The economy is not a washing machine. To make it work you can't just press buttons and turn dials.
As Nassim Nicholas Taleb wrote in 2012 in Antifragile: Things that Gain from Disorder, the messiness of human action is a constant frustration to all those experts who suffer from what he calls the "Soviet-Harvard" delusion and who believe all that's required for the economy to operate the way they'd like it to is data and reason.
As Taleb points out, "a complex system, contrary to what people believe, does not require complicated systems and regulations and intricate policies. The simpler the better ... Yet simplicity has been difficult to implement in modern life because it is against the spirit of a certain brand of people who seek sophistication so they can justify their profession."
Taleb is famous because in 2007 his book, The Black Swan: The Impact of the Highly Improbable, anticipated many of the events of the global financial crisis a year later. He is best-known for his study of the impact of seemingly random and infrequent events, such as the failure of the subprime mortgage market in Florida.
However, the consequences that flow from his work are that the more complicated the thing being regulated is, the more simple should be the regulations.
Likewise, the more complex the thing is that government is trying to influence, the more careful and gentle should be the government's interventions.
Maybe Reserve Bank of Australia staff have been reading Taleb lately. In a series of speeches over the past few months, RBA governor Glenn Stevens and his deputies have been refreshingly honest about what they don't know. It's the sort of honesty few politicians display.
Put simply, what the RBA says it can't work out is why, with record low interest rates and a relatively benign domestic and international outlook, local businesses are not investing.
BUSINESS INVESTMENT AT RECORD LOW
In a speech last month, assistant governor Christopher Kent identified that non-mining business investment is at a record low. He gave a range of reasons for this, including the cost of finance and the level of the exchange rate.
One explanation stood out and it was something Stevens has talked about on more than one occasion. But the problem is that it's not amenable to button-pressing and dial-turning by policymakers.
Kent asked whether "animal spirits are too weak?" In his evidence to the House of Representatives standing committee on economics in August, Stevens pondered the same question.
John Maynard Keynes popularised the term in the 1930s in The General Theory of Employment, Interest and Money, describing "animal spirits" as the "spontaneous optimism rather than the mathematical expectations" of humans.
Keynes wasn't keen on animal spirits because they're not susceptible to data and reason (or control by government), which is why things such as business confidence play such a small role in his theories.
On the other hand, for proponents of the Austrian school of economics such as Ludwig von Mises and Friedrich Hayek the confidence and expectations of business are central to understanding the economy.
The RBA has identified the blindingly obvious: the animal spirits of the economy are absent. And they're especially absent among the owners of small and medium-sized enterprises, which employ more than two-thirds of all the private-sector workers in this country. What the RBA hasn't done is identify why animal spirits are absent.
The answer to that question is not hard to find, and in fact Stevens has given it himself when he ventured some advice: "At some stage, hopefully sharemarket analysts and the investor community will ask fewer questions about risk reduction, and more about the company's growth strategy." If only they would.
The problem is that in the name of eliminating risk — and protecting workers and consumers and future generations and the environment and so on — governments through ever-growing regulation have done their best to snuff out the animal spirits of business.
Changing what governments do will take time. As we're now discovering, putting the animal spirits back into the economy is unfortunately more complicated than just pressing a few buttons and turning a few dials.
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