Commission to cease doing this work and instruct the staff involved to get real jobs and do something that matters”
We should have a list of such institutions across the nations that could be shut down and nobody would notice.
I nominate the OBR and the DMO in the UK.
In eurozone countries, CB jobs are highly paid and disputed by the elites.
You can’t work there, unless you are highly connected.
I guess they are making something, like statistics or the sort of studies they do in Australia, but they are as useless as the bank itself.
The only visible activity from the CB is the emission of junior bonds, now made popular by the rise of interest rates.
Funnily, reading through this blog post (highly recommended), similar things just happened to my country – recently Thai cabinet passed national strategic plans for the next decade. When I read it through, I fully understand what bill means and feel pretty much the same thing. So I decided to take the entire cabinet to the High Administrative Court to stop the order being carried out and to take it back for revision (the document is about 700 pages long).
I do believe also it will take the country (Thailand) more backward than forward as usual. This is because it is completely ridden with microeconomic thinking and hence very ill conceived policies. I am looking forward to present my case in court (it has a case number now waiting for further action decisions). Let’s see how far this will go. But let me say thank you to Bill et el., and all, for sharing the MMT knowledge to the public and me! I will make good use of them.
I’ll call a spade a spade. That was a strawman attack on CGE modelling. I am not defending the PC’s chosen model implementation. I am saying that any assumptions are clearly spelt out by the modeller. You can have super right wing assumptions – and these will appear in the equation system for everyone to see and interrogate. You can input super left wing assumptions (I have seen Keynesian labour market implementations and the results are very different to neoclassical, including in the long run). Each of the observations (weaknesses) you make at the end can be easily overcome and there are models that deal with global trade, capital flows and foreign policy shocks.
If you have the theory, it can be modelled. You are conflating your despise of the modellers’ ideology with the model itself. If you think you know better about the sensitivity of the parameters/coefficients, then tell somebody. Given that you are an accomplished econometrician, then you will have measured various elasticities and have well-informed ideas about labour productivity, capital investment models, etc. Put it out there and it will be tested. It’s not hard to validate the forecasts of a CGE model. The track record ain’t bad.
Australia does CGE modelling better than anyone. There are numerous well specified dynamic CGE models. When it comes to detailed industry and sector results, these models stand head and shoulders above their counterparts. The key weakness, I think, is the treatment of the financial sector. They struggle with the endogeneity of money and could strongly benefit from an MMT overlay.
Neoliberalism relies on ignorance? Do humans make decisions based on knowledge?
All ideologies seek to exploit ignorance. Why should neoliberalism, uniquely, succeed in the attempt?
What is the psychological role of the economy in our civilization? Read “Eros and Civilization.” (Read “Civilization and Its Discontents” first.)
Neoliberalism—its conception of “liberty”—prevailed because the neoclassical synthesis and the post-war consensus failed, in the seventies, to create an economy that could play the necessary role in fulfilling man’s psychological needs.
Neoliberalism is doomed, of course. For just as the “policy bind” of high inflation and low growth tripped-up the neoclassical synthesis, so neoliberalism will be unable to resolve the conflict between economic liberty and environmental destruction.
Well Joan Robinson said that the reason to study economics was to avoid being mislead by economists…
LOL. With a previous hat on, as Policy Chair of the Design Institute of Australia, I attempted to explain to the PC how design creates value, and how harmonising our designs protection with the EU and US would support the design and manufacture of both high value and high quality mass-produced products in Australia. In their infinite wisdom, the PC determined that the “best” outcome was for consumers to retain the right to choose cheap copied crap, and not be forced to buy original Australian designed and made products – or even original imported ones. The result? Not a manufacturing renaissance, but plenty of busted Matt Blatt chairs dumped in back lanes. The best Australian designers go and work for overseas manufacturers. If we lose these design skills our manufacturing will not recover.
At least I got the word “fabulous” into the transcript.
The PC is long past it’s use-by date. It’s 900 page report should be recycled into poo tickets, with which to wipe the bottom that dumps the commission itself into the can.
‘cut through the jargon’. Cutting through anything to give decent analysis isn’t what we get from the mainstream (here in the UK). The employers of our railway and postal workers are still largely getting away with the industry need for ‘modernisation’. Decipher the code = redundancies, automation at the expense of any non-modernised customer and stripping of pension provision. The latest from privatised Royal Mail bosses is their threat to declare the company insolvent. Thank goodness for the French standing up to Macron. But for catching a rare article in the G that made me more aware of who his reform would hit hardest (as always, poorer manual workers and those with childcare responsibilities, particularly women), I might be thinking that all they had to complain about was the pension age going up from 62 to 64, and think them fortunate as my state pension and local government pension have long since been shoved back to 67 (from 65 and 60 respectively). Still fortunate that I’m male nearer the end than start of working life.
And dont forget the preaching in all cases of yet more immigration, because ‘skills shortages’ (in other words its easier to hire a foreign visa slave worker who can be pushed around more).
Australia parliment house has a report commenting on a treasury paper on productivity +the Commission’s
They rightly attribute Australia’s low rate GDP per hour worked growth to firms not innovating/investing
“A key reason for the productivity slowdown is a decline in business dynamism (as evidenced by a decline in firm entry and exit rates), which has slowed the rate of innovation and technology adoption by firms and slowed the reallocation of resources to the most productive firms.”
All the policies in the Commission report reduce labor costs ; discouraging investment in training, innovation, automation, efficiency improvements.
It becomes a self defeating circle.
From the top of my head ;
A pro productivity environment would involve,
– tight labour market ( JG)
– high levels public infrastructure investment
-high levels of Public R&D investment
– credit guidance to SME’s
Maybe a public productivity consultancy where firms can access technology/know-how/cheap credit and be encouraged to adopt improvements