The head of Australia's Productivity Commission has defended the economics profession, saying it will have valuable contributions to make to the big public policy problems of the 21st century.

She says the "wicked problems" being faced right now, from housing affordability to the clean energy transition, cannot be solved without the expertise that economics provides.

But Danielle Wood, Productivity Commission chair, says the esteem in which the profession is held is clearly at a "low ebb" and it will take time to fix and rebuild trust.

"I think the first thing to note is that at least some of the criticisms levelled at economists are well justified," Ms Wood said.

"It is clear that economists still wield a lot of power in key debates, but there is a greater contestability and also a greater degree of scepticism of economic prescriptions.

"The scepticism ranges from mild questioning to outright hostility. The failures of economics have unleashed an almost infinite number of words and column inches.

"How should we reflect on this change?"

Ms Wood made her comments in her 2024 Ted Evans Public Policy Lecture at the University of Queensland on Wednesday afternoon.

In her lecture, she also talked about the Albanese government's Future Made in Australia policy, which is controversial among economists who are critical of industry policy.

"The role of economists in these debates is not to offer a reflexive 'no', but it is to ensure that there is rigour in the discussion of costs, benefits and trade-offs of any intervention," she said.

Why has trust in the economics profession fallen?

Ms Wood used her speech to defend the unique skills that economists bring to the policy-formation table.

She said some people contested economic advice because they preferred to avoid some of the "inconvenient truths" that economic frameworks can deliver.

But some criticisms of the economics profession were well justified, she said.

"Most [economists] failed to foresee the global financial crisis, many missed the rise of China, our multilateral organisations blindly rolled out the same policy prescriptions from capital account liberalisation, [to] slashing government spending and privatisation, for a range of countries with little regard to their context and history," she said.

"For a long time, many economists have been wilfully blind to questions of distribution, arguing 'it's not our job' to consider economic inequality, let alone exploring the feedback loops between inequality, mobility and growth.

"And in Australia, many hold economists responsible for the policy failures in human services markets — like vocational education and training, employment services, and the national disability insurance schemes — where gates were thrown open to private providers without enough thought to market design and regulatory oversight, leading to bad outcomes for vulnerable consumers and a padded bill for taxpayers," she said.

She said other reasons why economic advice was routinely contested these days was because so many modern problems cut across multiple areas of life.

"The most pressing policy problems today – including economic policy ones – are often more complex than in previous decades," she said.

"‘Wicked problems’ like climate change, housing affordability and closing the gap in outcomes for First Nations Australians are front and centre – as they should be.

"And these, and many other important policy challenges, cut across other policy realms.

"In this environment, it is necessary to draw on a broad range of expertise in policy making."

But then, she said another reason why people rejected economic advice in policy making was less justified and "should concern us."

"Economists can be a pain in the arse: our focus on trade-offs, demand for evidence on costs and benefits, and penchant for pointing to the potential for unintended consequences, can be tiresome for those who would prefer less scrutiny or more decisions on the 'vibes'," she said.

"It's always tempting to convince yourself that the easy thing to do is also the correct thing.

"Economics remains a powerful antidote to 'magical thinking' that can often prevail in the policy world. We should be wary of those who would like to silence it because they would prefer less scrutiny."

A Future Made in Australia, and the global rise in protectionism

To that end, Ms Wood argued why economists had crucial things to say about current policy initiatives, such as the green transition and industry policy, which are linked to each other.

"The rigour and clarity provided by economic frameworks are the reason I think economics has an important role to play," she said.

"Economics offers insights about how choices are being made by individuals, households, and governments in the use of their limited resources.

"And in the management of our national house, choices must always be made, and costs must always be borne, directly or indirectly, in pursuit of those choices.

"We should make those choices with our eyes wide open."

She said the Albanese government's Future Made in Australia policy, which has been criticised by some economists for the inefficiencies it could introduce into the economy, could be understood in its global context.

She said the 2020s has seen industry policy "come back into fashion" across much of the western world.

"The IMF has documented more than 2,500 new industrial policy measures — at least 1,600 of which are 'trade distorting' — introduced across the world in 2023 alone," she said.

"Current industry policy responds to real concerns about climate change and supply chain resilience, while also resurrecting some of the 'classic' aims such as job creation, industry competitiveness and regional economic development."

And she said there were "two principled justifications" for intervention in these areas.

What are the reasons for intervention?

"First is the green transition," she said.

"There may be some circumstances in which we expect that Australia might have a longer-term comparative advantage in the manufacture of certain products and energy sources.

"But for comparative advantage to be sustainable, the industry will need to be based on Australia’s key resources of high-skill labour, good universities, mineral and/or renewable energy resources."

The second justification was about managing geo-political risks.

"A concern is that the concentration of key supply chains leaves countries exposed to risks from disruptions across a range of products," she said.

"The costs of diversifying these supply chains can be thought of as a form of insurance against these risks.

"Of course this isn't a single country's problem to solve.  And as large economies like the US take steps to diversify, Australia will benefit.

"However, it is unlikely that Australia can simply free-ride on the costly efforts of others, and no doubt there will be pressure on us to 'do our bit' by seeking to diversify those supply chains where we have an obvious advantage. Critical minerals, where we have large endowments, is a frequently cited as an example. 

"These are, I think, the most robust arguments for government intervention. But they aren’t blank cheques for support."

Ms Wood warned that industry support comes with costs. 

These include direct costs (spending taxpayers' money) and the diversion of workforce and resources from other activities. 

"There are also dynamic costs – even the promise of money on the table will see a raft of firms and lobby groups spend time and resources pushing for taxpayer support," she said.

"And once the taps are on they can be hard to turn off."

And she said the likely benefits of government support needed to be weighed against the costs, and that is what economists do best: identifying and grappling with trade-offs.

Ms Wood has expressed concerns this year about the potential consequences of industry policy in Australia.

But on Wednesday, she said there were some reasons to be optimistic about the way in which Treasury officials were handling this space.

"We can take the evidence from the national security expert about the risks of concentrated supply chains, or the green manufacturing expert about potential emissions abatement and knowledge spillovers, and weigh them up against the cost of action," she said.

"The National Interest Framework developed by the Treasury to assess Future Made in Australia investments is a great example of applying economic frameworks in this way. 

"And the fact that the framework is written into the Future Made in Australia Bill and Treasury has been resourced to undertake sector assessments suggests the government recognises and values the discipline that economic frameworks can bring to these issues."

Economics is evolving

Ms Wood then detailed other ways in which the economics profession was evolving as technology developed and big datasets were becoming more common.

She said economists would have valuable things to say in plenty of areas of public policy in coming decades.

"Economics can and should play an important role in Australian policy making for decades to come," she said.

"Trust in the economics profession may be at a low ebb, but the best response is not to turn inwards.

"It's to be more open-minded, as people and institutions: to new ideas, new disciplines, new data, and new approaches."

She said the Productivity Commission was doing its bit to move with the times, and to maintain its focus on rigorous and independent research.

"Our goal is like all of yours: to help solve the problems, big and small, that can help contribute to a new era of sustainable prosperity for all Australians," she told her audience.

"Sometimes that will involve saying unpopular things that need to be said.

"Other times it may involve a dose of humility including admitting that economics does not hold all the answers."