Economics from a former garden fairy

IT is doubtful Cheryl Kernot would have noticed the irony, or even understood it. But many of us relished the fact that the Sydney Morning Herald published Kernot¿s op-ed ode to New Age economics on the morning Fairfax¿s senior management was steamrolled by the harsh realities of economic life.

Imagining that she was dancing on the grave of capitalism, Kernot wrote on Friday that “faith in the capitalist system is declining. Social capital is in resurgence. Participation and social inclusion are now on the political agenda.”

On the same day as Kernot’s embrace of hippy values, the chief executive and a key editor of the Australian newspapers most worshipful of amorphous terms such as social capital, participation and social inclusion paid the price for not adapting quickly enough to the commercial demands of the internet age.

Kernot really is the gift that keeps on giving. We need her jottings as a constant reminder of why the Democrats went bust and why dewy-eyed idealism always ends in tears.

Though wading through the treacle in search of the meaning of her opinion piece is not easy, one deduces ultimately that she is in favour of “social businesses”. If you wonder what these are, Kernot offers a definition – businesses “which put social and environmental objectives first.” There is more, of course. But all cut from the same ‘profit is bad, social ownership is good’ cloth. She wants us to re-embrace the “alternatives to the private company, the symbol of capitalism” and particularly co-operatives, mutuals and credit unions.

Kernot then helps her readers reminisce over the halcyon days of co-op utopia before demutualisation was discovered. She bemoans the perfidy of former members of AMP, NRMA and St George who fell for the promises of increased shareholder wealth and capital growth made to them.

Now, don’t get me wrong. I have nothing against co-ops, mutuals and unincorporated associations. Many of them do a sensational job especially in areas inherently unattractive to profit-seeking businesses. They are, of course, the backbone of many services to the poor and the disabled and are a critical part of our society. Some of them can and do compete effectively with for-profit enterprises. It is possible, for example, that local co-ops armed with the same subsidies from government as ABC Learning Centres could do a great job in child care.

But co-ops and mutuals can never be significant drivers of our economy and it is romantic twaddle to think they could be. They have very limited ability to raise capital, very restricted charters and are frequently unable to capture the economies of scale and efficiencies of entities that can use external capital to grow.

Mutuals are formed for limited and specific purposes. Thus they have no business risking their members’ money on growth or on the kind of entrepreneurial ventures that produce real progress. They have no interest in making profit but conversely cannot make losses if they are to preserve their members’ capital. Hence, the best a mutual or a co-op can ever be is safe, risk-averse and solid. Mutuals cannot drive progress because they cannot take the necessary risks. Private companies – though derided by Kernot and the economic Luddites – are prepared to take risks because of the lure of profits.

So if you like a pre-industrial age of genteel but safe poverty, Kernotland is for you. If, on the other hand, you like 21st century western progress and the creature comforts that flow from that, you’re going to have to accept capitalism despite the occasional greed, ugliness and creative destruction it brings.

Finally, a word on the unspoken but ever-present romanticism of governance procedures at mutuals. At the risk of simplifying somewhat, mutuals are built on the principle of one member, one vote whereas corporate entities confer votes based on the value of your shareholding. That is why pension funds and other investors can never invest serious capital in a mutual. How could they justify putting $1 million of their members money into a mutual if they get the same say about how it is used or managed as a person who puts in $1?

One member, one vote is a recipe for the disastrous politicisation that ultimately brought down the NSW motoring organization, NRMA. One member, one vote will mean Dawn Fraser is always much more likely to get elected as a director of a mutual than Don Argus.

Maybe that’s why Cheryl Kernot likes mutuals.