For 150 years Australian immigration policy has been dominated by economic considerations. In one sense, immigration policy was ‘economically rational’ long before that recent term was invented. But it was rarely ‘free market rationality’ which dominated. The state has usually responded to and assisted labour market pressures.

The term ‘economic rationalism’ was developed in Australia by a sociologist, Michael Pusey, in 1991, although occasionally used by others before that. It was meant to be a critical term and was initially rejected by most professional economists. It is defined in the Australian Oxford Dictionary as ‘the theory or practice of a government using narrow definitions of efficiency and productivity (including privatisation, deregulation and low government spending) as measures of economic success, without regard to gov-ernment's traditional economic responsibilities to the public sector and the welfare state’.

Over time it came to describe an approach to public policy which was free of special interests, subsidies, uncosted services or uneconomic practices. Its intellectual basis is in classical liberalism and economic theory. It implies free competition and cost–benefit measurement. The success or failure of public policy should be benchmarked against economic criteria: budgetary savings, efficient and effective administration, and outcomes which would increase the national wealth. The role of the state, apart from defence and law and order, is to remove obstacles to a free market which will make more rational decisions than can governments.