Addressing a graduation ceremony at ANU last week, Dr Ken Henry, the former secretary of the federal treasury (2001-2011), underscored the moral obligation for those with power to consider how others in society may be impacted by that power.
Drawing on the wisdom of pioneering economist Adam Smith, Henry told ANU graduates to remember to draw on their excellence, courage and resilience in facing the challenges of tomorrow.
“I want to encourage you, over the years ahead, to use them to do something for me and everybody else in this room; indeed, for humanity,” the former secretary said, pointing to examples of economic reform 40 years ago and government failure to address climate change to ask whether future governments could be trusted with the fate of upcoming generations.
“Think of governments allowing landscape scale deforestation and land clearing, loss of biodiversity, loss of habitat and species extinction.
“Think about the failure of Australian governments to legislate a tax system that ensures that Australians are the principal beneficiaries of the plunder of their non-renewable mineral and energy resources.
“And ask yourself how confident you can be that governments will ensure that the prospects of future generations will not be diminished by the present.”
The former secretary told the audience that if they often reflected on these issues and how democratic government had failed society, they were not alone. He sketched out the disasters of the 21st century, which had delivered “crony capitalism”, giving concentrated wealth to a select few, and described the ways in which the planet was “hurtling toward climate catastrophe” biodiversity tipping points and ecological collapse.
“The requirements of functional democratic government really are quite challenging. Our popularly elected officials are meant to take action to address the risks of market failure well in advance, even generations in advance, of probable social and environmental harm. Yet ‘the rest of us’, who make up the electorate, suffer from well-documented biases and other cognitive limitations that pretty much ensure that short-term political opportunism is going to have the inside running at the ballot box,” he said.
According to Henry, the political economy of the capitalist system was “a bit mad”, leading learned members of society to worry about the “dysfunction” of government and other citizens more generally to turn to business to directly take up their concerns. While union membership was experiencing a decline, he said employees were choosing to work for organisations whose social and environmental credentials pass muster.
What has followed is a concerted effort by the private sector to redress government inaction on some of the intractable issues facing society. Last year, for example, members of the Business Council committed to net zero emissions by 2050 — beating the government’s targets even on emissions cutbacks to 2030.
“The good news is that these concerned citizens have been having quite an impact. Because of their protests, the rules governing commercial activity are being rewritten. Not so much by governments, but by shareholders, workers and consumers.
“As you know, even shareholder activism is an affront to the capitalist model, with its insistence that the generation of profit is the singular social purpose of business. But shareholder activism is now mainstream,” Henry said.
“In the capitalist system, it is the role of democratically elected government to address the market failures I have listed. But our democratic institutions have not been up to the job.
“With democratic governance dysfunctional, business leaders in several countries have found themselves uncomfortably exposed. And that has caused a rethink. In searching for purpose more defensible than profit, many business leaders have begun modelling new accountabilities, not merely to shareholders, but also to workers, consumers, and to the communities in which they operate.
“Corporate community accountability could change everything,” he said.
Henry made his remarks in accepting an honorary award from ANU for his contribution to public policy last Wednesday.
When he was teaching economics at university over a decade ago, the ex-mandarin, said the neoclassical general equilibrium models he would lecture about did not assume economic agents would focus on collective issues such as social and environmental objectives through the market.
The original architects of the capitalist system and democratic parliaments had also failed to appreciate that citizens would not be focussed exclusively on themselves, he said.
“But this is the 21st century world that those institutions, through their dysfunction, have delivered. And this is your world. A world of massive upheaval. But also a world of great opportunity,” Henry said.
“In this world, you can have a big impact, whether you choose to work in government, business, academia, the not-for-profit sector, or the emergent ‘profit for purpose’ sector. And, by the way, you might want to assume that you will spend time in all five of these sectors, as I have done in my career.”
Ken Henry: 'The memory of that afternoon has troubled me for all of last 30 years', Master of Economics 30 year reunion, ANU – 2001 —
Hadn’t realised Ken Henry has conscience around environment.
Extraordinary speech by Ken Henry-cutting down forests. https://t.co/sEk6BT1ThP— 💧Peggy Sanders (@peggymel2001) May 29, 2022
Financial instruments such as voluntary markets in carbon credits, carbon credits with embedded co-benefits, green bonds, social impact bonds, and biodiversity bonds were leading the way.
What this shifting dynamic represented for the economy was significant, Henry said, because in Australia the pendulum has swung away from the “economics of plunder” to a nature-positive approach that aims to rebuild what has been destroyed.
“This generation has the opportunity to put virtually all our most degraded ecosystems on a trajectory to recapture ecological function, rebuild habitat and create rewarding employment opportunities in nature-positive land management, including for the indigenous custodians of traditional ecological knowledge,” Henry said.
“And, because of the commitments business has made, this can be done without any significant cost to government budgets.”
Society and business had also worked out a way to use transparency measures to keep the market accountable, Henry added, highlighting initiatives like the Task Force on Climate-Related Financial Disclosures (TCFD) and the emerging Taskforce on Nature-related Financial Disclosures (TNFD) that helped show where and who was contributing to the problem.
“With heightened awareness of our precarious proximity to climate and other environmental tipping points, shareholders, workers, and consumers are hungry for this information. So too are debt financiers and insurance providers,” Henry said.
“Businesses that fail to take voluntary action to limit, or offset, social and environmental externalities will have to accept lower prices for their products, pay higher wages to attract workers, or confront a higher cost of capital, whether equity or debt. And they will face higher insurance premiums.”
It was this transparency that would influence change in the same ways as tax or negative externalities to do what government had failed, Henry said. And, over time, he said he felt optimistic that new standards of corporate community accountability would be taken up by business leaders.
“All of these market signals will act to reduce the profit-maximising scale of activity and also the size of the negative externalities being generated.
“Our politicians will [then] be emboldened to begin the vital task of rebuilding effective government. Indeed, we can see signs of this already. Who knows, perhaps one day we will even see much needed, broad-based tax reform, upon which the wellbeing of future generations is so heavily dependent,” Henry said.
“But the role for government is different. Rather than legislating a new tax, which appears beyond the capability of even responsible governments, the role involves investing in, even mandating, critical transparency mechanisms and developing the regulatory infrastructure that is required to support new financial instruments and voluntary markets. That includes regulatory infrastructure to deal with so-called ‘green washing’.”
Henry concluded his address by telling the students the transforming world they faced was a very different landscape to the commercial realities he stepped into more than 40 years ago when he finished his PhD. He urged graduates not to waste the opportunity to improve public policy by using their understanding of financial instruments and markets, as well as knowledge of how private business could help achieve mutual goals.
“Making this new paradigm work is going to demand a lot from people like you [sic] — people who understand what it would mean to be able to declare that the wellbeing of future generations of Australians will not be diminished, but will rather be enlarged, by the present generation,” he said.
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