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Treasury thinking more laterally about driving social achievement, Makhlouf says

A more holistic approach is being taken, Secretary Gabriel Makhlouf says.

Paul McBeth
Wed, 05 Nov 2014

The Treasury is adopting a more holistic approach in formulating ways to drive social achievement beyond simple economic growth measures, Secretary Gabriel Makhlouf says.

The government's financial adviser has further developed its living standards framework model since it was introduced in 2011 to try and expand the department's advice to include less tangible measures when weighing up policy. Secretary Makhlouf told the Government Economics Network annual conference in Wellington today that the old days of measuring social achievement solely on gains in gross domestic product are "on their way out" amid growing recognition that simple models and rational expectations are only part of the solution to lifting living standards.

"Increasingly we are facing up to the challenge that economic actors operate in complex ways and not according to straightforward and predictable scientific formulae," Makhlouf said. "We have allowed too much of economics, and too many economists, to rest on the laurels of algebraic certainty and not push themselves into the field of human science that economics actually is, where choices are more difficult to arrive at and certainty more difficult to see."

The framework identifies financial and physical capital, natural capital, social capital and human capital as the four components essential to current and future living standards, with economic growth, future sustainability, increasing equity, social infrastructure and risk management as influencing those components.

The Treasury got a tick from external reviewers in its Performance Improvement Framework report earlier this year over its shift to the new model, which found the department's thinking had been shaped by living standards framework.

Makhlouf said the Treasury is trying to take its understanding of living standards from the conceptual level to a tangible one, ultimately to provide more effective and successful advice to ministers to "make choices that improve the well-being of New Zealand."

That puts the Treasury at the frontier of economic thought, though requires well-trained economists who are exposed to broader schools of thought, he said.

The 2007/08 global financial crisis was a good example where the concept of an efficient market became the dominant school of thought for those who found it difficult to deal with uncertainties of cultural norms, human reactions and complex choices, he said.

"Problems arise when the simple models developed to think systematically about the economic problems and the relative effectiveness of alternative solutions to them, are confused with the reality we are trying to address," Makhlouf said. "That risks confusing a moral science for a natural one."


Paul McBeth
Wed, 05 Nov 2014
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Treasury thinking more laterally about driving social achievement, Makhlouf says