CHAPTER 7
The central concept of liberalism is that under the enforcement of universal rules of just conduct, protecting a recognisable private domain of individuals, a spontaneous order of human activities of much greater complexity will form itself than ever could be produced by deliberate arrangement, and that in consequence the coercive activities of Government should be limited to the enforcement of such rules.
F A Hayek (124)
Economic liberalism could not have been adopted how it was, when it was or to extent that it was if the think tanks, the Tariff Board and others had not so assiduously prepared the electorate for change. Ultimately, however, if economic liberalism were to be given effect in Australia, then it would be politicians who would have to implement the principal changes. When, from about 1979, several took up the cause their constituencies were not yet demanding it, the vested interests were still influential and leadership was required of them.
A WORLDWIDE TREND
The worldwide climate of opinion had been changing for many years before the Berlin wall fell in 1989. During the 1980s some Australians were in the van of these changes but they were not by then defying the Zeitgeist. They could draw on experience in Great Britain, the US, New Zealand and many countries, even China.
Although Australia had tried to isolate itself behind high tariff walls and a fixed exchange rate, the international economy had been changing. Since the 1950s and early 1960s, with the gradual liberalisation of capital flows, currency traders had been able to speculate against obvious exchange rate disequilibria of many countries. Lax monetary policies, wage explosions and expansionary fiscal policies led to capital outflows and political lessons. (125)
Australian politicians were naturally interested in what other politicians had done and were doing contemporaneously. This chapter looks overseas. Setting the changing scene also serves another purpose. Every man is entitled to be judged by the standards of his own time. Malcolm Fraser, for instance, makes a fair point when he defends his record by asking critics to note that he governed relatively early in the trend.
The liberal ideals had been disparaged but never been lost. Von Mises had won a following that in time was to be influential, first in post-war Germany and later throughout the developed world. Friedrich Hayek who during the Second World War managed to have The Road to Serfdom published had been one of his students. From 1947 there was the Mont Pelerin Society and, from the end of the 1950s, the IEA in Britain, Milton Friedman in the US and Bert Kelly in Australia. And the United States always had substantial numbers of classical liberals. (They just called themselves "conservative".) Nevertheless, from the 1940s to the 1960s and even into the 1970s it had been possible to portray economic liberals as cranks. Yet by the 1990s such diverse and apparently unlikely places as Hungary, Poland, India and the USSR were deregulating and privatising with gusto.
The absence of moral/ideological rhetoric suggests the respective Governments had been mugged by events rather than inspired by theory or commitment to fundamental values. Nevertheless, the ideas of, for instance, Michael Novak, who among other things stressed the connection between political and economic freedom, and the principled position of, for instance, Lech Walesa, were by then understood and appreciated. Australians too were being mugged by failure, our relative economic decline. Here too the alternatives were understood and appreciated by modest but growing numbers. Had there been no Thatcher, Reagan, Lange/Douglas or Bolger/Richardson Governments, some Australian politicians would no doubt have tried to address our economic malaise, but it is easier to swim with a current than against it.
The Lange/Douglas Labour Government in New Zealand and the Thatcher Conservative Government in the United Kingdom had both been first elected to get rid of administrations that had lost the plot -- Muldoon's and Callaghan's respectively. Australian dry politicians were pleased when the Lange and Thatcher Governments actually introduced genuine reforms and surprised and delighted when their respective electorates gave them second terms. These Governments demonstrated that many things were not after all "politically impossible". When voters withdrew support after those Governments lost direction, Dries' admiration of electorates was further enhanced. It was, they reasoned, entirely consistent with public choice theory that the noise that they had heard in opposition to reform should bear little relationship to the preferences of majorities.
Nevertheless, there can be little doubt that it was the failure of Keynesian economic prescriptions that was responsible for Governments in several countries grasping economic nettles at about the same time. They had run out of attractive alternatives and the poor economic growth of the inward-looking economies in particularly Latin America, South Asia and Africa was evident to any who cared to notice.
THE END OF THE KEYNESIAN CONSENSUS
The ideas of John Maynard Keynes dominated post-war macro-economic thinking. He was undoubtedly a brilliant scholar and publicist. He was a darling of left-wing intellectuals and many not of the left saw him as giving capitalism a new lease of life. He had been one of the principal architects of the "Bretton Woods" arrangement that had fixed the price of gold at US$35 per ounce and committed the major economies to politically fixed exchange rates. These had held up remarkably well as long as capital flows were controlled and until the 1964 Vietnam-War inflation of the US dollar undermined them. During the 1970s, when tried in several countries simultaneously, his means of macro-economic management involving budget deficits and loose monetary policy (Keynesian stimuli) failed spectacularly. Inflation soared as economic growth and employment tumbled -- stagflation. Hayek's prediction, made in the 1930s, was correct, after all!
In essence Keynes had thought that a little inflation could dupe labour and the unions into accepting reductions in the real wage that would restore full employment. When in the 1970s they turned their attention from nominal to real wages, that is, they no longer allowed themselves to be duped, redistribution battles ensued and unemployment rose. In fairness to Keynes it should be noted that had he lived beyond 1946, it is doubtful that he would have approved of undisciplined Governments adding deficit upon deficit without intervening surpluses. Nevertheless, the "Keynesian consensus" of others' interpretations of his position dominated economic policy for three decades after his death.
When stagflation discredited Keynesian policy, the long-standing ideas of opponents of his theories, such as those of Hayek and Friedman, the leading lights of the Austrian and Monetarist schools of economic thought respectively, gained influence. (126)
THE G.A.T.T.
Australia had been one of 23 nations to sign the General Agreement on Tariffs and Trade (GATT) in 1948. Its successor, the World Trade Organisation (WTO), now has around 130 members. GATT was an agreement among nations to:
- apply uniform tariffs to imports of member countries and to apply concessions made to one country to all members of the club, that is to eschew discrimination -- Article I, the "most favoured nation" clause;
- treat goods, once imported, equally with domestically produced goods -- Article III; and
- eschew quantitative restrictions relying instead upon tariffs -- Articles II and XI.
Where the political problems were thought too great, certain exceptions were allowed under Article XX. Agriculture was from the beginning a major exception -- one that was, in GATT's early days when Australia had preferred access to the UK market, favoured by Australia.
The GATT probably could not have succeeded had not the US at a time of superpower rivalry been committed to freer trade as a tool against Soviet influence. Nevertheless, the expansion of trade across national borders was one of the most persistent trends of the half-century from 1950 to 2000, increasing far faster than world GDP. The evidence is overwhelming that the increase in world competition -- a consequence of broadening trade flows -- fostered much higher living standards in almost all the countries.
Under the GATT's auspices, "rounds" of multilateral trade negotiations have by mutual agreement established rules to facilitate international trade. The last four have been called the Kennedy, Tokyo, Uruguay and Doha rounds respectively. Australia, however, did not join the linear, across the board, reduction in tariffs of the Kennedy Round. The Uruguay Round managed to reverse the exclusion of agricultural products, textiles and clothing; and this time Australia recognised the benefits of participation. (127) But that was not until 1986. In the implementation, much but not all of the potential benefits of the Uruguay Round were disingenuously negated by the European Union and the United States. At the time of writing, it is not clear what will come from Doha. Calling it the "Development Round", the WTO emphasised the benefit of trade to the people in developing nations. Nevertheless, environmental and labour organisations and the EU are mounting a strong campaign to allow developed countries to ban the products of developing countries if these are not produced in ways that meet the developed countries' environmental or labour standards.
Although many of the negotiating parties have tended to think in mercantilist exports-good-imports-bad terms, the GATT's activities and its publications influenced thinking. What is more, those who cared to notice must have been disgusted by the cynicism of some negotiating parties, not least the Australian until the Uruguay Round. (128) The utterances of Australian politicians at home and the demands they made upon other nations were wildly inconsistent. Doug Anthony, Australia's Trade Minister at the Tokyo Round, regarded reductions in Australian trade barriers as concessions to foreign producers rather than to Australian consumers, other Australian industries and the living standards of future generations of Australians. In 1979, he told the House of Representatives:
Australia has achieved a meaningful and advantageous settlement with the United States, EEC, and Japan without reducing the current level of protection on a single tariff item applicable to any manufacturing industry ... This was, I believe -- and I am sure industry agrees with me -- a commendable result.
What can a mere backbencher do about such nonsense? Snape, Gropp and Luttrell observed:
This was one of the strongest -- and last -- ministerial statements of this position, fully in accord with the McEwen view of industry and trade policy that had prevailed throughout the post-war period to that time. (129)
The "young old-men" of politics were soon to make way, but that was then by no means apparent.
THE UNITED KINGDOM
Early in 1983 John Hyde ate with an elderly Tory MP in one of the Palace of Westminster's many dining rooms. Looking disdainfully about, his host said, "They think they must go into their parish halls, learn what their constituents want, and come back to tell Her (Thatcher). It is their duty to go into their parish halls and explain what must be done for Britain". He told much about the British Conservative Party at the time.
Britain's power that had so offended Hitler was gone and her living standards overtaken by West Germany. Since by popular agreement East Germany did not count, Britain, like Australia with Japan, had lost the peace. The British had so reduced their economy that, had they faced 1940 again, they would have lost the war. The "British Disease" had not responded to post-war plans, or "social contracts", or North Sea oil, or "The White Heat of the Technological Revolution". In 1983, toward the end of Margaret Thatcher's first term, the British Disease was, however, about to respond to "Thatcherism".
John Ranelagh wrote of Thatcher that she was "the Receiver in Bankruptcy of the British political order". (130) She was said to have declared, "It would be nice to win the next election but winning the argument is far more important". I hope the story is not apocryphal. Australian politicians would be better remembered if more of them followed that advice. When the British public re-elected her in 1983, politicians and the interest groups that had dominated them had been compelled to ask whether voters might be a lot less selfish and short-sighted than they had presumed. In spite of manifest errors in implementation, her domestic policies were becoming received wisdom.
Her "revolution" has been analysed in economic, institutional and political terms, but none is complete without consideration of its moral basis. From Hayek's publication of The Road to Serfdom to Thatcher's election the case for liberalism had been put not just in terms of material advantage but also of right and wrong. Few doubt that Thatcher saw herself as crusading. While still in Opposition she had said:
... you have constantly to assert that people have a moral responsibility which they must accept. Moral in the widest sense of the term. Moral responsibility for their own actions. We must exorcise the idea that if you do something wrong it is not your fault but the fault of society around.
The chattering class still say that the quotation shows Thatcher at her school-ma'am worst. The wider public is, however, not averse to normative assertion. While Thatcher hectored them the British public re-elected her in 1983 and again in 1987. She was, in fact, re-elected more often than any British Prime Minister since Lord Liverpool between 1812 and 1827. It may be relevant that he too was a liberal-economic reformer. (131)
Her critics were no less given to moralising -- they merely employed a different, less traditional, moral scale. They accused Thatcher of dividing Britain -- north against south, black against white, worker against employer, welfare recipient against taxpayer etc. If Britain's remarkable economic recovery and nowadays by European standards low unemployment levels were achieved only at the cost of increased social division, they might still be worth their cost but the cost should be conceded. However, if we recall that her election marked the end of poor James Callaghan's infamous "winter of discontent," the accusation immediately seems unlikely. When we note Britain's rising employment despite the strong pound, absence of industrial protest and even Labour leader Tony Blair publicly turning to her for advice, it becomes preposterous. Today's Tories and Labour divide less on economic matters than cultural, such as political correctness. (132)
Yet Thatcher did give the British social order a considerable shaking that opened cracks that were evident within her first term. These appeared most notably within the union movement, the industry lobbies and the Conservative Party itself. Other rifts were closed however, as she reduced the numbers of unemployed, brought trade unions within the ambit of ordinary law, won broad consensus among the governing elites and gave people their own homes and hope.
By the time of John Hyde's conversation with the Tory MP and very shortly thereafter the demise of the Fraser Government, the Thatcher experiment was reaching only the end of the beginning:
- Productivity had risen sharply and stories of success in European markets were being recounted with satisfaction.
- Few British by then doubted that she would stick to her economic policies.
- Because British Labour had not then reformed itself, most people thought that a replacement Government, if there were one, would come from the Alliance, comprised of the Social Democratic Party (made up of defected Labour MPs and a couple of Tory Wets) and the Liberal Party. The Alliance had committed itself to retaining most of Thatcher's policies.
- Despite three million unemployed and Britain's unpleasant class divisions, there had been relatively little violent protest -- the public had accepted that trade union power had to be curbed.
It was still too early to be confident that Thatcherite policies had put Britain on a path of sustainable economic growth. For every piece of available evidence that that was the case somebody always produced counter¬evidence. Some Australians were however, carefully studying political events in Britain.
Serious policy errors had exacerbated Britain's immediate difficulties. Her monetary policy was tighter than intended and the Tories had agreed during the 1979 election campaign to exempt Britain's huge public sector from cuts in real earnings. (133)
Thatcher never did succeed in controlling Government expenditure. Between 1979-80 and 1990-91, in real terms, health expenditure increased by 37%, social security by 35% and education and science by 16%. Her "monetarism", without deep cuts in public expenditure and supply-side reform generally, placed too much pressure on too small a part of the economy. Failure to cut expenditure was to cause inflationary pressures to rebuild in the late 1980s. (134)
However, in her second term between 1983 and 1987, Thatcher addressed further labour market liberalisation and privatisation. Together these measures provided the enduring efficiencies and flexibilities that have since stood by the British economy. The electorate accepted these reforms too, again re-electing her. Then Labour reformed from within, substantially adopting Thatcher's reform program.
Her battle with the trade union movement became the stuff of legend. Jim Prior, Thatcher's first Minister for Employment was the archetypal, consensual, collectivist Conservative politician and Thatcher's most effective opponent within the Cabinet. (135) His Ministry, therefore, moved only extremely cautiously against the closed shop and trade union immunities from the law. Norman Tebbit, an ex trade-union man, who replaced Prior in September 1981, needed no encouragement to reform. John Hyde recalls noting at the time, however, that although he moved relentlessly against union privilege he did so by steps that each wisely fell short of provoking a general strike or alienating public opinion. When the coal strike erupted in 1984, about half of Britain's mines continued to produce and the public remained generally on side.
Privatisation or "denationalisation" had been recommended by the IEA and was taken up as the principal cause of the Adam Smith Institute. In its second term, after 1983, the Thatcher Government privatised several utilities and local Government let many functions to tender. The efficiencies won were considerable but more would have been available had more be done to divide the monopolies. The program was widely criticised for this failure, with hindsight it would seem correctly, but it had been demonstrated that public sector monopolies are even worse than private sector monopolies.
The success of waterfront deregulation was but one example among many to impress Australians. It was achieved by a very carefully planned campaign to get the necessary support from the Government and its advisors, other MPs, the dry think tanks, the stevedores, the shippers, the users of shipped goods, unions other than the Transport and General Workers Union and the press on side and, where relevant, to have them make plans to cope with initial disruption. In July 1989 the Government repealed the dock labour scheme. By only October of the next year, the waterfront was functioning better with less than 4,000 dockers instead of 9,221. All national agreements, all seventy port agreements, all industry Conciliation and Arbitration procedures and all national and local employers associations had been removed from waterfront management. New industrial contracts based entirely on the relationship with each employer's own workforce, with flexible shift patterns, part time working and contracting were in force. Artificial demarcation lines and labour pooling were gone and programmes that operated without Government money were in place. Dockers in five ports established major stevedoring companies with their own redundancy money. Productivity improved by between 25% and 400% and ship turn-around times by up to 100%. Docks and container berths that had been closed for sixteen years were opened. The ports won new investment in the port facilities themselves and in warehousing, cold storage, packaging, food preparation, and processing plants. For the foreseeable, the incubus of a national dock strike was lifted from the British people. Dries were as fascinated by what a concerted and well managed campaign could achieve as by the reforms themselves. (136)
By the 1987 election, Thatcherism had become a by-word for a way of Government that privatised, deregulated and reduced trade union bosses to the status of citizens. As the 1980s had progressed, for the first time in decades, Britain's economy had outperformed most other industrial countries. (137) By then, however, the Thatcher Governments had lost their reforming zeal. Thatcher eventually went the way of all political leaders too long in office. Ceasing to take advice, she began to substitute her own prejudices for those of a coherent body of thought. Her ultimate nemesis was an issue, the extent of Britain's collaboration with the European Community, on which liberal reformers could not agree. These raised political and cultural questions for which economic answers were inadequate. Even the IEA, which had provided so much of the intellectual basis for her reforms, was divided. At no stage had it proffered advice upon how to deal with the collectivist tendencies of the European Union. (138)
Thatcherism, particularly its monetary aspect, had in fact begun before her election in 1979. Under the pressure of circumstance and the International Monetary Fund, British Labour had been forced to adopt some of what had long been IEA's prescriptions. Attitudes too had already begun to change. James Callaghan, the Labour Prime Minister, addressing his own party conference in September of 1976, virtually endorsed the IEA's analysis of Britain's economic plight.
Thatcher had turned Britain away from privilege toward a society of citizens of equal legal status. It was hardly remarkable that the once powerful and influential did not much like her. Since it could no longer be denied that she had benefited the British economy, she was accused instead of harming British society, a concept supported by less robust data but one which could influence many natural conservatives. Thatcher was, of course, not a conservative but a liberal.
The Lady no doubt sees it otherwise, but I can't help the thought that it was the genius of democracy that she was forced out while her huge contribution to Britain, and by example to the world, was substantially intact. She had been a woman of action, a soldier in the Good Fight, who possessed political courage, tenacity in the face of abuse and setback, willingness to face unpleasant facts and single-mindedness. She had placed the welfare of Britain ahead of re-election and the state of the British economy and society today must be her testimony.
NEW ZEALAND
Although the Australian dry politicians relied more upon Britain and the United States for arguments, New Zealand offered them an unparalleled case study. It had begun the last quarter of the century more dominated by "wet" Government than Australia at its worst; then the remedial "dry" changes were similar but more radical; and finally New Zealanders' reforming zeal would be reversed more completely. No nation is politically, culturally and economically more like Australia. Lessons learned there could be applied here with exceptional confidence.
When in 1984, after the defeat of Fraser Government in Australia, the Lange Labour Party defeated the Muldoon National Party that had governed for 29 of the previous 36 years, the New Zealand economy was in a mess of Latin American dimensions. In the words of the new Finance Minister, Roger Douglas, for 30 years economic management had been dominated by the demands of sectional interest groups that became used to having their demands met. (139) During that time New Zealand had fallen from the third wealthiest nation in the world to the 22nd and was performing worst of all OECD nations. Muldoonism had become a byword for foolish economic management.
Under Douglas's driving influence, New Zealand began a program of rapid structural reform. Much later he told a Canadian audience that "within three years, New Zealand went from being one of the most regulated economies in the OECD to being one of the least". He exaggerated a little, but the Lange-Douglas Government did more in less time to liberate the New Zealand economy than had any OECD Government since Erhard's bonfire of the regulations in post war Germany.
Douglas wrote:
A Government's first duty is to work out its objectives. Secondly it must develop policies . ... The objectives, whatever portfolio they might fall within, including Finance, are ultimately all (his emphasis) social. They are to do with people's living standards, with their security and with personal and financial opportunities. (140)
Note his appeal to Labour Party values.
The new Labour Government enjoyed exceptional intellectual input from its Treasury, Reserve Bank and the New Zealand Business Roundtable. It immediately devalued the currency, deregulated interest rates and abolished exchange rate controls, then floated the New Zealand dollar. It cut taxes, taxed social security benefits that were very much more generous than in Australia, corporatised and then sold state-owned assets, removed subsidies, deregulated the supply of goods and services, and rapidly reduced most import barriers. In these actions it had the support of a National Party Opposition that was ashamed of the Muldoon years and key business groups such as the Federated Farmers and the NZ Business Roundtable. Such generosity in a political Opposition is rare, yet the Australian Liberal/National-Party Opposition was at the same time supporting the Australian Labor Party's reforms. There was something unusual about the Zeitgeist.
The New Zealand electorate, like the British, re-elected the reforming Government. Nevertheless, early into Lange's second three-year term the Government's standing fell. Douglas claims the Government had ceased explaining why it was reforming. (141) While Douglas was overseas the left wing of the Labour Party, the superannuation lobby and some others suborned the Prime Minister into announcing a "tea break". Roger Douglas came charging home to fight the vandals but he lost that fight and was dismissed as Finance Minister. He and two other Ministers left an increasingly divided administration.
Douglas had become a hero among economic liberals the English-speaking world over and was the obvious choice to address a Mont Pelerin Society dinner in Christchurch. It was a remarkable speech delivered when the New Zealand economy was not out of the woods but when a future prosperous New Zealand had become thinkable. Rogernomics, as the reforms had been dubbed, was being compared with Thatcherism, the reforms that produced the Asian Tigers -- South Korea, Hong Kong, Thailand, Malaysia, Taiwan, the Philippines, Singapore and Indonesia -- and Erhard's bonfire of 1948-55. Significantly, New Zealand's reforms had been achieved within the constraints of a mature democracy. Some fine minds, from Nobel Laureates down, listened carefully to Douglas that evening.
These scholars had preached in economic terms all that was necessary to avoid and to reverse the British Disease, the Dutch Disease, the New Zealand Disease, the Australian Disease, etc. They had, however, been unable to tell the politicians how to do it. In fact, their theories about politics tended to be pessimistic. Public choice theory explained to their satisfaction why politicians damaged economies and the theory encouraged them to expect all lawmakers to remain enslaved by vested interests and to treat the next election as the end of time. Douglas did not fit their model.
With authority that came with achievement, he was arguing that the "quality decisions" -- his term -- that are the keys to structural reform were not only politically possible but enjoyed voter support.
[Politicians and voters] can take the costs up-front for larger medium-term gains; or focus on short-run satisfaction to be sandbagged later by the accumulated costs.
Voters ultimately place a higher value on enhancing their medium-term prospects than on action that looks successful short-term, but only by sacrificing larger and more enduring future gains. ...
There is a deep well of realism and common sense among ordinary people. ... [who] accept low incomes as students to earn more later ... save for old age and invest for their children. They want politicians to have guts and vision to deliver sustainable gains in living standard.
[Only] inadequate politicians see instant popularity as the key to power. If their rating slips, they feel threatened. They look for policies with instant appeal to create continuous public bliss.
He also told of an event following his first budget. People who insisted that their own privileges were special had inundated him with requests for opportunities to put their cases. He agreed to meet several of them together but arrived late. There was thus a little time for interaction between the groups. By the time that he arrived, the complainants had become subdued because far from being able to combine to savage the Minister it had become apparent to them all that they did not have a common interest. Each group's privilege was another group's cost. The dairy farmer did not like the inefficient rail system; the railway union and the welfare agency did not like expensive milk; nobody liked high taxes and so on.
Defining "quality" as the actions that deliver most benefit in the medium term, Douglas contended that when the Lange Government implemented quality policies the polls showed on-going voter approval and, wherever it stopped short of quality, the polls showed rising disapproval. He may have generalised too widely, but certainly New Zealanders re-elected the Lange Government at the height of its reforms and dismissed it only after the "tea break", electing a party promising radical labour market reform. Douglas offered a very much more optimistic view of democracy than most of the governing classes accepted, but one that was borne out also by Australian and British experience. What is more, he had only to be partly right to offer hope to the democratic world.
Douglas himself was a necessary but insufficient condition for Rogernomics. Circumstance and bad politics had taken New Zealanders to the edge of an abyss from which they had peered at the bones of once wealthy nations such as Argentina. New Zealanders were aware of the worldwide revival of classical-liberal ideals. Rogernomics had the benefit of economically-literate senior bureaucrats and industrialists who cared enough to argue. The very deep abyss aside, these were conditions that pertained in Australia also. It is doubtful, however, whether an Australian equivalent of Douglas, had there been one, could have got Douglas's reforms past the Senate.
During the course of the address, Douglas offered ten pieces of advice to politicians.
Roger Douglas's ten principles for structural reform
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With a touch of bitterness, he had also said, "Politics is a mess because too many quality people are content to criticise from the sidelines." That too was true of Australia!
As in Britain, nothing illustrated the rigour of Douglas's program better than the waterfront. New Zealand's wharves had been even less productive than Australia's but after the reforms became among the world's best. Change was not achieved without a costly strike and some direct loss to waterside employees whose annual earnings fell from around NZ$70,000 to NZ$50,000. What is more, they incurred the inconvenience of attending their places of employment for the hours that they were paid. The gains were, however, not trivial. Ports of Auckland became profitable paying NZ$122 million in company tax. The fertiliser and dairy industries each claimed to be saving $5 million annually. There was industrial peace. The waterfront became "just another industry"
In 1990, in spite of the fact that by then investment was coming back to New Zealand, rising in the year to June 1990 by 12% real, the Bolger-led National Party defeated the Lange Labour Government. Voters returned a party that was to continue the Douglas reforms and introduce others. Ruth Richardson, the new Finance Minister, was committed to economic freedom without respect for sacred cows. In many respects she was more Douglas than Douglas and she had advertised the fact. The sequence of election outcomes was interpreted in inconsistent ways. The one that I like, however, is that in spite of vehement denunciation of all that Douglas stood for by unionists, newspaper columnists, churchmen and other members of the chattering class, the street marches and the false forecasts by academics, the NZ public had understood what he was saying, liked it, and trusted him as much as it trusted anybody. But when, having done a lot and won one election on the way, the New Zealand Labour Party backed off voters threw it out. It is the simplest explanation and it is the only one that does not disparage electors.
Examples of the demise of tired Governments are plentiful but as knockdown evidence for my preferred thesis they often suffer the difficulty that a tired Government does not preclude an equally tired electorate. New Zealanders, however, knew that this incoming Government promised radical labour market reform and further privatisation.
By 1991 New Zealand was beginning to reap the benefits of the Douglas reforms. In May, (that is, six months before Keating replaced Hawke as Australian Prime Minister) the NZ parliament passed the Employment Contracts Act (ECA) abolishing compulsory unionism and allowing workers to negotiate for themselves or to use a privately chosen bargaining agent. Thus, when both parties wished it, employment contracts were permitted to replace awards. A minimum wage and other statutory minimums still prevented a worker from reducing the direct cost of his job, but the Act allowed him to negotiate away wasteful work practices in exchange for higher remuneration or whatever. The ECA retained an Employment Court staffed with holdovers from the old system that was to do its best to prevent employment contracts becoming as uncontentious as other commercial contracts.
An editorial in The Dominion described the ECA as a "dizzying industrial free-for-all" and Ken Douglas, the head of the Council of Trade Unions, warned that "the munitions factory [was] having the chains taken off the door". Some employers were terrified, and industrial journalists enjoyed writing about splits in employer ranks. The New Zealand Labour Party opposed the Bill and eventually, in 2000, repealed the Act.
The ECA was nevertheless a huge success. In the five years before the ECA, workdays lost through strikes had averaged 266,000 per year. In 1998 only 11,778 were lost. Industrial relations simply ceased to be newsworthy. In the private sector, occupational and multi-employer awards nearly all went. Many uneconomic penal and overtime rates were replaced by performance-related pay and some productivity gains were spectacular. For instance, productivity rose 300% in the big Lion Nathan brewery and, at the other end of the scale, by going over to piecework, a clothing factory escaped imminent insolvency and at the same time raised its workers' incomes by $110 per week. Union membership fell by around 20%.
As predicted by some, average weekly earnings did fall during the early 1990's as the low-skilled once-unemployed brought the average down, but by 1999 these were NZ$682 compared with NZ$640 (1999 dollars) in 1991. Discovering a hitherto latent interest in productivity, critics of the ECA complained that productivity gains had been only modest. As unemployment fell from 11% to 6%, total employment grew by 250,000 of New Zealand's least skilled potential employees. It was therefore remarkable that labour productivity gained at all. The proportion of casual to permanent employees remained much as it was. Part-time work did increase considerably but only 7% of those employed part-time said they preferred full-time work. Maoris, women and the long-term unemployed gained disproportionately.
By 1992, the post office had turned an expected $50 million loss into a $30 million profit. Real electricity prices had been reduced by 13% while the profit of the corporatised authority had gone from $140 million to $404 million. Coal Corporation of NZ Ltd, which had lost money in 20 of the previous 22 years, turned in a profit while reducing the real price of coal from $73.48 per tonne to $52.20 per tonne (both in 1986 dollars). NZ Telecom had increased its profits by 300%, while cutting the real cost of phone services by 20% and reducing the waiting time for a phone connection from six weeks to three days. NZ Post achieved an exorbitant profit (30% on capital) while charging 40 cents per standard letter. Stevedoring charges were down by 20-50% and turn-round times for vessels had been halved. NZ Rail had raised productivity by 900%, admittedly from a woeful base.
During 1993/94 economic growth reached 7% and the emigration of skilled people had turned around. New Zealand was again able to hold its brightest, most enterprising youngsters and companies such as PDL Holdings, Heinz, Gillette, Unilever, Kraft, Shiseido, Johnson and Johnson, Alcatel and Mars had chosen to invest in New Zealand rather than in Australia. Although the NZ Labour Party at that time would probably have reversed few or none of the important Bolger/Richardson policies, it seemed that NZ voters were not about to run that risk. It is plausible that if the risk had been removed the electorate may have taken great pleasure in punishing the National Government, as another electorate was later to punish the Kennett Government in Victoria. However, encouraged by Richardson, the Government had stuck bravely to the task of remaking New Zealand to find that the electorate re-elected it.
Between 1984 and 1994, under first Labour and then National Party Governments, New Zealand was the leading economic reformer of the Western world. It had deregulated its financial markets; abolished import controls and reduced tariffs; abolished farm subsidies and export assistance; privatised or corporatised many state utilities including Telecom, Air NZ, Postbank and the railways; introduced a Goods and Services Tax (GST); radically reformed the labour market; given its central bank the one task of keeping inflation within the 0-2% range; and legislated the Fiscal Responsibility Act requiring the Government to accept the accounting standards expected of the private sector.
Australian Dries were glowing in their praise, but the New Zealand Business Roundtable was more cautious. It was to prove nearer the mark. New Zealand was coming off a low base. It was, the NZBR pointed out, not difficult to do better than the past but more difficult to match the world. The reforms, for all their brilliance, had serious omissions and voter patience was tested by economic dislocation that was real.
Nevertheless, by the year ending March 1995, the New Zealand economy was still growing at 5.3% per annum. Real household disposable incomes had risen by 3.7% in the year to June 1994. Unemployment was expected to fall to 8.5% -- better than Australia at that time. Inflation, as measured by the consumer price index, was 1.3%. The New Zealand budget had a surplus of 0.6% of GDP with a rise to 2.7% expected for 1995-96. Net public debt that had peaked at 51% of GDP in 1991-92 and was down to 42%. The current account deficit was 1.4% of GDP. The OECD report of February 1993 had said that New Zealand was positioning itself for sustained non-inflationary growth. The NZIER Survey of Business Opinion showed the most sustained period of business optimism for 26 years. The Kiwis were finding their accustomed aura of gloom harder to maintain, but it was then that they turned on the Government and then that the conservatives in the Government lost their nerve.
Ruth Richardson's departure from the Parliament in 1994 marked the end of New Zealand's political will. Twice New Zealand had suffered Prime Ministers that were not committed to the reforms and sacked their drivers.
THE U.S.A.
Throughout the final quarter of the 20th Century the capacity of the United States enterprises to create jobs stood in sharp contrast to Europe and Australasia. (143) Flexible labour markets made possible by the absence of restrictive regulation were associated in the US with much better jobs growth than elsewhere. Defenders of regulation tended not to deny that the labour-market flexibility explained the low levels of unemployment but pointed to the working poor --people who by wealthy US standards had low incomes. The claim was factual, but these poorly-employed people lived better than the unemployed in Europe, Australasia or the US itself. What is more, they were not destined to be imprisoned in a welfare-dependent underclass but were in a position to climb the employment ladder.
Americans contributed much to the liberal-economic intellectual ferment. Their supply-side reforms, in the cases of airline and trucking deregulation at least, influenced Australia. They were, however, marred by the explosion of the budget deficit in the Reagan years. I had too much difficulty disentangling the expenditures the Reagan Administration needed to win the Cold War to draw much instruction from its economic management, which I suspected was second-rate. Not every Australian dry agrees with me. The Reagan tax reduction, some say, eventually forced the expenditure reduction. The United States' greatest contribution to liberal reform in Australia came from the ideas of people such as Milton Friedman, James Buchanan, Julian Simon, Charles Murray and many more, including the well-funded think tanks, Cato, American Enterprise and Heritage.
THE ASIAN TIGERS
In contrast, it was not what was said in several nations in East Asia but what was done that impressed Australians. Initially the Asian Tigers (South Korea, Hong Kong, Thailand, Malaysia, Taiwan, the Philippines, Singapore and Indonesia) and Japan had achieved extraordinarily high, sustained growth from a low base while importing capital and technology -- catch-up economics in countries where industrial lobbies had not yet established a strong hold over parliamentary clients. By the 1980s, however, Japan and Singapore had for practical purposes caught up and were exporting capital and know-how to industrially backward Australia.
Such success, albeit off a low base, was bound to influence thinking in Australia. There was probably some merit in the argument, often advanced by Australian protected manufacturers, that the Asians of those times picked winners. The significant difference at that time was that we featherbedded yesterday's industries, that is, we picked losers. Relatively poor nations during a catch-up phase can imitate, but when they actually catch up they no longer can know what the winners will be. That is not to argue that at any time Governments can be trusted with intervention. Even the best, in time, get too close to their clients and then we get what in Korea was called "crony capitalism" and in Australia, "WA Inc." etc.
THE CULTURAL AGENDA
By the 1980s more of the discussion circulating internationally had turned to the foundations of civil society. Non-economic cultural issues, such as the limits of Government, crime, family breakdown, community, dependency and virtue had gained greater prominence within it. Although the issues were different, at a fundamental level the battle was the same. It was still individual autonomy, personal responsibility and voluntary association versus compulsory collectivism. As argument shifted from what people may do for mutual reward to what they ought to do as citizens, names such as Bridget and Peter Berger, Michael Oakshot, John Gray, Gertrude Himmelfarb, Myron Magnet, Lawrence Mead, Charles Murray, Michael Novak, John Rawls, Wilhelm Ropke, David Selbourne and John Q. Wilson kept cropping up wherever public policy was discussed. (144)
Some of these see themselves as on the left, others on the right; some say they are liberal, some conservative. Each would, however, have agreed with Ropke who wrote:
Self discipline, a sense of justice, honesty, fairness, chivalry, moderation, public spirit, respect for human dignity, firm ethical norms -- all of these are things which people must possess before they go to the market to compete with each other.
Ropke had warned in 1960 that "it would be sheer suicide on the part of the market economy's friends to leave to others the cheap triumph of this discovery".
As the world abandoned collectivism, events and people closer to home had particular influences over the attitudes and confidence of Australian politicians.
THE PRESS
Although the media reflect public opinion more than they influence it, they, of course, do have a special capacity to change what large numbers of people believe and even know about. In Australia, as elsewhere, the media most often reflected the collectivist hegemony. Often naïve and untutored in even basic economics, history and politics they were to concentrate on the failures of uncontrolled individuality. On the whole they worried dry politicians more than encouraged them. There were, nevertheless, classically liberal journalists and commentators. Most notably throughout the collectivist years, Max Newton, Peter Samuel, Paddy McGuinness, Alan Wood and Max Walsh were consistent in their advocacy of dry economics. Newton an early editor of the Australian Financial Review had established what became the continuing freer-trade position of that paper, when it might have favoured the protectionist sympathies of many of the business readership. These and others presented the dry economic cause well and frequently enough for it to grow in acceptance in some business circles.
Leading newspapers gave the dry politicians, the staff of the think tanks and other economic liberals opportunities to reach wide readerships. Bert Kelly wrote about 1000 newspaper columns, John Hyde wrote well over 700. Without this opportunity much less could have been achieved.
With their struggle for the culture, Dries were to do less well. Television is the important medium and its commentary and soap operas tend to reflect ephemeral values and more immediate gratification than those of mainstream Australians. Dries did not develop an adequate strategy to counter media that cater to violence and voyeurism.
THE INDUSTRY LOBBIES
The Australian business community is well organised. Although it helps to finance the dry think tanks, in their dealings with Governments businessmen are mostly rent-seekers. Their contributions to public policy formation were, therefore, with a few notable exceptions negative. The Business Council of Australia (BCA) around the time of its Debt Summit was briefly among these exceptions but, even so, its record compares unfavourably with the New Zealand Business Roundtable which was consistently pro-market. Hugh Morgan, the CEO of Western Mining, was also over a longer period a notable individual advocate of liberalism. The Western Australian Chamber of Commerce and Industry from the early 1980s deserves honourable mention.
Farmers, despite most of them having little option as exporters but to be efficient, devoted most of their energies to preserving regulated prices in the domestic market and inefficient statutory marketing and handling monopolies. However, the free-market voice within primary industry, unlike secondary industry, was always significant. It predominated while David Trebeck and Ian McLachlan ran the National Farmers' Federation. In 1985 the NFF, calculating that the net gain to farmers of lifting the protection of other sectors and of wage indexation would be 54 times greater than the benefit of the superphosphate bounty, called for protection reduction all round, including their own.
The professions too mostly lobbied and campaigned for their own privileges but both accountants and lawyers from time to time addressed tax or legal matters in terms of the public interest. It is easy to wish a pox on all lobbyists. Australia would probably have been very much better governed had there been none but their activities are, lies aside, legitimate, even potentially helpful. The real fault lay with the Governments that acceded to their demands.
THE WORKERS' AND PROGRESS PARTIES
During the 1960s, Bob Howard, who had written Rip van Australia, Duncan Yule, John Singleton, John Whiting, Ron Kitching, Ron Diamond, Ron Manners, and other people of libertarian inclination formed the Workers' Party. It fielded candidates winning 14% of the vote in a rural WA parliamentary seat but never came close to winning one. When it collapsed, the Progress Party was formed from its ashes. Although it also never looked like winning seats, because it was intellectual and gave no quarter to vested interests, it was respected among people interested in public policy. It succeeded in seeding ideas that in time bore fruit. Probably more significantly, these organisations spawned a network that lives on, offering ideas to any who will listen and encouragement to any who will try.
THE PUBLIC SERVICE
Although exceptions are plentiful, the civil service's influence on public policy may be divided between the empire building of the service-delivery departments and the whole-of-the-nation approach of Treasury, Finance and Prime Minister and Cabinet, their equivalents at State level, and the Reserve Bank.
The Westminster tradition prevents individuals from contributing as much to public understanding as they do, for instance, in the United States, nevertheless, public servants contributed much to better policy that is under¬recognised. Alf Rattigan, Dick Boyer, Bill Carmichael, John Stone, Austin Holmes, and Ted Evans require special mention.
In January 1979, the Fraser Government appointed John Stone, a Rhodes Scholar with an extraordinarily sharp mind and notorious intolerance of fools, as Secretary to the Treasury. Although Stone was bound by civil service codes of secrecy and loyalty to the Government of the day, which he honoured to the letter, the world was seldom in much doubt as to what he believed. His beliefs were conventional, rigorous and often condemnatory. On the whole they withstand the scrutiny of hindsight very well, except possibly his opposition to floating the currency. It is not known why Stone opposed floating and I am inclined to accept David Barnett's view that Keating, the then Treasurer, gave a great deal of spin to his fairly conventional advice that pointed to real consequences and risks, some of them political. (145)
Stone was often a poor advocate, tending to patronise lesser minds and moral weaklings. I am convinced that Australia would have been better governed had he managed better to disguise his contempt for some Ministers. Upon his retirement from the Treasury he entered the Senate, ironically as a National Party Member. He later joined the staff of the IPA, was prominent in the HR Nicholls Society, formed the Samuel Griffith Society and wrote a very effective weekly column in the Australian Financial Review. When talk of the formation of a new conservative (economically liberal) political party developed, his name was often mentioned.
Austin Holmes, who is even less widely known, too possessed an acute mind admired by other economists. He had an earthy humour, (146) exceptional patience and kindness and was unerringly on the side of liberty and individualism. Serving on the Whitlam Government's Priorities Review Staff, as an economist in the Department of Prime Minister and Cabinet, and as head of the Research Department at the Reserve Bank, he was a never-tiring iconoclast, who nurtured the young and bluntly advised the not-so-young.
No account of what he liked to call "The Good Fight" would be complete without at least one Holmes anecdote. In 1981 or 1982, he had been invited to address the Government parties' Treasury Committee. The Dries felt that the Fraser Government's economic policy was irresponsible and expected the plain-speaking Holmes to say so. Further, they felt strongly that the majority of the committee, who were demanding more folly than even Cabinet would countenance, needed their heads knocked together.
To their chagrin Holmes simply explained the current state of the economy in terms of the macro-economic variables, without making comments or suggesting policy changes. Then he answered economically irresponsible suggestions by simply indicating the immediate effects of the suggested policy changes. Meanwhile the Dries were nearly in tears. Finally, someone asked if interest rates could be cut to encourage investment. "Naw" says Aussie, "with what you bastards have done to the economy tonight it is fucked". Several faces fell, the Dries had won their point, the bells rang to mark the end of the dinner break and they all trooped off.
As a backbench MP John Hyde had made a few speeches critical of his own party's economic management. Hyde had said nothing original, relying on conventional sources such as IAC reports and Treasury and Reserve Bank sources, but criticism itself attracts attention. Hyde was therefore painfully aware of his lack of economic training. At a post-budget party, Aussie, whom Hyde had not previously met, drew him to one side and said that they must make time to talk. Holmes did not say that he was prepared to undertake the education that Hyde needed if he was to continue the path he had set himself upon, but somehow he implied it. From then until his death Holmes patiently and kindly explained economic principles, as Hyde needed them.
He did as much for anyone who would try to get the arguments right and had the courage to express them. Holmes left a valuable legacy in the form of younger men and women who because of him found the courage and knowledge to fight the Good Fight. (147)
We now turn to politicians and Governments.
ENDNOTES
124. FA Hayek, Studies in Philosophy, Politics and Economics, Routledge, 1967, pp 162-3 as quoted by Richard Cockett, Thinking the Unthinkable, Harper Collins, 1994, p 5
125. Wolfgang Kasper, The Liberal Idea and Populist Statism in Economic Policy: A Personal Perspective, p 116
126. The Austrian emphasises the process by which market participants gather information and therefore concentrates on the institutions, such as money, freedom of contract and property, by which people deal with uncertainty. He tends to be sceptical of planning and quantification generally, seeing rivalrous behaviour in markets as a discovery process. He doubts that even the most all-wise and incorruptible Government can assemble information about what millions of people each with thousands of options might do in a world where one size does not fit all. The monetarist is concerned with a public policy issue that few Governments escape, management of the currency. He emphasises the effect of monetary growth or contraction upon prices, interest rates, output and the exchange rate. Few today doubt the underlying theory but it is not always easy for policy makers to identify 'money' or estimate the lags.
127. Snape, Gropp and Luttrell, Australian Trade Policy 1965-1997, Allen & Unwin, 1998, p. 362
128. ibid, p. 363
129. ibid, pp. 367 & 398
130. John Ranelagh, Thatcher's People, Fontana, 1992, p 20.
131. Richard Cockett, Thinking the Unthinkable, Harper Collins, 1994, p 322
132. Hal G.P. Colebatch, Blair's Britain, Claridge Press London 1998
133. With inflation running at 22%, the new Government had reduced the money supply -- the conventional monetarist response. However, M3 the most used measure was not at the time in Britain reliable. Controls on regulated money had encouraged people to seek unregulated securities that had become in effect monetised but were not included in M3. When the controls were removed liquid assets flowed back into bank balances and other more conventional 'money'. M3 expanded rapidly but money, an imprecise concept at the best of times, did not. Monetary management was, in consequence, tighter than intended. Inflation had been reduced to 12% and was still falling but at the price of even more unemployment. Despite having been warned by the Centre for Policy Studies, of which more below, she had done little by then to address public expenditure or to reduce the control of national resources by inefficient publicly-owned enterprises. During the election she had undertaken to be bound by an inquiry into public sector pay scales, the Clegg Commission, further insulating the public sector from the adjustment pains in a country where every second employee worked for the Government. The pain experienced by the private sector was even further increased by high oil prices, which, as Britain is a substantial oil producer from the North Sea, produced a strong pound. See Richard Cockett, Thinking the Unthinkable, Harper Collins, 1994, pp 295-7
134. Richard Cockett, Thinking the Unthinkable, Harper Collins, 1994, p 316
135. ibid, p 298
136. Nicholas Finney, Back to the Waterfront, hrnicholls.com.au
137. Allan H Meltzer, The Fortune Encyclopedia of Economics, Warner Books, 1993, p 132
138. Richard Cockett, Thinking the Unthinkable, Harper Collins, 1994, p 327
139. Roger Douglas, Rogernomics, GP Books, 1989, p 23
140. ibid
141. Roger Douglas, Rogernomics, GP Books, 1989, p 24
142. This is the abbreviated form that AIPP printed on a credit-card size piece of plastic, The Credibility Card, that it sent to every Federal MP and to candidates thought to have a chance of winning at the 1990 Australian election. It was, of course, a tease and, if the banal conduct of that campaign was an indication, not a very successful one.
143. 4.1% unemployed in 1999
144. These few names are from the references pages of From the Welfare State to Civil Society by Dr David Green, a study commissioned by the New Zealand Business Roundtable.
145. David Barnett, John Howard, Viking Press, p 259
146. He once observed that, like statistics, he too had been 'broken down by age and sex'.
147. Chris Ulyatt editor, The Good Fight, Essays in Honour of Austin Stewart Holmes, Allen & Unwin, 1989, offers an excellent account of his character and of the economics he believed in.
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