Taking up the opportunity to carefully reflect on policy outcomes is akin to responding to Bastiat’s challenge - ‘see the unseen’:
“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.”[1]
This way of thinking can make economists very unpopular, as policy effects will often take the form of consequences (that is negative outcomes) provoking defensive and offensive reactions from policy originators. This however should and must not deter careful consideration of policy outcomes. Recognising the importance of performing policy reviews, we investigated economic resilience during the implementation of pandemic measures using Job Keeper and Industry Location data[2] - one aspect of a complex policy environment.
A commonly accepted proposition within economics (as well as common to several other related areas such as Urban Planning) is that industry diversity is beneficial. Industrial diversity supports entrepreneurial[3] activity and innovation as well as insulates regions against economic shocks[4]. Taking advantage of Jobkeeper application data, we examined whether regions (Local Government Areas – LGAs) with greater industry diversity were less likely to require Government support via JobKeeper payments. In other words, are diversified areas potentially more resilient against external shocks - like a pandemic?
We found that as industrial diversity increased, economic resilience strengthened for all States and Territories, except Victoria. Perhaps unsurprisingly, as the most locked-down state in Australia and one of the most locked-down cities in the world. Within Victoria, unlike every other state/territory, there was a negative association (increased diversity was associated with lower resilience). This suggests that Government policies, when stringent enough, can inadvertently change economic relationships.
‘Unforeseen’ consequences are not necessarily detrimental, but they do point to the complexity of policy initiatives and the fragility of the forecasting models we use to estimate outcomes:
“…’change consequences’ are those which are occasioned by the interplay of forces and circumstances which are so complex and numerous that prediction of them is quite beyond or reach.”[5]
And here we believe lies a big problem that is often overlooked (or ignored) by large-scale national and State/Territory policy initiatives – to borrow from the Emergent Order Foundation[6] and in the spirit of Ludwig von Mises and Friedrich Hayek – the economy is not an engine, it is ‘us’, as we interact with each other daily in many different ‘markets’. Spatially aggregated policy actions, therefore, by definition, will have heterogeneous effects on local communities.
We advocate, given the complexity of policy transmissions, a goal for policymakers must be to focus on reducing policy distortions across locations by recognising that the economy is a function of ‘many places’ and just as many markets. To reiterate, policies will affect different places in different ways because fundamentally, each place is a unique combination of resources, people and life. To improve the effectiveness of policy initiatives and thus the outcomes for our local communities, wherever they live and work, policy design needs to be more conscious of place-based approaches – with a particular focus on seeking out the “unseen”.
References:
[1] Bastiat, F. (1995). Selected Essays on Political Economy (FEE ed.). Foundation for Economic Education.
[2] Angelopoulos, S., de Silva, A., Navon, Y., Sinclair, S., & Yanotti, M. (2023). Economic Resilience in a Pandemic: Did COVID-19 Policy Effects Override Industry Diversity Impacts in Australia? Economic Papers (Economic Society of Australia). https://doi.org/10.1111/1759-3441.12384
[3] Jacobs externality: Beaudry, C., & Schiffauerova, A. (2009). Who's right, Marshall or Jacobs? The localization versus urbanization debate. Research policy, 38(2), 318-337.
[4] Deitz, R. and Garcia, R. (2002), ‘Economic Diversity and New York State’, Economic Diversity and New York State, 2002 (Winter), 1–4; Izraeli, O. and Murphy, K.J. (2003), ‘The Effect of Industrial Diversity on State Unemployment Rate and Per Capita Income’, Annals of Regional Science, 37 (1), 1–14; Frenken, K., Van Oort, F. and Verburg, T. (2007), ‘Related Variety, Unrelated Variety and Regional Economic
Growth’, Regional Studies, 41 (5), 685–97; Davies, A. and Tonts, M. (2010), ‘Economic Diversity and Regional Socioeconomic Performance: An Empirical Analysis of the Western Australian Grain Belt’, Geographical Research, 48 (3), 223–34.
[5] Merton, R. K. (1936). The Unanticipated Consequences of Purposive Social Action. American Sociological Review, 1(6), 894–904. https://doi.org/10.2307/2084615
[6] https://eo.foundation/studio
Author:
A/Prof Ashton DeSilva - School of Economics, Finance and Marketing, RMIT University
