The Dry Agenda around 1980

CHAPTER 4

Men are qualified for civil liberty in exact proportion to their disposition to put moral chains upon their own appetites;  in proportion as their love of justice is above their rapacity;  in proportion as their soundness and sobriety of understanding is above their vanity and presumption;  in proportion as they are more disposed to listen to the counsels of the wise and good, in preference to the flattery of knaves.  Society cannot exist unless a controlling power upon will and appetite be placed somewhere, and the less of it there is within, the more there must be without.

Edmund Burke

Dries successes and failures can be assessed only against what they actually campaigned for.

Had Australian Dries not been concerned about poor economic performance they would probably never have found the zeal to campaign.  Initially and predominantly they addressed only those issues with strongest links to the economic.  Asked in the early 1980s by National Times journalists Paul Kelly and Deborah Snow what Dries really stood for, Jim Carlton summarised:

We believe in the competitive market.  We don't equate private enterprise with competitive enterprise.  Therefore, we see an active role for the Government in promoting competition.  We argue for restraint in Government expenditure, direction of welfare towards the truly needy (we oppose middle class welfare) and we believe in firm monetary policy.

We look at the overall public-sector borrowing requirement, not just the deficit.  We want economic growth and we are worried about the inflexibility of the labour market.

From the late 1970s the parliamentary Dries in the Coalition in Canberra appreciated that the dominant weltanschauung would ultimately determine public policy.  This would, they knew, shape policies for new issues (such as Internet commerce) and new circumstances (such as the Asian meltdown) as well as those that were already upon the Australian community.  They therefore determined to appeal to the public over the heads of their Ministers despite the political consequences.

Two accounts of the dry agenda are available and there are many records of portions of it.  One is a booklet John Hyde published in 1982.  It had a cover that one press wag called as "blue as Andrew Peacock's shirts" and became known as "The Blue Book".  The other is Australia at the Crossroads co-authored by Wolfgang Kasper, Professor of Economics with University of NSW at the Royal Military College Duntroon; John Freebairn, Professor of Agricultural Economics at La Trobe University;  Doug Hocking, Chief Economist at Shell Australia;  Bob O'Neil, Professorial Fellow in International Relations at the Australian National University and Richard Blandy, Professor of Economics at Flinders University. ⁽⁴¹⁾

AUSTRALIA AT THE CROSSROADS

"Crossroads" set out to subvert the "Old Establishment" of money, private schools and clubs and the "New Establishment" of unions, media and academics.  It described economic, demographic and social trends as they were in 1980, projected those that were beyond Australian policy influence to 2000 and then suggested two contrasting alternative scenarios.  In the first of these economic reform was avoided, Australians remained highly regulated and privilege prevailed over community interests.  In the second, policy allows markets to find their own price levels without direct intervention and protects the incomes of the population at large by economic growth, high employment and direct transfers of income. ⁽⁴²⁾  In the second Australians would experience:

• More international trade;
• More structural change wrought by new technologies and the removal of protection;
• Fewer restrictions on international and domestic capital flows;
• Resolute application of anti-monopoly and anti-restrictive trade practices legislation;
• Deregulation of many markets and other activities, especially in the area of entry by persons and firms that wish to compete;
• More variation in relative wages in response to market forces;
• Reduction of the Government's role with services, including education, health and welfare;  and
• Expansion of the Government's role in the provision of income maintenance through negative income tax, endowment and voucher schemes.

The book rounded off with amusing letters from each author to one of five hypothetical but typical Australians.  These offer a summary of the publication's advocacy.

Doug Hocking, the Chief Economist with Shell Australia, much the oldest of the authors and avuncular by nature, writes to the imaginary Barbara Donato, a third-generation Australian just graduated from university.  He begins with an amusing attempt by the elderly to show that he understands the concerns of the young, castigates her for not reading his book and then:

We believe that if our policy-makers adopt what we have called the Libertarian approach, your problems and those of many others will be reasonably well resolved.  If it's as simple as all that, why the doubts?  You may ask.  Unfortunately good policies often require hard choices.  Long-term benefits so often can be secured only at the cost of sacrifices today.

Broadly speaking, we advocate a policy of minimum intervention by Governments in markets which can be relied on to operate reasonably competitively.  Where Governments have already erected barriers to competition, such as high tariff walls, we urge their speedy dismantling.

The "energy crisis", we fear, has been exacerbated by the unwillingness of Governments to allow market pressures to sort out imbalances between demand and supply, though I must add that our own Government has, in recent years, taken some out-of-character steps to rectify the most glaring absurdities. ...

The Libertarian approach which we advocate means allowing competitive market forces to operate more freely between countries as well as between firms within a country.  We believe that we have demonstrated that this policy would, in the long run, result in more, not fewer employment opportunities, especially for the young who are, after all, more adaptable and enterprising than people of my age.

Wolfgang Kasper, an Australian citizen by choice, was an academic economist who had discovered his love of freedom and Austrian economics in 1950s Germany where he had worked with the German Council of Economic Advisers and the Kiel Institute.  An optimistic enthusiast who devoted a lifetime to the liberal cause, he addressed his letter to John F Watson Jr, a dynamic young American interested in investing in Australia:

I agree with you that Australia is a country of great economic potential and I share, to a degree, your bewilderment about why this potential has not been fully exploited.

... I am somewhat more optimistic than you are. ... So far, I have seen little genuine reform beyond the veneer of rhetoric.  However, if you lived in Australia you would note that the stagnation of the 1970s has induced many people to re-evaluate long-unquestioned precepts and attitudes. ...

So you should continue to keep an eye on Australia in the next few years and watch how things develop.  At the moment, I probably would not feel too confident about putting my money into Australia, but if you detect that tariffs are cut, capital exchange controls are eased and competition policy sharpened, you can take this as a harbinger of a new start and the beginning of a virtuous circle in which many of the present problems, like the strike problem you mention, will evaporate.  If these signs become visible, bet heavily on this country!  The opportunities for a small, innovative firm like yours could quickly become excellent here, much better than in Europe and probably America.  And if you want to expand into the West Pacific, you will probably feel more at ease in the long run with Australia's political and social climate than with having your investment in a riskier Asian location.  You will find the higher wage levels (but also the higher productivity) of Australia and the cost of business trips North a small price to pay for the security of a politically stable country.  And your wife and children will find our side of the Pacific a very pleasant place to live in.

John Freebairn, the agricultural economist, steeped in price theory, careful and not prone to exaggeration, wrote to Charles MacIntyre, general manager of a large Australian firm producing manufactures.

Australia is well endowed with land, mineral and energy resources.  She has a highly educated population with a diversity of skills and a record of success.  She is in proximity to the rapidly developing economies of the Pacific Basin, and she has a stable political system.

There are ... many factors beyond the control of Australian Governments and businessmen...[n]evertheless, there are several ways in which you and Government can actively influence the future direction of your business, the state of the economy, and the well-being of the population. ...

Our alternative scenario poses a world of change, but much of it predictable and hence manageable, which will quickly reward you and other innovative managers.  Tariffs and other trade restrictions will be reduced by known fixed amounts over the next five years.  Interstate trade costs, particularly coastal shipping will be reduced.  There will be deregulation and vigorous technological innovation in all sectors of the economy.  Restrictions on capital flows will be dismantled.  There will be less need to spend time and money lobbying politicians, filling in forms and attending Government inquiries.  To survive you will have to cope with competition from the rest of the world and you will have to adopt new technology at least as quickly as your competitors. ...

Finally, we cannot avoid change, so why not face the problem directly and attempt to make the most of the available opportunities?

The easy-going Dick Blandy, the expert in labour relations, chose the hypothetical beer-swilling process-worker, Norman L. Beinit (a send-up of Norm the central character of the Government-sponsored Life Be In It television and print program intended to encourage healthy lifestyles.)

When you asked me at the pub what was the strength of Australia at the Crossroads for the ordinary Australian, you rather caught me off guard ... especially as the Windies were none for plenty. ... So let me try again.

I agree that the country doesn't seem to be doing too well lately. ... On the face of it, this does not seem like much of a time to be talking about shaking things up.  Better wait for calmer weather.

Well, the truth is that the weather doesn't look like getting calmer for a while and certainly not by itself.  On the other hand, if we re-rig the boat a bit, we could sail through this turbulent patch of weather rather better.  As a matter of fact, you are one of the Australians on a "no risk" option from our having a go at re-rigging the boat.  The job you are doing as a process-worker isn't all that skilled.  You've moved jobs several times, and provided there are jobs around, you wouldn't be surprised if you moved a few more times.  If we stand pat, there aren't going to be so many jobs for you to choose from as there will be if we accept some changes. ... The big difference for you and Edna (and little Kenny and the girls) [however] is that you will have a much higher living standard if we re-rig the boat now. ...

... if you become unemployed or chronically sick ... under the new welfare system proposed in our book you would never fall below the poverty line because you would receive a negative income tax. ...

... it's Kenny's schooling that Edna is a bit concerned about because of what the papers are saying about kids not learning the 3 Rs properly these days.  We suggest that you could do more about your concern if the Government were to give you a voucher to pay for Kenny's schooling wherever you wanted . ...

Most of us, I reckon, might be pretty happy with a scheme in which we ourselves paid for health expenses up to 5% of our income and were then covered 100%. ...

Bob O'Neil, the defence expert, addresses a fledgling Federal MP.  Had John Hyde received such a letter six years earlier when he entered the Federal Parliament, he would have been a better MP sooner.  After castigating him for being unduly hung up about the existence or otherwise of an immediate threat:

In diplomatic terms, we will never achieve really warm acceptance as a regional partner while our representatives abroad are spending much of their time justifying tariff barriers, apologising for our inability to accept more Asians into Australia, and explaining why we do not consult other Governments in our neighbourhood on questions such as cheap airfares before we introduce contentious policies. ... If we open up our regional relationships ... the emphasis of our diplomacy will change from justification and apology to cooperation.  Relationships will stand more securely through not being founded on the basis of fear, guilt and charity and more on that of mutual contribution to each other's prosperity.  Regional political perceptions of Australia will incline away from the view that we are an alien intrusion and towards the realisation that, without our involvement, the region will be a worse place to live. ...

In social terms, the opening-up of the Australian system to the outside world can also contribute to wider regional acceptance and greater security in the long term.  Australians whose major impact on the region is made by hordes of Ocker tourists chasing booze, girls and bargains [will have their country portrayed] as the South Africa of the West Pacific. ...

In military terms, a mercantilist Australia has to consider facing a wider range of threats with a weaker resource base. ... Instead of bitter wrangles over whether we can afford an airborne early-warning system or an aircraft carrier ... we can have both. ...

In addition ... a libertarian Australia will be less Byzantine in the way it is governed.  While the roles of lobby groups, public servants and politicians will all be important, the last group will have a better yardstick by which to evaluate the demands and advice of the former two.

"Crossroads" developed several attitudes that today are not exceptional but at the time were far from the mainstream.

The authors argued, "Inflation, profit compression and institutional regulation of the capital market ... divert substantial sums into private housing ... [with] small output effect of a given investment." ⁽⁴³⁾  Strangely they did not in this context mention taxation that combined with inflation to impose penal rates on investments with specified dollar values such as bank deposits but did not tax either capital gains made on the family home or an imputed rent.  John Hyde was at the time fond of quoting an employee of a building society, who had told him that "Australians are the best-housed unemployed in the world".  Dries attracted the considerable ire of the housing lobby.

The education lobby loved them even less.  Education was managed to serve the interests of the providers rather than the students and pupils.  The Crossroads authors mildly observed:  "The [OECD] study concluded that 'it is the supply from the educational system rather than the needs of the economy which is the sharply dominating influence in the determination of levels of education for the different occupational categories.' " ⁽⁴⁴⁾

They also wrote "... a mercantilist economy, with its relatively slow growth, will not be able to support a normal defence burden much greater than at present. ... the levels of technology used by the armed services will be constrained by the general level of economic capability of the nation." ⁽⁴⁵⁾  I once asked the older members of a CEDA audience in Melbourne why, since they had had the courage to bear arms for Australia, they were prepared to so weaken the economy that their sons would also be condemned to fly the equivalents of Wirraways against the equivalents of Zeros.  I asked if they felt the outcome of the war would have been assured if the Japanese economy could have rebuilt the Japanese fleet after the battles of the Coral Sea and Midway?  No reply was ventured.

Reflecting the conventional wisdom of the day and its origin as a study for Shell, Crossroads devoted considerable space to the energy crisis.  It asserted that "Liquid fuels are bound to become increasingly scarce in relation to demand and more expensive to produce" and "We conclude that rising energy costs will have some adverse long-term effects on global economic growth".  The authors argued that adjustment was possible and would occur if Governments allowed it to happen but they did not contemplate the possibility that the energy crisis was already over.  They possessed no crystal ball, but Australia at the Crossroads withstands the scrutiny of hindsight remarkably well.

The "Crossroads" authors stated explicitly that Crossroads' two scenarios were not predictions but mere contrasted alternatives.  Significant events, such as the sustained growth of the US economy, occurred that were not anticipated in either and of course their recommendations were not implemented immediately and completely.  Nevertheless, I cannot resist comparing them with what actually occurred.

1973-2000 Average Annual Growth

	Mercantilist 1975-2000 (46)	Libertarian 1975-2000 (47)	Actual 1990s
Agriculture	2.5	4.0	3.2
Mining	3.7	8.0	4.1
Manufacturing	1.7	5.1	1.6
Utilities & Construction	2.6	5.0	2.8
Trade etc	2.5	4.9	3.5
Admin, Dwellings & entertainment	3.0	4.2	3.8
Total	2.5	4.9	3.4
Per Capita	1.7	3.8	2.8

JOHN HYDE'S BLUE BOOK

The introduction of John Hyde's Blue Book explains its origins and purpose:

In a public speech last year, I criticised the Government's failure to maintain direction.  Faced with a disgruntled backbencher, our Prime Minister is apt to suggest a task to keep him busy -- the bigger the better.

He asked me to write down my goals for Australia for the year 2000. ... I am sufficiently convinced of the democratic nature of Australian society to believe that public perceptions of where we ought to go will in the end have a profound influence on where we get to. ...

Our very broadest aspirations for Australia must include security from military threat, individual freedom, and universal prosperity for her people.  So unexceptional are these ends that most would regard them as trite -- a mere call for motherhood.  Yet so often they are prejudiced in the pursuit of less important ends such as electoral success, preservation of the status quo and vested interests of power or wealth, or ideology, or the quiet life.

The achievement of each of these three ends is necessary to gain what I believe is meant by "dignity" and "self-fulfilment".  They are not the last word on some other important ends including justice, communal harmony, compassionate care of the needy, or spiritual ends, but without freedom, security or wealth it is difficult to envisage a society in which these can be the normal expectation.  They are prerequisites of most worthwhile ends.  They are also prerequisites of each other.  The year 2000 without a large measure of all three would appeal to very few of us.

If security, freedom and wealth are our ultimate ends, by keeping them well in mind we can identify a next generation of goals that have immediate implication for Government policy.  The identification of these second-generation goals is the object of this paper.

I have chosen eleven major subjects that I believe would respond to better Government policy, but the catalogue is not meant to be exhaustive:  in fact there are some obvious omissions such as the need to control inflation better, left out because I think the present policies are sufficient if only the Government can keep with them.  Health, although inherently complex, has been tackled by the Government.  The over-regulation of commerce, management of the police force, and the definition and control of vice fall largely outside the responsibility of the Federal Government -- that is not to say that all of them would not be susceptible to the application of appropriate liberal policy.

The financial system, industry protection, transport, communications, industrial relations and employment are mainly economic issues while taxation, welfare, education, Commonwealth/State relations, the process of governing and international relations have increasing political content, but at no stage is the political divorced from the economic.  At each stage, the tendency for short-run political considerations to override economic ends, national security and personal freedom is seen as the nub of a problem.

It reads a bit pretentiously for Hyde's liking now and, noting how much "self-fulfilment" has since equated with selfishness, if he mentioned it today, he would probably be sarcastic.  Nevertheless, this introduction does exemplify several aspects of dryness:  In its attempt to list community ends and fit the policies within them it is, I believe a fair example of the quest for consistency that characterises Dries.  By starting the argument from premises shared with Wets it is an attempt to persuade and not to browbeat.  And it directs attention to the central concern:  the tendency for privilege to prejudice communal goals.

The fates of nine of these policy prescriptions plus inflation, health (which the Fraser Government did not address adequately), the over-regulation of commerce, privatisation and fiscal rectitude -- fourteen in all -- are followed through the succeeding chapters of this book.

JIM CARLTON'S BLUE BOOK

In prosecuting the good fight Jim Carlton, then Member for MacKellar in NSW, brought a number of his own speeches over several years between one pair of covers.  In 1980 he told the Melbourne Business School Association:

... I would like to insert a determined political slant by insisting that a Government should be aiming constantly to encourage self-regulating systems outside the immediate control of the Government, rather than seeking to expand the role of Government, and therefore of bureaucratic decision making into more and more fields of human endeavour.  In other words, the evolving forward structures or frameworks should at least aim for a diminishing Government stream.

The best self-regulating device yet known to man is the market.  It has the capacity to bring about change in the least disruptive way. ... Let me quote Arthur Seldon of the London Institute of Economic Affairs. ... In a functioning market with monopoly bottlenecks minimised and access to supply widened by topping up low incomes, decisions in adapting supply to demand are decentralised to individual undertakings or establishments -- factories and shops, mines and docks, schools and hospitals.  Change is organic, gradual, continuous, by degree.  It affects relatively small numbers.  Disturbance, dislocation, disruption are minimised.  The confrontations in the market are small, and solved by higgling and haggling over price, the peacemaker.

As they all so often did, Jim drew on arguments put in concise form by the IEA.

In the same year he tackled the then popular Luddite myth that technology destroyed jobs:

Improved technology will make some jobs redundant, but it will necessarily and always release resources for the creation of new jobs.  There is no limit to the useful activity that mankind can undertake.  If a machine is used to do what was once done manually, the money previously paid in wages is available to create employment. ...

THE C.E.D.A. SPEECHES

During 1982 Grant Chapman (Liberal, South Australia), Murray Sainsbury and Jim Carlton (Liberal NSW), Steve Lusher (National, NSW), Peter Shack, Ross McLean and John Hyde (Liberal WA) coordinated their speeches in parliament and various forums to present a comprehensive case for economic reform.  They then circulated them as packages and these resulted in invitations to address CEDA meetings.

One such effort involved addressing groups in Sydney and Melbourne.  John Hyde introduced the "circus" with evidence that Australian per capita economic growth was indeed dismal -- Annually over 7 years:  Japan 3.26%, South Korea 8.73%, Hong Kong 7.70%, Singapore 6.44%, Philippines 3.85%, Indonesia 4.78%, Australia 1.37%, and OECD average 2.25%.  What is more, it was getting worse:  during the 1960s it had been 3.19% but during the 1970s only 1.13%.

Murray Sainsbury then described how we had created the problem, Peter Shack the political environment that perpetuated economic mistakes and Grant Chapman what needed to be done.  Shack's address was a good account of how Dries viewed political failure and concluded with a list of principal items from the dry agenda, first saying why there was an agenda:

Whenever the Liberal Party in Government pursues or effects policies which are in denial of Liberal philosophy, freedom is limited, choice is restricted and competition reduced.

Distortions are created, a misallocation of resources is promoted and economic mistakes are made and perpetuated. ...

If the philosophy is clear, then why in policy is it so often denied? ...

An inflated appreciation of the ability of Government, as such, to solve problems not only results in loss of personal and economic freedom but creates and perpetuates social and economic mistakes. ...

The pandering to vested interest groups in response to political pressure ... strikes at the very heart of democracy. ... The giving by Government of new benefits to some inevitably means the taking away from others.

He called for reduced protection; a freer labour market, particularly for an end to "comparative wage justice";  deregulation of rail, sea and air transport;  budget balance; needs-based welfare payments and tax reform involving a broadening of the tax base, better recognition of single income families and an end to the double taxation of dividends.

STONE'S SHANN MEMORIAL LECTURE

Four years after the publication of Crossroads, the retiring Secretary to the Treasury, John Stone, delivered the Shann Memorial Lecture. ⁽⁴⁸⁾  He too saw over regulation of commerce, industry protection and an inflexible centrally-controlled labour market as the principle reasons for Australia's relatively poor economic performance.  Drawing upon Shann's prescient warnings before the Great Depression he warned of the dangers facing an economy that was too like that of the late 1920s.  Some said that Stone, never one to pull punches, had delivered a paper in terms calculated more to offend than to instruct but he had insured that it was widely reported and his authority and unequivocating clarity made the address the most effective warning of the time.

It is time to turn to the individual areas of Government policy.

INDUSTRY PROTECTION FROM INTERNATIONAL COMPETITION

Australian barriers to international trade were extremely high and much of Australian manufacturing was not internationally competitive.  The barriers took the forms of simple tariffs, quotas backed by prohibitive tariffs and, more rarely, subsidies.  If there is one matter on which economists are agreed it is that trade barriers inhibit economic growth.  Further, with encouragement from Dick Boyer and Bill Carmichael at the Industries Assistance Commission (IAC), Austin Holmes at the Reserve Bank, Professor Wolfgang Kasper of the University of NSW (Australian Defence Force Academy), and David Trebeck of the National Farmers' Federation, the Parliamentary Dries believed that if the product markets were deregulated competition would sooner or later lead to deregulation of labour and other factor markets.  (Their "education" in this and much else was typical of a process by which the central ideas were spread not coincidently but by processes that both teachers and learners recognised as features of a campaign.)

The Dries argued that Government-imposed trade barriers were not only inefficient but also unfair.  They made much of the fact that inhibiting trade penalised not only the mining and agricultural sectors but also those manufacturers with the potential to export.

They noted the harm done to international relations, particularly with nations to our near north, and hence to Australian security, by efforts to protect our clothing, textile, footwear and motor industries, Qantas and the Australian National Line.

In John Hyde's Blue Book he wrote:

There is nothing more important for Australia's long-term economic health than the removal of the tariffs and quotas from very high cost industry.  The arguments are well understood and often enough articulated by those responsible:  all that is needed is sufficient political courage to act in the national interest rather than the narrow interest and the long-term interest rather than the short. ⁽⁴⁹⁾

If one did not believe at least as much, one was not a dry.

Australia at the Crossroads had emphasised the benefits of international trade and capital flows, lampooning at length then-existing attitudes to the inflow of foreign goods, capital and ideas. ⁽⁵⁰⁾  Without departing from totally mainstream economic theory the authors produced an easily-read account of the inevitable consequences of protection.  Specifically they called for elimination of border protection over five years.

In the Libertarian scenario the Government has bindingly pre-announced a gradual reduction of all tariffs and other trade restrictions over five years, except for genuine fiscal tariffs.  To ensure that this pre-announcement has public credibility and to fend off lobbying for retention of individual tariffs and quotas, the Government makes these tariff cuts binding under the GATT (General Agreement on Tariffs and Trade) agreement and adopts the simple clear-cut formula that all tariffs are to be cut by the same percentage of the tariff level prevailing at the starting date of the exercise. ⁽⁵¹⁾

Tariffs are an indirect tax and, like sales taxes, raise the prices of the items taxed.  In 1982 Jim Carlton told the Metal Trades Industries Association that:

[W]e use the euphemism "assistance" to describe the Government's conscription of one group in the community to pay for the supposed needs of another.  Governments do not really "assist", they merely redistribute ... industry assistance tends to involve taking resources from relatively more productive industries.  Whenever I get the question:  "What will we do if reductions in protection force us out of business?", I am inclined to say:  "If you can't see the answer to that question then I fear for your shareholders, and also for the taxpayers and buyers of your products who will be forced to subsidise your failure to shift your investment into more productive areas". ⁽⁵²⁾

Many of the assembled manufacturers would not have enjoyed the homily.

THE FINANCIAL SYSTEM

Although there were reservations from Treasury ⁽⁵³⁾ most Dries accepted the overwhelming majority of the findings of the Campbell Inquiry set up by John Howard when he was Treasurer in the Fraser Government.  John Hyde's Blue Book had this to say:

Like so much more of Australian commerce, our financial system is governed by mercantilist regulation which for the most part prevents it from working efficiently.  It is often said that Australians are averse to investment in risk taking ventures to the point that it is inevitable that that our new and potentially very profitable resources-based enterprises must be owned by foreigners.  It is admittedly unlikely that, even with the most perfectly operating capital markets, we could exploit fully the veritable Aladdin's cave over which it is our good fortune to have political control with domestic capital alone.  It is, however, an indictment of something that a nation as wealthy as Australia should invest so little in its future.

The Campbell Inquiry, has identified problems of the Australian financial system that are amenable to Government action and which suggest that the "something" is to be found in the system rather than in the psyche of the Australian people.  In most cases, all that is required of the Government to improve the system is that it ceases the imposition of rules that are discriminatory or inefficient.

For instance, interest rate controls reduce the earnings of small lenders who mainly lend to savings banks and building societies and force small borrowers away from cheaper bank and building society loans into hire purchase.  The Campbell Committee observed that "interest rate controls are an inefficient and ineffective means of assisting low-income potential homebuyers.  They have regressive distributional consequences, harming many they are intended to benefit and benefiting many who do not require assistance.  In short, they can be said to have been counter-productive in achieving their welfare objectives while hurting the community at large by impairing the efficiency of the financial system.

The Report notes that in regulated capital markets the regulations discriminate against lenders, are regressive and, in many cases are inefficient both technically and in the allocation of resources.  Australian banks have been sheltered from competition so that they have not needed to adopt new technology.  On the other hand, they have been hamstrung in meeting reasonable customer requirements by interest rate regulation and other restrictions.

The Australian Industries Development Corporation is not yet commercially viable.  Government insurance offices enjoy unfair advantages and distort the market.  Rules requiring some intermediaries to invest with Government and semi-Government authorities have resulted in a hidden form of taxation by reducing the cost of Government borrowings at the expense of depositors and of potential customers of banks who are, as a result, unable to borrow.  The Committee saw variable reserve requirements as an inefficient means of managing money supply and prefer a floating exchange rate.

Australia at the Crossroads ridiculed restrictions on the entry of foreign banks and control of capital flows and the exchange rate ⁽⁵⁴⁾ and in 1984 Kasper expanded on the theme for the CIS. ⁽⁵⁵⁾

INFLATION

Dries accepted that inflation responds to money supply and believed money supply should be managed by a Reserve Bank that was independent of political interference.  In the late seventies and early eighties, that is before the Thatcher Government and the Bank of England had so much trouble interpreting Britain's monetary aggregates, they had more confidence in the various measures of money, M0, M1, M2, M3 etc than they have today.  Nevertheless, their preference for leaving monetary management to professional central bankers has not changed.  Further, they believed that budget imbalance can make the central bankers' job more difficult.  The Crossroads authors stated that for a collective bargaining "wage system to function without long-term inflation it is absolutely necessary that the Government be committed not to adjust the growth of money supply to validate whatever rate of growth of money wages eventuates in the economy." ⁽⁵⁶⁾  At about this time Thatcher incurred the considerable wrath of some members of the Confederation of British Industry by telling them that they could go broke in any way they chose;  she was not going to validate their wage settlements with inflation.  Settlements they made in anticipation of rising prices would, therefore, in all probability prove too difficult to pay.

FISCAL POLICY

Dries asked three things of fiscal policy:  First, that wasteful expenditure is avoided.  Of course there was some disagreement as to what was wasteful -- for instance Jim Carlton and John Hyde differed on arts funding.  Nevertheless, there was agreement that public-sector waste was far from trivial and that expenditures and therefore taxes were too high.  Most opposed expenditure upon "middle-class welfare", which is the mere churning of taxes and handouts.  All opposed subsidies to industry, and uncosted investments in grandiose capital works.  More generally expressed, they believed that under the present circumstances, one dollar less in Government coffers and one more in private pockets would enhance welfare.

Second, they agreed that expenditure and revenue should balance over the business cycle or, while there is debt to liquidate, be in surplus.  In times of peace and prosperity public debt should be reduced to zero, giving Governments the capacity to respond to a crisis should something such as the two world wars or the great depression again occur and saving taxpayers the interest payments.

Third, they asked that the arithmetic in budgets and election manifestos be sound.  The "rubbery figures" budget of 1977 had reduced the automatic respect that later parliamentary Dries might otherwise have afforded their leaders and party solidarity.

PRIVATISATION

In the late 1970s, the parliamentary Dries had not fully appreciated that private ownership was necessary for the efficient formation and allocation of capital.  Neither had they at first adequately appreciated the tendency for public ownership to overload the political system with the demands of rent-seekers.  They suspected that Cabinets would use the proceeds of privatisation not to retire debt but to finance extravagant current expenditures.  They were, therefore, ambivalent about privatisation and concentrated upon competition in product markets, for instance, advocating domestic airline deregulation but not then the privatisation of Trans Australian Airlines.

Nevertheless, from the beginning they had appreciated that when privatising, Governments should maximise the consumers' gains rather than the sale price.  Government monopolies should therefore, wherever possible, be broken up and sold only into competitive markets even though the immediate benefit to the budget was less.

I was assisted to a conviction that private ownership was the only way to ensure competition, as in much else, by Institute of Economic Affairs publications.  George and Priscilla Polanyi had shown that the financial performance of Britain's nationalised industries was consistently way below that of the British private sector.  From 1955 to 1974 the net annual return on capital of nationalised industries had been in the range 2% to 6% compared with 11% to 19% with privately owned companies.  The six industries nationalised since the war (coal, electricity, gas, railways and the two international airlines BEA and BOAC) had accumulated losses of £1,169 million and had received subsidies of nearly £6,500 million.  The price rises of the goods and services produced by the nationalised industries had been about the same as for all goods and services.  Over the twenty years to 1968 the nationalised industries had reduced employment by 33% while the private sector had increased employment by 16%.  From 1962 to 1972 nationalised industries had paid £67 million in taxes, while privately-owned companies had paid £13,729 million. ⁽⁵⁷⁾

Most Dries became staunch privatisers.  Those in Parliament became convinced that political interference with state-owned enterprises was too hard to avoid.  We would have to accept that Governments would be presented with large dollops of money that they would be tempted to squander.  Just before the defeat of the last Fraser Government, Jim Carlton, then Minister for Health, spelt out the difficulties.  It is unlikely that Malcolm Fraser thanked him for that speech!

He identified the principal shortcomings of the state enterprise model.  From the point of view of the management of the enterprise these are:

• Capital structure is decided politically within the context of constraints unrelated to the needs of the enterprise.
• Product range is also decided politically.
• Industrial relations policy is tied in with the policy for the whole public sector.
• The ability of the management to hire and fire key personnel is severely constrained and the workforce captures the state-owned enterprise.
• Superannuation costs are often governed by rules for the policy sections of the public service.
• Inability to negotiate terms of business with other parts of the public sector.
• Political uncertainty.

He also saw difficulties arising from and for the Minister.  Ministers may have several enterprises for which they are responsible and the board-equivalents never have the same feeling of responsibility for shareholders' funds because they know that if the worst comes to the worst there will always be more taxpayer funds.  Only the minister bears the ultimate responsibility and he does so without advice that is independent of the enterprise concerned.  Departmental advice is normally unattuned to the subtleties of the marketplace. ⁽⁵⁸⁾

Jim might have added to his catalogue the fact the ministers are not normally chosen for commercial acumen.

TRANSPORT

Most Australian transport was concentrated in the public sector, highly regulated and/or protected from competition.  Again drawing on John Hyde's Blue Book:

Non-bulk shipping -- the liner trade -- is controlled by tight cartels, euphemistically called conferences, that negotiate freights with Australian shippers who are, in turn, organised into the shippers' council.  This anti-competitive arrangement is specifically excluded from the ambit of the Trade Practices Act.  Liner freights have risen rapidly at the same time as those freights that have been subject to competition have fallen.

Coastal shipping is tightly regulated by the Navigation Act, part VI which requires every ship engaged in coastal trade to be licensed by the Federal Government.  License is granted only to those vessels that meet Australian manning, pay and even accommodation levels.  This effectively prevents foreign vessels from entering our coastal trade.  Australian coastal shipping is very expensive indeed:  for instance, it costs about half as much to send iron ore from Port Headland to Japan as from Port Headland to Port Kembla in the same sized vessel or, in the opposite direction, it costs almost one and a half times as much to send steel from Port Kembla to Perth as it would to ship the same steel from Japan to Perth.

So costly is coastal shipping that it has been deemed necessary to pay a subsidy of $33 million per year to reduce sea freights to and from Tasmania to levels comparable with mainland road and rail freights of similar distance.

The wharves are governed by powerful unions and by stevedoring companies, which have a monopoly over the supply of labour on the waterfront.  Over-manning and lost time are serious problems.  There appears to be a cosy and effective, if chaste, agreement between the shipping conferences, the stevedores and the unions to meet each other's demands and pass on the costs.  Reports of scandal, even loss of life, are rife.  In short, the waterfront exhibits all the worst features of the concentration of power in a few hands in a regulated environment.

The difficulty of introducing Australian shipping and stevedoring to competition should not be underestimated, yet the burden the industry places upon an island nation dependent on international trade ought not to be ignored.  The Federal Government should abandon the conference arrangement in short order, gradually work toward the repeal of the Navigation Act and gradually introduce competition to the wharves.  Consistent with this approach, any attempt to regulate bulk shipping or extend the worst of stevedoring practice should be resisted. ⁽⁵⁹⁾

John Hyde's recommendation to introduce competition gradually to the wharves proved even more difficult than he imagined, but twenty years on it seems remarkable that at the beginning of the 1980s we felt obliged to resist further regulation of bulk cargoes.

Other preferred transport policies included:

• Notice of termination of the Two Airline Agreement given as soon as possible to become effective in 1989 and the States encouraged to deregulate their air services.
• Unrestricted competition on international air routes, and
• Full cost recovery by Australian National Railways by 1987/88 with lines that showed no signs of becoming profitable closed.

COMMUNICATIONS

The monopolies, Telecom and Australia Post, and the ABC, which enjoyed privileged positions, dominated communications.  John Hyde argued:

The Government should not restrict the development of alternative networks considered to be commercial by those who are prepared to risk their own capital in the development of them using whatever technology is appropriate -- satellite, microwave or cables.

Australia Post and Telecom monopolies should be broken up. ... [L]egal barriers to the full use of electronic facsimile machines should be removed and alternative carriers should be permitted to carry messages on a regular or irregular basis.  All add-on equipment for Telecom's basic service -- handsets, PABX equipment, facsimile machines, telex etc -- should be open to competition.

Satellite ground stations should be privately owned and as numerous as the market dictates.  The number of available television and radio ground stations should not be limited by law below the number of available frequencies.  As many as wish to own cables or provide services through them should be permitted to do so.

Throughout history, the great propaganda machines which have supported despotic behaviour have been run by Governments. ... The Government should adopt those provisions of the Dix Report that will make the ABC more independent of Government finance and control;  the Government Information Unit is unnecessary and should be abolished. ⁽⁶⁰⁾

TAXATION

Decisions to do less work are the form of tax avoidance that most reduces the size of the economy.  The progressive income tax, falling most heavily on those who choose to produce most was not an obviously smart way to raise revenue and the relative ease with which the relatively wealthy avoided it despite mountains of ever-changing law rendered it unfair.

The Whitlam Government had commissioned the Asprey Report.  With it to guide him John Hyde was able to advocate changes in tax law that have since largely come to fruition:  the shift from excessive emphasis on direct taxation to taxing goods and services, the elimination of the double taxation of dividend income, the removal of special deductions for favoured investments, and an end to the tax-free status of income derived from gold.  He also called for more equitable treatment of single income families, and taxation of the benefits of home ownership.  The last was without doubt "courageous" in the Sir Humphry sense and, although the economic case for not favouring housing over other investment and the justice of taxing imputed rents was conceded to him privately, no one was ready for the political consequences.  Ross McLean, quipped in the party room that John Hyde had all the survival instincts of a Kamikaze pilot.  Hyde poured cold water on the popular notions that substantially more revenues could be raised either by eliminating tax evasion, which was too difficult to eliminate, or the then current idea of a resource rent tax. ⁽⁶¹⁾

The authors of Australia at the Crossroads, on the other hand, favoured a resource rent tax, accepting its inevitable anomalies and the possibility of its being applied at rates that inhibited exploration (even more than currently) as a, nevertheless, superior alternative to the plethora of taxes, royalties and penal rail freights then in existence. ⁽⁶²⁾  In the area of direct taxation, they were insistent that the tax bias towards profit retention in established firms must be removed by abolishing the double taxation of dividend income ⁽⁶³⁾ but did not mention the bias toward investment in housing.

Dries were never to reach a clear majority view on the wisdom of resource rental taxation.  It was favoured by some Labor Party Dries.  The objections to it were later spelt out in a Centre for Independent Studies Publication written by Professor Ray Ball and John Bowers. ⁽⁶⁴⁾  Ball and Bowers contended that there were no rents to tax as the big profits made from successful mines and wells financed the millions spent sinking exploratory holes etc.  A resource rental tax thus became a tax on exploration.

Dries remain divided on the wisdom of introducing a broad-based consumption tax.  They generally accept that consumption, particularly if there are no or minimal exceptions, is a more efficient tax base than income which is too difficult to define.  The huge sums spent on tax-accounting are, for the main part, a dead-weight cost to the economy.  However, its easy yield worries some.  Consumption taxation allows Governments to get their hands on huge revenues too easily without the public being aware that they are being taxed.  The Dries who tend to have the strongest objection to income taxation, and who therefore favour broad-based consumption taxes, tend to be those with business experience, who like me who have had most opportunity to take advantage of the inability to define income.  Salary earners seldom appreciate how easy it is for others to avoid income tax by devoting money and effort to doing so.

Australian Dries similarly expressed no consistent view on the taxation of inheritance.  The Australian probate/estate duty/gift tax system had been too easily avoided and too uneven, taxing some families punitively and avoiding others.  It was also too "lumpy" for a tax triggered by an event that could not be accurately predicted.  An accessions tax, taxing aggregating lifetime inheritances allowing an extended time to pay, is, however, a reasonable source of public revenue.  Neither Thatcher nor Reagan sought to abolish death duties. ⁽⁶⁵⁾

THE OVER-REGULATION OF COMMERCE

The Dries were careful to acknowledge market failure but contended that in many important situations Government induced market failures were the most common and Government failure was the bigger problem.  Obviously, command would not be necessary if there were not losers and Dries contrasted win-win voluntary transactions favourably with win-lose command transactions.

Although they were sometimes caricatured as libertarians demanding a society without rules, they had always understood that markets are possible only within a framework of rules.  Dries were in time to devote much attention to that framework but at the beginning of the 1980s most tended to take their presence as axiomatic.

The scenarios that "Crossroads" employed to make its argument contrasted the relative absence of Government control of outcomes with a regulated environment.  The latter was characterised by:  widening productivity gaps between protected and regulated domestic producers and large-scale producers overseas;  investment inhibited on the one hand by doubts about the continuation of protective regulation and on the other by high costs imposed by the protected sector; repeated disputes over income distribution between labour, capital and Government;  and unstable industrial relations. ⁽⁶⁶⁾  Kasper, Blandy, Freebairn, Hocking and O'Neil called for substantial deregulation of the production and supply of goods and services with the exception of Trade Practices legislation:

The Trade Practices legislation is sharpened to encourage price competition and broadened to include markets for services.  Markets for minerals, foodstuffs, professional services, transport and finance are deregulated.  Freedom of entry for newcomers is enforced.  Governments withdraw their protection of cartels and self-regulating corporate bodies.  The Byzantine regulations restricting interstate transport, protecting national shipping and airlines' interests, and giving medical, legal and similar associations monopoly powers are withdrawn.  The Prices Justification Tribunal is abolished as unnecessary in the competitive business environment. ⁽⁶⁷⁾

Jim Carlton, gently as was his way, tipped a bucket on all those many people who believed that it was safe for Governments to plan and manage a country like a corporation.  That would, he said, be "very dangerous". ⁽⁶⁸⁾  It is no use saying "no deal" to Governments:  they don't, indeed should not, listen.

John Hyde had in an ad hoc way opposed wool reserve prices, the acquisition of wheat by the Wheat Board, the bulk handling monopolies and the acquisition of lamb by the Western Australian Lamb Board from before his time in parliament.  Once elected, he used an MP's opportunities to continue his opposition, but to little avail.  On the backbench rural committee he had little support; yet it was strange that farmers, who so vehemently opposed mergers and takeovers among wool brokers, demanded choice of farm machinery and resisted mightily attempts to monopolise their fertiliser supply, should insist that the Government monopolise wheat and sugar handling and marketing.  Most Dries, unless constrained by public service rules, had similarly publicly opposed inefficient regulation within their own areas of interest and expertise.

PRIVATE PROPERTY AND SOVEREIGN RISK

Dries had few doubts that private property was a necessary condition for market exchange and private saving and that it stood between the state and individuals' liberties.  They were not, however, in the late 1970s as familiar as they became with the tendency of Government to attenuate property by over-riding individual rights without compensating owners for their losses.  Except in left-wing anti-property circles there was then less discussion of the role of property than there was in later years.

The relatively complex example of the Commonwealth and State Government's attempts to regulate fish stocks off the South East corner of the nation illustrates several of the relevant principles and dilemmas. ⁽⁶⁹⁾

As it is too difficult to establish individual ownership of ocean fish stocks, nobody has an incentive to preserve them and in the absence of imposed rationing over-fishing is inevitable.  Regulation of this industry was thus not of a type with the anti-competitive favouritism that confers economic rents on undeserving businesses, keeps bureaucrats employed and causes voters with relevant vested interests to return undeserving politicians.  In this case, however, the Governments regulated badly.

They restricted the size and horsepower of fishing boats but the regulation did not tend towards efficiency and was not effective.  It made fishing needlessly costly and, when better gear allowed small boats to catch more fish, it didn't work.  The Federal Minister, nevertheless, told the fishermen that the method would be retained and they invested accordingly.  Then, in spite of the assurance, Government changed from regulating inputs to restricting individuals' catches.  It cancelled the previous entitlements to fish for the regulated species and substituted instead a system of individual transferable catch quotas.  The new rules should have been more efficient and they were more effective.  Nevertheless, a lot of anger was generated and the Government lost two major court cases.  Despite eight inquiries, five years on, the fishermen still did not enjoy stable rules.

The administrators cannot have understood the nature and role of private property and their, no doubt well-intentioned, efforts failed.  Without bothering to defend the contention, the Commonwealth Government claimed that the fish in question were a community resource.  They were not.  It is true that certain residual rights rested with the community -- those affecting recreational fishing and the unregulated species for instance -- but other rights had been alienated.  Before the introduction of output quotas, the relevant private property right was to catch as many fish as each licensee could with a boat of the specified characteristics.  This right was as much private property as the right to cultivate a farm or occupy a residential house.  The Crown is entitled to acquire private property but only, says the Constitution, "on just terms".  In the case of the fishermen, the compensation, in the form of the output license, was in some cases unjustly low and that was the root of the subsequent trouble.

The situation of the fishermen has very many parallels.  Property is a bundle of rights.  When owners' rights are taken from the bundle, property is reduced in value.  For various reasons but particularly in the name of land-use planning and environmental protection, the Crown takes rights to graze, cultivate, build upon, export, import, sell, buy, lease and very much more without conceding the need to compensate the owners.

The converse also occurs.  Governments give away property to private citizens without pricing them properly, as the broadcasting spectrum has been alienated to private ownership by successive Governments.

Although Dries often recognised the individual injustices and sometimes wrangled with Governments in defence of private property, the nature of property rights did not feature in any general or theoretical way in the early1980s debates.  It is perhaps a consequence of Dries' early failure to take-up the issue that little progress has been made at the level of public policy despite increasingly sophisticated public discussion.  Property rights and the risk of their uncompensated taking by the crown (sovereign risk) are today major dry issues.  They contend that when private property rights are taken by the Crown then it should be at public cost rather than that of the savings of unlucky individuals.

WELFARE

During the ten years to 1979, pensions, benefits and allowances had increased from 2.8% to 6.4% of GDP and from 11.7% to 22% of Commonwealth outlays.  These increases had been brought about mainly by the creation of new benefits and by easier access to the income security system so that over the decade the proportion of the population in receipt of income security benefits had nearly doubled.

Nobody argued that the adverse economic effects of welfare were sufficient reason to abandon Government welfare but, with difficulty, Dries said that they needed to be taken into account when assessing alternative strategies.  Access to welfare does induce some work shyness;  taxation does encourage people to work less hard and to devote resources to tax avoidance;  and Government guarantees of income during old age, unemployment and sickness does discourage saving.  To ignore these tendencies was a recipe for bad policy.  To admit them was to be accused of possessing a hard heart or worse.

Although aware of the disincentive effects of means tests, Dries favoured a welfare system that was to a much greater extent based on need than was then the practice.  John Hyde wrote:

That the financially stronger members of society ought to ensure that the financially weaker do not needlessly fall below reasonable standards of material wellbeing is a value judgement shared by most and is not questioned here.  Aproblem has arisen, however, because, increasingly, payments are made to those who are not in need of them while, arguably, the needy still get inadequate succour. ⁽⁷⁰⁾

Specifically, Hyde called for the family allowance to be means-tested -- not a proposal that found much political support.

The parliamentary Dries (and others) were concerned by the mismatch of income taxes levied on individuals and welfare payments made to families or households and by poverty traps, that is, the tendency for withdrawal of benefit and taxation together to destroy the rewards of employment.  They worked especially with Ian Wilson, the member for Sturt in South Australian who was sometimes numbered among the Wets, against the sometimes-bitter opposition of feminists, to design a less anomalous tax/welfare system.  Hyde's Blue Book called for a progressive shift toward a system akin to negative income tax with two differences.  The current work test discriminating against those unwilling to accept gainful employment should be retained and income should be imputed to assets enjoyed by the taxpayer/beneficiary.  A common entity -- individual or family -- should be adopted for tax and income security purposes. ⁽⁷¹⁾  Crossroads also proposed a guaranteed minimum income to be achieved by way of a less qualified negative income tax system than Hyde's. ⁽⁷²⁾

The proposals may have been politically naïve but, if adopted, they could have benefited only the needy at the expense of the greedy.

Post-war increases in "welfare" had coincided with increases in some of the problems they once thought welfare would overcome.  Among welfare recipients there were obviously many of both honourable battlers and dishonourable loafers but these could not be neatly categorised.  Moral judgements were inevitable.  Most "welfare" was delivered by families that, for all their ups and downs, mostly delivered it of higher quality than could any outsiders and particularly Governments.  Some, maybe most, Dries suspected that Governments were creating unmet needs by weakening that pre-eminently successful social institution.  If in fact they were, then that was an act of collective madness of the type that ultimately destroys societies.  Most Dries were, therefore, concerned about increasing family breakdown.  They believed that welfare policy should strengthen families but, because families did sometimes fail, the state should provide a safety net while leaving the provision of higher levels of welfare to markets and to families.  Wherever it was possible, state welfare delivery should be via agents of the state competing one with another much as nursing homes did already. ⁽⁷³⁾  It is, of course, one thing to agree upon these general principles and an altogether more difficult task to agree upon the crucial element, the level of the safety net.

In the early 1980s Aboriginal problems did not loom large in dry discussion.  It was not that they did not want to know about them.  John Hyde recalled a conversation with Peter Walsh from about those times in which they each regretted that they had nothing useful to contribute to the debate.  Since the Mabo judgement, however, many Dries have come to a position on some aspects of it which is at variance with what aboriginal activists propound.

While Dries tended to share widespread concerns about the often poor living conditions, low life expectancy, high unemployment, high drug abuse and frequent clashes with the law among aborigines and part aborigines, they were sceptical of top-down welfare that destroys self-reliant individuals.  Their concern that handouts encouraged dependency was, however, a very general one, in the early 1980s raised most often by them in the context of industry policy.  By the 1990s, however, they were discussing welfare dependency in terms of the development of an underclass culturally alienated from mainstream values and aspirations.  The unhappy circumstances of Aborigines were a subset of a more general problem.

Dries are inspired by individualism and optimistic that that self-reliant individuals can better their condition if left free.  However, they were not blind to institutional and cultural differences or to the obvious fact that not all cultures and institutions serve those who adhere to them equally well in our open, technically advanced, Western community.  While tribal Aborigines had institutions and knowledge that were well fitted to the survival of small nomadic bands, these might not serve as well in today's Australia.  Dries, therefore, favoured opportunities for adaptation and learning and questioned policies encouraging separate development.

In the 1970s the land-ownership issue came to prominence in the Northern Territory.  Initially John Hyde at least did not think clearly about it, but Dries quickly came to prefer land ownership to be devolved to self-responsible groups with those responsible individually identifiable, rather than to distant land councils.  They also opposed making land inalienable, since that deprives Aborigines of full use of their property.

Collectivists have, in this area, successfully claimed the moral high ground silencing alternative, pragmatic, politically incorrect, views.  To the extent that Dries opted out of the debate, they allowed a situation to develop where the silent majority felt that official policy and rhetoric were wrong and a backlash to develop.  Had they had the foresight to stress liberal principles for Aboriginal policy earlier, they might have had a beneficial influence on subsequent events.

HEALTH CARE

Even such dedicated reformers as Margaret Thatcher and Roger Douglas found health-care reform too difficult.  No area of public policy better illustrates the types of dilemmas that Dries -- who were far from being ideological zealots -- could not avoid.

Bureaucrats and politicians are prone to defend socialised medicine by noting that Britain spends a lesser proportion of GDP on health care than does the United States.  It is not unreasonable, however, that as living standards rise the average citizen should wish to spend more on avoiding pain and living longer, as he does on his wine, his house and his car.  The objection to Australian health-care is not that we spend too much on it but that we aren't getting value.

Australian health insurance relied upon the community rating principle.  This required insurers to offer everyone the same premiums for the same level of cover irrespective of the age or health of the individual or family that was insured.  It caused people who had low health risks to cross-subsidise people who expect big health bills.  To most people this seemed fair but it had the fatal disadvantage that it encouraged the young and the single to opt out of private insurance.  Then the funds, left with ever-higher proportions of bad risks, had no option but to increase their premiums, which in turn drove more low-risk people away to the "free" basic health-care, offered by Medicare irrespective of capacity to pay.  In 1983 two thirds of the population had been covered by private health insurance:  by the late 1990s this had fallen to one third, there were queues at public hospitals, vacant beds in private hospitals, a huge cost to the Federal budget and significant wealth transfers from poor to rich.

That part of health services that causes the funding problems is the provision of the private goods:  hospital accommodation, surgery, advice and drugs.  The public-goods such as quarantine services are not the main problem.

The health (sickness) industry is like others in that the production and allocation of health services is an economic process responding to competition, demand and price.  It does, however, like most other production, have some economic and political features which, although far from unique, need to be taken into account.  These include:

• The tendency, one that I share, to regard access to a certain minimum standard of health care as a right irrespective of the ability to pay for it.
• The presumption that a long life is an unmitigated good and that anyone who incurs major health costs is unlucky.
• Individuals' health-care costs are unpredictable, they can be large, and they are associated with loss of income.  They are, in short, the sort of costs that prudent people would wish to insure against.  The desired risk-pooling can be provided either by a private fund financed by voluntarily contributed premiums -- HBF or Medicare Private for instance -- or it can be financed by taxes.  There can be no free lunches but some individuals can have their dining out paid for by others.

Two well-known problems that are associated with all insurance are inescapably associated with health insurance.

• The first of these is "moral hazard".  People who are insured against health costs are more likely to adopt life-styles, such as football, that incur health costs and more likely to seek those treatments, such as hip replacements, that improve comfort.  Moral hazard also affects suppliers.  Like car body repairmen who when paid by insurance companies tend to undertake unnecessary work to a higher standard and at greater cost than when paid by individuals, human body repairmen have attenuated incentives to adopt the cheapest effective repairs.  The tendency is well documented in the case of the supply of drugs and I well remember the occasion when I asked my surgeon how soon he could get me out of hospital.  For reply he asked me who was paying -- that is, was I insured?
• The other insurers' bane, "adverse selection", the practice of seeking more insurance when the risk is high, presents health insurance funds with a huge problem.  The tendencies for the low-risk young not to insure privately and for people anticipating heart-bypass operations to take out insurance are extreme examples of adverse selection.

Two other problems that present in other parts of the economy also affect health care.

• The carefully-fostered belief that patients are necessarily in the hands of doctors (the white-coated priesthood who alone can read the auguries and communicate with the Fates) has its usual economic effect:  namely the unhealthy influence of suppliers over demand.  Some analysts go so far as to claim that this influence is so great that this industry is so exceptional and the problem so intractable that its costs can and should be reduced by reducing the supply of doctors.
• The health industry at all levels is highly unionised.

Medicare offers:

• Universal health cover so that no one is faced with crippling expenses.
• Taxpayer-funded medical and hospital insurance.
• Non-transparent cross-subsidies from the majority who have low health risks to the minority with high health risks.

There was no alternative health scheme upon which most Dries agreed.  They divided upon the legitimacy of compulsory health insurance.  The more dedicated civil libertarians believed that people should be permitted to opt out of health insurance.  The more pragmatic noted that, since nobody expected or wanted those who could not pay to be denied treatment for serious conditions, some compulsion was unavoidable.  Better they thought to compel everybody to subscribe to competing health insurance funds than to achieve the compulsion via the tax system.

Dries did agree, however, that by one means or another taxpayer-funded medical and hospital insurance should be available only to those who, because of low income or high health cost, actually needed it.  This did not appeal to some of "the left" who are more concerned about their own privileges than those of the under¬privileged about whom they talk so much.  This group of highly articulate middle-class was to demonstrate its political clout!

Dries further agreed that transfers from low health risk people to high health risk people should be transparent.

Most agreed that compulsory community rating should be abandoned, allowing insurers to charge premiums that are determined by the risk that each patient poses to the insurer.  Since that change alone would have left some people to pay premiums that they could not afford, they wished the Government to spend some of the money it already spent on subsidising everyone subsidising the premiums of those who have low incomes and face high premiums.

They wanted Medicare to charge for membership like any other health fund.

Most importantly, Dries wanted insurers, doctors and hospitals to face market incentives to increase quality and reduce prices.  They did not believe that vigorous health policing could duplicate the necessary incentives.  Funding based on DRGs (Diagnostically Related Groups), sometimes referred to as "casemix", offered an, albeit imperfect, mechanism that could be employed even within the public hospital system.

So far as I am aware, Dries had not spelt out these general principles before the advent of the Hawke Government in 1983 but they can be found in publications by the Australian Institute for Public Policy and the Centre for Independent Studies not long after.

EDUCATION

The authors of Australia at the Crossroads advocated education vouchers to provide parents with choice and put pressure on the institutions to provide quality while ensuring that access to quality schooling was available to every child. ⁽⁷⁴⁾

Other Dries agreed.  John Hyde contended:

The Australian education system suffers the lack of, or very unequal competition.  It absorbs about 8% of the Federal budget and about 30% of the State budgets.  During the past decade, education's share of GDP has risen from about 4% to about 6% of GDP although some people doubt that the greatly increased share of expenditures has led to improvement in educational performance.

At the tertiary level the system is regressive providing free education for people who will enjoy high lifetime incomes at the expense of less wealthy taxpayers who did not attend a tertiary institution and whose children will not.

Those parents who send their children to church or secular private schools pay twice for portion of their child's education:  once through taxes, when they contribute to a school system they do not use, and again when they pay school fees.  Many of those who choose a private education are relatively poor.  Many poorer families are locked into a particular Government school irrespective of their perception of its quality, by inability to pay fees or by school catchment areas.

Governments must achieve greater equity between those who get a tertiary education and those who do not and between the private and the public supply of education at all its levels. ...

At the tertiary level of education, equity should be simply achieved by charging fees to those who receive the benefits ... [and] a system of student loans should be instituted recoverable from earnings later in life. ...

So long as the Commonwealth continues to fund schooling, grants should be made in such a way as to redress the imbalance in funding of Government and non-Government school children.  In fact, to some extent this is happening already. ⁽⁷⁵⁾

At about that time in the context of assistance to the blind, Hyde urged Education Minister Wal Fife to grant vouchers to all children with special educational difficulties taking the Isolated Children's Grant as his model.

COMMONWEALTH/STATE RELATIONS

Our second Prime Minister and a father of the Constitution, Alfred Deakin, observed in 1902 that:

... the rights of self-Government of the States have been fondly supposed to be safeguarded by the Constitution.  It left them legally free, but financially bound to the chariot wheels of the central Government.  Their need will be its opportunity.

He was prescient.  When Hyde recorded that there was too much quarrelling over authority and money, too much talk about where authority lies, too much confusing overlap, too much buck-passing, and too little direct electoral influence over expenditures ⁽⁷⁶⁾ he too was right.  However, the will to make Federalism work better was absent in the State Capitals.

The parliamentary Dries distrusted concentrated authority and, therefore, were federalists at heart.  Hyde therefore wrote:

State Governments must be encouraged to use their taxing powers, if necessary by the Commonwealth's refusing to raise their taxes for them. ⁽⁷⁷⁾

In the United States the several States competed successfully for investment and population by offering drier, more efficient, administrations. ⁽⁷⁸⁾  The Australian Dries who had hoped for similar behaviour here were, however, generally disappointed until the end of the 1980s when Victoria suffered a period of exceptionally bad Government followed by the Kennett revolution, causing Victoria to lose and then gain population.  An earlier episode had, however, supported the theory.  When Queensland abolished death duties and population moved north, within six years all other States had matched the competition.  Dries had, however, not advocated the abolition of inheritance taxes, merely reform of Australia's version of them.

The most obvious competition between State Governments in Australia had until the Victorian episode taken the forms of costly tax breaks, subsidies and uneconomic infrastructure.  Recently similar largesse has been offered to attract sporting extravaganzas.  Investors followed rent-gathering opportunities rather than productive ones, and the nation is in consequence less wealthy that it could be. ⁽⁷⁹⁾

Our States avoid competition by collusive action.  Abetted by the Commonwealth Government, they offer similar tax-and-service packages that are larger than would be the case if each State raised its own revenues.  If a State were to cut its services it would be excoriated by its employees and perhaps also by the electorate, and it would not be praised by anybody since the Commonwealth collects the taxes.

Since only the wealthiest people and companies can move offshore, the Commonwealth, that raises the visible taxes, is a considerable natural monopolist.  It can, therefore, raise more tax than individual competing States could raise in aggregate.  It therefore suits State Governments to have the Commonwealth raise their revenue, even though the price they pay is the "States' Rights" they claim to cherish.  "Fiscal equalisation" remains to inhibit competition between the States, a hangover from notions of equality, particularly collective equality masking personal differences of access to relatively narrowly-defined publicly-provided services.

INDUSTRIAL RELATIONS AND EMPLOYMENT

John Hyde's cautious approach to labour market reform in 1982 might bring a wry smile to the face of Peter Reith who was Minister for Industrial Relations in the 1990s.  Then Hyde wrote:

The abuse of monopoly bargaining by trade unions seriously subtracts from the freedom and wealth of the Australian community.  It is perhaps the most intractable of all our serious problems and, in spite of efforts to overcome it, it may well still be regarded as serious in year 2000.  But as the power of kings, barons, the army, the guilds, and corporations has, in the past, been checked, so in time unions will come to accept limits to their powers that are more acceptable to the community.

In the absence of an adequately free labour market, Australian society has evolved a system that is essentially one of countervailing monopoly, with an umpire that is the Arbitration Commission, Industrial Court or similar State body.  That the system does not work well is evident in unemployment, skill shortages and strikes.

Trade unions are cartels in the market for employees.  Like other cartels, they hold out for higher returns for their members and, like all successful cartels, as they increase the cost of the cartelised good or service, they reduce the demand for it.  As wages are forced up above the level at which everyone can get a job, unemployment results. ...

Most cartels are a conspiracy of the strong against the weak.  In this, unions are no different -- the weak in this case being the unemployed and those consumers who cannot pass on increased costs caused by increased wages.

That Hyde made no mention of productivity and unit cost in this context is I believe more a measure of his own lack of sophistication in the area than that of Dries in general.  The caution displayed in the immediately following paragraphs was, however, widely shared.  This section of the Blue Book was well received and, Hyde is convinced, earned respect for the rest of it.  It was not written with that in mind, however.  Hyde continued in these terms:

The various consequences of engaging unions at law are such that, for all practical purposes, they are, in most important matters, above the law.  Unions deny workers freedom of association or non-association and deny workers freedom to dispose of their own labour or its production as each sees fit.

While the major reason that the centralised award system does not work well is that the agreements reached between the parties are inappropriate, there is the additional problem that one of the parties -- the union -- does not feel bound by agreements reached and there is no way short of bloodshed that it can be forced to comply with the umpire's ruling.  Those who believe that democratic Government can force the obedience of any substantial minority delude themselves.

The Hancock Report was later to make the same point in these words:

[Unions are] centres of power:- they replace the powerlessness of individual workers with collective strength.  It is a mistaken view of a pluralist society that every subject is equally dominated by the might of the state and its arms of enforcement.

Like the barons of old or the drug barons of Colombia today, unions are to a significant extent beyond the reach of civil authority.  Hyde continued cautiously -- too cautiously for some of his friends:

What won't yield to force might, however, yield to leadership.  If the Australian public is brought to understand the nature of monopoly power, in particular its social and economic costs, then the weight of democratic public opinion would oppose the maintenance of any position of privilege.  Then actions which are in restraint of trade or which damage others might suffer a legal restraint which enjoyed almost universal support even within the unions and, what may in the end be more important, those who abuse monopoly would suffer widespread opprobrium.

But if any Government is to be strong enough to remove any of the privileges of trade unions, it must have the support of almost the entire public.  No narrow majority will do.

Trade Unionists are unlikely to forego any of their monopoly rights unless they are convinced that the same principle is applied to everybody.  It is unrealistic to expect unionists -- who can see companies granted monopolist's rights to air routes and wheat farmers granted a legislated cartel to control wheat sales -- willingly to forego the privileges they have won, however damaging those privileges are to others.

If a Government's main influence is but moral suasion, it cannot afford to be inconsistent.  As with other battles affecting human freedom, the process of restoring equality under the law in the matter of employment will take time and patience and will not be achieved until the vast majority understand the nature of the problem and support the measures needed to correct it.  Gradually, with good leadership through consistent argument and even-handed treatment, several things are possible.  Employers will come to understand that Government does not have a primary role in industrial relations and, on pain of financial loss, they will probably perform better themselves;  better awards will be written changing such extreme anomalies as penalty rates;  minimum wage rates will become real minimums with individual employees claiming margins appropriate to their skills;  and unions will more often comply with agreements negotiated or arbitrated.

The first requirement of good industrial relations is an understanding of the nature of the problem.  Government's contribution is to engender that understanding.  Since it is not the Government but the unions that are primarily responsible for unemployment, political self interest should demand reasoned explanation of the problem to the electorate.  Willingness on the part of Government gradually to revoke legislation granting monopoly rights to employer and employee alike is essential.

Clearly, at that time, Hyde was far from advocating anything as liberal as New Zealand's Employment Contracts Act.

In Australia at the Crossroads' libertarian alternative:

The Arbitration Commission continues to exist, but its role has modified perceptibly.  [It] states its assumptions concerning the overall pattern of wage settlements which would best meet the balance of economic and social objectives, sets a wage guideline in view of these stated assumptions.  It abandons the making of awards, however, restricting itself to a conciliation function between parties in dispute.  Collective bargaining governs the development of the pay structure. ⁽⁸⁰⁾

At HR Nicholls Society meetings both Kasper et al and Hyde must have been regarded as decidedly wet.  Dries were later to be criticised for not deregulating labour markets ahead of tariff reduction and domestic deregulation.  At the time Hyde believed that, such was the strength of the union movement, that the pressure of competition in the product markets would be needed to achieve fulsome deregulation of the most important of the factor markets, labour.  In the HR Nicholls Society they breathed air that was more pure but it does not follow that Kasper et al and Hyde were wrong.

THE ENVIRONMENT

In the 1970s, as now, many environmental concerns were soundly based but others were not.  Predictions of catastrophic global cooling still had some currency.  The Club of Rome ⁽⁸¹⁾ predictions had not then been discredited and Zero Population Growth was a sufficiently popular concept to be referred to simply as ZPG.  The oil shocks, caused by the OPEC cartel's in the short term successful attempts to restrict supply, gave rise to widespread fears of serious shortages that would not take the form of unpleasant price rises but an actual shortage of petrol at the bowsers.  Nuclear catastrophe was widely predicted.  The less spectacular but better evidenced environmental disorders including dry-land salt encroachment, the salting of the Murray Darling river system, city air pollution, species depletion, wind and water erosion, and deforestation were then about as much part of public concern as today but they competed for attention with a different catalogue of unlikely catastrophes.

Even so, the environment did not feature much in the early parliamentary Dries' agenda.  Australia at the Crossroads, however, addressed the issue in these terms:

... economic wealth is a precondition for environmental protection.

New extraction technologies and rising prices of any given mineral will tend to increase reserves and resources, as they have in the past, making the exploitation of further deposits feasible.

Its authors clearly did not accept the popular doomsday projections but they did foresee the possibility of environmental concerns limiting access to resources and capital and energy intensive investment leading to a slow down in world economic growth.

By the middle Hawke years and perhaps before, however, an identifiable dry position on environmental matters had been established.  Encouraged by an underlying optimism about human ability to adjust to changing problems and opportunities, it had these features:

• The environment includes irreplaceable and limited gene pools, ecosystems and other features ... some of them will be of enormous benefit to man and no one can predict which.  A practical environment policy must balance the conflicting demands of conservation and development, within constraints (social, economic, political, legal) imposed by society. ⁽⁸²⁾
• Much environmental degradation occurs because of the circumstance where nobody owns an asset such as rangeland, a fish stock or a water supply, it, therefore, pays people to consume what they can before others beat them to it.  In such circumstances sometimes the surest way to protect environmental values is to provide the assets with owners who have the authority and incentive to husband them. ⁽⁸³⁾
• Where ownership is impractical, as it is in the case with clean air, then usage must be rationed, but even then tradeable emission rights, perhaps above a small minimum, usually offer the most efficient method of achieving any desired level of air quality. ⁽⁸⁴⁾
• Environmental ends necessarily compete with others and to inform the trade off regulators should examine the economic as well as the environmental effects of the developments and proposed controls. ⁽⁸⁵⁾
• Miners, foresters, and other developers should enjoy secure although restricted access to their resources. ⁽⁸⁶⁾

Dries have since the early 1980s often locked horns with elements of the environmental movement.  Three issues have been in continual contention:  whether environmental ends are absolute or whether they must compromise with other social ends such as living standards, whether there are not market-friendly ways of protecting the environment;  and whether half truths and damned lies may be employed to advance even the best cause.

THE MEDIA

John Hyde is also aware of no evidence that Dries had a comprehensive view on restrictions upon media ownership and on local content rules but at least Jim Carlton had given thought to the issues and Hyde can recall no disagreement.  ABC staff in the press gallery did not take Hyde seriously, but he enjoyed at the time telling them that they should be privatised.  Hyde did not write the following until February 1989 but he is confident it reflects opinions held seven or eight years before:

However professional their journalism, private media, like Government media, will from time to time be selective or report inaccurately to benefit a trade union, a business, a political party, a social class or somebody.  As well as the inevitable biases of owners, editors and journalists, bias may be bought for cash or favours by Governments and by other private interests.

None of this is a serious problem, as long as there is plenty of competition -- right- and left-wing papers, papers that report unions or businesses favourably and so on, do not trouble us.  Neither should right- and left-wing, etc TV and radio stations.

Unlike the print media, entry to the broadcasting industry is restricted by Government fiat, and licences are obviously worth a lot of money.

The picture of Messrs Bond and Packer with their arms around the Prime Minister, which appeared in several newspapers about three years ago, therefore raised the possibility of an alliance which is potentially harmful.

The restriction the Government places on the number of visual and sound transmissions that we may legally receive is unnecessary.  The average American can receive, at home, 46 TV stations and 39 radio stations.  Over 50% of Americans subscribe to cable TV and another 40% could if they wished.  The share of the three major networks, ABC, CBS and NBC, has already dropped from 90% to 60% of prime-time viewing.

In January 1993 Hyde characterised local content rules as particularly egregious protectionism.

... local content rules for Australian television are imposed by rulers who fear alien ideas.  Restrictions placed on the exchange of ideas are in general even worse than those on the exchange of goods, because what is foregone is more valuable.

The Dries were to fail more completely in their efforts to convince Governments to allow competition in the entertainment and information industries than in anything else.

THE DRY MP's ATTITUDES

Dry MPs were not alone in believing that the only lasting way to change public policy was to change what people will willingly accept, but that was one of their distinguishing features.  In this they were as one with the liberal think tanks such as the Institute of Economic Affairs in Britain, Heritage, American Enterprise and Brookings in the US and the Institute of Public Affairs and Centre for Independent Studies in Australia, but way out of step with the received wisdom of their political parties.  They believed, that leadership was the art not of defying or deluding public opinion but of changing it.

In debates in the party room or elsewhere Dries would make general cases for balanced budgets, tighter control of the money supply, reduced public expenditure, freer trade, deregulation, privatisation, and so on.  Agreement around the principle was usually easily obtained, only to dissolve when specifics were raised and it became clear that there would be a political cost.  They became a mite cynical about some of their colleagues but more often they were heartened by the support they actually had within the relative privacy of the party room.

They understood very clearly that it was not sufficient to be correct; one's aim had to be to persuade.  Invective was employed but sparingly because it mostly did not work.  On the other hand they took no hostages.  They did on occasion damage the reputations and electoral prospects of people to whom they bore no malice.  Aware of what they were doing they were more nervous than I think their public performances showed.  Given the trouble they caused and their willingness to flout party solidarity, it is remarkable how little enmity they incurred from party colleagues.  They were exceptionally careful not to break confidences and were extravagant in praise of the Government whenever they felt it had been principled and courageous.  Nevertheless, they backed their own judgement a long way and had reason to be nervous.

---

ENDNOTES

41.  Kasper et al, Australia at the Crossroads, Harcourt, Brace Jovanovich Group, 1980,

42.  ibid p 215

43.  Kasper et al, Australia at the Crossroads, Harcourt, Brace Jovanovich Group, 1980, p196

44.  ibid, p200

45.  ibid, p206

46.  Kasper et al, Australia at the Crossroads, Harcourt, Brace Jovanovich Group, 1980, p189

47.  ibid, p221

48.  J.O. Stone, A decade of Shann memorial lectures, API, p 129 ff

49.  The Year 2000: A Radical Liberal Alternative, My so-called 'Blue Book'.

50.  Kasper et al, Australia at the Crossroads, Harcourt, Brace Jovanovich Group, 1980, p185

51.  ibid, p218

52.  Jim Carlton's Blue Book, p 57

53.  Minutes of a briefing by Dick Rye to the Government parties' Treasury Committee, 7 December, 1981

54.  Kasper et al, Australia at the Crossroads, Harcourt, Brace Jovanovich Group, 1980, p188

55.  Wolfgang Kasper, Capital Xenophobia, CIS 1984

56.  Kasper et al, Australia at the Crossroads, Harcourt, Brace Jovanovich Group, 1980, p240

57.  George and Priscilla Polanyi, Background Memorandum, Comparative Returns from Investment in Nationalised Industries, IEA 1968.

58.  Jim Carlton's Blue Book, p 135

59.  The Year 2000: A Radical Liberal Alternative.  My so-called 'Blue Book'.

60.  John Hyde's so-called 'Blue Book', pp 7 & 8

61.  ibid, pp 10 & 11

62.  Kasper et al, Australia at the Crossroads Harcourt, Brace Jovanovich Group, 1980, p222

63.  ibid, p217, 219

64.  Ray Ball and John Bowers, The Resource Rent Tax: A penalty on risk-taking, CIS, 1984

65.  Peter Walsh, Confessions of a Failed Finance Minister, Random House, p 37.

66.  Kasper et al, Australia at the Crossroads, Harcourt, Brace Jovanovich Group, 1980, p190

67.  ibid, p219

68.  Jim Carlton's 'Blue Book' p 27

69.  David Trebeck et al, Report to the Federal Government of the South East Fishery Adjustment Working Group, 1996, Attachment C

70.  John Hyde's so-called 'Blue Book', p 12

71.  ibid, p 13

72.  Kasper et al, Australia at the Crossroads, Harcourt, Brace Jovanovich Group, 1980, p219

73.  The executive summary of a speech I delivered to a CEDA meeting in October 1992.

74.  Kasper et al, Australia at the Crossroads, Harcourt, Brace Jovanovich Group, 1980, p90

75.  John Hyde's so called 'Blue Book', p 14

76.  ibid, p 16

77.  ibid

78.  Philip Grossman, Critical Issues No.11, AIPP, 1990

79.  Wolfgang Kasper in Building Prosperity, CIS, 2000, p 97 addresses this tendency with the recommendation that a 'non-discrimination rule should stipulate that a State or local Government that grants material advantage to one firm in an industry is automatically obliged to extend that preferment to all other firms in that industry.  This is the equivalent of the most-favoured nation clause, which was so successful on limiting political opportunism in international trade'.

80.  Kasper et al, Australia at the Crossroads, Harcourt, Brace Jovanovich Group, 1980, p239

81.  An international think tank that in 1970 published The Limits to Growth, which was translated into nearly 30 languages and at the time was thought by many to be a well-founded warning of impending shortages of the raw materials upon which growth would depend.

82.  Mandate to Govern, The Australian Institute for Public Policy and The Australian Chamber of Commerce, Edited by John Nurick, 1987.

83.  Jeff Bennett and Walter Block eds, Reconciling economics and the environment, AIPP, see index for 'property rights'

84.  ibid

85.  Mandate to Govern, The Australian Institute for Public Policy and The Australian Chamber of Commerce, Edited by John Nurick, 1987, p 200.

86.  ibid, p 201 and following