Dr Henry says the outdated narrative – which he calls "Australian mercantilism", and which has been used to support Australia's major economic policy reforms for the past 30 years – is now "crippling serious attempts to deal with some of our biggest challenges".

Speaking at the ANU's Crawford School of Public Policy on Tuesday, Dr Henry said Australia needs a new economic "narrative" that promotes a "more meaningful" concept of international competitiveness and which does not place so much emphasis on the real exchange rate.

Dr Henry said the old-fashioned idea of what international competitiveness is has crippled our attempts this century to adapt to changing global economic circumstances.

"Our conventional measures of the international competitiveness of a business or a country  is about as sophisticated as the pre-Ricardian labour theory of value," he said.

"We call this metric the 'real exchange rate' ... But how did the concept get to occupy such a prominent space in the Australian economic policy tool kit?"

Dr Henry highlighted three major policy areas – all politically charged – where a one-eyed focus on the real exchange rate and "international competitiveness" prohibited serious policy reform: the Rudd government's mining tax, the attempt to put a price on carbon, and the attempt to maintain labour and regulatory standards in the face of economic pressures from Asia.

"The failure of policy in these three areas – the mining boom, climate change and the Asian century – should have had all Australia's economists wondering about the policy narrative," Dr Henry said.

These things were all crippled by the concern about their effect on Australia's export competitiveness, but export competitiveness should not be everything, he said.

"The case for reforms to boost competition, enhance labour market flexibility and provide the conditions for productivity growth is strong. But it does not rest on export competitiveness," he said.

"Whether they induce a real depreciation and boost exports or not, these things should be pursued because they expand opportunities, enhance freedoms and, in so doing, improve the wellbeing of the Australian people."

Dr Henry said the concept of international competitiveness embodied in the Australian mercantilist narrative, "with its focus on the costs confronting exporters", had outlived its usefulness.

"It is clouding our understanding of structural adjustments under way in the Australian economy, especially as a consequence of the China boom."

He also said we needed to refrain from being "too critical" of people like former Treasury official Ric Simes, or groups such as the Business Council of Australia, when they came up with visions for what a future Australian economy could look like.

And we need to be more comfortable about identifying industries to support that may provide a competitive advantage for Australia in the future.

"The counsel against governments "picking winners in terms of products and industries is well-based historically", he said.

"But governments do have a responsibility for building national endowments. And we should be comfortable with the fact that a country's pattern of national endowments favours some industries and products over others."