Gillard’s Revenge of the Physiocrats

In the 18th century some French economists called the Physiocrats believed only agriculture and those who worked the land created wealth. Fortunately they didn’t last long. JAMES BOND, FSC chief economist, writes. We all know that any good or service that is traded generates wealth and economic growth. We also know that Australia’s largest industry, contributing 10.8 per cent to gross domestic product, is financial services. We know our third largest export behind coal and iron ore is education, and that services account for 85 per cent of employment in Australia and 80 per cent of GDP. Or do we? The ghosts of the Physiocrats stalk the suburbs and towns of Australia. This is understandable. The concept of gains from trade is complex enough and only taught in university economics departments. Applying the concept to exporting legal services or education services becomes ethereal. Things that are grown or dug out of the ground seem to have an inherit value that services do not. What is surprising, however, is that despite knowing better, our politicians seem to still be influenced by the philosophy of the Physiocrats.

The Rudd Government was probably the most services-friendly government Australia has had. The Johnson Report on Australia as a financial services centre, championed by Rudd, and driven by Chris Bowen, finally gave our largest sector, financial services, some attention from government that wasn’t about how it should be regulated. The government needs to continue to recognise the importance of financial services to the economy. However, there are some discouraging signs. There remains a view that if you don’t grow it or dig it out of the ground, put it on a train and then on a ship, it deserves less attention. Too often services are an after-thought behind mining, manufacturing and agriculture. The composition of the Federal Cabinet indicates a decline in the importance of services for the government. In the current Cabinet we have a Minister for Agriculture who represents 2.6 per cent of the Australian economy and a Minister for Resources representing 7.7 per cent. The services do not fare so well.

Our third largest export sector behind iron ore and coal, tertiary education, was left out of the Ministry altogether. After a rebuke from the universities, the Prime Minister quickly released the Ministry Mark II which added Tertiary Education to the responsibilities of the ‘Minister for Skills, Jobs and Workplace Relations’. From the title it is clear that tertiary education is really there to provide skilled labour to fill jobs, not an industry in its own right that exports $15.5 billion a year. After enjoying a Cabinet seat for the first time under Kevin Rudd, financial services –worth more in GDP than mining and agriculture combined – has been demoted to the outer Ministry. Tourism gets a seat in Cabinet, but is a rump to the rest of the Minister for Resources, Energy and Tourism’s portfolio. The Ministry for the Services Economy – a development under Rudd – has disappeared altogether. Physiocrat thinking is obvious in the department presided over by the Minister for Innovation, Industry, Research and Science. It has “manufacturing’, “automobiles” and “pharmaceuticals” divisions but not one division devoted to a services industry.