Glenn Withers, AO, is Professor of Public Policy at Australian National University. He is a Harvard graduate and has chaired a range of Australian government inquiries and bodies, including the Economic Planning Advisory Commission and the National Population Council. His most recent work in the field is a Chifley Foundation report on regional migration, a position paper on population for the Business Council of Australia and assistance to the Malaysian Government on reforming foreign worker policy. Glenn also works on other human resource issues, public expenditure, cultural policy and economic reform. He is a Fellow of the Academy of Social Sciences in Australia.

Is the dismal science changing?
by Glenn Withers

Session 3: Questions/discussion

This morning we have talked a lot about the problems of the way we work in universities. In particular, we organise ourselves in disciplines. Indeed, universities have been one of the long-lived institutions of this world, perhaps because of some of the strengths of disciplines and what they bring to our understanding of aspects of reality and the world.

But human problems are inconveniently holistic. They don't operate the way disciplines wish they would. There are many facets to any problem and no one discipline can command all of those facets as we operate within our knowledge structures today. So, correspondingly, human problems have been rather long-lived – longer lived than universities. For all their contributions, universities have not conquered the truly challenging intellectual battle of interdisciplinarity; it is the great frontier of the mind and we continue to wimp that.

Within its silo, what does economics contribute? On matters of population there is a healthy subdiscipline – as Richard [Denniss] indicated, marginal, but important – of demographic economics and, in areas like immigration, for instance, and within the straight area of the discipline, it has served a useful purpose in addressing and indeed dispelling a number of economic myths. It might seem evident on casual inspection that immigration might create unemployment, inflation, balance of payments crises, wage inequality, deterioration of public budgets and the like. Numerous studies, from all sorts of ideologies, methodologies and data, show that they are basically myths rather than realities. Very few studies show anything seriously in the opposite direction – a useful contribution and something relatively rare in Australian economics, given the scale we operate at, which is a consensus-type result. Normally we look to, unfortunately, say, North America for consensus estimates for metastudies that bring all these things together; in this area we have a useful Australian contribution.

There are also many economists now employed on the other side of the population-environment equation that we are here to address. We have a flourishing resource economics, environmental economics and ecological economics group of scholars here and globally. Indeed, the basic pessimism of Frank Fenner (quoted from the Academy Newsletter about Frank's worries about the global future, see next slide) derived from some very venerable economics. The classical model of growth that began soon after Adam Smith's Modern Economics saw pressure of population on resources producing a subsistence, stationary state. Hence economics earned the label 'The Dismal Science'.

That label continued for some time. As the Malthusian vision became outdated as we moved from an agriculturally based economy into an industrial economy based on the Industrial Revolution, Marxian theory and later Neo-Keynesian theory took over and still saw the world as somewhat dismal. It saw the world now able to transcend the limits of natural resources, particularly agricultural land, but saw the world as still exploitative, particularly in the Marxian version, and unstable – subject to booms and busts – in the Neo-Keynesian version.

However, it is interesting that since the 1950s the Dismal Science has changed itself, it has reinvented itself. Neo-Classical economics, which is not the same as but helps underpin rationalist economics – which is a much more ideological version of Neo-Keynesian economics, which sees markets as always right in rationalist economics – is much more open to persuasion on these sorts of matters and does have a greater optimism. The period of the long boom (if you like, the Menzies era in Australian terms) caused economists to review the way in which the world might be viewed in terms of how growth can proceed, and most recently the new growth theory of endogenous growth, which has taken over from that, is even more optimistic because it sees knowledge as a basis for continued sustainability of growth.

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Frank [Fenner], we were told in the Academy Newsletter, was pessimistic about the future because of the increasing world population, the gap between the wealthy and the poor, and global warming – some sentiments that have been shared here already. Yet on each, to our post-1950s economists, there is some cause for optimism. Population, for instance, is peaking because it is endogenous to economic growth. Actually, contrary to what Richard Denniss indicated, many economists see population as endogenous. It is not just 'out there' and left alone, it responds to growth.

Indeed, combined with social justice – that is, the liberation of women's position in life such that they control their own fertility, they can work and have independent lives – that combination with affluence which has enabled that to happen has meant we are peaking the world's population by the middle of the century and declining thereafter. Now, that is still 3 billion to go before we peak, a real problem for managing the world's resources, but the underlying forces of the population transition arising from affluence and social justice joined, and education and liberation of the female half of our population, have made that almost inescapable. It is yet to reach Africa and parts of South America, but around the rest of the world there is a dramatic change in the population trajectory on the globe, one already well evident in Australia too, for our natural increase.

Global poverty, too, is shrinking, I think. While in absolute numbers it is not – we have still got that problem and the numbers affected are immense and worrying – we have the transition in the Chinese economy and the Indian economy in the last 15 years with the release of authoritarianism. It was A K Sen who said that no country that has a free press ever has a famine. What you get in an open and freer society is the capacity for affluence to spread and grow. This is not trickle-down, it is actually boot-strapping. And that's happening dramatically.

If it happens to those populations, then the world picture is transformed, and that seems to be in place – not guaranteed, because of all sorts of problems in ensuring that continues to happen and all sorts of problems in the resource use of that. But the poverty dimension of it is, I think, a cause for some optimism now coming in those countries in particular, compared with where we have been in the past. And even the IPCC, over global warming, may be too pessimistic. You will be all familiar with the numerous missives from Ian Castles and David Henderson about how we may be overstating the pressure in those analyses, simply from some fundamental measurement errors in economics about using exchange rates rather than purchasing power parity. But perhaps more optimistically than that debate over measurement, someone like Warwick McKibbin, here at the ANU, in his design for mechanisms for dealing with global trading, I think is providing causes for optimism as to a way forward in these sorts of areas.

But I am less optimistic about global warming than I am about the others, because that illustrates where economics is weakest. That is, it reflects a problem of market failure in natural systems, where the spill-overs are not only large but pervasive, such as to affect the system in a way that economics, with its micro-focus, as Richard Denniss indicated, its small-scale focus on particular decision making, doesn't allow. The market doesn't reflect this, therefore the market doesn't economise properly on these impacts.

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But is it an eco-catastrophe facing us? You are familiar with all these things – on the driest inhabited continent, the waters degraded, congested and polluted cities, and as Bob Carr would add, not as a scientist but as someone convinced, we are facing an Australia full up to the coast.

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We have got more per capita renewable water resources than the USA; as Bob Wasson hinted, our northern plains are capable of sustaining much greater population – Montreal to Miami is less than Cairns to Melbourne and it has got 21 cities as large as or larger than Sydney – and so on.

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My point is not to argue those in particular, but indeed to contrast the two. They are trivia from both sides of the silos in this population-environment debate. They are debating points we put forward in the attempt to counteract the sniping from each side of a disciplinary divide.

There is, however, some importance that I may add with more substantive research for why, within the population-environment debate, we do have to worry about the size of our population for economic purposes – economic purposes that might spill over in some ways to the interests of the membership of the Australian Academy of Science.

A 1 per cent increase in total output has been shown to increase the rate of innovation significantly. I will drop to the bottom two dot points in particular, in the interest of time. More than 50 per cent of technology diffusion within country largely comes from internal communication networks, rather than the Net or technology. And technology spillover is halved at 1200 kilometres. That is, we need people to indeed enhance technology and innovation substantially. It is quite fascinating that the digital revolution has not solved these problems and the transmission of knowledge via interpersonal communication is increasing over time, according to studies in the American Economic Review.

How do we square the circle, then, of a contrast between population, economic silos and environmental science type silos, to take the two core disciplines involved here? It seems to me we need to deploy economic insights where the activities are well suited to markets and property rights – as with saleable resources, they are not purely so. And the reason for doing that is that the market does encourage, more than most social inventions, conservation and innovation. That is, it encourages us where things are scarce to reduce our use of those scarce items, and where things are scarce to find better ways of doing things to get around the scarcity. That's a wonderful human invention which is a self-adjusting property, provided all that is important is taken account of in the market process. But it's not. We need to move to social markets or regulation where the activities have spillovers and system affects beyond that calculus of less or more.

We need to recognise, indeed, that we have legitimate multiple objectives. We have as a society very important economic objectives, we have as a society very important social justice objectives and we have as a society very important environmental objectives. And we need to work much more closely together to seek win-win solutions.

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We need a way forward on population policy. Let me just mention item 6 here: Complementary policies in education, infrastructure and the environment are required, including conditionality. I don't have any problem with our not expanding population substantially unless we have in place appropriate limits and conditions on what we wish to achieve in the environment at the same time. If our politicians don't deliver on that, then they should not be able to expand the population substantially through immigration. Conditionality I think is a very reasonable policy proposition.

Within the academy I think economics itself is being immensely strengthened already by insights from mathematics, statistics, history, philosophy, social psychology, law and political science. It has transformed very substantially in the past 20 or 30 years. The natural sciences need to be added to this; it has been less influential, but vice versa. We need full integrated systems approaches that are mergers and not takeovers, and above all I think we need some civility and respect to go with that interdisciplinarity – more Australia 21-type groups, Wentworth Groups, this symposium, less of the old ways – and please stop the sniping. I think some of the little barbs and crude representations of other intelligent people for their presumed ignorance are not helping in producing a sensible, cooperative way forward.

The National Academies Forum might be an excellent way to sponsor that, and in the spirit of Barney Foran let me indicate some evidence on how diversity and tolerance can pay off. A wonderful study in the American Economic Review of American sporting results in the last 20 years for basketball, football and other major sports showed that there was a 20 per cent advantage to those teams that integrated between blacks and whites over a 15-year period, compared with those that stayed in their own little comfortable silos of racial discrimination and difference. Integration within ethnic-cultural backgrounds was a wonderful stimulus to doing better. I think interdisciplinary stimulation could well have the same effect.