No. 156

MARKETS, FEDERATION AND PROTECTION – THE CONTROVERSY CONTINUES

STONE the crows! Is that the sound of a paradigm shifting?

Ever since the end of the 1980s just about everybody, other than union activists and manufacturers in search of a subsidy, has accepted that the twentieth century Australian economy under-performed due to protectionism, industrial awards and arbitration.

The argument is generally associated with Paul Kelly’s idea of the Australian Settlement and Gerard Henderson’s Federation Trifecta.[i] For a quarter of a century the idea of a bipartisan deal between labour and capital at Federation, that allowed the regulators and rentiers to keep the brakes on the economy, was orthodox opinion among practical policy thinkers.

Certainly union officials who relied on the arbitration system for their authority, industry that needed protection to prosper and the clients of the big spending welfare state loathed the idea that a free market could enhance opportunity for ordinary Australians. There were also ample academics who disputed the thesis that the old model had, was and would impede growth. [ii]

But, while they made an enormous amount of noise, the evidence was against them. Australia’s per capita GDP growth was below the OECD average from the 1960s to the 1980s as the economy slowed, stalled and seized due the ancien regime’s regulatory rigidities.[iii] So, rather than argue economics, they claimed there was more to government than managing resources equitably and efficiently (which is rather why got Australia into a mess in the first place).

As Lindy Edwards put it:

The Australian Settlement was embedded in our social values and was a coherent part of our cultural system. Economic rationalism is not. … Our social values dictate that government is the centre of our collective efforts to manage ourselves. It is strong and proactive. It negotiates social conflict and protects the vulnerable. The government’s rejection of this role is breeding distrust. People have felt betrayed and frightened as they watched government withdraw.[iv]

But the evidence was against the idea of the morally sound command economy. Even after the GFC made the case for better regulation of financial engineers, less interested in creating wealth than larceny by algorithm, the fact that it was the social democracies of Europe who were, and remain, in the worse shape demonstrated the utility of marketing economies.

But now the times they are a changing. And the big spending state is back. This has less to do with ideology than the assumptions of ageing populations that their health and welfare are more important than sustainable spending.

And so watch for advocates of the high spending, regulating state seize on Ian McLean’s new book.[v] Not that McLean argues their case. This is fine scholarship, based on evidence not ideology, which makes no polemical points. If there was ever evidence to support Stephen King’s claim (no, not that one) that universities were insane to abandon economic history in the 1980s, this is it. [vi]

As John Edwards suggests, the book is a “patient rebuttal” of the argument that the Federation generation buggered up the economy and that government, plus the industrial relations club, kept making things worse until Hawke-Keating-Howard struck the shackles of protection and arbitration off the economy.[vii]

The essence of McLean’s argument is attractive, at least for everybody who likes to think well of Australians. Our ancestors were no so much idiots as pragmatists, adapting institutions as economic circumstances changed and overall making the most of opportunities.

“Why Australia was, and remains, so rich,” McLean argues, is based on the interactions “between the principal determinants of growth” and the range of different drivers used as circumstances changed – including manufacturing, the incubus to the succubus of protection in the orthodox interpretation. (That’s the Crows’ metaphor, not McLean’s). He writes:

At the core of our story lies a policy and institutional adaptability in the face of markedly changed economic conditions that ensured enhance living standards for a rapidly expanding population over most of the past two centuries.[viii]

Australia, in short, has made its own luck, opening the economy and pursuing growth when the global trade winds blow strong and protecting the country’s standard of living when times are tougher.[ix] In this model, industry protection and regulation are rational responses to national need rather than rewards for the few paid by ordinary people outside the club of manufacturers with unionised workforces:

The goal of diversifying the economic base by encouraging industrialisation may, for a period, have been an appropriate means of securing the social objectives of high population growth through immigration and the maintenance of real wages. In hindsight, it is clear that encouraging manufacturing through tariff protection resulted in Australia being much better placed to secure economic benefits during the war against Japan and, following the war, manufacturing made a significant contribution to exports, thereby easing the recurrent balance of payments constraint to growth at that time. No doubt some efficiency gains from a freer trade regime were foregone: but how significant these were in terms of average incomes remains unclear and how important these were as an offset to the other benefits noted is a matter of speculation. [x]

This is challenging, indeed dangerous stuff, which will be used by opponents of market discipline and advocates of a welfare centred, command economy to justify a return to the profligacy of the 1970s.

Of course it does no such thing. McLean describes where we were, not where we are or are going to be in a world beyond comparison with that of the 1970’s.

But there is going to be a great deal of time spent arguing out the issues that were settled by the economists inspired by Kelly, Henderson and the great Bert Kelly, author of the “modest member” columns in the AFR.[xi]

The Crows are bracing themselves for the car industry announcing why ever greater subsidies for workers and management is an act of patriotism.

ENDNOTES