Few Australians would have heard of Charlie Munger despite him being arguably the most important business partner in the world. Munger, previously a lawyer, is the billionaire long-time associate of Warren Buffett and is the vice-chairman of Berkshire Hathaway (and the chairman of Westco, an investment conglomerate 80% held by Berkshire).

While Buffett tends to attract most of the headlines, Munger (who was born in Omaha like Buffett but moved to Los Angeles in 1948) shares Buffett’s dry wit, value investing philosophies and strong adherence to corporate governance.

Last week, Munger briefly stepped out of Buffett’s shadow to write a parable for the Slate ezine (an American version of Crikey), which provides a salutary lesson on the reliance on debt and high finance.

Talking of a fictional placed called “Basicland” (which sounds very much like a current day United States), which had, in its first 150 years, spent no more than 7% of its gross domestic product providing its citizens with essential services, had a strong family-oriented culture and very little debt.

However, the good times in Basicland did not last forever, as Munger opined:

… Even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland’s citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called “the bucket shop system”.

The winnings of the casinos eventually amounted to 25% of Basicland’s GDP, while 22% of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called “financial derivatives” …

Munger is, of course, referring to the growing reliance in the United States on debt and high finance — of the type practised by investment banks, private equity firms and hedge funds. These activities, while ostensibly profitable, add little value to society as a whole. Arguably, in many instances, losses from short-term risk-taking undertaken by such entities outweigh the benefits they provide through allocation of capital.

Munger’s views, and the experience of the United States, remains relevant to Australia, although no one seems to be listening.

In 2008, Treasurer Wayne Swan and Chris Bowen announced a plan to make Australia into a “regional financial hub”. At the time, the federal government boasted of Australia’s “reputation for funds management”. (Given the majority of fund managers fail to outperform the market, and financial management is not a key plank of a successful economy, the boast appears foolhardy). More recently, the Johnson report suggested that tax on foreign investors in Australia be lowered. The author of the report, Mark Johnson, was previously the deputy chairman of Macquarie Bank, which is kind of like asking Pauline Hanson to prepare a report on immigration.

It appears that Australian politicians are slow learners. In 2006, then Treasurer Peter Costello removed the requirement for foreign investors to pay capital gains tax. At the time, Costello claimed the move would “enhance Australia’s status as an attractive place for business and investment by addressing the deterrent effect for foreign investors”. Four years later and it appears that the removal has made Australia a very attractive place for wealthy private equity firms, which are able to pay no tax on profits made in Australia (profits that are generated partially due to the sacking of Australian workers).

The financial hub dream is extending to companies such as ANZ Bank, which, under CEO Mike Smith, continues to pursue an Asian expansion (despite ANZ losing hundreds of millions of dollars in Asia last decade). Of course, for CEOs such as Smith the equation is simple — if the expansion is successful, executives are richly rewarded, if it fails, there is always a generous termination payment waiting.

As Munger explained, financial services and debt are not the way to improve living standards in an economy. They seem to be a good way to win a few votes though.