The great challenge currently dominating our national discourse manifests as an economic one: it is an uncomfortable combination of rising inflation rates, rising energy prices, housing affordability issues and significant government debt largely driven by the pandemic. However, the challenge starts and ends as a social and political one - a question about our values and whom we aspire to be. Our nation’s greatest comparative advantage has been our measured freedom manifested in both markets and mindsets. It is unfettered thinking, coupled with incentive and opportunity that are the heart, soul, and backbone of our nation’s success and, indeed, that of many western democracies. However, recent government responses suggest the greatest threat to our future prosperity lies in the delusion that government can and should cast itself in the lead role of our economy - the Don Quixote of prosperity. History has shown that only a free market with limited government involvement will produce the solutions to the challenges we face.

The timeless tale of Don Quixote holds several useful lessons for us as we emerge from the pandemic. On one hand, the story is one of aspiration, of dreaming big dreams and refusing to be limited by the circumstances into which we might be born. Miguel de Cervantes Saavedra pondered “When life itself seems lunatic, who knows where madness lies? Perhaps to be too practical is madness… .and maddest of all: to see life as it is, and not as it should be!”

As we confront the issues before us, we will need to be innovative. And we will need to be deliberate in the methods we choose if we want the outcomes to be both sustainable and consistent with our nation’s values and ambitions. It’s timely to recall that it has been the primacy of the principles of free trade that have supported great ideas in western democracies - creating and innovating to overcome not only the basic challenges of the human condition like disease, hunger, warmth, energy and security, but also to create moments of joy, opportunity and prosperity. It is the freedom provided by a capitalist economy that allows for people’s needs to be heard, understood, and met most efficiently and effectively. Put simply, ideas cannot flourish in an environment of state control and good ideas can’t do good in a distorted market where need, effect and response are muddled by the interference of the state. It is only when freedom exists - in the market and our lives - that ideas allow us to turn life from something it is to something we want it to be.

Given the level of government intervention across all aspects of Australian life during the pandemic, it is perhaps unsurprising that many believe government should lead us out of the current inflationary challenges. However, the skewed outcomes and unintended consequences of countless government-driven programmes (pink bats, school halls, aspects of JobKeeper), remind us of the other poignant lesson Miguel de Cervantes bestows us: the danger of self-delusion. Filling his head with tales of chivalry, our protagonist, Don Quixote, casts himself as the knight-errant in his epic and sets out to right the wrongs of the world. What ensues is a series of misadventures fuelled by the misalignment of belief and reality. Problems were created where none existed, and our hero wastes his energy tilting at windmills.

Similarly, the government must avoid the paternalistic delusion that it knows better than our communities of business and enterprise. This is because the free market allows businesses to not only bear the consequences of poor decisions through financial losses but adjust quickly when this happens. Government has neither the incentives to change course quickly, nor does it face immediate consequences for bad business decisions. This leaves the taxpayer to foot the bill not only for the term of the policy but its long-term consequences as well.

So, what gives businesses the ability to read the market better than well-intentioned albeit quixotic governments? Put simply, prices. Prices, as the economist Thomas Sowell states, are like “messengers conveying news”. Those prices alert sellers to supply, consumer demand, and efficiencies. They are also sensitive, allowing for early detection of misallocated resources.

This means that when the government chooses to take the lead role on prices to right perceived wrongs in pursuit of its vision of what society should look like, we stifle the indicators of demand and supply, and lose the creator of efficiency. Monty Python’s famous ‘hearing aid’ sketch springs to mind in which the customer’s need was not satisfied because of the misunderstanding of the request.

The case for the primacy of the principles of free trade is made starkly in Australia’s quest for energy security in this era of transition. If managed correctly, Australia could emerge as a renewable energy superpower, with significant economic, environmental and security advantages that would boost its international influence, diminish its dependencies on nations that do not share its values and create more jobs locally in industries that have a future.

Australia already is an energy superpower being one of the world’s largest exporters of coal, uranium and liquified natural gas (LNG). However, this mantle has been won through a ‘dig it and ship it philosophy that fails to nurture the development of higher-value domestic industries and has done little to capitalise on arguably our most powerful comparative advantage: Australian ingenuity. Our creative approach to problem-solving has manifested in several world-leading innovations, including the black box flight recorder, Wi-Fi, spray-on skin for burn victims, and the technology behind Google Maps. Our track record in the renewable energy space is also impressive and includes the Passivated Emitter and Rear Cell (PERC), developed at the University of New South Wales, which has supercharged efficiency rates for solar panels and is projected to power approximately half the world’s solar power. Technology, investment, and demand can do a great many things if the market is free enough to incentivise good thinking. We are seeing similar developments in nuclear power generation in the United States.

More significant for our nation’s renewables transition are the economic circumstances currently manifesting. If we accept that there is both a significant economic and security benefit for our nation in moving to renewables, let alone an environmental one, with the potential for our nation to be a price setter rather than a price taker when it comes to energy, then it would be counterintuitive for government to intervene today and directly regulate the price of gas. This is because the increased price of gas (inflamed by the invasion of Ukraine) would incentivise consumers to use less of it, further encouraging the uptake of renewables and sending positive signals to the investor market to continue to invest and innovate in new technologies.

However, the reality Australia faces is that the transition to renewable sources of energy will continue to take time. The government would do better to address supply issues for gas in the short term - the price of which would still be influenced by geopolitics and the global directional shift to renewables - rather than engage in the indelicate task of price fixing.

What would happen if the government were to succumb to the temptation of donning its suit of armour (imagine a pasteboard taped to a helmet to fashion a visor) and take the lead on gas prices? When government interferes in the price of traded goods, history has proven the consequences: investment is stifled, jobs are jeopardised, and, if that price is set too high, our exports become uncompetitive, and if set too low, our exports are exposed to retaliatory measures by importing countries. This is particularly so when it relates to a production input as critical and ubiquitous as energy. More immediately, the viability of domestic operations is reassessed, as the cost to do business locally becomes less advantageous than in other markets. This puts both jobs and our local gas supply at risk.

Governments don’t have to search long to find examples of how best intentions exercised through market interference create perverse outcomes. One of history’s most notable is what Horst Sibert coined “the Cobra Effect”. To reduce Delhi's deadly cobra population, the British offered payment for every dead cobra. While the programme was initially successful, enterprising locals quickly responded to the situation by breeding more cobras. Once authorities realised this, the payment quickly ceased. Cobra breeders now had no reason to keep their stocks and released them in their now greater numbers, further exacerbating an already bad situation.

We are on the brink of our cobra effect moment here. Price controls on fossil fuels would undoubtedly create a market distortion that, even when lifted, will have robbed our nation of the crucial time and necessary circumstances to not only encourage energy transition but also support a local renewable energy industry that could have enormous potential for our nation as a leader in the fuels of the future. Without government price intervention, the rise in the price of gas would see consumers and investors look at options that are less costly, less vulnerable to supply challenges, and less regulated.

The current trade wars over semiconductors are also a stark reminder of how we should go about supporting any fledgling renewable energy industry in Australia. Over the last 40 years, the manufacturing of the world’s semiconductors has moved from the United States and Europe to East Asia. The disruptions of the pandemic and war made the west’s dependency more apparent - especially given semiconductors are now as essential as energy to both consumer and defence technologies. So, in 2022, the United States introduced a host of legislation aiming to distort the market in favour of encouraging the manufacturing of semiconductors back to America. This tool kit is made up of significant subsidies and export controls and has now set the scene for a problematic ‘race to the bottom’.

It is important to note a part of the reason the United State and Europe lost these industries in the first place was because of state involvement. Higher levels of regulation for inputs and red tape combined with comparatively higher taxes in Europe and the United States made a compelling case for moving businesses to where the cost of running them was cheaper - even if the know-how resided elsewhere. Some of the economies trying to lure the semiconductor industry also put on the table significant direct subsidies as well as subsidised energy inputs. While some may argue this strategy seems like a great way to create industries, the wins are temporary. Heavy subsidies work for a limited time only if these economies find other markets to export to and can push out the local competition. Significantly, they do so even at the expense of higher quality products which in turn stymies the development of efficiencies and new capabilities, ultimately depriving the market and consumer of a better product on both price and functionality. The cost to the state and thus the taxpayer is also significant because it means finite resources that could have been allocated to more beneficial ends were squandered on an unsustainable strategy.

Australia’s agriculture industry has shown how better products outperform highly subsidised ones. The OECD average producer support was 18.5% of gross farm receipts from 2016 to 2018. In the United States producer support sat at around 10% and in Australia, that support was only 2% for the same period. And yet, Australia has a far more export-oriented agriculture industry compared with the United States, exporting approximately 70% of its produce compared with 20% from the United States. It’s Australia’s high-value agricultural products that make it a successful exporter, able to compete exceedingly well in the most sophisticated consumer markets. As Professor Patrick Boyle has noted, “you don't win a race by trying to trip your opponent up, especially when there are significant costs to doing so. A far better strategy is to run faster.”

Of course, the government has also not been absent from renewable power adoption in Australia. Some could argue that given the rapid increase in price efficiencies - for example, solar photovoltaic dropping by over 80% per megawatt hour in the decade even after subsidies applied in certain countries are accounted for - this should mean that renewables are now able to sit alongside all other forms of energy, unaided by government support, and compete purely on what makes the most sense to the end consumer. Others would argue that due to the climate crisis, support is required to accelerate the adoption that would have occurred regardless.

While the government would do well to avoid auditioning for the lead role in markets, when it comes to economic policy, the government’s greatest value lies in its ability to create a framework supporting ingenuity and enterprise. Investing in research and development, encouraging the local development of, and migration of people with the right skills, supporting industry and academia to work more closely and reducing red tape. In addition to the carrot, this role also requires a stick as market freedom is not absolute - disincentivising and regulating anti-competitive behaviours, like monopolies, predatory pricing and dumping, are crucial to ensuring the market continues to do what it does best: respond effectively and efficiently to what the people want, demand or need. In maintaining this framework, government plays its role in prosperity, knowing this is the best way to secure the resources for those in our society who need help.

As Australia fronts into the latest economic headwinds, it is more important than ever to remember the foundation of freedom that has made our nation a success to date. As Margaret Thatcher stated “A [person]'s right to work as [they] will, to spend what [they] earn, to own property, to have the State as a servant and not as master… they are the essence of a free economy. And on that freedom, all our other freedoms depend.”

Gisele Kapterian is the Senior Director of Public Sector Strategy for Salesforce APAC. She has previously worked as a lawyer and as an adviser in the federal parliament.

This was originally a chapter in Markets and Prosperity (2023), edited by Harry Stutchbury and published by Connor Court.