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Coping with greater economic uncertainty

Analysis

Flexibility, adaptability and creativity are essential for the survival of businesses and the growth of the South Australian economy in an increasingly uncertain future world, writes Richard Blandy.

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Economic uncertainty has increased greatly in recent times, with world economies looking more vulnerable than they have in a long time.

It is not only the unravelling of financial speculation in the global financial crisis that has led to growth in uncertainty and vulnerability. Globalisation of economic influences, opportunities and competition – resulting from the continuing fall of transport and communication costs, as well as the decline of protectionist barriers to international competition – underpin the rise in economic uncertainty.

The precise, long-run outcomes of actions taken in such complex systems are both unknowable and unpredictable. We cannot even untangle cause and effect in such a nest of feedback loops constantly evolving under its own internal dynamics.

What becomes central is the importance of flexibility and adaptability, the capacity to learn and modify, to “go with the flow”, to turn the course of events to advantage, to be opportunistic and “seize the main chance”, to be innovative and to invest in capacities to do these sorts of things. Successful economic and social systems will possess these sorts of characteristics in the highly uncertain world that has come into being.

The large evolutionary advantage of competition and free markets over “strong government” in such a world is that they maintain flexibility.

As the world changes, it deals out an ever-changing set of winning and losing economic activities. Competitive free market systems grow into the expanding niches and contract out of the shrinking ones. Look at the changes in the list of top Australian companies over the last 40 years. Sure, there are stabilities, but where is Bond Corporation today? Or Quintex? Where did CSL come from? Or Transurban, Macquarie and Scentre?

Despite unpredictable ups and downs in particular economic activities, our economy and society have evolved and survived because of the free market system. This is a major reason why the democratic, market societies outcompeted the totalitarian, centrally-planned economies in the Cold War – the centrally planned economies were not flexible enough to cope with the unpredictable and uncontrollable change that characterises our world.

The longer-term future of economies (and the societies containing them) cannot be planned. The law of unintended consequences will always be in operation. All governments can do is take initiatives that seem likely, in the long run, to have positive consequences, to manage short-term outcomes as best they can, and to ameliorate events as they come along.

The period of economic tranquility I grew up in in the 1950s and 1960s can now be seen as an accident of history – a peculiar set of circumstances that gave rise to a particular set of outcomes which we generalised into a belief that that we could plan, control and manage long-term economic outcomes. We have moved into far more turbulent circumstances now – circumstances which appear to be far more typical in world history than those of the 1950s and 1960s – and to which we must adapt if we are to be successful.

The South Australian economy needs to become more flexible, adaptable and creative if its economic growth and employment outcomes are to improve

What does this all mean for the job market?

Employment is becoming much more precarious than when I graduated from university more than half a century ago. Businesses must look to becoming more flexible as well as becoming more competitive. The irony is that the more flexible that businesses become, the less precarious employment in them will be.

General skills giving a capacity to learn new skills on the job are likely to become more important. Careers, as we understand them, are likely to be enjoyed by people who have highly sought-after “core” skills and knowledge, who are flexible, who have the general knowledge base to learn new skills as required, and who have attitudes and values that make them good team players. The future will likely see the resurrection of the generalist.

By the same token, some (varying) specific skills are crucial to an enterprise. Flexibility may also be gained by firms adopting a “core/periphery” structure of jobs: the essential skills and jobs being held in the core as “permanent” jobs, jobs which are not precarious, surrounded by a penumbra of less crucial jobs which are more precarious, with job numbers rising and falling as required.

Some businesses may offer to pay people less but guarantee their jobs irrespective of the state of the market (short of the firm being liquidated). The “permanency” discount is likely to be substantial. In other words, tenure may return – but at a far greater price compared with the more stable past when I became a university academic.

Additional labour market adaptations and social innovations may be necessary to ensure low levels of unemployment and a reduction in precariousness in employment. Wage subsidies (and government make-work schemes) may become widespread, but most government effort is likely also to be directed at supporting careers and long-term attachments between particular employers and particular employees.

The reason for this is that the investments in skill and knowledge that enhance productivity most depend on long-duration attachments between specific employees and their own employers. Otherwise, on-the-job training and learning has too little pay-off time to be worthwhile. Communities and their governments are not going to permit a situation where our human capital becomes obsolescent and uncompetitive on the world scene.

Governments of successful nations or states are likely, therefore, to rethink the rules surrounding work contracts to make them more durable in the face of greater uncertainty. This will mean that workers will be required to be more flexible and adaptable, and more willing to relocate, retrain and accept lower pay than before, in return for durable work guarantees.

Summing up, flexibility, adaptability, learning and creative responses to changing circumstances mark the successful way forward in our increasingly uncertain future world. The industrial order is evolving into the post-industrial order, accompanied by a shift from large scale to small scale. Uber and Airbnb, franchising, the supermarket and the shopping mall are examples of business models responding to this shift.

The growth (and death) of small businesses will characterise the era we are in. Linked small businesses (in markets, franchises, supermarkets and shopping centres) will have scale economies in purchasing and advertising, as well as the productivity of small business driven by feelings of team solidarity, self-fulfilment, freedom, “ownership” and “belonging”. Many people will work, at least in part, from home, with a blurring of the boundaries between work and other life activities. These trends will favour the employment of women.

The South Australian economy needs to become more flexible, adaptable and creative if its economic growth and employment outcomes are to improve. This means becoming more reliant on private-sector evolution and less reliant on government visions.

Richard Blandy is an Adjunct Professor of Economics in the Business School at the University of South Australia and a weekly contributor to InDaily.

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