Wednesday, July 26, 2006
Chapter 16 from: J.J. Ray (Ed.) "Conservatism as Heresy". Sydney: A.N.Z. Book Co., 1974
The first section of this chapter originally appeared as an article in Nation Review, 15 June 1973, p. 1074.
Is Inflation Inevitable?
ALL THE FURORE about inflation ignores one vital thing; governments are the major beneficiary. For Mr Whitlam and his ilk, inflation is a godsend.
Increasingly, commentators are saying: 'Why worry about inflation? Wages, social service payments and other sources of income do rise at roughly the same rate as prices, and have in fact kept slightly ahead of them in past years.' So why worry indeed? Only if prices rose, but wages didn't, might we have cause for worry.
The answer is that it seems unlikely that what used to happen in the past will ever happen again. The inflation rates that we used to have (an average of about two per cent per year) affect us quite differently from those we have now (about fourteen per cent). To see this, we must understand how inflation benefits governments.
The key to the matter is our progressive taxation scales. if both prices and our wages go up by fourteen per cent a year, we are not able to buy as much as we could to start with. This is because the higher wage puts us into a higher tax bracket. The wage we are getting buys us no more than it did before, but because it seems to be a higher wage, the government takes away a bigger proportion of it.
We can now see just how Mr Whitlam was able to promise so blandly that Labor would not increase our tax rates. He knew that inflation would do the job for him. With inflation, we automatically pay the government a higher proportion of our wages in tax. The more prices rise, the more cause our government has to be secretly pleased.
Mr Snedden, by contrast, must be given great credit for the fact that he was the first treasurer we have had for a long time who did actually succeed in reducing inflation. Under Menzies, inflation used to run at about two per cent. Under McMahon, it grew to as high as six per cent. Snedden brought it back to four and a half per cent. Under Whitlam it is fourteen per cent at the time of writing.
Is Inflation Inevitable?
Under Whitlam, then, the workers must lose. If their productivity rises at about three per cent per year, this cannot compensate them for the extra large bite the tax man keeps taking out of their salaries and wages. Under Menzies, the rate of inflation was tiny and the extra amount the tax man took each year was accordingly tiny also. Productivity increases could easily exceed it and allow the average man to improve his standard of living.
Under Whitlam, the inflation rate is too great to allow this to happen. Productivity is very hard to increase, but inflation can shoot up practically without limit.
'But don't the prices justification tribunals and all the other attacks the state and federal Labor governments are making on prices show that they are trying to hold down inflation?', someone might ask. The answer is that all these measures show is that Labor is trying to have its cake and eat it too. Labor wants wages to go up by huge amounts, but have prices remain stable.
Where do they think the money to pay the higher wages is going to come from? How can the manufacturer pay the higher wages if he doesn't get higher prices? Enough businesses fail as it is. Do we want them all to fail at once?
No, I am sure that Mr Whitlam, Mr Cameron and all the other Labor ministers are intelligent enough to see that demands for wage increases which exceed productivity increases are an exercise in futility. The community cannot have more goods and services unless it produces more goods and services. If wages go up ten per cent, but prices go up seven per cent you have still only got your three per cent productivity increase anyhow, so why not just ask for three per cent to start with?
The answer is of course that the worker has got no guarantee that others will do the same. He has to look to his government to set the pace and enforce moderation all round. This Labor will not do.
Why not? Because inflation is what they want. Labor must have inflation or else it will not be able to raise all the extra tax revenue it needs to pay its vastly increased army of public servants.
So next time Mr Cameron or any other Labor spokesman is advocating great new handouts for the workers we must realise that he is really advocating that the workers give him a handout in the form of increased tax. Any increase the workers do get will be more than eaten up by the combination of higher prices and higher tax. Only if he announces that the tax rates will be reduced by whatever the inflation rate turns out to be should he be taken seriously. He is dishonest unless he does.
Governments cannot easily control prices and wages. Taxes they can. If Labor is sincere in wanting to help the working man, it will prevent his taxes from rising. Unless this is done there will be great unrest. We are used to rising standards of living. Australians will not tolerate governments grabbing all of the increase in wealth that we produce each year.
To socialists increased public control of the nation's spending power is what life is all about. This is a matter for debate in its own right. Conservatives argue that government activity is intrinsically bureaucratic and inefficient, and is hence to be minimised. Socialists, on the other hand feel unsafe in a threatening world unless they have centralised all power into their own fumbling hands. The outcome of this debate is not the point here. The point is that the issue should be debated rather than having the measures favoured by one side being introduced by stealth. And that is what inflation does. Via the progressive income tax scales, it transfers a larger and larger proportion of the nation's income into government hands. It automatically decides the debate in favour of the socialists.
In Australia, this increased government share of the wealth was obtained by the socialists not only by stealth, but also under the cloak of outright lies. In his 1972 election speech, Mr Whitlam, the Labor leader, promised that there would be no increase in income taxes under his government. It was under this promise that he was elected to power. He uses the flimsy excuse that he has not increased the tax rates to claim that he has not broken his word. He omits to mention that by causing everybody to move into a higher bracket it is just the same as if he had increased the rates.
The very fact that Mr Whitlam had to resort to such a shabby lie is some indication that, if given the choice, the people would not want the socialist program of bigger and bigger government. He was elected to ensure that government would not grab more and more of the wealth. One wonders where his supposedly tender morals and high principles are, when he stealthily does the opposite.
What is inflation?
'But inflation is a worldwide problem. You cannot blame just one government for it! How do you know that Australia's Labor government deliberately set out to cause inflation?' To answer the latter question first: if you saw someone pouring petrol on a fire, which would be more likely-that he wanted to encourage the fire or put it out? Inflation is like a constantly smouldering fire. It is always there even if there is very little of it and a government must always be vigilant to hold it down. It certainly must not do anything to encourage it. Labor, however, has turned all its wits to the task of encouraging it.
The very word 'inflation' indicates the cause of the problem. What is being inflated is the money supply. If you issue too much money it is worth less. Prices rise. All weak governments of whatever political colour tend to do this. Because governments alone have the power to print money they must be vigilant not to abuse that power. A strong government will only issue as much money as is needed to keep the nation's business activity and productivity running at full capacity. If they want to spend more money themselves they will not just print some. They will take as much as they need back from the people in tax. If they just kept printing it, it would be like a huge gang of counterfeiters broken loose. Soon there would be so much of it around it would be worthless. A weak government, however, is too afraid to ask the people for more money in taxes. At the same time, it also finds it hard to say 'no' to many of the demands that are made on it.
In the modern world, everybody wants a handout. Everybody can think of something extra that they would like the government to do for them. The 'do-gooders' want handouts for Aborigines and pensioners to salve their own aching, but affluent consciences, the farmers want handouts for all sorts of rural subsidies, the businessmen want handouts in the form of tax exemptions and tariff protection and middle class intellectuals want more child-minding centres so they will not have to look after their own infants. Any government has to be very good at saying 'no'. The whole country would have to work an eighty hour week to carry out even a fraction of the tasks that individual people think the government should undertake. A weak government, however, not only finds it hard to say 'no', but also finds it hard to raise the taxes to pay for those things to which it says 'yes'. Issuing more money -- inflation -- is the only way out.
So the answer so far to the question posed in the title to this chapter would appear to be 'yes'; as long as a majority of the people will vote for a government that promises them something for nothing, inflation is inevitable.
Who is to blame?
The Australian Labor government is not alone in promising the people something for nothing. Its predecessor, the McMahon 'Liberal' government was also in a very weak position prior to the 1972 election and they too had started down the slippery road of inflation. If the Labor government had been a responsible one, therefore, what it should have done when it came into office was at least to have kept spending down to its then current levels. Instead, it increased its spending enormously and added fuel to the inflationary flames. It turned a flame into a blaze. In less than a year inflation rose from four to fourteen per cent.
Note, however, that this sort of inflation is only caused by continually increasing government spending. If a new government simply increases spending to a new higher level and thereafter maintains that level without further increases, inflation should slacken off. This could just possibly happen in Australia. It takes up to a year for changes in government spending policies to have their full effect on the economy and much of the fourteen per cent inflation that occurred under Labor was in fact traceable to excess spending initiated under the previous government. Had a conservative government been re-elected, however, this rate would have represented a peak from which there would have been a rapid fall. In this case, the effect of electing a Labor government rather than a conservative one might simply have been that high rates of inflation were maintained for a longer period. The effects of inflation are, however, permanent. If you have fourteen per cent inflation in one year and none in the next, it still means that your money has permanently lost fourteen per cent of its value. If you have fourteen per cent inflation for two years running, it means your money has permanently lost nearly twenty-eight per cent of its old value. High rates of inflation for long periods are much more damaging than high rates of inflation for short periods.
The fact that inflation is worldwide is no apology for inflation in any particular country. Weak governments are quite common so inflation will be quite common. Talk of the presence or absence of inflation in other countries is, however, quite vacant. Because its presence is so universal, what matters is not its presence or absence, but its rate. Americans seem to be more enraged by inflation than are Australians, but in fact their rate of inflation at around seven per cent is only half Australia's at the time of writing. Under the Allende government in Chile -- which never had much more than a third of the vote and was so weak and disastrously mismanaged as to provoke a most reluctant military takeover -- inflation was running at over 300 per cent. The difference between two per cent and 300 per cent inflation may well be the difference between orderly democratic process and social disruption leading to violent authoritarian revolution.
This brings us back to the question of who actually does suffer because of inflation. We are not very likely to have a revolution here in Australia (though the Chileans once thought that too) so what is the problem? The answer is that although people's rage at their money's losing its value might be less under our inflation than under Chile's, it is still often very clearly felt. This answer also shows who is worse hit: people with savings. More accurately, little people with savings. People who have a lot of money have it invested where inflation cannot hurt it (in real estate etc ) , but Joe the worker, the poor 'mug' who carries the country on his back, is the one who loses. He tries to save for a house, a trip, his old age or some little luxuries, but the longer he leaves it in the bank the less it is worth. It gets to the point where the thing he is saving for increases its price faster than he is putting money by. Even though he is saving, he is getting further away from being able to buy it rather than nearer.
Not only is this totally unjust, it is economically disastrous. It discourages saving. With reduced savings, banks would have less money to lend out; and with less money to be borrowed, businessmen would not be as able to invest in the plant, buildings, machinery and equipment needed to provide the workers with more and better jobs. Improvement in living standards could not only grind to a halt but actually give way to a decline. If we were totally without savings, we would be back in the caveman era within a couple of generations. To improve the standard of living, every government must encourage savings for all it is worth. Handout-loving governments discourage it.
Even a government takeover of all businesses would be no solution here. Quite apart from the inefficiency and waste such moves tend to engender, if a government was so weak as to have to resort to inflation in a last-ditch attempt to stay in office, it would scarcely be strong enough to take a step as radical as complete nationalisation. Not that nationalisation is any substitute for savings. Only if nationalisation was accompanied by much higher taxes and rationing to substitute for voluntary saving (as in Soviet Russia) could it lead to increased productivity. It is no secret that such a state has never been freely and voluntarily chosen by the majority of the population of any nation anywhere. Even Allende's electoral victory in Chile came about only because of the absence of preferential voting. The conservative vote was split down the middle between two candidates and a solid Leftist vote for Allende gave him the victory with little more than one third of the total vote. Right up to the end of democracy in Chile, the Chilean congress had a solid conservative majority.
Another group that suffers from inflation are those who are not well organised to agitate for income justice. Pensioners and people (often widows) living off a private income from stocks and shares would perhaps be good examples here. While these people do eventually get increases in their income to compensate for inflation, such increases are often much delayed and seldom do more than allow for inflation that has already occurred. Strongly unionised workers, by contrast, can also get increases to compensate for anticipated inflation. The upshot is that the average income of poorly organised groups may in fact tend to be much less than it is supposed to be. They will chronically be in a 'fallen behind' state.
Another thing to consider is the loss of subjective welfare. While not easily amenable to exact economic analysis, it can make or break governments via the ballot box so it must be regarded as of no small importance. There is little doubt that the transfer of spending power to the government must reduce subjective economic welfare below what it would otherwise be. That was one lesson that was forced very clearly on the welfare state governments of Scandinavia during 1973. The fact that inflation transfers spending power to the government, should not necessarily reduce total national welfare if the money acquired is used by the government for socially enjoyed works such as better roads, more schools etc. The people still enjoy the fruits of their labour, but in a collective rather than in a private way. The snag here, however, is that such reasoning requires an assumption that a dollar spent (or enjoyed) collectively gives as much satisfaction as a dollar spent privately. This assumption is most certainly false. J. K. Galbraith in his book The Affluent Society documents very well the apparent idiocy of private affluence and public poverty. What is the good of a big shiny new car replete with gadgets if the road you have to drive it on is little more than a bush track with tar on it? This is surely an example -- an all too familiar example -- of a great disparity between the level of affluence in publicly and privately consumed goods. With a good economist's suspicion of the subjective, Galbraith documents this phenomenon and inveighs against it, but he utterly fails to make any attempt at understanding it or incorporating it in his economics. The acknowledged or apparent utility of a good is often only a small part of its total utility. Exclusiveness to any degree is something highly valued by many people. The adjective 'exclusive' would not be so overworked by advertisers were it not so. Public goods, however, cannot by definition have any exclusiveness. They are therefore less attractive. A man may enjoy a small private backyard lawn more than a large public park simply because it is private and no-one can disturb him there without his prior permission.
Exclusiveness is of course only one aspect of why a dollar spent on private goods is more satisfying than a dollar spent for you on public goods. Prestige, competitiveness and impersonality are other factors that would be needed in a complete understanding of the phenomenon. Given that that is the way things are, inflation must lead to a reduction in subjective economic satisfaction wherever fixed and progressive tax rates apply. This must surely be of concern to anyone but the convinced Fascist who thinks that the things people want are of no concern. Note that this subjective loss from inflation applies to all of the population --not just some sectors of it.
Of all the evils brought about by inflation perhaps the most cankerous is increased industrial unrest. It is a sorry but true statement that wage rises in Australia are often extorted by strikes, bans and other forms of industrial disruption. With a high rate of inflation any wage rise that is secured by any means becomes more rapidly eroded in its purchasing power. This means that if its purchasing power is to be maintained, wage rises must be secured more frequently. If wage rises are obtained by way of industrial action, however, this means that industrial action must be taken more frequently. Quite aside from the increased community disruption and resentment that this causes, it means that a greater part of the working year is lost and total production must decline. The combination of an expanding money supply and a shrinking supply of goods means that inflation becomes even more severe than it would otherwise have been. The whole community suffers a real and irretrievable loss. Lost working days can never be had over again. They and the goods they would have produced are gone forever.
It should by now be very clear why people who dismiss inflation as not really much of an evil are the most wishful of wishful thinkers. It is probably the greatest ill that the economist has yet to find a cure for. Because the cure most certainly involves subjective and sociological factors that the economist either cannot or will not deal with, we can be sure that it will be a long time before any generally accepted solution to the problem emerges. For a start, a means would have to be devised whereby weak governments could not use inflation as a backdoor way of increasing their spending. Something like the U.S. Federal Reserve Board might do the trick, but it would have to be given authority to set limits to total government expenditure as well as controlling monetary policy.
This alone would only solve half of the problem. While weak government is the inflationary cause heavily concentrated on in this paper so far, it is not the only one. In economists' terms, what has been concentrated on is the most usual form of 'demand pull' inflation. As well as this there is 'cost push' inflation and certain other varieties of demand pull inflation that even strong and economically responsible democratic governments can do little about. Several Fascist governments, however, appear to have succeeded in overcoming them. The main ones among these several causes of inflation are: attempts to push incomes ahead of productivity, attempts to alter relativities between incomes, changes in the velocity of circulation of money, fluctuations in rural incomes, fluctuations in consumer spending, fluctuations in investment spending, declining standards of living and 'imported' inflation. In discussing each of these, problems below, some possible solutions will be suggested.
Perhaps the least important are changes in the velocity of circulation of money. Great though these changes may be over long periods, in any one year their effect is so slight as to be quite swamped in the other inflationary processes. All that is required to deal with inflation from this source would be fractionally more restrained expenditure policies.
Fluctuations in rural incomes are much more of a problem for Australia than for most other developed countries. At the time of writing they are a considerable element in the league of inflationary forces. Prices for Australia's wool, wheat and meat are all simultaneously at near record levels. This means, expressed in lay terms, that the Reserve Bank is issuing record amounts of Australian dollars to graziers and farmers in exchange for the huge amounts of American dollars they (or, more strictly, their agents) are bringing from overseas. An upwards revaluation of our currency could reduce this effect and this has already been largely done, but to do so is quite clearly unfair to the farmers. The farmers have had a long run of bad seasons and low prices and this is the first chance they have had to start paying off their debts. To revalue is to rob them of that opportunity and return them to their familiar role of beggars on the state. A far more equitable solution to the problem would be an increase in the deposits ( SRDs ) that trading banks are required to make with the Reserve Bank. This would soak up the extra cash as soon as it is issued.
A very fashionable cry at the moment concerns the spectre of 'imported inflation'. This refers to the higher prices overseas of many things that Australia imports. Again this is only reflected by higher prices for those same goods in Australia if Australia's exchange rates remain steady. Therefore a revaluation of our currency in an amount just sufficient to allow for overseas inflation is the appropriate step here. In Australia at the time of writing such steps would appear to have been taken already.
Closely related to the phenomenon of imported inflation is inflation due to falling standards of living. This has been relatively unusual in the world so far, but that may not last indefinitely. It can be best understood by considering what would happen to the value of your money after a nuclear war. It would obviously buy less (if anything). This would be because many of the things (and people) going to make up our previous standard of living would have gone. Although we would be poorer in real terms, the amount of money we had might not have changed. This would be another variety of inflation. The most likely cause of such inflation in the near future is an Arab oil embargo. Such an unplanned-for event might mean that many industries would have to reduce production below that of previous years. There would therefore be less for one's money to buy. The best measure to deal with this would be to increase taxes to sop up the excess spending-power and use the proceeds on government sponsored research and development projects designed to overcome the energy (oil) deficit.
Fluctuations in investment spending have a now (since Keynes) well-known role in the cycle of economic activity. The Keynesian prescription of complementary governmental expenditure patterns is one of the solutions that would work in allowing for such phenomena. Other alternatives are indicative planning on the highly successful French model, or perhaps sheer Friedmanite optimism about their minor disruptive role under a stable money supply regime.
Fluctuations in aggregate consumer spending are a cause of the inflation that Australia is experiencing currently. In theory they are not supposed to happen, but as a response to existing inflation they are eminently understandable. If money seems to be going out of fashion, it makes sense to buy something with it while it still has its value. The result is an upsurge in consumer demand which exceeds the available supply and encourages businessmen to profit-taking via higher prices. It is a vicious circle phenomenon whereby inflation generates more inflation. As a secondary phenomenon, its solution lies in solving the other inflationary influences being described in this chapter.
By far the most important cause of inflation in the modern world is the one I have left for last: monopoly activity. We do not always suffer from weak government, but we always suffer from monopoly activity. Under the term 'monopoly', must of course be included the labour monopolies represented by the various trade unions. In the modern world, trade unions are the most overt, vicious and unassailable of all monopolies.
The two main varieties of monopoly activity are attempts to push incomes ahead of productivity, and attempts to alter relativities between incomes. In practice the two go together with the latter being used to cloak the logical futility of the former. The worker wants to be paid more than his production is worth and cloaks the overall impossibility by saying that he is going to do it by taking away part of 'the boss's' share. The cake is only so big, so if you want more of the national cake you have got to take it from someone else. Labour monopolies are not alone in attempting this, but they are the most obtrusive. There is no point in arguing who is most successful at it or who started it. On both sides the action is equal folly and is equally unsuccessful. In spite of fluctuations from year to year, there has been no consistent change in the share of the national cake going to either side for over a century. In both Australia and the U.S.A. roughly two thirds of the national income goes to labour and that is that. A hundred years of strikes and union activity has not altered the basic pattern. (If this seems a surprising assertion, it can be checked in any basic economics textbook.)
But how does such activity lead to inflation? It leads to inflation by the well-known route of higher wages being agreed to which can only be paid by the employer charging higher prices. Higher prices would in turn lead to declining business turnover were the money supply held fixed and this in turn would lead to unemployment, so the government feels obliged to issue more money in order to prevent any unemployment. Thus, for the best of motives on the government's part, the currency is inflated again. The only way it can be prevented is if the only wage rises granted are those that business can afford without raising prices and without going broke. Such rises would be small and hence psychologically unacceptable to the unions. Even if their members are getting richer at only two per cent per year, the position of the officials of the union makes it important that the members look as if they are getting richer faster than that.
Since the above is probably a little difficult to follow for the economically unsophisticated, some elaboration of the basic axioms involved seems appropriate at this point. The basic axiom is that wealth is goods and services, not money. You can have a bale of money as big as a haystack but if no one wants to accept it in exchange for goods and services you are a pauper and could in fact starve to death. The wealth of a country consists then not in the amount of gold or money that it has, but rather in the amount of goods and services it produces. It is this wealth that was metaphorically described above as 'the national cake'. The only way for everybody in the nation to get richer is to expand production, and this is usually done by giving the workers better machines to work with. It is done, in other words, by capital investment undertaken by businessmen. The day when it is done by the workers working harder does not exactly seem to be upon us. Thus, because of the quite selfishly motivated activities of businessmen, the whole nation experiences steady rises in its standard of living -- in Australia at about the rate of two per cent per annum. Therefore, if anybody is getting richer at more than two per cent per annum he is doing so at the expense of someone else. Individuals may do this of course by such means as winning the lottery, getting for themselves more specifically career oriented education, by real estate speculation and a whole host of other means. Since they are individuals the effect of their so doing on the whole economy (on the incomes of the rest of us) is too small to be noticed. Paul Getty (said to be the richest man in the world and probably worth approximately $1,000 million) made this point well to a visiting agitator who told him that he should divide up his fortune and give equal shares of it to the workers. Getty then had his accountants do some sums and said to the agitator: 'O.K., well at least I can give you your share of my fortune' -- and handed the agitator 14c. However, what is true for individuals is not true for whole sectors of the economy such as the members of a trade union. If all the members of the metalworkers union get a twenty per cent rise, it will be at the expense of reducing what the wages of all the rest of us will buy. The prices of metal goods will rise and we will be able to afford fewer of them. That the members of the metalworkers became richer will have made us poorer-poorer not in the money we get, but in what the money will buy (what economists call poorer 'in real terms'). No one will of course tolerate just one sector, such at the metalworkers, getting richer at their expense. Everybody will want similar treatment. So everybody will put in for the same rise and everything produced in the economy will have its price raised and everybody will be right back where they started -- including the metalworkers. The whole thing will have been an exercise in futility that made no one richer in real terms, but simply produced inflation (of around twenty per cent). Savers and people on fixed incomes will have been penalised and all the other ill effects of inflation (in this case 'cost push' inflation) will ensue. Logically, the only wage rises that a union can get for its members is whatever rise would cover any increases in production they have accomplished. If productivity has increased two per cent and they get a wage rise of twenty per cent, they will still end up with only a two per cent rise in real terms (purchasing power). The other eighteen per cent will simply be inflation. As mentioned at the beginning of this chapter, the logical thing to do is to settle for two per cent in the first place.
How can cost push inflation such as that described above be solved? How can unions and other monopolies be persuaded to accept only such rises in income as they have produced? The answer is not a simple matter of just one measure. Rather it is a multi-pronged attack on the problem which is required. A concerted anti-monopoly policy has to be implemented. To deal with the labour monopolies first:
Policy towards labour
The first measure required is restoration of automatic quarterly cost of living adjustments to all salaries and wages. This few people seem now to dispute. Certainly the unions themselves are strongly behind it. This would eliminate any need for strikes to recover lost purchasing power of wages. Eliminating strikes would mean more production and more production would mean reduced supply, as a cause of inflation, would be eliminated. Quarterly cost of living adjustments based on the Commonwealth Statistician's Consumer Price Index were once attacked as inflationary in themselves, but to do so overlooks the fact that compensation for inflation will be gained by the workers in the long run regardless, therefore they might as well be given it without the need for them to resort to economic disruption.
The next step would be the relatively unprecedented one of also making automatic adjustments for increases in productivity. These would ideally be annual and uniform nationwide. If the Net National Product (or some other suitable aggregate) increased by three per cent in real terms during the year, a two per cent rise should be automatically given to all workers at the beginning of the succeeding financial year.
Why two and not three per cent? Because the gross increase in productivity would have to have subtracted from it that share which goes to capital. If the workers consistently get only two thirds of the national income they should also get only two thirds of any increase in that income. To do otherwise would only introduce disequilibrium and distortions.
Why should these increases be uniform nationwide? What if one industry increases its productivity twenty per cent. Should they not get more than just a two per cent increase? This is a fairly difficult question, but the reason for the nationwide basis is that it is really the nation as a whole which makes any increase possible. One thing for sure is that any increase is most unlikely to stem from the workers working harder. It will usually stem from investment in better machines or introduction of superior work methods by management. Increases such as this are then not the property of the workers who happen to be working there when such improvements are introduced. Nor are such increases the property of the management. The managers and the owners of the business are highly unlikely to be the ones who thought of the new idea or invented the new machine. The whole question of the ownership of productivity increases is irredeemably complicated. To say that they belong to the nation as a whole and hence to all of us equally, is probably as near as we can get to the truth, and if not, it is certainly likely to be the most generally acceptable practical compromise.
A case with a little difference is where productivity increases are brought about by the introduction of incentive schemes and the like. In this instance, it is the workers working harder that accounts for the increase. Such schemes do have their own inbuilt reward for productivity so further allowance for it on the national level is not required. A national rise in wages due to productivity of, say two per cent, however, would have to be applied to piecework rates as well as to other forms of wages.
Once annual productivity adjustments were introduced, unions would be deprived of one more reason for striking and again the supply aspect of the inflation equation would be improved. In fact, the only remaining reason they could give for agitation is the well-known concern over 'relativities'.
'Relativities' refer to the differences between the wages paid for doing different sorts of jobs. If at one time university lecturers are getting an average of $8,000 per year and schoolteachers are getting an average of $5,000 the relativities between the two are obviously eight to five. If then the lecturers get a rise that brings them up to $10,000 then the relativities have been disturbed (from eight to five to ten to five) and some very angry muttering will be heard from schoolteachers.
Schoolteachers will then consider themselves entitled to a rise of, say, another $1,000 or thereabouts 'to restore relativities'. What can be done about this? Does anything need to be done about it?
The one time when something definitely would need to be done by the government about relativities would be at the time the above two annual adjustments (cost of living and productivity) were introduced. At the time such adjustments were introduced, the government would want to say something such as: 'In future you will get all the wage rises you can possible get automatically. Agitation for more will in future be just plain disruptiveness or selfishness. Anybody who does so will be opposed and resisted by all the authority that the state can command.' If, before this was said, relativities had not been taken care of, many unions would quite reasonably protest: 'You ask us to stop all agitation for more wages, but if we do we will be locked into a permanently disadvantaged position. Two years ago, our members got thirty per cent more than a day labourer, but now they only get fifteen per cent more. We were just about to make a claim to restore the relativities, but if you now will not let us we will never be able to get justice.' And so the lines would be drawn with the government cast in the role of unreasonable autocracy. The resulting showdown could wreck the whole scheme.
A non-monetary relativities index
What would need to be done would be to draw up a non-monetary relativities index. At present relativities are normally negotiated in terms of dollars and the issue of relativities gets confused with other issues such as cost of living and productivity. There are, moreover, no inbuilt checks and balances. If somebody thinks his job is worth thirty per cent more than a day labourer's, the day labourers will not come into the discussion and argue with him. They will in fact hope that he can win his argument and get thirty per cent more. Then they can come forward and claim that relativities have been violated and that the other man's job is only worth twenty per cent more than theirs. So then they will get a wage rise too and the whole thing will go on as a vicious and inflationary circle.
With a non-monetary index this could not happen. Such an index would be drawn up by taking the work of day labourers as a base of 100 units. Then the worth of all other jobs would be expressed in terms of a day labourer's work. If a teacher's work was decided to be worth 150 units, this would mean that his work was fifty per cent more valuable than a day labourer's. How would such relativities be decided? How would we check whether a teacher should in fact be rated as 150? By taking the average relativities to day labourers over the preceding fifteen years. Fifteen years is a long enough period for several cycles of approaching and receding relativities to have been passed through and the average should be the best estimate of what the actual relativities are. It would also be a short enough period not to be affected by real changes in relative work value. Once these initial values for relativities had been statistically established in terms of a common base, they would be subject to further negotiation in the Commonwealth Industrial Court. The various unions would then have to oppose each other if they genuinely thought differently about their relativities, one to the other. The presiding judge or judges could then decide the case on the basis of having heard, in the one hearing, both sides of the case. Australia is in fact fortunate in already having a widely accepted court system for deciding such issues. Other countries wanting to establish a non-monetary relativities index would have to set up courts especially for deciding between competing claims.
Immediately before the introduction of the automatic adjustments outlined earlier, the non-monetary relativity index would have to be applied to all existing wages and all deviant wages adjusted so that the money relativities corresponded to the relativities of the non-monetary index. Since no government ever likes to order a reduction of wages, this might have to be done by upgrading all wages so that the wage most out of line with the index could stay put. This, however, would be a once-and-for-all inflation, not to be repeated, and done in lieu of allowing continuing inflation. If, with subsequent technological and social changes, the value of certain occupations should rise or fall and thus go out of line with the index, this could always be debated and decided in open court and appropriate adjustments to the index made.
What is advocated here is a three-pronged attack on cost push inflation; automatic cost of living adjustments, automatic productivity adjustments and a non-monetary relativities index. If all these three things were introduced, all objective justification for union wage demands would be removed. Any union going on strike to make demands for more money would not have a logical leg to stand on. In such circumstances, they would receive much less public support and sympathy than they do now and the government would be able to act more successfully against them. Cost push inflation would be largely defeated.
The nature of economic power
The underlying assumption of the above-outlined three-pronged attack on union-caused inflation can be expressed in the epigram 'power is plausibility'. Few people in a modern society can get away with defying their governments. Unionists are the major exception. The government does not have sufficient power over them. The power of the unions is too great relative to the government's power. To beat inflation and the social disruptions of strikes, the government must acquire more power relative to the unions. How can that be done? Only by demonstrating that the government is the most fair and the most reasonable.
In a democracy, power does not consist of guns; it is only backed up by guns. A democratic election is not the process of choosing the men best fit to govern. Were that the case, educational and intellectual qualifications could well be the final court of appeal. No, what a democratic election does is to choose those who are most plausible as a government -- those who seem to be the fairest and the most reasonable in what they propose to do. Even in a dictatorship, the leader must be plausible, if only to those on whose guns he relies. The three-pronged program I have outlined would give the government immense plausibility as an authority that has taken account of, and provided for, every possible reasonable demand that a union could raise. The union would be implausible and hence powerless. The officers would be unlikely to get the support of even their own rank and file.
Perhaps this picture is unduly optimistic. Selfishness on the part of some sections of the union movement may still be sufficient motivation to defy even the most plausible opponent. In this case reason is thrown out the window and it becomes a brute conflict of might: who can hurt the other most. In this instance, the government would have to arm itself with extra powers for the conflict such as are outlined in the next chapter. Existing wage setting procedures have succeeded only in producing inflation. The time for new government action has undeniably arrived.
What do we do with the convinced revolutionary who thinks that all the provisions of the above vaunted three-pronged wages policy are still implausible because they simply perpetuate and help to work better a system that is itself intrinsically and basically unjust -- someone who thinks that the worker should get not two thirds of the national income, but all of it? Fortunately, such people are quite rare in this country, and therefore unlikely to form any substantial body of opposition to the policy proposed here. Some answer, nevertheless, must be given to their claims.
The basic point to be made can be put in the form of a question: 'Who digs the ditch-the worker or the shovel?' Obviously the worker would be in difficulty without the shovel and the shovel would be equally ineffective without the worker to wield it. If you are determined to be aggrieved you can, depending on your bias, make a case for saying either that all the credit should go to the worker or that all the credit should go to the shovel. But if we are going to be honest the credit should obviously be divided up between the two. This is precisely what any economic system does. The only variation is what share the system gives to the worker and what share the system gives to the providers of the tools. In Australia and the U.S.A. as we mentioned, the workers get two thirds of the national income. In other countries, such as the Soviet Union, they get much less. What the proportion is depends on how scarce the two factors (labour and capital) are and how much adding a bit more of either increases production. If labour is highly productive relative to capital, it gets more of the rewards. The proportion of the generated income that goes to labour and the proportion that goes to capital, entrepreneurship, etc., is in other words fixed naturally by the free interplay of market forces. The only way this can be upset is by introducing the all-pervasive monopoly of the totalitarian state. People who want that are beyond the reach of any argument that I could put up.
A generational hypothesis
One remaining point to be made about cost push inflation from the labour side, is to consider why it seems to have been on the upsurge throughout the world in recent years. What has happened to the two per cent inflation rates of the Menzies era? The answer does show how urgently government must revise its techniques for dealing with the unions.
Up until the end of the 'sixties', the majority of the workforce could remember the Great Depression. They remembered how valuable a job was and how eagerly work was once sought. They feared unemployment with a holy fear. If the government held the threat (or the reality) of unemployment over their head they would surrender in any confrontation. If they went on strike, they always saw in their mind's eye the unemployed throngs of men crowding at the factory gate ready and eager to take over their job. They were just plain grateful to have work. In their day governments could, and did, control inflation and union militancy simply by bringing on a 'squeeze'-a temporary rise in levels of unemployment. Inflation was inversely proportional to the level of unemployment -- the famous 'Phillips curve'.
Now, however, these men are no longer in the majority at union meetings. The post-war generation has grown up and for this generation the Depression is something vague they have heard about and which they simply see as yet another evidence of the stupidity and incompetence of their predecessors. For them, the world has always been devoid of any serious economic threats and they take material sufficiency as being just the natural order of things. It is certainly not something they have reason to fear will vanish overnight (as it did for the men of 1929). Even if they are thrown out of work, the hardships are only small and temporary. Unemployment is not a weapon that can be used to browbeat them. In the circumstances, why not demand even more in wages and conditions? What is there to lose?
The postwar generation is right. Governments have learnt a lot more about how to control economies. You seldom have any unemployment now unless governments deliberately create it. Certainly there is no fear of things getting so out of hand that we have a repeat performance of the Great Depression. Governments have learnt how to control unemployment. Now they have to learn how to control inflation. In so doing they will have to discard both the outdated ideologies of the Left and the inertia of the Right. No political ideology failing to adapt itself to the times can hope to survive.
This need for new government activity in the field of inflation is widely recognised and is generally referred to as a need for a 'prices and incomes policy'. Just what such a policy should consist of, however, is a matter of no agreement and even less imagination. The 'anti-monopoly' policy suggested in this paper is one proposal for what a prices and incomes policy should consist of.
This leads us to the other side of an anti-monopoly policy: measures to deal with business monopolies. How many prongs does an attack on this sort of monopoly require? Curiously enough, a three pronged attack seems to be required here too. In summary, the three prongs are: tariff cuts, price control and restrictive trade practices legislation.
The first point to be made is that the most effective form of price control that there is is undoubtedly free competition. Anybody who thinks that bureaucratic control can keep prices down better than can competition should consider the case of Australian petrol prices. For over thirty years these were subject to bureaucratic control in the form of the South Australian Prices Commissioner. Every so often, the companies would come along and give full details of their costs and operations and where these costs had risen, the Commissioner would grant a rise in the price of petrol in proportion to the rise in costs. The Australian oil companies formed a cosy cartel (a form of monopoly) without a care in the world. They were happy and the consumer -- because he thought his interests were well guarded -- was happy also. Then along came competition in the form of Eric Sykes and his new and cheeky XL Petroleum Co. Petrol prices were slashed by up to ten cents a gallon wherever his service stations appeared. We would have waited forever for a bureaucracy to give us a twenty per cent cut in the price of petrol, but competition gave it to us almost instantly. And it did not cost us a penny for bureaucrats' salaries! It was not even a matter of the bureaucracy being dishonest or incompetent. It is just that a monopoly has little incentive for cost saving. If a monopolist thinks he needs a new office building he just builds it and passes the cost on to the consumer in the form of higher prices. Thus, when the prices commissioner is told that costs have risen due to the need for new quarters, he checks up to see that the quarters are being used and that they did cost what they were claimed to cost and that is all he can reasonably do. The monopolist has suffered higher costs so in all justice he must be allowed to charge higher prices. Mr Sykes, by contrast, does without a lot of staff and works in quite modest accommodation. Because he is competing and trying to take business away from the big established companies, he has every incentive to cut costs to the bone and pass the saving on in the form of lower prices so he can attract more customers. Under competition, the selfishness of Mr Sykes (he is doing it all for his own good, not as an act of philanthropy) is enlisted to give us lower prices.
Government protection of business monopolies
XL Petroleum, then, sets the model for the best way to attack monopolistic prices. With the all-important exceptions of food, clothing and housing, much of the Australian economy is monopolised so there is plenty of room for improvement. One of the most obvious steps would be for the government to stop protecting monopolies. The previous Liberal government came very close to breaking Mr Sykes by insisting that he conform to regulations designed for companies quite different to his. In fact, only a rise in the international price of crude oil saved him from this attack. Monopolists are great providers of extravagant dinners for politicians and top bureaucrats. Perhaps forbidding attendance at such dinners would be one way of curbing pro-monopoly sentiment in our leaders. The government should have a positive policy of encouraging and facilitating competition -- even a department for it!
One particular way that governments could stop protecting monopolies, is by abolishing Customs Tariffs on all industries except those which are vital for defence. At the moment Australia even has tariffs for protecting the local plastic Christmas tree industry! The whole point of tariffs is to reduce competition from overseas. We need that competition if prices are to be minimised. Australian companies that are too inefficient to stand the pace should close. The consumer cannot be expected to go on subsidising them with artificially high prices indefinitely. The whole reason why monopolies arise is that the larger a firm gets the more advantages it tends to have (economies of scale). This process does have a limit. Beyond a certain point, bigness becomes a net disadvantage. The trouble is that when the optimal size of a business is reached, it may be so big as to be supplying most of the Australian market. There is simply no room for any local competition. In this case, we must have international competition. If our local monopolist begins to put his prices up, he must have the threat of an overseas supplier coming in with lower prices to deter him. Mr Whitlam's recent cut in tariffs has shown that they can be reduced without fear of creating unemployment.
Restrictive trade practices
Another thing that the U.S.A. has had for many years, but which Australia seems only now to be on the brink of getting is restrictive trade practices legislation. This is legislation to forbid small groups of suppliers getting together in various ways to form themselves into an effective monopoly. This can be done both by mergers and by prices agreements. Both have long been rife in Australia. Since our market is so small that it can in many industries support only a small group of suppliers (an 'oligopoly'), it is very easy for collusion to exist beneath what on the face of it does appear to be competition. The American legislation referring to such matters is generally referred to as 'anti-trust' legislation and even it could be strengthened. The businessmen do not like it, but it is good for the consumer.
Finally, for the cases where there is little prospect of prices being kept down by competition, bureaucratic price control must be resorted to. It is only second best, but it is probably better than no control at all. Such is the ever increasing specialisation of modern life that it seems we will always have at least some monopolies with us. There must, therefore, always be some means of checking on whether they are getting greedy or not. It must not, however, be assumed that a monopoly is utterly without check in the absence of bureaucratic price control. There is always inter-product competition and the threat or reality of public criticism. Perhaps the best example of the former is the experience of Australian Consolidated Industries ( ACI ) -- Australia's one-time glass monopoly. ACI had been dozing for many years in its comfortable monopoly position when suddenly beer in cans came along. Its monopoly was broken not by another glass firm setting up, but by competition from another monopoly -- Broken Hill Proprietary (BHP), our steel monopoly. Suddenly ACI had to become innovative and think of the consumer again. BHP itself is the best example of the second form of check that monopolies are subject to -- public criticism. So great has been the national paranoia about BHP that it has actually been afraid to put up prices until it was long overdue.
Here is an example where government price control is needed to help put prices up rather than keep them down. We will only in the long run import steel and pay higher prices for the imported product unless BHP is given more realistic prices now.
To sum up this chapter: It is advocated that inflation due to weak government be prevented by introducing a strengthened version of the U.S. Federal Reserve Board. This would have the obligation to set maximum limits to total government spending (given any particular tax base) as well as controlling banking ('monetary') policy. It is argued that strong unions cause inflation and that such inflation can be solved by a three-pronged policy of automatic national productivity and cost of living wage increments, together with the use of a non-monetary job relativities index. Individual solutions are also advanced for other less central causes of inflation.