In the neoclassical school of economics that has come to dominate much of political decision making since the 1980s, there is an assumption that people act rationally based on the information at hand — rational choice theory.
This theory holds that, when presented with a problem, people make rational choices between potential courses of action to arrive at the optimum choice for that particular situation.
But what happens when people don’t act rationally?
The current health crisis has led to a range of irrational behaviour that has provoked another crisis within our economy. People have been panic-buying goods, pulling children out of school against expert advice, and businesses are putting thousands of workers out of work rather than pay for any additional leave.
This theory assumes that when every actor in the economy acts in their own interests — whether they are an individual or a multinational corporation — it will lead to the benefit of all. Yet there is nothing rational about an economy in crisis.
The latest act of irrationality came when Prime Minister Scott Morrison, who has long called for the end of the “handout generation”, handed $715 million to Qantas, the national air carrier. The only problem is that it’s not actually our national airline. Less than 48 hours after receiving news that a bailout was coming, Qantas stood down two thirds of its workforce — just over 20,000 workers.
The actually rational thing to do when faced with a large company and important national icon like Qantas that is at risk of going under in a crisis is to buy the company.
Any stockbroker or hedge fund manager worth her or his salt will tell you that you buy low, and sell high. Since the news of coronavirus spread as quickly as the virus itself, Qantas’ share price fell from $6.67 on February 20 to $2.14 on March 19. The time to buy is now.
While it may sound like a radical idea, the re-nationalisation of ailing industries in a crisis is a comparatively normal transaction around the world. Spain has declared a national emergency and has sensibly nationalised all private hospitals and private healthcare providers, mobilising them for the benefit of all citizens. France is currently considering the nationalisation of important companies like auto-manufacturer Renault and the bank BNP Paribas. The French are also looking to follow their Italian neighbours who are renationalising their national carrier Alitalia; they’re looking to bring Air France back into public hands.
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The reason that these governments are taking these currently unorthodox steps is because they are the most rational choice if you want to take care of their economy and the people who depend on it.
By renationalising important companies like airlines, hospitals and manufacturers, governments can make decisions that will keep production moving, without worrying about returning the highest possible return to shareholders.
Airlines can bring forward essential maintenance work and invest in upgrading technology on a largely grounded fleet. Hospitals can be repurposed to become institutions dedicated to the care of affected individuals. Manufacturing firms can be repurposed to focus on research and development.
They can use this time to experiment with production techniques and technologies that hold promise.
In private hands however, the crisis encourages the irrational behaviour of placing the profit of the shareholder ahead of the needs of their workforce or consumer base.
We know that this is the likely outcome, because it was exactly what happened during the global financial crisis. When facing ruin, important financial institutions in the US used their bailout money to pay out shareholders, award bonuses to executives, and allocate US$32.6 billion in bailout money to those at the top while the industry collapsed.
Given Qantas’ decision to stand down 20,000 workers after receiving nearly three quarters of a billion dollars in taxpayer money, it is hard to see them breaking the pattern. While it is admirable that CEO Alan Joyce has announced that he will be foregoing his salary for the remainder of the financial year, it is not the grand gesture it appears to be.
Mainly because his $2.17 million base salary is only part of his staggering $23.8 million renumeration package, but also because the end of the financial year is only three months away. A generous estimate of the amount he is donating would be approximately $542,500, or approximately 2.2% of his total yearly renumeration.
So which is the most rational choice?
Spending potentially billions of taxpayer money on bailouts that are likely to be spent ensuring a return to shareholders and compensating high-paid executives like Alan Joyce? Or buying an important national landmark at a low price and repurposing it in the interests of the nation?
Shirley Jackson is Senior Economist at Per Capita, a think tank committee to fighting inequality.