Economic reform must start with ethics

With inflation tamed, interest rates falling and wages rising, the government of Anthony Albanese has worked itself into a position where it can now develop a range of longer-term economic initiatives.

With this in mind, the government will convene an Economic Roundtable next week to consider ideas about how to best to achieve sustainable prosperity. 

I suspect that the Roundtable will focus on a range of ‘big ticket’ ideas for innovation and reform in areas such as tax, energy, infrastructure, industrial relations and the like. If all goes well, equal attention will be given to areas of social policy that have a major impact on the economy – including in areas such as childcare, mental health, social welfare, etc. Although not falling under a narrow heading of ‘economic policy’, all of these areas have a significant impact on the productive capacity of the Australian economy. In other words, a strong economy depends as much on sound ‘social’ policies as it does on sound ‘economic’ policies. 

However, there is a deeper ethical dimension that we hope will also be taken into account. Over a period of four years, Deloitte Access Economics has been exploring the link between ethics and the economy. Most recently, its work has zeroed in on the connection between ethics and productivity. Their findings are as follows: 

The relationship between ethics and productivity is increasingly recognised in economic literature and international practice. 

There is capacity for trust and ethical behaviour to: 

• Boost worker wellbeing and mental health, which are directly linked to labour productivity. 
• Improve business performance, with higher ethical standards leading to stronger returns on investment. 
• Reduce red tape, by lowering the perceived need for regulation in high-trust environments. 
• Enable economic reform, by building public support for complex policy changes. 
• Accelerate the uptake of technology, such as artificial intelligence, where trust remains a key adoption barrier. 

This has remarkable implications for our nation’s prosperity (in both economic and social terms): 

• A 10% improvement in ethical behaviour yields a 2.7% wage increase and a 1% gain in mental health, worth over $23 billion across the economy.
• A standard deviation increase in business governance is associated with a 7% increase in return on assets. 
• Countries with higher social trust experience 15-19% fewer regulatory procedures to start a business. 
• Aligning Australia’s trust levels with global leaders could lift GDP by $45 billion, or $1,800 per person. 

There should be no mystery in this, and the effects are clear and simple. Much of it comes down to the possibility of reform (of any kind). Identifying areas of reform is relatively easy. The difficulty relies in their adoption. This is because all reform is subject to resistance from those who fear that they will be left worse off. In turn, strong resistance creates friction that either slows or prevents reform – inevitably leading to sub-optimal outcomes for society as a whole. The number of people who fear being left worse off is often greater than the number of people who will actually be adversely affected. Even when people recognise that they are likely to benefit from reform – they will still oppose it in the belief that the ‘people in charge’ cannot be trusted to ensure that the benefits and burdens are fairly distributed. In other words, it all boils down to questions of trust. And as economists have known since the dawn of their ‘dismal science’ – high trust=low cost and low trust=high cost. 

Yet, trust itself is a function of ethical alignment. Ethics, and the trust it engenders, reduces ‘friction’. Thus, trust is a catalyst and enabler of productive reform. To put it simply: 

Good ethics → improved trust → greater prosperity. 

There are some deep paradoxes in this outcome. The most challenging of these is that although ethics produces a demonstrable economic dividend, it only has maximum effect if people act for non-instrumental reasons. In other words, ‘you don’t get the dividend if you do it for the dividend.’ 

We have long believed that the whole of Australia would benefit if, as a society, we invested more in revitalising our ‘ethical infrastructure’ alongside the physical and technical infrastructure that typically receives all of the attention and funding.

The evidence is clear that good ethical infrastructure enhances the ‘dividend’ earned from these more typical investments – while bad ethical infrastructure only leads to sub-optimal outcomes.

I doubt that the link between ethics, trust and prosperity will capture any headlines when the Economic Roundtable is convened. But wouldn’t it be great if it could at least be noted as a vital enabler of any reform that hopes to succeed.