Former Treasury secretary Ken Henry’s speech yesterday on economic reform in Canberra yesterday is probably the best contribution by a senior figure to Australia’s economic debate in years, and one that ideally should help reframe our discussion of economic policy into a more fertile area than the current, sterile arguments.

There have been two staples of our economic debate in recent years: the obsessive focus from business, government and conservative commentators on cutting business costs — whether wages, or taxes, or regulation — as the be-all and end-all of national policy, and the lamentation about the inability of politicians to achieve the sorts of reforms Australia got from the Hawke-Keating governments. However correct or incorrect it is, such was the complaint about the Rudd and Gillard governments, and it’s now being made about this government as well.

Henry’s speech addresses both of these increasingly arid and unhelpful arguments by recasting Australia’s economic history since the 1980s in terms of narratives. Many of the important reforms of that period, he argues, were sold as part of a narrative focused on the need to increase our international competitiveness — competitiveness specifically measured by lower wages, higher productivity and a flexible exchange rate — so that we would increase our exports.

Henry dubs this “Australian mercantilism”, after the policies engaged in by early modern European governments that protected industries, discouraged imports and pursued colonial expansion in order to maximise gold reserves, which envisioned international trade and economic growth as a zero-sum game in which France could only prosper at the expense of England or Prussia, and so on. It’s a rather harsh description, but the main problem with “Australian mercantilism”, Henry argues, is that it is no longer useful, partly because it has become a sterile and permanent advocacy of slashing wages and taxes and running surpluses, partly because it has actually hindered important reforms like proper resource rent taxation and carbon pricing, and partly because it isn’t especially helpful for Australia in trying to take advantage of the growing importance of Asian economies.

What’s the alternative? It’s here that Henry seems to divert into winner-picking territory, especially after he praised the Business Council’s recent paper urging a government focus on specific areas of national competitiveness. But his argument is much more subtle than that: for a start, he points out, the “Australian mercantilism” argument is also about picking winners — specifically, exports. And that proved a “compelling narrative” in the 1980s and 1990s. All successful reform narratives require “winners”, he says, otherwise they won’t be compelling for voters:

“In developing compelling narratives, there’s no choice but to identify winners — it’s actually a large part of what makes them compelling. The identification of winners is the attractive ‘vision bit’ that follows the scary ‘burning platform’ part of the story that we economists feel much more comfortable telling. But once the winners of government policy have been identified, a government can hardly maintain that it would have preferred a different set of winners. And so in that very real sense, the winners of government policy are those the government has picked.”

Henry urges that we thus aim for what he calls further “foundational investments in Australian endowments” — not merely our natural resources but a high-quality educational system, a functional political system, transparency, an accessible justice system, a fiscal system that can effectively respond to challenges, a functional and apolitical public service, an independent media, freedom from bigotry — all endowments he believes are in danger of being taken for granted in public debate, or in some cases even seen as impediments to the mercantilist narrative of always cutting taxes and wages. “Some of these will boost productivity, but they’ll also involve higher wages,” he said. And they will afford the environment in which, borrowing from economist , “grassroots dynamism” can drive innovation.

Above all, he argues, not merely should international competitiveness not simply be measured by the real exchange rate, but international competitiveness in the broader sense as described by Henry himself shouldn’t be the objective of national policy. Instead, it should be directed at “ensuring all Australians including those not yet born are endowed with capabilities that afford them the opportunity to choose a life of value”.

The “mercantilist narrative” has not merely, as Henry argues, outlived its usefulness in terms of the economic prescriptions it offers for Australia, but it has also run out of steam as the sort of compelling narrative Henry says is necessary to drive reform. What Henry doesn’t say is that, increasingly,  economic debate in Australia is punitive, a debate focused on the need for Australians to work for less, to work harder or in more “flexible” i.e. worse conditions, focused on cuts to government spending aimed at low- and middle-income earners, on structuring policy to address long-term challenges like climate change around the balance sheets of exporters rather than around the national interest. Voters have, unsurprisingly, become steadily less enthusiastic about such “reform”, seeing the budget as unfair, believing the government is looking after the interests of business ahead of their own — even those who support the abolition of the carbon price see no benefit in the government’s replacement policy of business handouts. In response, some commentators attack voters themselves as being “in denial” about the need for a punitive economic policy.

But absent some clear “winners”, such commentators and the politicians who follow their advice are going to struggle to ever obtain electoral approval for the kinds of policies they want to pursue.