Economic liberalism and the opportunities for political favours

Today John Quiggin published a post on ‘probity and economic liberalism’, arguments from which have also been appearing in the thread to this post of mine.

In response to the argument that economic liberalism reduces the scope for wrong-doing, Quiggin offers evidence which I think is in itself pretty much irrelevant: that various governments that introduced some liberal policies also had scandals. But as social scientists often point out, correlation is not causation. All governments eventually have scandals of some sort, and by Quiggin’s standard every ideology stands condemned.

The Latham argument I agreed with was that to the extent government either withdraws from activities or sets neutral rules of the game the scope for political favours is reduced. Because classical/neo-liberalism provides no ideological justification for industry policy and advocates cutting taxes over most forms of government spending it seems to me that it must, to the extent it is successful, have a prophylactic effect on political favours.

Don Arthur came up with an argument as to why this might not entirely be so:

It seems to me that shifting from direct government provision to outsourcing would create new opportunities for cronyism, corruption etc.

I can see this potential problem with outsourcing (though the problems with it here have been more to do with contract design and risk management than impropriety), but outsourcing has mixed reviews from a classical liberal perspective. Just recently, for example, the CIS published Supping with the Devil?: Government Contracts and the Non-Profit Sector, noting disadvantages for non-profits (and government, for that matter) in these arrangements. Outsourcing is not the preferred classical liberal way of delivering goverment-subsidised services. That remains voucher systems, wherever it is possible to use consumer choice.

So overall I think, to the extent classical/economic/neo-liberalism had some influence it would have reduced opportunities for political favours. On the other hand, despite the massive theoretical scope for political favours created by the pervasive modern state, I don’t think this is actually a major problem. The reason the corporate welfare state is bloating is not that any of the Labor Cabinet are crooks. They actually believe they are doing the right thing. Which is worse I am not sure.

27 thoughts on “Economic liberalism and the opportunities for political favours

  1. I see your logic, I just don’t see the point. No government at all would produce zero chance for political favors – would that be a good thing? Given that we all agree to have (these days) a fairly complex level of government, the problem is to have processes that reduce the opportunities for favors/corruption. We can hardly say that because we can’t guarantee there’ll be no opportunity for favors, we should just reduce the size of government.
    Surely you have to look at the pros and cons of the policy in question – assistance to the car industry, or whatever – and the risk of the policy producing opportunities for political favors is something best dealt with by other means.
    So Latham’s point isn’t worth much: neoliberalism might have a “prophylactic effect on political favours”, but at the cost of denying ourselves what we want out of governments.


  2. In my comment at Quiggin’s I go on to say:

    “Of course there are certain kinds of corruption and favouritism that flourish in systems of direct government provision (nepotism, the spoils system etc) but over time, governments in developed nations have found ways of minimising these opportunities.”
    “In the same way it’s possible to develop systems which minimise opportunities for corruption and favouritism in outsourcing.”
    Should we have a voucher system for prisons?


  3. Come again, Russell? With respect to your second paragraph, do you really mean that we should assess policy in a theoretical vacuum, and not consider its real-world impact?

    Or is corruption not a cost relevant to cost-benefit analysis? Ah, I had forgot, you don’t believe in cost-benefit analysis!

    Further, is it really the case that known real-world interactions are best dealt with by other means than the policy design in the first place, even meta-policy?


  4. Russell – Since I don’t think corruption or impropriety in goverment decision making is a big problem here, I don’t think this argument adds much weight to the case for classical liberalism in the Australian context. But as an intellectual point I think Quiggin is wrong on this one.

    Don – It’s not clear whether that is a voucher scheme or simply self-pay. Interesting idea though.


  5. Andrew – It’s self pay. But you could combine vouchers with the option for prisoners to pay a top-up and get a better quality ‘incarceration experience’.

    I’m not suggesting this because I think it’s a good idea but because I think it raises some interesting questions about vouchers.

    For example, in many cases it’s wrong to assume that the ‘service consumer’ is the person who is meant to benefit from the service.

    And there are issues about fairness.


  6. I agree vouchers can’t work in all cases – but they could (and partially do) for most of the big-spend health and education services.

    Whether the prison example is ‘fair’ depends on what the punishment is intended to be. If it is just restricted liberty, I can’t see that the California scheme is conceptually that different from the home detention system in Australia.


  7. outsourcing has mixed reviews from a classical liberal perspective

    to the extent classical/economic/neo-liberalism had some influence…

    Andrew has – correctly, I think – argued in the past that classical liberal intellectuals in Australia tend to be Gramscian “embedded intellectuals” — meaning that they pursue their classical liberal agendas through organisations that have other agenda as well, e.g. business lobbies.
    An inference I would draw (though I don’t know if Andrew will agree) is that the extent to which liberal “true believers” can and do exert influence — and exactly which goals they exercise that influence to achieve — is necessarily constrained by the agendas of their patrons. And also, too, by what they judge to be the limits of what is politically achievable at any given time.
    So outsourcing may be less than ideal from a THEORETICAL classical liberal point of view, but I think in the last couple of decades – in Federal politics, in Victorian politics – plenty of people who have been PRACTICALLY associated with “neoliberalism” have also been up to their necks in various policies — including outsourcing — that have increased the opportunities for cronyism and corruption in our political system.


  8. Alan – As you know, I have resisted the term ‘neoliberalism’ to describe policy shifts in Australia because it gives a fundamentally misleading view of what actually happened here. The reform movement was fundamentally about giving the state capacity to meet the demands placed on it. To some extent that coincided with a classical liberal agenda – shedding some functions via privatisation and competition reforms to increase efficiency and tax revenues from the private sector – but outsourcing and other public sector reforms don’t have much inherently to do with classical or any other form of liberalism, even if as you say people who would call themselves classical liberals were involved in implementation.

    Outsourcing fits into the theory of the firm, which seeks to explain why businesses do some things in-house and contract out others. Outsourcing can take advantage of the specialist knowledge and efficiencies of scale of other organisations, but can weaken control, information flows etc. While this theory is unideological in its original context, resistance of public sector unions and ideological preference for public ownership and control made it controversial for the government ‘firm’.

    One reason to outsource was to break the de facto client relationship public sector unions had with state governments especially. That’s probably been the biggest benefit of outsourcing public transport management in Victoria – while there are still reliability issues, the once chronic strikes are now rare.

    As Don noted, while in theory outsourcing creates opportunities for favours, in practice this has not been a major issue – though it creates issues of its own. If the original tender is not very carefully crafted a high integrity process can lead to sub-optimal outcomes, as the successful bidder will be the party that best meets the tender terms, rather than the party that might do the best overall job. The job network has seen example of this, with firms with excellent placement records not getting contracts. I’ve never understood why vouchers are not used in employment markets.


  9. Some years ago, in the pages of Quadrant, Hugh Emy attacked something he referred to as “liberalism”, by which he clearly meant (though he seemed to struggle to say in straight-forward language) an identifiable movement of people active in Australian politics. Chandran Kukathas replied with a defence of “liberalism” as a tradition of theoretical thought.
    Fast forward to now and this blog thread about probity and “economic liberalism” (which it seems nowadays we must firmly distinguish from “rule of law/checks and balances/restraints on arbitrary govt power liberalism”) seems to suffer from the same equivocation between liberalism as a theory and liberalism as a flesh-and-blood practical movement.
    Thus I don’t think it is “irrelevant” at all when John Quiggin points out:

    The Howard government breached standards of public probity on a scale never before seen with an Australian government…With relatively few exceptions, economic liberals didn’t complain about this.

    I grant that it sounds, in theory, as if economically liberal policies would diminish opportunities for cronyism etc. But looking at the evidence of how “economic liberals” have behaved in practice when they have gotten close to the seats of power (e.g. when riding on the coat-tails of Kennett and Howard) then it appears they are just as big a — if not an even bigger — bunch of spivs and carpetbaggers than their competitors.


  10. “I’ve never understood why vouchers are not used in employment markets.”
    They’ve been tried but they usually don’t live up to expectations.
    For example, in the UK during the early 1990s young people were given vouchers for training. But evaluations of the scheme showed that few felt genuinely empowered as consumers.
    When a young person applied for a training course you’d sign a form and give the provider your number.
    In practice vouchers often aren’t all that different from other funding mechanisms. Their importance is mostly symbolic and more noticeable to politicians than users.
    In welfare-to-work services there’s more emphasis placed on the obligation to participate. Policy makers often regard training and other assistance as a cheap and politically acceptable way of ‘hassling’ unemployed people so that they’ll search for work more intensely and be less selective about the jobs they’ll take.
    In these circumstances, unemployed ‘consumers’ are generally indifferent when it comes to choice of provider. The major consideration is whether the provider’s office is conveniently located (to minimise the hassle).
    To make vouchers work properly, you’d need to do a number of things:
    1. Make participation voluntary.
    2. Open up the market to competition — allow any provider who meets minimum standards to obtain a license.
    3. Provide adequate funding so that providers could offer job seekers a worthwhile and attractive service.
    4. Allow job seekers to convert unused credit into something else they value (eg food or clothing) at a discounted rate.
    The idea behind condition 4 is that if a service that costs the government $1000 is worth less than a $100 worth of groceries to an unemployed person, it’s probably not worth paying for.
    Governments are generally not attracted by schemes with these limitations.
    Personally I’m not convinced that vouchers are the best option for employment services.
    Some info on UK voucher schemes here:


  11. Don – Thanks for this. Is there are problem with the job network system when providers lose their contracts? – it must be quite disruptive for their client jobseekers as well as their staff.


  12. According to Transparency International’s country rankings the Nordic Social Democracies are considerably less corrupt than the Anglo Saxon countries, the latter being closer than most western countries to the economic liberal ideal and the former being closest to the social democratic ideal. See here:

    Since we have actual data to compare there isn’t much need for armchair theorising.

    The only thing left to say is Game, Set and Match John Quiggin, thankyou linesmen, thankyou ballboys …. 🙂


  13. Melaleuca – The corruption index is an opinion survey rather than actual evidence (though of course by its nature that is hard to collect). But it doesn’t prove the point you think it does, because the Nordic countries, while having very high taxes, are actually pretty good on free trade and markets.

    For example, in the Fraser Institute economic freedom index Denmark and Sweden both do better than Australia on business regulation 8.23/10, 7.97 and 7.79 respectively. The two Nordic countries are also slightly ahead on free international trade: 7.72, 7.77, 7.17.


  14. According to the Heritage Foundation’s Index of Economic Freedom, Denmark tops the list on the ‘freedom from corruption’ score.
    The Nordic countries outrank the Australia, the UK and UK on this element of the index.


  15. It’s the same data source on corruption as cited in comment 13; it is hard to compare as there are no real global stats. But it is minimal in both countries and nobody doing business in either place need worry about it. The Danes do better on business and investment freedom then we do as well, consistent with Fraser (I’m not much of a fan of indexes in general, but I prefer Fraser after finding egregious errors in the Australia entry of Heritage a few years back). But to me it is all entirely consistent: while I am sure both countries can do better, they are also both fortunate to have strongly rule-based systems of governance with minimal favour doing.


  16. Two more case studies that demonstrate Andrew is wrong:

    (1) The American health care is about as close as we get in the western world to the economic liberal ideal, yet almost no serious observer thinks the system works and most members of the public want it reformed. However it is almost impossible to reform because the key for-profit stakeholders in the system spend hundreds of million of dollars buying politician’s votes. We don’t get anything like corruption on this grand scale in democratic countries with a comprehensive system of socialised medicine.

    (2) In line with economic liberal thought, the US military outsources many functions that militaries ordinarily perform. This has provided an opportunity for corruption on a grand scale as per Cheney and Halliburton.


  17. Melaleuca – If you can show me a correlation study finding that the relationship between business/economic freedom indexes and the corruption index you are using (not the greatest measure, but I don’t know of a better one) is negative or low I’ll believe that there is a prima facie case to answer.

    Until then, you and Professor Q are left with Don’s theory but without any Australian examples of dodgy outsourcing, and a few unspecified Howard era scandals, with not even an attempt to show how they are linked to the very modest liberal reform agenda of that government.

    To me, it’s just ideological prejudice on your part, and Professor Q’s.


  18. Andrew says: “If you can show me a correlation study finding …”

    I’m sorry but that is naive empiricism, IMO. I’m sure there are plenty of peer reviewed and replicated studies that have come out of left wing sociology departments that your intuition and experience tells you are BS.


  19. You and Professor Q are pushing the proposition that Government X had some scandals and Government X had some ‘neoliberal policies, therefore there is a casual relationship between scandals and neoliberalism. This is perhaps what we could call ‘naive conjecture’, since it comes without clear evidence or an explanatory theory (other than Don’s).

    However, since virtually all governments eventually have some scandals we need a way of seeing whether scandals are unusually likely in governments that also had ‘neoliberal’ policies. Correlation studies don’t prove things, but they often suggest that further investigation could be fruitful. This is your way to prove that your hunch is not BS! It should only take you a few hours to the data entry….


  20. Andrew, in the real world the value of empirical studies is strictly limited in all fields other than the most simple, where only one or two variables are involved, and where disinterested study is a real possibility. The subject matter under discussion here is far too complex and ideologically charged to be amenable to the kind of decisive white lab coat study you envisage.

    In truth I’m not really sure if social democratic or economic liberal systems are more prone to corruption. I wouldn’t be surprised if they were roughly equal but as I say this is essentially an unanswerable question.


  21. Mel:

    The point Andrew is making can be seen far more easily when its taken to extreme.

    If the government decided tomorrow that it would only control 5% of GDP and reverse many of its economic laws you would find that the level of corruption by definition would also have to fall.

    There’s no point in comparing the political shade of the party involved either. Even though Thatcher, Reagan and Hawke are considered neo-liberal reformers (Hawke less so) no one lowered the level of government involvement in the economy. Thatcher arrested it but didn’t lower it.

    Seeing corruption is directly related to the level of government interference it is wrong to look at the political party in power to figure something like this.


  22. The difference between the “anglo” model and the “nordic” model is not as great as people think. Both are versions of a social-democratic welfare state.

    The US health system is not as bad as people think. And it is not accurate to say it’s a free-market system as there is a government provider, extensive regulation and legislation that biases the system towards work-based insurance.

    One of the most “liberal” examples of a health system is the Dutch, who use a voucher system.


  23. John Humphreys says:

    “The US health system is not as bad as people think. ”

    It is actually far worse. About 500,000 Americans are bankrupted by health bills each year. One of the first American truck drivers to be kidnapped in Iraq only went there as he could see no other option for paying the bills for his wife’s cancer treatment.

    The 45 million Americans without health insurance are matched by a further 45 million American with “no frills” insurance. Such insurance is OK for a broken leg but useless if you have a major chronic illness like cancer. If you are in the latter category doctors routinely stop treating patients as soon as the insurance runs out and the credit card defaults.


  24. and 89% of Americans are also very satisfied with their health insurance.

    Anecdotes about a truck driver heading to iraq is not evidence. It’s a 60 minutes story.

    John is actually saying that the US system is NOT a free market in health care. It never was and people who peddle that simply don’t understand the system over there or are badly informed as the system is heavily controlled and mandated.

    89% of Americans basically means that 225 million Americans are very satisfied. That’s evidence that John’s comment:

    The US health system is not as bad as people think.

    is founded on some really solid evidence, not anecdotes about truck drivers in iraq.

    So the objective should be how to provide health care to all that matches that sort of satisfaction rate and doesn’t bankrupt the country.


  25. That bankruptcy stat is sheer BS. In essence, it boils down to little more than that over 500,000 people used bankruptcy to avoid their medical bills, along with whatever else they didn’t pay.

    But shorter Mel: we can’t study anything meaningfully, we just have to emote our way to the answers.

    I prefer clinging to my outmoded useless empiricism, thank you.


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