Fear of the Market-Place

The Doomsday Myth:  10,000 years of Economic Crises
by Charles Maurice and Charles W. Smithson,
Stanford University, Hoover Institution Press.

Agoraphobia -- in the original Greek meaning of the word, fear of the market-place, rather than its modern usage to describe a species of neurosis -- takes two distinct forms.  One is a fastidious distaste for the market and all it represents.  This distaste may be occasioned by the presumed money-grubbing motives of practitioners in the market-place, by the vulgarity of the hucksters and their appeal to human cupidity, or by the inequality of incomes and wealth which are seen as the result of giving full rein to market forces.  Criticism of markets on these grounds is as old as human history and, based as it is on value judgements, will no doubt be levelled for as many years again.

The other assault on markets comes from those who question their efficacy.  Admittedly many of those who doubt whether markets work are encouraged in their scepticism by a dislike of the very idea of leaving economic decisions to the whims of individual producers and consumers.  Such scepticism is thus often a rationalisation for dirigisme.  At least, however, where the ostensible argument is over effectiveness economists can make a useful contribution.

Two economists who have recently made just such a contribution are the authors of The Doomsday Myth, Charles Maurice and Charles Smithson.  In a slim volume they manage to cover what the subtitle calls "10,000 years of economic crises" in order to make the point that the market has proved itself capable of defusing even the most threatening of resource shortages.  Doomsday is thus for ever being delayed.

The latest such crisis they discuss is, hardly surprisingly, the supposed shortage of energy from which the world was seen to be suffering for much of the decade subsequent to 1973.  Earlier shortages identified by the authors as giving rise to much unnecessary anxiety include rubber, timber, whale oil, labour (post the Black Death) and land.  Each was resolved by allowing the price of the resource in short supply to rise and/ or the application of new technology to economise in the resource in question.  Thus the dearth of wood which so exercised the British in the late Middle Ages was overcome by the exploitation of coal, while the US, facing a similar dilemma at the beginning of this century, responded by the use of substitute materials, e.g. steel and concrete, on the railroads, by redesigned wooden bridges, by preserving timber to extend its life etc.  In both cases the price mechanism solved the problem with minimal assistance from government.

Maurice and Smithson rightly take doomsayers like the Club of Rome to task for naively extrapolating past trends into the future without paying sufficient regard to the impact which the impending shortages have on prices and the effect of rising prices on the behaviour of producers and consumers.  In this regard they see the Club of Rome as latter-day Malthusians after the English economist cum cleric who predicted that population would outrun food production and thereby earned the economists' profession the stigma of the dismal science.  It would, as they observe, be nearer the truth to describe the profession, or at least those among it who believe in the power of free markets to dispel shortages, as optimists.  Economists, as they also might have observed, tend to be more impressed by supply and demand elasticities than the layman while agoraphobia is particularly prevalent in government circles, among environmentalists and others of a paternalistic bent, it is by no means unknown in commerce itself.  There will always be self-serving business people who will see benefit from having the government ration limited supplies rather than having the rationing done by price.  Export controls are often promoted by downstream industries which would prefer not to have to outbid foreigners to obtain access to their inputs.  They call in government to prevent a supposed shortage, but in reality are complaining about having to pay a price which would obviate any shortage.

The worst offenders, however, tend to be those industries most under the control of government.  Maurice and Smithson mention the unhelpful role of the US Forest Service in the so-called timber crisis.  Nearer home it is only necessary to mention the absurdity of the SECV busily promoting the virtues of energy saving, while holding down prices to artificially low levels i.e. levels which cover only a minimal proportion.

Having surveyed 10,000 years of economic history Maurice and Smithson try to anticipate where the next resource crisis might arise.  They believe it could well concern the American water supply and suggest ways in which market forces could pre-empt it.  They make the familiar but nevertheless valid point that many apparent shortages arise from the absence of property rights in the resource in question e.g. the depletion of whales.

Water has also occasioned much agoraphobia in Australia.  In the last Victorian drought bans on usage were combined with a system of pricing which encouraged wasteful consumption.  Australia's water authorities have shown themselves wholly incompetent in the marketing of their product and yet not even the driest of Liberals seem to want to recommend them for privatisation.

It's a funny world, but at least, the doom merchants notwithstanding, it shows no signs of coming to an end because of scarcity of essential resources.  Human ingenuity will see to that -- provided the market is allowed to work.  The problem with markets is not that they can't eliminate shortages, but that they sometimes do the job too well and turn shortages into glut.  Again The Doomsday Myth contains examples of this phenomenon.  This overreaction often results from government intervention, the present glut of oil being a case in point.  Even without the helping hand of government, however, markets do have a tendency to over-react if only because investors tend to respond to present prices or at least recent price trends without taking full heed of what their decisions and those of other investors will do to future prices.

The trend-is-my-friend mentality is a real problem.  Perhaps agoraphobes would be more usefully engaged in addressing it than by flagellating themselves unnecesarily over imaginary shortages of so-called finite resources.  For a start they could stop talking about finite resources, a term which is not only economically meaningless but helps encourage over-investment.

One of a Few

A Course Through Life
by H.W. Arndt,
Canberra, National Centre for Development Studies, ANU

During my years at Ipswich Grammar School I regarded Heinz Arndt as the best academic economist in Australia.  For most of those years he was a socialist -- an ideology which I detested, and still do.  But he underwent a remarkable conversion -- a change of faith -- in the Whitlam years, and no doubt partly because of them, a conversion which he explains in his book of memoirs, A Course Through Life.

The reason he was such an admirable academic had its roots in his personal qualities -- his transparent intellectual honesty (above all), his fine analytical mind, and his fierce desire to arrive at the truth.  He was not a "pure" academic because, like Copland and Giblin of an earlier generation, he participated publicly in the great economic controversies of the post-World-War II era.  I disagreed with most of his prescriptions for policy from the 1950s and 1960s -- particularly those on taxation and his belief, in those days, in the need for central planning -- but that did not lessen my admiration for him as a person and as an economist.

While he held his opinions passionately, he did not -- like so many economists of strong ideological convictions -- let his passions submerge his reasonableness and objectivity.  That was why he was so good to talk to.

He is also, unlike most ivory-tower economists, a first-rate communicator.  He writes with clarity and distinction and because he is always interesting, he is easy to read.  One doesn't have to waste valuable time in puzzling out what he means.

A large part of his book is fairly straight biography of his professional life, but the final two chapters are partly an essay in self-analysis and partly an examination of the nature and the limitations of economics as an instrument for effecting improvements in public policy.

It was the explosion of government spending, the emergence of "big government" and its associated interfering, big-spending bureaucracies in the Whitlam era that completed Arndt's rejection of his socialist faith.  (Previously he had been concerned about what he calls "the more extreme follies" of economic nationalism and environmentalism, the former having to do with the opposition from many quarters to foreign investment, the latter with the anti-growth ideology and the hostility towards uranium mining).

Arndt writes, "... I found myself increasingly in the liberal camp.  While I could not persuade myself that the libertarians had the whole answer, and in particular the inescapable minimum demands for social justice, I became convinced that something had to be done to limit the role of government and that, on this crucial issue, the libertarians were wholly on the side of the angels".

I remember visiting Arndt in Canberra and asking him what he thought of central planning (to which he was formerly addicted) in the light of the Whitlamite excesses.  His answer was to the effect that he had given all that away.  This came as a stunning, but welcome surprise to me because of his life-long marriage to socialist ideas.

In his final chapter Arndt reveals a rather puzzling, because ambivalent, attitude to modern developments in economic theory.  On the one hand he says that the almost exclusive concentration of theoretical economics in the past thirty years on mathematical and econometric techniques has contributed little to the sum total of economic knowledge or to economic welfare.  "I ... remain unconvinced that these techniques, the theoretical construction and empirical testing of econometric models, can do much to help us understand economic behaviour, the working of economic systems and the nature of economic problems".  (With this I would entirely agree).  At the same time he reveals a personal predilection for pure economic theory over practical economics.  "I must confess that I have derived more pleasure from my modest output of theoretical articles than from my larger, and generally more appreciated, applied work".  He even argues that pure theory and its development should be left to "the most talented minority", thereby implying that the theoreticians are intellectually at any rate a cut above those concerned to contribute to the solution of the problems of the everyday world.

This, I think, is quite wrong.  The truth is that those who are able to make notable contributions, contributions of real worth, to practical problems are really "the talented minority".  They are a minority because as Keynes said in a famous passage "Good, even competent, economists are the rarest of birds".

My experience of economics and economists have made me realise how true this is.  During those years the really good economists in Australia could be numbered, I believe, on the fingers of one hand, certainly on those of two.  The reason for this is to be found in the nature of the subject.  Simply stated, economics is not a science which, like physics, provides ready-made answers to the problems of the real world.  It merely furnishes the tools with which to grapple with those problems.  How effectively the tools are used depends on the attributes of the user.

What are these attributes?  Alfred Marshall set them down very simply in the first chapter of his tremendous work, Principles of Economics -- common sense, judgment, imagination, intuition (Marshall, being what he was, would have taken intellectual honesty for granted).

To these attributes I would add close practical experience of the real world (Keynes' superb biographical essay -- which should be read by all aspiring economists -- makes clear the great importance which Marshall placed on a first-hand acquaintanceship with the world of industry and commerce).

All this seems to have been forgotten, or never learnt, by many of the modern breed of economists.  But Arndt, despite what he seems to think were his intellectual shortcomings, has the attributes of the first-rate economist.  These attributes were infinitely more important than any lack of theoretical expertise.

Prielration of New Discriminations

Affirmative Action;  The New Discrimination
by Gabriel Moens,
Centre for Independent Studies, 575 Pacific Highway, St. Leonards, 2065.
$11.95 plus $1.20 postage.

All businessmen (and women), employers and citizens who have any commitment to the free enterprise system should be vitally concerned with the implications of Affirmative Action, especially since the Federal Government's Affirmative Action (Equal Employment Opportunity for Women) Bill has passed the House of Representatives and is due to be debated by the Senate later this year.

The current problems of affirmative action are more easily diagnosed by those with expertise in the twin disciplines of law and philosophy.  Dr. Gabriel Moens, Dr.Jur (Leuven), LL.M (North-Western, Chicago) Ph.D (Sydney), is thus particularly well qualified to do this.  Dr. Moens, a Lecturer in the Law of European Communities at the University of Sydney, produced his monograph as a result of a study at first commissioned and later rejected by the Australian Human Rights Commision.  The Commission claimed Dr. Moens study did not meet the usual standards of scholarship and objectivity.  Hired as an independent expert, Dr. Moens seems to have misunderstood what in the vernacular of the Australian Tirf is referred to as "his racing orders".  The Commission apparently wanted no objective assessment of affirmative action -- merely some thesis from a well-qualified academic which could be used to bolster views that it had already reached.

Dr. Moens' book includes an interesting analysis of the American experience and literature on affirmative action.  He draws the very important distinction between "soft" affirmative action programmes and "hard" affirmative action programmes (which involve the setting of goals, targets or percentages to be achieved according to a prescribed timetable).  Dr. Moens argues that "soft" affirmative action programmes such as the elimination of artificial barriers to employment or promotion, improvement in selection and recruitment practices and new training procedures open to all employees, do conform genuinely to the ideal of "equality of opportunity".

On the other hand, "hard" affirmative action programmes, which, through the setting of targets or goals, seek proportional representation of women and minority groups, conform to a different ideal, that of "equality of result".  Such programmes are inconsistent with the principle of hiring by merit and in academia their most serious and obvious consequence is the loss of excellence.

In a university, excellence is incompatible with the selection or promotion of applicants who are good enough in contradistinction to the appointment of those who are the best for the job.  Dr. Moens thus highlights what is often deliberately obscured by equal opportunists namely that a contrived equality of result is not equal opportunity nor can it achieve it.  Indeed it is used to achieve the very opposite, a discrimination against individuals within a majority to the advantage of individuals within a minority.  The fact that already in Australia government advertisements are appearing inviting applications from persons "regardless of sex, race, ethnic background, physical or mental impairment" (my emphasis) tends strongly to support Dr. Moens' conclusion.  Presumably to belong to the minority group of those with a significant mental impairment could theoretically be an advantage, when, for example, one applied for the post of neuro-surgeon in a government hospital.

Dr. Moens asserts that those affirmative action programmes which involve the setting of targets are a smoke-screen behind which preferential hiring takes place, thus shifting the burden of discrimination to a new group;  "The practice ends up by creating new classes of victims by lifting the burden from past group discrimination (women and minorities) to a new group -- white Anglo-Saxon males".

In Australia complaints of this kind are already surfacing.  A country newspaper in New South Wales carried the report of a man who claimed he could not get a job because he was "a white Australian male who is not disabled".  Arguments for social reform which require one social group or sex to suffer at the expense of another are obviously fraught with grave dangers.

Dr. Moens also makes the important point that affirmative action programmes do not help the truly needy or disadvantaged, because the members of the minority group or women who benefit from such programmes are likely to come from the top of the minority or female population, whereas those white males who miss out as a consequence of preferential hiring are likely to come from the bottom of the white male distribution of the population.

Dr. Moens emphasises that the question of whether justice should be done for individuals or groups is a key issue often neglected in the affirmative action debate.  Quoting Nathan Glazer he says;  "... if the whole concept has been developed in individual terms, how do we provide justice for the group -- for example, by a quota which determines that so many jobs must go to members of the group -- then do we not by that process deprive individuals of other groups not included of the right to be treated and considered as individuals, independently of any group characteristics?"

Affirmative Action;  -- The New Discrimination is well-written, fully researched and adequately referenced, but, more important, it brilliantly analyses the fundamental errors of current feminist and "equal opportunist" philosophy, which propounded and cloaked in trendy jargon, is often not recognised for what it truly is -- "the new discrimination";  Henry Mayer, Emeritus Professor of Government, University of Sydney, commented;  "Moens' anti-affirmative action monograph is an able and intelligent brief, much above the usual level, and I think those who differ from him need to reply at the same level".  The Foreword, which acclaims Moens study as one of international importance, is written by Professor Lauchlan Chipman, currently visiting Fellow in Philosophy and Law at Harvard.