(Chapter 11 in: F.S. Stevens (Ed.) "Racism: The Australian Experience, volume 3". Sydney: ANZ Book Co., 1972)

Also reprinted as Chapter 14 in: J.J. Ray (Ed.) "Conservatism as Heresy". Sydney: A.N.Z. Book Co., 1974



IN DEFENCE OF AUSTRALIA'S POLICY TOWARDS NON-WHITE IMMIGRATION



John Ray

Among academics there is widespread criticism of Australia's immigration policies. 'White Australia' is definitely a dirty word among much of Australia's intelligentsia. The defences that one normally hears of Australia's policy generally come from politicians rather than from academics in the social sciences (see, for instance 'The evolution of a policy' by the Hon. Phillip Lynch, M.P.-- former Minister for Immigration). In this paper I wish, as both a social scientist and as a conservative, to rebut the usual criticisms made by academics and positively to argue for Australia's present policy.

Some of the criticism one reads, even in reputable academic journals, is so incoherent on the rational level as to be very difficult to answer at all. The article by the anthropologist, Ian Bedford, for instance, (in Politics of 1970, pp. 224-227) contains the bald assertion that: "If the Australian is not to make war on the Asian in Asia, he must live with him on his own soil" -- and a whole series of similar statements whose only support seems to be the moral rectitude of their writer. This writer indeed seems to be characterized by that very 'intolerance of ambiguity' for which the racially prejudiced person has long been slated (e.g. Adorno et al., 1950; Rokeach, 1960). He argues that Australia should allow much more Asian migration just so we will have another Rhodesia here. For the sake of showing white Australians clearly to belong in the 'Baddie' camp of Bedford's conceptual world, he is prepared to encourage all the suffering among, and injustice toward non-white races that he believes to have arisen in Rhodesia. He expects Australia to erupt in bloodshed and riot without the White Australia policy. And it is this that he advocates. It is this that he sees as desirable. For what gain? To show us up as what he believes we really are. This, then, is surely an example of, and a testimony to, the way in which moralism can distort our thinking into working against not only our own self-interest but also against moral ideals themselves.

Among the saner advocates of increased non-white immigration, however, different arguments are generally advanced. As far as I am able to summarize them, they seem to go as follows: 1. Australia is too culturally isolated and inward-looking; 2. Our policy angers other (Asian) nations; 3. We have a moral obligation to help the suffering humanity of Asia in every way we can; 4. Any form of discrimination on racial grounds is, in principle, morally offensive; 5. The gain to Australia would be greater than the loss even in purely material terms. 6. Racism is evil and we should force everybody to become non-racists. I will consider these arguments one by one.

The first is certainly the most superficial and easily refutable point. It is abundantly clear that, on the world scene, Australia has more cultural diversity than most. With several million migrants from all parts of Europe in its population, Australia has a wealth of cultural diversity that few societies in the world could equal. Roughly one fifth of Australia's population was not born in Australia. Is this true of India, of China, of the U.S.A. or of most countries Australia might be compared with? The great European cultures that have made the world in their image are all represented here in strength. Asia and Africa are falling over themselves to emulate the Coca-cola culture and successful materialism of the European world. Are we to weep that we are not being exposed to what Asia itself is rejecting? Being electronically open to and in communication with all the world, Australia is right in the main stream of the world's cultural and intellectual developments. The music of a new composer or the new social theories of a great thinker might reach Australia a few months after they have reached the U.S.A. but is this cause for self-castigation or derogatory comparison with someone such as the Asian peasant who is cut off entirely from the world's intellectual community? If Australia is indeed culturally isolated and inward-looking, then, on the same criteria, all but a tiny percentage of the world's population must be similarly condemned. Sydney and Melbourne are infinitely closer to the New Yorks and Londons of the world (or whatever other great cultural centres one has in mind) than are the Rangoons or Timbuctoos. When I go to the theatre in Sydney, I have a choice of plays that would not, in terms of number and variety, invite derogatory comparison with many other cities in the world. I can go to any number of Greek restaurants in Sydney (or for that matter Chinese, Indian, Italian, Lebanese or Yugoslav restaurants) and drink Greek wine while a roomful of Greeks around me drink Australian beer. In terms of cultural variety the comparison we need fear would be hard to draw. Paris? Perhaps. Peking? No. Even Tokyo, for all its commercialized (and Western) variety, hears fewer foreign accents than we. One may, of course, advocate that we be exposed to a different sort of variety, but variety per se we do have --- par excellence. I myself feel that I have more to learn from a refugee Romanian Jew than I have to learn from an Asian peasant whose one aspiration in life is to own a bicycle. So then, by any standard of objective comparison, I would like to claim that Australia is an intensely cosmopolitan and urban society centred around its two great metropolises -- highly advanced, taking the best that the world has to offer and itself contributing at least its fair share to the dominant world culture of which it forms a part. Personally, I might welcome greater immigration to Australia of educated Indians and Africans because of the refreshing skepticism and joie de vivre that these groups might respectively contribute to our culture, but so to say is to imply a consciousness that any society -- even the very best -- can be improved. It is not to say that the society we presently have is at all a bad one in the respect under discussion.

The second criticism listed above is that our policy angers Asian nations. This is an assertion about which it is hard for either side to be factual. Most nations of the world do have restrictive immigration policies and ours in fact would rate among the more liberal. Nearly all the Asian nations themselves forbid people other than those of their own race from settling and acquiring citizenship. Indeed, others of their own race might not even be welcome. The one country that has made public protest about our policy in recent times is Japan -- a country which itself is almost fanatically ethnocentric and oppressive towards its own small Korean minority. Their protest against our policy is, in fact, the protest of a country which forbids permanent immigration of foreigners against a country which will accept any number of Japanese applicants of sufficient educational standards. Unlike the U.S.A., there are no quota restrictions on Asian settlement in Australia. The only restrictions are educational. Our Immigration Department statistics regularly reveal, in fact, that of those Asians whose application to settle here is approved, not much more than half actually come. From 1966 to 1971 (inclusive), 7,000 applications to immigrate made by Asians were approved but only 3,200 actually arrived. Many Asian countries are in fact themselves most unwilling to allow their people to leave (Taiwan being perhaps the most extreme example), so our policy, in fact, ought to accord well with what they themselves want. In summary then, the only evidence we have for Asian irritation with our policies is the case of Japan. Given Japan's own policy, however, we cannot see this criticism as very deep-seated or defensible. A situation that would, of course, draw criticism from Asian nations would be if we did have here a substantial minority of their people and ill-treated them. Witness the criticisms of Britain by the Afro-Asian nations or of South Africa by the black African nations. Since it is most implausible to believe that Australians would he more tolerant than Britons, our present policy can be seen as one that ensures that we do not anger Asian nations.

The third criticism listed above is that we have a moral obligation to help the suffering humanity of Asia in every way we can. In answer to this I could well make here the usual observations about the relative efficacy of foreign aid versus immigrant intake and I am sure that an impressive case could be made for the claim that the best place to help Asians is in Asia. One could even argue that importing a tiny minority of the Asian population into our midst (into what is, for them, an alien society) would be counter-productive to the welfare of both the individuals concerned and of the countries concerned. What I want to do instead of this however, is to challenge the basic premise that we are under a moral obligation. I would contend that the entire conception of Right and Wrong here involved is faulty. The existence of a discoverable right and wrong is implied in the criticism. Against this we must put the commonplace among many educated people today that there is no such thing as an absolute Right and Wrong. At least since Nietzsche (1906) and Sorel (1915) the existence of moral properties has also been widely questioned among philosophers and social scientists. It is true that the two statements 'X is pink' and 'X is right' have the same grammatical form. While 'pink' does indeed describe a property of the object, 'right' would seem rather to describe our reaction to the object or action. The rightness of some action exists in our opinion of it -- not in the action itself. 'Rightness' attributed to some action is therefore a fraudulent attribution -- designed to provoke argument, discussion or consensus in a pseudo-objective form. It is a polite (but misleading) way of saying 'I favour X' -- or, at best, 'all men would favour X if they had proper consideration for their own long-term self-interest'. If the moralist claims that something other than self-interest is involved, he must at least show where his moral basis emanates from. How does he know whether a thing is an instance of the category 'a right action' ( or 'an action which we are morally obliged to perform')? If God is the source of our moral information one has to be a metaphysician to be a moralist. Since I am not a metaphysician I am not impressed. Even if I was a metaphysician how could I be sure that I was getting the correct account of what God's will is? Given the divisions among religious people on moral questions, it would seem that moral information is not only metaphysical information but metaphysical information of a particularly uncertain sort. The only possible non-metaphysical answer that a moralist can give for the source of his moral information is to say that what is morally right is what he likes, or what all men would like in some optimum situation. The moral information is not to be gained from the action itself. A moralist will see taking up sword (or whatever example of an action one has in mind) as right on one occasion but wrong on another. The action has not changed --only our response to it (a response that is, of course, dictated by circumstances). Applying this to the question in hand, we must translate the contention here at issue as: 'I would approve of us helping the starving millions of Asia in any way we can'. This, of course, deprives the original assertion of its original imperative force. The utterer wished not only to report his own feelings but also to influence us to act in accordance with those inclinations of his. He could have said, 'Thou shalt help ... etc.' but this would not have succeeded in influencing us unless he had direct power over us. He therefore resorted to the subterfuge of moralism and endeavoured to convince us that we were under an obligation similar to a contractual obligation. Once this subterfuge is perceived however we must immediately be interested to ask, 'What is the origin of this obligation? Contractual obligations arise when we exchange one service for another but no such exchange has been undertaken on the present occasion'. In answer to this, the moralist can only resort to the Deity or some other mystical or hypothetical source of obligation. Alternatively he can abandon morality altogether and argue that it would be in our best long term self-interest to act in the manner he advocates. If he does this, the burden of proving his new empirical assertion is thrown upon him. He must advance arguments such as the two considered first above in order to show us that it is, in fact, the case that acting as he advocates would further our long-term self-interest. He may, of course, resort to arguments of a more general sort than the ones considered above. He may say something like: 'It is always wise to be benevolent'. This however is a contentious statement and requires proof. If 'benevolent' is defined in some non-circular way, it can surely be shown that some benevolent acts might not lead to the long-term advantage of any party. One has in mind such adages as 'Sometimes you've got to be cruel to be kind'. Surely the European nations were being benevolent in allowing Hitler to remilitarize the Rhineland in the mid-1930s but it would be a brave spirit who would argue that this action was to our long-term self-advantage. Whether benevolence is wise also depends on what our goals are. If we enjoy aggression or the humiliation and suffering of others, then benevolence will obviously be less often wise than if we are otherwise motivated. Obviously then, general rules such as 'It is always wise to be benevolent' just will not work as such. At best they are guides to consider accepting when we have no other information as to the consequences of our actions or when such information as we do have leads to irresolvably conflicting conclusions. In all situations, our first preference must be to argue each case on its individual merits. It is this, then, that the advocate of change in our immigration policies has to do. He has to show that a change is to our advantage in this particular case. His primary reason for so arguing may not, of course, be that he believes a change would be to our advantage. While some advocates may be in this category, I believe that the greatest number would be people who have been conditioned in their upbringing to accepting as true, parental assertions that some acts are good or bad of themselves.

Little Johnny is told that it is bad to act in a certain way -- not that such an act is disliked by the parent (for whatever reason). Although it will not stand up to rational scrutiny, such children may often accept the inculcated belief that the act itself has this imputed property of 'badness' in some way intrinsic to it. The acceptance that certain acts have a property of 'badness' is also associated with (conditioned) negative affect towards such acts. Therefore, any acts that seem similar to acts that the child has accepted to have this property of 'badness' will suffer from generalization of negative affect. The adult feels (not necessarily consciously) that prohibiting unlimited Asian immigration is similar to acts that he was conditioned to avoid as a child. His advocacy of freer migration may therefore be dictated, not by rational considerations, but by generalized conditioned negative affect. Presumably, however, most of us would want to give more thought to our own long-term advantage in this particular situation than following our immediate emotional impulses. That the moralist's conditioned affect is a poor basis for action can also be appreciated if we reflect that others may not share that affect or even have conditioned affect of opposite effect. Where different people have opposite affective responses to the same actions, we cannot expect argument to alter the affect in any way but we might, if we are optimistic, hope that the policy actually adopted by the parties concerned would be decided on rational considerations of long-term self-interest. If this is to happen, debate on the likely outcomes of the alternative policies is essential before our estimation of the relative advantages to us can be made. Moralistic utterances cannot contribute to such a debate. This dismissal of moralistic utterances as nonsensical does then dispose of not only argument 3 above, but also of arguments 4 and 6. Argument 6, however, could be recast as: 'It would be in our interest to force people to become non-racists'. It is in this form that it will be considered below.

Before that, however, we will move on to argument 5 -- that the gain to Australia of freer Asian migration would be greater than the loss even in purely material terms. Such arguments generally turn on the economic advantages of immigration per se -- such as the elimination of upbringing expenses and the greater entrepreneurial motivation and rate of capital accumulation among migrants. It is proposed that the latter might be higher among Asian migrants and that we could be more selective of educational level etc. if we gave ourselves Asia to pick and choose from as well as Europe. Also falling under this general rubric, is the argument that we could correct the imbalance of the sexes in Australia by importing large numbers of Asian women.

Since Australia's per capita rate of capital accumulation is second only to Japan's and since the migrants we already get do have an average level of education higher than that of native Australians, it is evident that, even though it might in theory be possible to do better, we are certainly not doing at all badly already. Even if we were to make a concerted effort to get the cream of Asian society here, this would be at great cost to those societies and would certainly not be permitted by them. Because average educational levels are so much higher in Europe than in Asia, anxiety not to offend other nations by attempting to drain off their best talent would alone constitute sufficient reason to concentrate our immigrant-seeking activities on Europe. The loss of one professional man is an immeasurably greater loss to Asia than it is to Europe. The third proposal to correct the abnormal preponderance of men in Australia by importing Asian women is probably a rather facetious one. It has obvious difficulties associated with the acceptability of women from a vastly different culture to unwed Australian men and is also a policy unlikely to gain acceptance from the Asian nations concerned.

The sixth point listed above is not readily disputable in its revised form -- but it also has lost most of its impact in the revision. Obviously if all people were not racists this would solve a lot of problems. The point is, however, that bringing Asian migrants here is certainly not the way to achieve this. Britain's experience suggests in fact that this would lead to the emergence of racism. If we want people to become non-racists the only way is the slow sure way of more education.

Having now seen that the reasons why we should have more Asian migration do not stand up well to fuller consideration, we may ask: 'Are there any reasons why we should not have more Asian migration? The answers I want to suggest to this are, in general, so well known as to appear passe but the only answer the Left can generally produce to them takes the form of misapplying a psychiatric but clearly pejorative label such as 'paranoid'.

Let us face the fact that large numbers of even educated Australians do not like Jews or 'Wogs'. This is not concentration camp mentality. It is simply the perceptual discrimination of identifiably different characteristics in these people and the personal preference of not liking such characteristics. The concept of national characteristics stands in somewhat of a bad odour today but for all that it remains true that people who travel overseas have no difficulty in naming what those characteristics are (Cf. Madariaga, 1970). To say that Italians are more emotional is not at all to deny that some Italians are not emotional. It is simply to say that emotionality is more common among Italians than it is among us. We all have personal preferences about what we like in other people. If Italians are more emotional and we don't approve of emotionality -- (for us a cultural value), it makes perfect sense not to like Italians or any other group that is similarly characterized. Disliking Italians in this way is not even inconsistent with liking some individual Italians. I personally don't like marmalade jams but I have occasionally tasted a marmalade jam that I did like. In spite of the exceptions, when I go to the supermarket, I don't buy marmalade. Similarly I once knew even an ardent neo-Nazi who regarded the white race as the only one with a right to exist. One of his best friends and most constant associates was a Pakistani who was nearly as black as the proverbial ace of spades. Some exceptions don't necessarily disturb a rule. Following this line of reasoning through, if Australians like English migrants most and Asian migrants least, it is English migrants we should choose. This may be ethnocentric but it is not racist. The ethnocentric places a high value on those characteristics that are prominent in his own group. The racist actively persecutes members of other groups. Many superbly functioning and well-adjusted Australians I know will justly deny being racists and honestly deplore and condemn Hitler's concentration camps. Yet these same people will, among friends, exchange mocking misnomers for suburbs in which Jews have settled: Bellevue Hill becomes 'BelleJew Hill' and Rose Bay becomes 'Nose Bay'; Dover Heights becomes 'Jehovah Heights'. On the issue of admitting Jews to their exclusive schools and clubs, these WASPs will say: 'We let a few of them in-just to show we're not prejudiced'. If this feeling exists towards a group demonstrably not of inferior educational or cultural standards and which is not easily distinguished by something as salient as skin colour, how much more feeling must be expected against Asians? As happened with Great Britain, ethnocentrism could erupt into racism. Large numbers of Asians are readily accepted in our University communities but outside the sheltered world of academe things are different. We do have in Australia our own long-established Asian communities and we do have a continuing flow of Asian migrants. Pragmatic management has so far kept the proportion of Asians to a level where racism has not evolved. Let not moralists stampede us from this policy into something that can advantage no-one. The misguided compulsions of moralism offer us the prospect of transforming Sydney into another New York. Against this, I advocate enlightened self interest and an Australia not torn by racial tensions. At present I can walk alone at night through the streets of Sydney without fear. I would like to keep it that way.

REFERENCES

ADORNO, T. W., FRENKEL-BRUNSWIK, ELSE, LEVINSON, D. J., & SANFORD, R. N. The authoritarian personality: Harper, N.Y., 1950.

BEDFORD, I. White Australia, the Fear of Others, Politics, 1970, 5, 224-227.

DEPARTMENT OF IMMIGRATION Australia's Immigration policy: Government Printer, Canberra, 1910.

LYNCH, P. The evolution of a policy: Australian Government Publishing Service, Canberra, 1971.

MADARIAGA, S. De. Englishmen, Frenchmen, Spaniards: An essay in comparative psychology 2nd. ed.: Pitman, London, 1970.

NIETZSCHE, F. Beyond good and evil (vol. 12 of The complete works. Ed.: O. LEVY) Foulis, Edinburgh, 1911.

ROKEACH, M. The open and closed mind: Basic Books, N.Y., 1960.

SOREL, G. Reflections on violence" (Trans. T. E. Hulme ) : Allen & Unwin, London, 1915.



POST-PUBLICATION ADDENDA

1). I reproduce below a blog post I put up on Sept 30, 2004:

I WAS WRONG

"I note that Keith Burgess-Jackson has a post up explaining why he has reversed his view of President Bush and why he no longer advocates liberalism in general. Heaps of conservative thinkers have at one time been Left-leaning (including Ronald Reagan and Winston Churchill) so all of them must have had to do a lot of explaining at some stage. I am pleased that I have never had to do that but I am also pleased to say that I have been wrong in the past on some matters nonetheless. I am pleased to find that I was wrong because it shows that I have learned something.

The mistake I made which I most regret was to underestimate the good nature and tolerance of my fellow Australians. In an article I wrote in 1972, I expressed the view that admitting large numbers of ethnic Chinese immigrants to Australia could well cause racial strife—as indeed it actually did in the Australia of 100 years ago or more. In the last 30 years, however, Australia has admitted large numbers of ethnic Chinese immigrants so that they are now probably around 10% of the population—but there seems to have been no friction between them and other Australians whatever. Note however that it was my fellow Anglo-Australians that I doubted. I have never doubted the civilized qualities of the Chinese".



2). In the last half a dozen sentences of the article above, I was (as I said) envisaging what moralism could eventually lead to: No restrictions on immigration at all -- with its attendant problems.



3). My pessimism was shared by a much more eminent Australian than I and for much the same reasons:

As Opposition Leader in 1988, Mr Howard attacked Asian immigration.... His comment in August 1988 was: "I wouldn't like to see it (the rate of Asian immigration) greater. I'm not in favour of going back to a White Australia policy. I do believe that if it is in the eyes of some in the community that it's too great, it would be in our immediate-term interest and supporting of social cohesion if it were slowed down a little, so the capacity of the community to absorb it was greater."

Like me, Prime Minister Howard was delighted when he found that his fears had not been realized.



Click here for a list of all John Ray's comments on moral philosophy

Chapter 15 from: J.J. Ray (Ed.) "Conservatism as Heresy". Sydney: A.N.Z. Book Co., 1974


Economic Growth-Blessing or Curse?



By J.W. NEVILE

TEN OR TWELVE years ago economic growth seemed to be universally considered one of the fundamental values that no one questioned, like Motherhood and God. John F. Kennedy beat Nixon in the Presidential race in the United States partly because he pointed to the low rate of growth of the American economy under Eisenhower and promised that the economy would grow more rapidly when he was president. In the United Kingdom Wilson won an election with the slogan 'Get Britain moving again'. In Australia newspapers had economic supplements with titles such as 'Australia Unlimited'. Economic growth was the thing and its high priests, the economists, seemed to attribute to it all virtues - even mystical ones. The first great modern economist, Adam Smith, was often quoted to the effect that:

Growth endows the community with a sense of vigour and social purpose. The progressive state is in reality the cheerful and hearty state to all different orders of the society. The stationary (state) is dull, the declining (state is) melancholy.

Now, scarcely ten years later, economic growth has become a dirty word in some quarters. The zero-population growth movement has already grown into the zero-production growth movement. Even economists are writing books entitled The Costs of Growth and wondering aloud whether or not their former idol perhaps after all has feet of clay.

Is economic growth then a wonderful blessing that no nation can afford to be without? Is it an unmitigated curse that if not countered will lead us inevitably to global disaster? If the truth lies somewhere between these extremes -- as certainly it does -- is economic growth more of a blessing or more of a curse?

I am a growth man myself, and most of us are only too aware of deficiencies in our society -- both considered nationally and globally -- that can only be overcome by the increase in material resources, which are part of the fruits of economic growth. Most of us are painfully aware of the needs right here in Australia for better social services to eliminate poverty, better hospitals, better schools, not to mention universal sewerage to go with our universal suffrage. Many of us are also aware of the needs of people in the less rich countries we euphemistically call underdeveloped. These needs can only be satisfied through economic growth. The belief that economic growth is a good thing seems little more than common sense.

I want therefore to answer the question 'Is economic growth a blessing or a curse?' by examining the arguments of those who oppose economic growth, and showing that they have no substance. There are three main lines of attack on economic growth.

The first is the anti-materialism of some of the young people in developed countries as exemplified by hippies, and also by some others who would consider themselves radical reformers of the new left rather than drop outs. This rejection of affluence and of materialistic values is mainly confined to the children of affluent families who have always had material comfort and who have become bored with it. It is most evident in the U.S.A., the richest country in the world, and even there is most prevalent among children of the families who are better off economically. Such people have, of course, every right to reject materialism and material comforts for themselves. But surely it is arrogant in the extreme for them to reject it for others, many of whom have never known respectable comfort let alone affluence.

The second group attacking economic growth are a small number of economists led by Professor E. J. Mishan whose views have been very trenchantly set out in his book The Costs o f Economic Growth. Mishan's arguments against growth can be summed up in three statements: (1) Western societies already have enough material things, (2) growth leads to large scale external diseconomies (I'll explain that piece of jargon shortly) and (3) growth leads to rapid obsolescence of knowledge as well as machinery and equipment, and the change accompanying it leads to the collapse of traditional values and growth of dissatisfaction with the status quo.

Mishan's first point might have some validity if the world only contained the rich industrialised nations. Even in these nations there are still numbers of people living in poverty, but Mishan would argue that this should be cured by taking wealth and income from the rich and giving it to the poor. However it is much easier for the better off to give up part of their growth in income to help those not so well off, than it is for them to accept an absolute cut in the living standards to which they have become accustomed. This argument for continued growth has even more force when one remembers that Western nations share this planet with under-developed countries. It can be hoped that the Western nations will give more and more of their resources to help development in underdeveloped countries. They are more likely to do this if they are giving a part of the increase in their income, than if increasing aid to underdeveloped countries requires a cut in their own standard of living.

Mishan's second point has some validity. To explain this it is necessary to explain what economists mean by external diseconomies. The essence of the idea is simple: if something I do causes a cost to others over and above the cost to me that is an external diseconomy. The pollution and congestion caused by cars are good examples of external diseconomies. Mishan especially hates the motor car -- He calls 'the invention of the private automobile . . . one of the great disasters to have befallen the human race'. It is true that in the past, economic growth has often been accompanied by disregard of the costs imposed on others by a whole host of things -- from smokey factory chimneys to the noise of jet aircraft. This is not an argument against economic growth, though it may be an argument in favour of discouraging certain forms of production or consumption. It is an argument in favour of making those who cause external diseconomies bear the cost of them, for example making all potential polluters bear the cost of preventing pollution or keeping it down to an acceptable level.

Mishan's third point, that growth leads to a disrespect for traditional values, has a lot of truth in it. In most societies the fairly rapid change that often accompanies economic growth does lead to a questioning of traditional values and the status quo. How much you are disturbed by measures which increase dissatisfaction with the status quo depends on how much you love the status quo.

Overall, I cannot help but be left with the unfortunate impression that a lot of Mishan's arguments amount to little more than saying that, with economic growth, many people can enjoy things previously only enjoyed by a select few, and that this greatly diminishes the welfare of those who were the select few previously enjoying these things. For example, his tirade against the tourist industry concludes with the words 'the annual invasion of tourists has transformed once-famous resorts ... into so many vulgar, Coney Islands'.

The third type of attack on economic growth has come from the ecologists and conservationists. The most famous example is the study entitled Limits to Growth undertaken by Meadows and others for the Club of Rome. There are two separate issues in what the conservationists are saying. One is the pollution problem and the other the conservation of non-renewable natural resources. I've already said that the proper response to pollution is to make the polluters pay the full costs of removing or preventing the pollution. One must add to this the further point that there may well be some activities that should be banned altogether -- e.g. the discharge of mercury wastes into the sea.

The other barrel of the ecologists' shotgun is that even if we stop polluting, we must still stop growing because otherwise we will exhaust the non-renewable natural resources of this world, perhaps in fifty years, perhaps in a hundred years but certainly sometime. This argument has two parts. One is that if population continues to grow at its present rate the population of the world will double every thirty years and soon there will be standing room only on space ship earth. The mathematics of these projections are unimpeachable, but population is unlikely to continue to grow at its present rate, particularly if we have economic growth. World population growth is dominated by the growth in the population of a small number of large underdeveloped countries, where population is growing very rapidly because the deathrate has fallen much more rapidly than the birthrate. The surest way of reducing the birthrate in these countries is by economic growth. To argue, as some ecologists have, that aid to underdeveloped countries will only give them a higher rate of population growth and make matters worse, is to fly in the face of this fact.

On the other hand it is true that in many underdeveloped countries, reducing the rate of population growth is very important if efforts to improve the standard of living are to have much chance of success. For the world as a whole it is true that the sooner the rate of population growth is drastically reduced the greater the chance of eliminating much of the poverty throughout the world.

The second part of the argument, by some ecologists, that achieving zero population growth will be fruitless, because it will merely postpone the doomsday when we run out of natural resources, is pessimism gone mad. If we can achieve zero population growth in the next seventy-five years and greatly reduce the rate of population growth almost immediately (as the largest country in the world, China, already appears to have done) the doomsday when we deplete this earth's resources will be pushed further into the future, giving us more time to change and adapt our patterns of production and consumption. Consumption patterns will change in any case with economic growth -- as communities become richer they spend more and more on services rather than goods. Productive patterns will also change automatically since if certain resources appear to be likely to be scarce in the foreseeable future their prices will rise -- encouraging both economy in their use and a search for substitutes. Consumption patterns and technology will both have to change greatly over the next 150 years. It seems hysterical to denounce economic growth because of a fear or assumption that change will not take place.

In conclusion I think that all the arguments against economic growth in the sense of growth in output and income per head, are mistaken. They are also extremely dangerous. In as much as they lead more countries to adopt measures to deal with external diseconomies they will do some good, but the danger is that they will distract the nations of the world from doing anything about the real world crisis in our midst -- the disparity in living standards between the developed and undeveloped nations -- between Australia and Indonesia to give but one example. The arguments of the doomsday men are particularly dangerous as they may lead to a fatalistic feeling that if everything is going to end in disaster it is not worth trying to improve living standards in underdeveloped countries or among the under privileged in rich countries. The world does face a crisis lying in the difference in living standards between rich and poor nations. Economic growth, as properly understood, holds the only solution.



Postscript

Because the above was constrained by the absolute limits imposed by a thirteen and a half minute radio talk many points were omitted or touched on only very briefly. Letters that I received after the broadcast showed that this led to some misunderstanding of my general position. Let me therefore add the following five points by way of a postscript.

(1) I do not advocate maximum economic growth as a goal of national policy. Like all economic goods economic growth has costs about which I said very little in my talk. One not insignificant cost is the consumption which must be foregone now to make possible the capital accumulation that is part of economic growth. I am not arguing that we should maximise economic growth. I am arguing that the benefits of economic growth at an appropriate rate far outweigh the costs. I have not considered at all the thorny question of what is the optimum rate of economic growth, except to assert, very strongly, that it is significantly greater than zero.

(2) I am well aware that growth in gross national product, as conventionally measured, is a faulty indicator of economic growth. Not only are various goods, such as the services of housewives not measured in gross national product, but many costs, e.g. many pollution costs, which should be subtracted from gross output to get net production also escape measurement. It is of course genuine economic growth, not growth in the imperfect statistical indicator called gross national product, with which I am concerned.

(3) My talk was concerned with per capita economic growth in total and not with the composition of output. I too would like to see more emphasis on many of the types of goods and services desired by many 'no growth' advocates; for example, I would like to see more of our growth in output devoted to preserving bushland in national parks, to better health services and to better education at all levels, and none to increasing the number of cars per head of population or introducing colour television. This point can be enlarged and strengthened. I indicated in the talk that there will have to be big changes in production and consumption patterns over the next fifty years. To some extent these will happen without any extra market pressures, as certain goods become more expensive due to increases in the relative scarcity of some resources. I see no reason why changes in consumption patterns should not be speeded up; not by government fiat but by forbidding things such as advertising campaigns which at present bias consumers' desires in the direction of more, bigger, and perhaps better material possessions.

(4) The distribution of gross national product is at least equally important, in terms of human welfare, as its total. If economic growth occurs only by the rich getting richer, with no improvement in the lot of the poor I would not consider it worthwhile. This maxim can be applied to the distribution of gross national product between countries as well as to its distribution between people in one country.

(5) Finally I am not one of those "madmen or economists" who think that exponential growth can go on for ever. However, I do believe that if zero population growth is achieved relatively quickly, growth in output per head for the world as a whole can continue at the present rate, or even slightly higher rates, for another 150 or 200 years. There will be immense problems in changing to a no growth world. It does not seem unreasonable to postpone consideration of these until a no growth world is only 100 years ahead, and to concentrate now on the equally immense and equally important problems facing the world in this century.



This paper was originally delivered as a 'Guest of Honour' broadcast on A.B.C. Radio

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?



John Ray

Who benefits?

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.

Socialism

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.

Who suffers?

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.

Nationalisation?

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.

Needy people

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.

Subjective welfare

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.

Strikes

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.

Cost push

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.

Monopolies

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.

Wealth

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.

Productivity

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

'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.

Revolutionaries

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.

Business monopolies

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.

Price control

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.

Chapter 17 from: J.J. Ray (Ed.) "Conservatism as Heresy". Sydney: A.N.Z. Book Co., 1974

This chapter originally appeared as a column in Nation Review, 13 April 1973, p. 785.

How to Control Union Power



John Ray

OUR CONTINUING WAVE Of petrol strikes, particularly in NSW, must be causing a lot of people to think that it is about time we had something like America's Taft-Hartley amendment in Australia. Under this law an American president can order striking workers back to work if their strike is endangering the national economy.

Transferring this legislation directly to Australia wouldn't work at all, of course. It is directly dependent on the immense prestige of the presidential office in the U.S.A.-to which we have no equivalent. An Australian PM ordering workers back to work would be greeted only with amused smiles.

We might consider a law that said some restriction of the right to strike must be accepted where workers are employed in a strategic industry-and simply fine such strikers whenever a strike occurs, regardless of the reason for the dissatisfaction. To do so however would only be to run up against the same basic problem -enforcement.

If strikers simply choose to ignore both the law and the instructions of their government, there is nothing at the moment that we can do about it. You can't put a whole union into jail. Even jailing their leaders, as we have found in Australia, just doesn't work.

Labor has no answer to the problem. I do however think that we in Australia are in a unique position to apply what would in fact be a workable solution. This stems from Australia's long commitment to the notion that disputes between unions and employers should be settled in the courts-just as are disputes between individuals.

We no longer allow the law of the jungle to rule in disputes between individuals. Why should we allow it to rule in disputes between groups of individuals? Surely no one would dispute that the rule of law is better than the rule of might.

Our Australian system falls down, however, precisely because we can never have enough police to lock up all those who flout industrial court decisions. We have the legal system-which is a start that other countries do not have -- but we don't have the power to back it up.

In this situation there is an historical precedent we can refer to. There was once before a time when the king's law could not always be enforced -- in the times of old England before police had ever been invented. An individual who defied the law in those days could often not be caught so he was declared an 'outlaw'. This meant that by defying the law he placed himself outside the law, i.e. he had to forgo his rights under law and the protection that the law affords even to the criminal.

In other words, anyone who so chose could use him for target practice without committing any crime or fearing any legal penalty. It meant he was on his own. For creatures of civilisation it was the ultimate penalty indeed. We still have that penalty available today.

The beauty of providing such a penalty for strikers who defied court orders to return to work is that it would never have to be used. One individual might risk such a penalty but a whole group of strikers would have to be totally out of their minds to do so. Even if a subset of strikers did decide to stay out, enough of the strikers would be determined not to risk it to make a continuation of the strike of little effect. This incentive to avoid outlawry would be provided by the fact that not only police and the army would have the right to beat up, torture, imprison and kill the outlaws but vigilante groups of enraged citizens could also do so.

At present strikers are having it both ways. They have the freedom to injure other peoples interests while other people have no right to hit back at them. Their freedom is our unfreedom. Their freedom to defy the court deprives us of the freedom to buy petrol.

They are destroying the basic symmetry of all legal philosophy -- that rights imply duties. They are accepting the protection afforded by law while acknowledging no obligation to the law. We may have to restore the symmetry by withdrawing the protection. As societies become more and more interdependent, strikes will become increasingly disruptive and intolerable. Societies will be forced to insist on the rule of law in industrial disputes.

It is sad and paradoxical that outlawry may be the only way to achieve it.

Chapter 18 from: J.J. Ray (Ed.) "Conservatism as Heresy". Sydney: A.N.Z. Book Co., 1974


Why Price Control Won't Work



By: PETER SAMUEL

Price controls are not the simple solution to inflation most people seem to envisage. There is one kind of evidence of this in South Australia which has had price controls in operation more or less continuously for thirty years. Prices in that State have risen by almost the same amount as everywhere else in Australia. To be a bit more precise, going back the twenty-four years of the consumer price index, prices have risen by 282 per cent in Adelaide compared with 297 per cent in all six State capitals.

Price control merely raises the very difficult question of what cost increases, especially wage cost increases, should firms be allowed to cover with price rises? The Chifley Labor Government is said to have been voted out of office quite largely because of its persistence with price control. At least, these controls and associated rationing were thought by many contemporary commentators to have ranked with the attempted nationalisation of the banks and the disruptive coal and transport strikes as issues contributing to the defeat of the Chifley Government.

For about two decades afterwards price controls were associated in the minds of the majority of the public with a whole host of undesirables such as government bureaucracy, blackmarketeering, shortages, ration cards, and queueing. But the early seventies seems to be seeing a swinging back of the pendulum of opinion in favour of controls, with the pollsters reporting around two-thirds of the electorate now wanting direct price regulation. Memories of the postwar years have faded.

The scope for squeezing business profits is smaller than most people realise. Take the estimates for the coming financial year which the Treasury has published in the budget papers. Wages and salaries are expected to rise by seventeen per cent or $3,800 million during the course of the year, of which about $1,200m would be extra pay to government employees and $2,600m extra pay for private sector employees. Total pre-tax company incomes in Australia last year was $3,663 million, and non-farm unincorporated enterprises (shops and other small businesses) $2,513 million. The pre-tax profits of the entire non-farm private sector were $6,176 million. At their present rate of growth, wage and salary increases accompanied by a prices freeze would entirely eliminate private sector profits within thirty months.

Only a government of the Allende brand which wished to drive the private sector into bankruptcy would contemplate such a policy. A somewhat less radical government might want to compress total profits by say, twenty per cent. Even this would create grave problems for many businesses, since rates of return vary considerably and ability to absorb cost increases through improved productivity differs greatly from firm to firm. But even such a step as aiming to reduce total profits by twenty per cent would provide only six months breathing space at current rates of wage increases. So price control inevitably takes any government back to the question of how to control wages. In a modern economy with many highly capitalised industries where the cost of strikes are enormous, strong unions are able to extort large percentage increases in wage rates from management, and the weaker unions are able to invoke the principle of 'comparative wage justice' to ensure that these flow through to the rest of the workforce.

Would all this be changed by a government which introduced price controls? The answer is: probably not. Because the union movement is very heavily manned by people who either want to radically reduce business profits or even to exploit price controls to destroy them altogether. And the general wage pace is always set by the most militant unions, since all the others feel a need to avoid dropping behind. If price controls are not to be an exercise in business-bashing then they have to be accompanied by wage restraints.

Then there is the sheer problem of controlling prices. A simple freeze of all prices is easy enough but it cannot last much more than three months, or at the most six months without starting to produce serious unemployment, bankruptcies and supply shortages in low return, low productivity-growth industries.

The experience of short prices freezes has been that they are generally complied with even if they are left voluntary. In Britain, the U.S.A. and New Zealand firms have generally been prepared to accept short price freezes to avoid public antagonism. But wherever freezes have been ended without longer term measures of control they have been followed by price explosions, restoring the rate of inflation very quickly to previous rates.

Longer term price controls are surrounded by fundamental problems. Business people have a great variety of means of avoiding the controls one way or another if they do not like them. Product quality can be reduced, service cut or options reduced. And if price restraint is pressed to any lengths, output may drop and shortages replace price increases as the manifestation of inflation.

Soon after price controls were introduced into the U.S.A., the union leader George Meany got the newspaper headlines by pointing out than a can of his favourite Matzo ball soup contained only three Matzo balls after price control compared with four before. 'The case of the missing Matzo ball' quickly came to characterise the problem of producer resistance to controls.

And once resistance to price control takes the form of reduced output and shortages begin to appear, the consumer loses all bargaining strength, and gets in a very weak position. Buying becomes more time consuming, sellers can adopt contemptuous 'take it or leave it' attitudes and choice is reduced. Inflation is not being eliminated, it merely takes a new form.

In some large areas of spending price control is simply impossible. For example, jobs done on tender such as housebuilding and personal services from such people as doctors, hairdressers, motor mechanics and television repairmen. Governments can lay down elaborate lists of services with price tags attached but it will always be up to the service dispenser to specify what services he has performed. A pound of flour is a pound of flour but what is a short surgery consultation or a general mechanical checking of your car?

The pointlessness of general price control leads those who want business to bear the burden of anti-inflation measures to attack profits. Wartime controls and some of those imposed recently in Western countries have focused on profits because of the difficulty of controlling hundreds of thousands of prices of changing and often unmeasurable goods and services.

Limits on profits encourage businesses to increase their costs, either in reality or in accounting terms. In small businesses anyway costs and profits are very difficult to disentangle. The tax men already encourage small businessmen to become expert at padding the costs of their business and with price controllers also in the act, they will be even more active in the general use of the business car, the business telephone and purchasing items of household use through the business.

As for the companies, limits on profits are a heaven-sent excuse for management to exploit shareholders, through taking more in salaries and expenses. The incentive to greater efficiency whether by investment, by better management or use of new technology is largely destroyed by profit controls.

Heinz Arndt, economics professor at the Australian National University, said in a paper to the recent Perth ANZAAS congress: 'What is at stake, to put it bluntly, is the free market economy . . . the most promising and popular remedy is worse than the disease.'

The single positive aspect of attempts to institute price controls might be the educative effect of a competently run prices body in highlighting the real choices which the community faces --in publicising the hard fact that profits do not constitute a vast reservoir of wealth which wage earners can costlessly tap.

A major crunch will come in October when the Prices Tribunal reports on the BHP move for a 9.42 per cent price rise. The public hearings of this vitally important case are over, and the tribunal staff are beginning work on the report. It is already clear that they are torn between economic and political considerations. Unless the tribunal staff can find some major errors in BHP's accounting, it seems as though they will have to conclude that the steel company's proposed price rise is fully justified, so overwhelmingly strong is the case it presents on its figures. Australia's biggest company has realised that its future depends heavily on the outcome and has put enormous effort into the strategy and tactics of its appearance before the tribunal. It should win its case.

But the tribunal is acutely aware of the politics of its existence, and may feel the need to compromise economic rationality in its first big show case. Government ministers are expecting a compromise judgment that a four or five per cent increase in steel prices is justified, and probably this would go down best with a general public which sees negotiation and compromise as the best way of settling such disputes. The future of the tribunal will be politically easier if it takes the middle course and establishes itself as a kind of arbitration body rather than as a coldly logical economic agency.

But if the tribunal is to establish itself as a soft rather illogical conflict resolver then it will not be playing any educative role. The views of one member of the tribunal, Dr Allan Fels, are well known because he was speaking about prices justification as an academic before its establishment. In a paper to the Economics Society in February he said some things which Labor politicians find most unpalatable: 'To make a significant impact on inflation, any prices policy needs to be complemented by an incomes policy.' And on the role of the tribunal: 'It is not the task of the tribunal to lower the share of profits as a whole permanently: if anyone's, this is the task of the government using tax policy. The tribunal's task at the most is to lower excessive profits in particular cases.' But that was an economist member of the tribunal speaking and it remains to be seen what the others think its role is.



EDITOR'S COMMENT:

We now know, of course, that the tribunal chose the path of political expediency rather than that of economic rationality. ( J.J.R. )



This chapter originally appeared as an article in "The Bulletin", 22 September 1973, p. 27.