Economic rationalism refers to Australia’s economic policy during the 1980s and 1990s. This economic orthodoxy was also known as neoliberalism.  The term was used as a favourable description of market-oriented economic policies under Whitlam government in the early 1970s. This briefing paper is served to elaborate the meaning of the term ‘Economic rationalism/neoliberalism’ and to explain the appropriate role of the state perceived by this economic theory.


Economic rationalism: definition and features


Economic rationalism/neoliberalism, supports the principle that markets are more efficient than government in organising society and providing for freedom. Economic rationalists believe that the market is the best way of deciding what to produce, how to produce, and thus market incomes should be determined by the market (J.W.Nevile 1997, p.5). This ideology follows a school of economic thinking known as ‘laissez fair’ or ‘neo-classical economics’. Economic rationalism is a sub-category of liberalism which stresses on the self-governing individual and freedom (John Carroll 1992, p.185).


The basic assumption is that everyone is motivated by self-interest. People will try to get as much as they can for themselves. Human well-being is, therefore, supposed to be best achieved through the expansion of free markets and free trade, and the state should be designed to encourage those practices. Government should have fewer interventions in the markets, and make it more like a market itself (John Dryzek).


Emergence of ‘economic rationalism’ in the Australia’s economic policy making process


The revolution of ‘economic rationalism’ initiated in the 1970s. During that time, there were extraordinary economic events that the dominant economic model of the time could not manage. Failures of the Keynesianism’ economic model applied in the late 1960’s placed Australia’s economy in dilemma with slow economic growth, increasing unemployment, increasing inflation, and falling productivity. Inflation was a consequence of the excessive supply of money, while unemployment was due to the labour market not operates efficiently. Business regulation was excessive and discouraged incentive investments. Those breakdowns challenged the effectiveness of government interventions. A new economic policy, ‘economic rationalism/neoliberalism’, which places emphasis on the market’s forces rather than government’s interference, was desired.


Implementation of economic rationalism


Financial deregulation is an early application of ‘rationalist’ economic policy (Ian R. Harper and Phillip J. Leslie 1993, p. 84). Foreign exchange controls and restrictions on Australians investing overseas were eliminated, exchange rate was floated, entry of foreign trading banks was approved, Australian stock exchanges were deregulated and restrictions on the terms of bank deposits were removed.


In the public sector, New Public Management was introduced in the 1980s to raise ‘efficiency’ across the public sector and increase private sector involvement in service delivery, asset management and ownership. Managerialism was implemented in which rules and regulations concentrate on workforce accountability, efficiency and effectiveness (Carolynne James 2003, p.95). The privatisations of Qantas, Telstra were some illustrations of institutional reforms in the public sector during that time. Competitive business conditions were improved by National Competition Policy which consists of industry plans, the abolition of protections (25 per cent cut in tariffs rate passed by the Whitlam government in 1973(John Carroll 1992, p.9)), contracting-out of government services (e.g. outsourcing of the Commonwealth government’s IT (Carolynne James 2003, p.97)).


In the labour market, there was a major shift from centralised to workplace determination of wages and working conditions. Industrial awards and collective agreements were abandoned in replacement of individual contracts to employ workers. There was an increase in number of casual and non-standard work forms, and decline in trade union memberships.


Globalisation is another implementation of economic rationalism. Government participates in international economic forums such as APEC and cooperative economic international agreements or treaties such as WTO, GATT, and OECD (Carolynne James 2003, p.97).


The role of the State and impact on social and economic policy making


The state is expected play a minimal role in governing the markets through enacting regulations to achieve efficient market mechanisms. The State thus performs three main roles under economic rationalism. Firstly, they should protect the system. Government should intervene to prevent private enterprises from corrupting the environment. Regulations (e.g. Trade Practices Act) are implemented to protect consumers, and the market atmosphere. Secondly, government impose laws to manage the market failures. Collusion between large corporations which creates monopolistic market needs to be avoided by price regulations. Rationalists believe that the State should provide public goods such as defence and so on. Thirdly, market should be extended by government through the process of privatisation and globalisation. Examples include selling of Power Station in New South Wales, and introducing private prisons.


The Australian state is less directly involved in providing services and the composition of assets has been significantly reduced. However, there has been no reduction in its size. The Australian state has developed a new and extensive ‘micro-structuring’ role through new regulatory instruments and institutions. The priority is to maintain acceptable level of employment, the conditions for long-term prosperity.


Criticisms of Economic Rationalism


Disjuncture between rhetoric and practice is the first criticism. The main purpose of economic rationalism is to minimize the government intervention. In practice, the regulatory role, however, is strongly increasing (i.e. regulations for competition). Free trades and ‘natural’ market competition can never be achieved unless the State takes action.


Second criticism is the assumptions of rationality and perfect information. Individuals do not only act to maximise their self-interest. Consumer choices are affected by other elements such as commitments, ethical issues, sympathy, and cultural restrictions etc. In addition, information is not equally distributed to everyone in the economy. There are always trade secrets and various laws to protect those secrets between corporations.


The treatment of labour process is also challenged. There is an incentive to overlook the qualitative difference between human labour and other inputs to production to treat labour market as similar to other markets. Desirability for leisure, for example, is not accounted for by the supply-demand models of economic rationalism.


Failures of 1980s rationalism


In John Carroll’s book, the author summarises various consequences of the application of 1980s economic rationalism. Those categories of losses include rising debt levels, increasing interest rate and unemployment rate,  and overvalued currency. The Australia’s overseas debt rapidly increased in from $15 billion in 1980/81 to $137 billion in 1988/89.  Throughout the 1980s Australian interest rates remained markedly high. The productive sector of the economy and the tradeable goods sector were served by lot of bankruptcies. Unemployment rate jumped from 6 per cent in 1988/89 to over 10 per cent in mid-1991.  Floating of the dollar put the local loans in risky property development. The dollar remained over-valued. Many investments facilitated by deregulation went into unproductive areas. Australia was at the mercy of an irrational international market and the result was the permanent economic recession in the 1990s.



There are ongoing debates about whether the economy should be constructed through market forces or whether it should be interfered by government policies. The recent swing in public debate in an interventionist direction was supported by most political leaders at the state level. A successful return to intervention will have both political and practical dimensions. It will depend on a realist government, and a policy structure.

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