FOREWORD
I have read "Increased Production" with great interest.
The author has carried out a valuable national service in setting out so logically the arguments for maximum efficiency and production.
Our financial commitments as a nation are such that the greatest efficiency and the highest production will be essential if we are to hold our economy on a sound basis. This will call for an Australia-wide recognition by all sections that we must make the "long pull and the strong pull" together.
We have made great technical progress during the past few years -- we have enlarged our factories and improved our methods -- but other countries have done likewise, and world competition will be on a keener basis than ever before.
I commend a study of "Increased Production" to all those Australians who love their country and wish to see it prosper.
Wm. Queale, Esq.
President,
Associated Chambers of Manufactures of Australia.
PREFACE
In October, 1994, we published a comprehensive statement of economic policy for application after the war, entitled "Looking Forward". The interest aroused by this examination of post-war problems and of current controversies surrounding those problems considerably exceeded expectations. In the daily and periodical press, "Looking Forward" received exceptional publicity and was highly commended. Its circulation in all states of the Commonwealth, by way both of bookshop sales and free distribution, is now over 30,000 -- and should eventually reach the neighbourhood of 50,000 -- copies. It has been widely discussed and debated by numerous organisations and voluntary groups interested in post-war questions. We have received many requests that certain sections of "Looking Forward" should be elaborated and clarified.
One of the most vital issues of national policy raised, but not fully dealt with, in "Looking Forward" is that of the post-war productivity and efficiency of industry in its broadest sense.
Production is the ultimate source of higher incomes for the individual man and woman, and the sole foundation of all plans of social improvement. Whilst the full and equitable distribution of the fruits of production between individuals, and the division of the total productive effort of the nation between different avenues of employment are both problems of the first importance, it is these questions alone which appear to be receiving attention from the public and governments. The more fundamental problem of economic policy, that of ensuring an adequate total volume of production, is apparently being neglected. It is in an attempt to correct this misdirection of public interest and economic planning that these articles have been issued.
ARTICLE I -- NUMBER ONE POST-WAR
PROBLEM IS: MAXIMUM PRODUCTION
In the welter of investigations into post-war economic problems one supremely important problem is being overlooked, if not entirely neglected. This problem is probably the greatest and the most crucial of all the complex social and economic questions which will beset the nation with the coming of peace. The neglect to give it the attention it merits is therefore a matter of the utmost national concern.
In brief, it is the problem of our national industrial efficiency, the problem of bringing the community's output of goods and services of every kind to the highest level possible in the light of our resources of labour, materials and capital equipment. Unless we can increase, and increase vastly, efficiency in every phase and feature of Australian industry, then all other plans of national improvement may well come to naught. In order that there may be more to divide up and distribute, more must be produced. That is no more than a statement of an obvious and vital truth, but one to which post-war planning is paying negligible regard. It can safely be said that there is no prospect whatever of realising the social and economic goals, taking shape in a multitude of official and unofficial reports and inquiries, unless the total production of the nation can be enlarged through higher efficiencies and the most effective use of human and material resources. "A better standard of life and increasing leisure for all demand hard and efficient work by all" -- that could well be made a national slogan so that it might become part of the conscious or subconscious mental equipment of every citizen in the Commonwealth.
FULL EMPLOYMENT AND SOCIAL SECURITY NOT ENOUGH.
Two post-war aims which have been given a primary place in economic planning and in the public thought are full employment and social security. Both are of high importance. But both can be satisfactorily achieved only through a rapid expansion of the national income, which, in turn, depends entirely on a more productive organisation of economic resources -- of men, materials, and machines. A policy of full employment may provide jobs for all -- but not necessarily well-paid, satisfactory, productive jobs, or jobs efficiently organised. Provided the national production is sufficiently large, social security schemes can assure to every man and woman throughout their span of years the primary, minimum needs of existence, but not necessarily an existence which will bring opportunities for a happy, full, abundant life. Such opportunities come only from higher standards of living; and higher standards of living only from higher standards of production. Full employment and social security will not, therefore, in themselves achieve for the people of this country the kind of life to which they really aspire after the war. Without greater production, success in achieving jobs for all and minimum security for all will be at the most a hollow, half-baked success.
To full employment and social security a third great aim, therefore, needs to be added -- maximum efficiency or maximum productivity -- and the attention of the community riveted fairly and squarely upon it. Only an efficient nation of producers can be a nation of prosperous consumers. What we can consume is inexorably limited by what we produce. It is thus supremely necessary to arouse a great public 'feeling on the need for higher efficiency, and for those directly concerned with national planning, in both private and public spheres, to prepare the policies which will ensure a rapid and continuous expansion of the nation's industrial output. This is a question to' which trade unions, employers and governments should give immediate attention.
THE COMMITTEE OF ECONOMIC DEVELOPMENT.
Two years ago, leading business men in the United States founded a nation-wide organisation -- called the Committee of Economic Development -- to plan to provide post-war jobs for many millions of returning servicemen and war workers. The Committee is basing its attack on the problem of the sound premise "that jobs are a by-product of production and distribution", and it has taken as its "No. 1 post-war objective the attainment of a record-breaking increase in the gross output of peace-time goods and services over the record-breaking year of 1940". It insists that all policies of governments, business and labour be examined from the point of view not of an economy of scarcity, but of an economy of plenty, and that if changes in policy are needed to contribute to expansion, these changes should be made. We in Australia could well take a lesson from this and apply it to our own efforts at planning the reconstruction of our economic affairs.
PLANNING FOR PLENTY.
There is strong reason to believe that, before the war, many of our industrial and political arrangements were based, unwittingly perhaps, on principles of scarcity. There is even stronger reason to believe that much of our post-war planning -- particularly official planning -- will accentuate the worst features of those arrangements. But official policy in a democracy is, to some extent, a reflection of private policy, of the views and aims of sectional groups. Plainly, if every section of the community or every institution is determined to cling obstinately to the methods and policies which it followed before the war, the post-war Australia will eventually differ little, in essentials, from the pre-war. We cannot build a brave new world by timid conservatism. We must organise our planning boldly on the basis of an economy of plenty, not one of scarcity. We must be prepared to make changes where changes are needed to give maximum production.
Great, and for the most part laudable, post-war goals are gradually taking clearer, shape in government quarters charged with the responsibility of blue-printing the broad outlines of post-war reconstruction. Whether all these goals can be won even with the most efficient use of our national resources is open to some doubt. It is, however, beyond all doubt that the hopes engendered by these ambitious plans are doomed to disappointment, unless our industrial machine is organised to produce at the highest levels of efficiency.
POST-WAR OBJECTIVES.
Let us glance for a moment at some of these goals and at the vast claims which they will make on the total production of the nation.
The official housing programme contemplates the erection of homes a short time after the war at the rate of 80,000 homes a year. The cost of the plan will amount to something of the order of £100 million a year. This alone is roughly one-tenth of the total post-war income of the nation on present indications.
The precarious position of Australia in the Pacific makes imperative a great expansion in our peace-time defences. The Director-General of Post-war Reconstruction has suggested that this will demand, on the most modest estimates, an annual expenditure of £50 million.
Commonwealth and State Governments are planning immense programmes of public works. It has been indicated that the urgent and indispensable works -- and not including any of the imaginative large-scale developments which have been proposed and have received much attention in various quarters during the war -- will cost approximately £100 million a year.
The annual cost of post-war government expenditure on administration will almost certainly be greatly larger than the corresponding pre-war expenditure -- it has been estimated at £30 million. The community has been promised -- and is entitled to expect -- substantial expansion and improvement in the nation's health and educational facilities. New hospitals, schools, university buildings, research institutions, expensive equipment, larger teaching staffs will clearly make a large levy on the national production. Without allowing for much expansion of these facilities, estimates have placed the total government expenditure on social services of this kind at £50 million a year. The expansion of pensions, repatriation and social services benefits of all kinds will probably absorb something like £100 million, annually, or £70 million more than the corresponding benefits before the war. In addition, we must expect to make some contribution to the economic revival of the war-devastated countries. This contribution has been placed at £5 million. Interest and sinking fund on the national debt, which has been greatly increased during the war, may amount to an annual charge of £140 millions -- nearly twice as much as the corresponding pre-war charge.
It is true that some of these charges on the national income are in the nature of "transfer payments" -- that is, they involve the transfer of income from one set of individuals in the community to another set and do not of themselves make a direct levy on the national production. On the other hand, they must be paid for through taxation, and therefore necessarily limit the extent to which taxes can be imposed for other purposes. (1)
On these estimates expenditure on government works and services would be roughly twice as much as the pre-war expenditure -- £570 million against £270 million before the war. This figure of £570 million for post-war government expenditure would comprise about one-half of the total post-war national income at a reasonable calculation. But the claims on the total national production represented by these immense figures take practically no account of the consumer goods and services, produced -- for the most part -- by private enterprise. These goods and services are those which the people regard, in the main, as going to make up their standards of life, and with that part of the national effort devoted to producing or purchasing the capital plant and equipment needed to provide them, constitute the remainder of the national production. The flow of consumer goods and services can be sustained only if the capital plant and equipment which produces it is maintained in effective working condition and steadily expanded to meet the needs of a growing population. At a fair estimate the maintenance and development of the capital assets of private producers and companies will demand at the very least £100 million or about one-tenth of the national income.
Before the war, the community devoted £700 to £800 million of its annual income to the purchase of consumer goods and services. It is in the highest degree unlikely that it will expect or wish to spend less than this sum after the war. In fact, there are strong grounds for the belief that it will expect and wish to spend somewhat more. Great arrears of demand for consumer goods, such as household equipment, furniture, clothes, motor cars, have accumulated, and the public will wish to satisfy and make good these arrears as soon as possible.
NATIONAL OUTPUT 50 PER CENT. HIGHER THAN PRE-WAR REQUIRED.
These figures are all calculated in terms of the average prices ruling during the financial year 1943-44. They are quoted to show the immensity of the tasks we are setting ourselves and to suggest that a national income greatly in excess of pre-war standards will be required. As a matter of simple arithmetic we cannot devote a much larger proportion of our total effort to government plans of housing, national works, defence, and social facilities and services -- as is proposed in official plans -- and at the same time maintain or increase our consumption of every-day commodities and "services without a much greater national output and income than before the war. Our peace-time national income in the last year before the war amounted to £880 million. Expressed in terms of the higher prices of 1943-44 this figure becomes £1109 million. Plainly a post-war national production (at 1943/44 prices) substantially above £1100 million a year -- perhaps nearer £1600 million -- will be necessary to meet the immense claims we are building up against it. Levels of efficiency and output much higher than pre-war, or even war-time levels, will be imperative.
POLICY FOR MAXIMUM PRODUCTION.
We have a policy for full employment; we have a policy for social security; we have a policy for housing. Clearly, and beyond all question, we must evolve a policy for maximum production, for it is on this that all else will depend. Such a policy does not imply longer hours and more drudgery. It does imply diligent and enterprising work while working, backed by enterprising management and the most efficient equipment.
The far-reaching and bold aspirations of our people for higher levels of comfort, health and material well-being, and for higher standards of education and opportunity will clearly demand not merely the full employment of all resources of labour, materials and capital, but the most intelligent and efficient use of these resources. With maximum production the post-war Australia can win a better, fuller, and more ample life for all its people. Without it the prospects of national and individual advancement are poor indeed.
ARTICLE II -- THE WAR EFFORT OF THE U.S.A. HAS
SET NEW STANDARDS IN INDUSTRIAL PRODUCTIVITY.
In the first article it was urged that to the two well-accepted post-war aims of full employment and social security there be added a third -- maximum efficiency or maximum productivity. It was further suggested that the attention of all bodies, public or private, concerned with post-war planning be directed urgently to examine the conditions necessary to the achievement of this aim. Unless accompanied by maximum efficiency in the production of commodities and services, neither full employment nor social security will give the Australian people the fuller life to which they aspire as the reward of victory. In fact, it is conceivable that jobs for all and a bare economic security for all could be attained with a somewhat lower all-round standard of life than existed before 1939. Clearly this is not what the Australian public wants. The average Australian certainly desires to be assured of a job and his family to be protected under all circumstances against the grosser forms of economic want, but beyond this he wishes for a life of expanding material well-being, opportunity and hope. In short, he wishes for that kind of life which only a growing output of industrial goods, cheaply and efficiently produced, can provide.
At this point, a closer definition of industrial efficiency is necessary. What is the test of efficiency? How can it be measured?
INDUSTRIAL EFFICIENCY -- HOW CAN IT BE MEASURED?
Industrial efficiency is a relative concept; there are no absolute standards by which it can be determined. The efficiency of a business can be assessed only by comparing the costs and quality of the goods it produces with the costs and quality of the goods produced by other businesses. Similarly, the industrial efficiency of a particular nation can be appraised only by reference to the efficiency of other nations. The total quantity and quality of the goods and services produced by a nation or business clearly depends on the contributions made to total production by each individual producer in that nation or business. For all practical purposes, then, the best measure of efficiency is the output of a single worker in an hour of work. There are, of course, a multitude of factors determining whether that output is relatively high or relatively low -- but two are predominant. One is the skill and energy of the worker; the other, the effectiveness of the machines of production with which he works. One workman with modern, high-class machinery will obviously produce more in an hour of work than another worker, of equal skill and enthusiasm, contending with machines that are second-rate or outmoded.
RUSSIA HAS IMPORTANT LESSONS.
In trying to determine the scope available for rapidly, increasing production and efficiency in Australia after the war the industrial results being achieved in other countries provide helpful indications. Outstanding in significance are the two immense war efforts on the production front of the United States, the greatest stronghold of capitalistic private enterprise in the world, and Soviet Russia, whose efforts are directed under a diametrically opposite system of organisation, loosely called Communism. From the standpoint of industrial production there can no longer be any doubt that the Soviet experiment has succeeded. In spite of the tremendous supplies of munitions poured into Russia by the United States and Britain, it is clear that the Soviet armies could never have successfully resisted and beaten back the might and power of the German mechanised forces unless they had been backed by a large, modern, and relatively efficient industrial machine. Responsible documents such as Joseph E. Davies' (former American Ambassador to the Soviet) "Mission to Moscow", the late Wendell Wilkie's "One World", and now the reports of Eric Johnston, the President of the United States Chamber of Commerce, provide unassailable evidence of the spectacular industrial advance of the Soviet Union.
In a short space of time, Russia, under a novel form of industrial organisation, has achieved a miraculous improvement in its output of material wealth. The processes of wealth production have been vastly speeded up and the output of the individual Russian worker- greatly increased. One does not need to be a Communist to realise that the methods by which this advance has been achieved call for earnest study by the peoples of other nations. The fact that Russian efficiency as measured by output per worker is yet much below the efficiency of the older highly industrial nations is not so significant as the remarkable pace with which Russia, from a long way behind scratch, has gained a foremost place among the industrial countries of the world. This has measureless implications for the post-war economic future.
U.S.A. SETTING NEW STANDARDS IN INDUSTRIAL PRODUCTIVITY.
Perhaps of even greater significance than the industrial progress of Russia is the evidence available of the unrivalled feats in production achieved by the United States during the war. Even before the war, the United States, in spite of devastating fluctuations in economic activity and the absence of adequate social measures to guard its people against the effects of these fluctuations, was fast outstripping the world as an efficient producer. The output of the American worker and the real income per head were, at the outbreak of the war, considerably in advance of those of any other country. But the achievements in production prior to 1940 are dwarfed against the colossal outpouring of munitions and civilian goods of the last few years. In September, 1943, the Federal Reserve Board's index of industrial production was 243 compared with an index figure of 100 as the average for the years 1935-1939. What do these figures mean? They mean that the production level in August, 1943, was not merely double, but nearly two and one-half times the pre-war standards of production. Commenting on these astonishing figures, the monthly report of the National City Bank of New York states:
"Dividing industrial output, as measured by this figure, between civilian and war production, the calculation shows that civilian production is 25 to 30 per cent, below the 1935-39 average, while for war alone the industries are turning out 70 per cent, more than their entire production for all uses in those pre-war years. The showing is one of efficiency and resourcefulness without parallel in industrial history".
Competent observers have stated that the United States has been able to maintain a standard of civilian consumption not greatly below the pre-war level, and to superimpose on this the gigantic output of war machines and supplies which is contributing so largely to overthrow the Axis powers. It is not too much to say that we are witnessing a new industrial revolution. The United States, with wise economic direction, would seem to have within it the power to win not merely "freedom from want" but a standard of material comfort for its people surpassing anything hitherto envisaged. It has been said that if America is to absorb post-war the full industrial output made possible by the recent developments, the standard of living of the average American will have to be doubled. By its performance in production the U.S.A. is setting new forms of industrial efficiency, in comparison with which traditional standards are dwarfed and outmoded. As with the Russian, the industrial war effort of the United States has implications of the highest significance for the economic future of the world.
U.S. MAN-HOURS PRODUCTION DOUBLE THE BRITISH.
The great efficiency of American industry is further confirmed by statistical comparisons recently made with the industrial productivity of Britain. These estimates have been adopted as reliable and authoritative by the British "Economist", probably the leading world authority on current economic affairs. The comparisons show that industrial efficiency as measured by production per head is roughly similar in Great Britain and Germany, while in the United States it is more than twice as great as the other two countries. The "Economist" makes this interesting comment:
"In 1943, when there was full employment in both countries the output of wealth per head of the population was from one and two-thirds to two and a-half times as large in America as in Britain, and this in spite of the fact that a much higher proportion of the American labour force is in agriculture with its below-average productivity, and in spite of the shorter hours worked in the richer country. Whatever the exact figure may be, and whatever allowance it may be proper to make for the abnormal conditions of war-time, there is very little room for doubt that the average American workman produces in an hour from one and a-half to two and a-half times as much wealth as the average British worker".
These comparisons of industrial efficiency are astounding.
From the long-run, if not from the short-run, standpoint -- and even allowing for the unsurpassed quality of many British products -- they would seem to indicate a grave economic and political future for Britain, unless the most strenuous efforts are made to retrieve the position.
So far as we know there are no statistics of Australian productivity which would allow accurate comparisons to be made with overseas countries. It is possible that before the war the output of the Australian worker, over the whole field of industry, was fairly close to, perhaps slightly below, that of his opposite number in Britain. Since the war, however, it is highly probable that any margin which may have existed in favour of the British worker has been increased, The proximity of Britain to the conflict and the terrible threat of 1940 have almost certainly produced an intensity of effort by workers and industrial leaders alike, greater than this country could claim.
CHALLENGE TO ECONOMIC STATUS OF THE BRITISH PEOPLES.
The high pitch of industrial efficiency demonstrated by the figures of American war production is probably the most significant single fact in world economics today. Little less portentious is the entry on to the world industrial stage of Soviet Russia, a new and mighty protagonist. These two facts present a challenge to the industrial and competitive status of the British nations, a challenge which must be answered by bold imaginative policies. Otherwise as an industrial and political force -- no nation or group of nations under modern conditions can play a leading part on the world political stage unless it is great industrially -- the British Empire may sink to relative inferiority.
There are many signs that responsible circles in Britain are awakening to this new challenge to her position as an economic power. A clear recognition of the need for diverting a greatly increased proportion of the national income into scientific research is growing. Economists, one and all, are waging unrelenting warfare on those practices and policies -- whether of labour, capital or government -- which have the effect of restricting production or reducing efficiency. The post-war restoration and modernisation of much of Britain's capital equipment are being studied intensively in business and government quarters. The White Paper of the British Government on Employment states: "The aim of the government can be realised only if the whole productive power of the nation is employed efficiently. It is not enough that it should be employed".
In Australia a more realistic approach and attitude to the problems of post-war economic policy are urgently needed. For instance, confident statements are being constantly made about the prospects of export markets for the products of our manufacturing industries. But it is idle to suppose that any considerable market for these products can be gained unless the highest attainable efficiencies are striven after continuously and without respite. To assure a secure and expanding external market we must produce efficiently. In plain words, the output of the Australian worker in an hour of work must be increased. (2) This is the fundamental requirement from which there is no escape.
EXPORT MARKETS FOR AUSTRALIAN MANUFACTURES?
According to press statements a recent report of the Secondary Industries Commission -- attached to the Department of Post-war Reconstruction -- speaks optimistically of the export possibilities for Australian manufactured goods after the war. Apparently the report states that as our price-fixing policy has been more successful in holding down prices and costs than the price stabilisation policy of the United States, we would be placed in a relatively favourable position to export. This kind of economic reasoning is fallacious and disturbing. In the light of the magnificent efficiency of American industry, demonstrated by its remarkable war achievements, any idea that Australia will be favourably situated in the export of manufactured goods relative to the United States seems the height of foolish optimism. Furthermore, on present indications and with the probable establishment of the International Monetary Fund, it is a reasonable supposition that exchange rates will be fixed some time after the war in accordance with the price levels prevailing in the different countries. There is no sound basis for any assumption that we will be able to acquire marked advantages through a favourable exchange rate. Our competitive position will depend almost wholly on our real efficiency and efforts in production, and not on artificial advantages in our exchange position.
Only the highest possible production per man-hour will assure us of the opportunities abroad and the standards of life at home which we have set up as among our chief post-war aims. No more than simple common sense is needed to see that a study of the ways and means of enlarging the output of the individual Australian worker is of first importance to the economic future of this country.
ARTICLE III -- PAYMENT ACCORDING TO INDIVIDUAL OUTPUT.
The first two articles in this series have claimed that a policy for maximum production should have a high, and possibly the first, priority in plans of economic reconstruction. Both the demands on the national income involved in the ambitious post-war objectives in housing, defence, public works, social services, and the like, and the startling evidence of tremendous industrial progress overseas, notably in the United Slates and Soviet Russia, give irresistible weight to this claim.
It needs to be made clear, however, that it is not the intention of these articles to present a detailed policy for increasing total production. They aim at the more limited objective of gaining wider public acceptance of the need for such a policy, and of drawing attention to one or two of the more important considerations which it would have to take into account.
OUTPUT PER WORKER LIMITING FACTOR IN RECONSTRUCTION.
The extent of our social and economic achievements at home and our status and competitive power as an industrial nation abroad will alike depend upon, and will be limited by, the output of the individual Australian worker. We have suggested that this output will be governed by two main immediate factors -- one, the talent, energy and attitude of the worker himself; the other, the efficiency of the mechanical aids to production, or, in other words, of the capital equipment with which he is provided by industrial managements. This article is concerned with a limited aspect of the former -- that is, with the contribution to production made by the worker.
So far as its labour force is concerned, Australia is, in a sense, most fortunately placed. The native ability of the Australian worker is uncommonly high. In fact, it is not too much to claim that in certain qualities -- in ingenuity, enterprise, individuality, self-reliance -- he is unsurpassed by the workers of any other country in the world. This has often been conceded by competent industrial observers from overseas, but if further proof were needed it is to be found in the remarkable individual feats of the Australian soldier in two world wars. In France in the 1914-18 war, and in Northern Africa and in New Guinea in the present conflict, the Australian has demonstrated an exceptional degree of individuality and self-dependence. The fact that in the Australian worker we have a magnificent native talent makes it all the more necessary that our policies and methods of industrial organisation should permit and encourage this talent to be applied to the best advantage both of the worker himself and of the nation at large. The strong individuality of the Australian character requires a proportionately adequate outlet through which to express itself.
STANDARDISED REWARDS.
The methods at present followed in the organisation of Australian labour are by no means ideally adapted to the distinctive Australian attributes and temperament: It cannot be doubted that in Australian labour there is a rich field of latent talent lying relatively uncultivated. A good part of the blame for this must be attributed to our methods of wage payment and the failure to provide direct monetary and other incentives to the individual worker to make his best contribution to the processes of production. Over a vast field of Australian industry the rewards of the worker are standardised. The efficient and energetic worker receives no more for an hour's work than the lazy or inefficient. The worker is paid by the hour, not by his output; his reward is measured by the time he spends in production, not the contribution he makes to production. In addition, in many industries the output of the worker is deliberately limited by trade union regulations stipulating rates of production not to be exceeded by union members. Invariably these rates are set by reference to the standards of production which the slower and more incapable of the workers can comfortably achieve. The effect of this is to reduce the fast, efficient worker to the level of the below-average worker.
Clearly these policies involve the suppression of the very qualities and attributes in which the Australian is peculiarly and distinctively gifted. They are a denial of all the best features of individualism -- the right of the individual to make the best use of his own capacities, and to win for himself, in fair competition with his fellowmen, the rewards and opportunities which his abilities merit.
To restrict the output of the worker is to refuse him the opportunity to improve his standard of life and to gain the full advantages made possible by modern technical devices and mechanical aids to production. It is also to deny to the nation the right which it has to the best use of the talents and ability of all its members. It is contrary both to individual welfare and public interest.
PAYMENT BY RESULTS.
This undemocratic and grossly uneconomic situation can be corrected. The main remedy lies in the application, wherever possible throughout industry, of systems of wage payment based on the principle of "payment by results" -- that is, of systems in which the reward of the individual worker bears an equitable and fair relationship to the energies and abilities he displays. (3) It may be confidently asserted that there is no single policy which could contribute more to the enlargement of the total national income and to the improvement of the real standards of life of the worker than the adoption of "payment by results" as an integral part of the Australian industrial structure. Its importance can scarcely be over-estimated.
MR. ERIC JOHNSTON.
In the previous article reference was made to the great industrial strides made by Russia under the direction of the Soviet Government. The President of the United States Chamber of Commerce, Mr. Eric Johnston, recently visited the U.S.S.R. as a special guest of the government. In one of the reports on his tour, he tells of an interview with a prominent government official. He put the following question to the official:
"Will the Russian citizen benefit in peace from the lower prices, better services and increased variety which competition brings to the American?"
The reply he received is illuminating:
"You use competition to secure better results. We use incentive payments. Most Russian workers, whether on the farm or in the factory, are paid on a piece-time-work basis".
This striking testimony, taken in conjunction with other evidence such as that given in Mr. Joseph E. Davies' "Mission to Moscow", strongly suggests that "payment by results" or, in other words, adequate incentive to the individual, has been at the root of the industrial achievement of the Soviet Union.
However, the reply of the Russian official reveals a misconception of the position in the United States. It is true that America has placed great reliance on competition in the industrial arrangements which have been responsible for achieving for its people the highest level of material comfort of any people in the world. But it is also true that those arrangements have given a primary place to systems of reward based on individual output and enterprise. In the United States a great deal of weight is placed on the fact that one man's output may be considerably greater than the next. Throughout American industry "payment by results" is fairly widespread. Every encouragement is given to the exercise of individual inventiveness and ingenuity. In many classes of production American workers are earning astonishingly high wages compared with Australian workers, but these high rewards have not prevented American goods being sold on the world markets at prices with which other nations have found it difficult, and often impossible, to compete.
LINCOLN ELECTRIC COMPANY.
In some companies "payment by results" has been carried t6 remarkable lengths. Exceptional results in efficiency have been achieved. The Lincoln Electric Company presents a case in point. In this organisation during 1942, an engineer on a salary of 6,634 dollars a year received a bonus of 50,000 dollars; a shop foreman on 4,120 dollars a year, a bonus of 25,000 dollars; and a machine hand, one of 3,000 dollars. The company has an unrivalled record in output, rapid development, high efficiency and low prices. The head of this organisation, Mr. James Lincoln, rates incentive payments above competition as an efficiency factor in industry. His industrial philosophy -- expressed in typically American terms -- is interesting:
"The greatest chance to reduce industrial costs is to tap the greatest of all resources -- unused manpower potentials. And there's only one sure way to do this that I know of, and that's to give men unlimited incentives. Let them know that when do more they'll get more -- preferably more cold cash. Never agree that 'a man who works with his hands is only worth so much'."
Here, then, in two nations which, during the war, have astonished the world by the magnitude of their industrial achievements, "payment by results" holds an honoured and vital place.
SIR WALTER LAYTON.
In Britain this system of payment, although probably much more widespread than in Australia, has not been applied so intensively or with as much imagination as in either the United States or the Soviet Union. Some years ago one of the most distinguished minds in England, Sir Walter Lay ton (a former editor of "The Economist"), in referring to "payments by results", stated:
"Our recent industrial history would have been very different if more industries had realised the economic importance of a wage system which provided big prizes for wage earners".
Clearly Australia cannot afford to disregard the lessons implicit in the above facts. Australian industry cannot thrive and prosper post-war if we refuse to accept methods used by the great industrial nations overseas, and largely responsible for the high levels of industrial output and efficiency which they are achieving. We will not be able to improve, or even maintain, our place in the economic race if we impose on ourselves handicaps from which other countries are free. At the very least, the principles of international trade proclaimed in the Atlantic Charter and the Mutual Aid Agreement will involve an even more rigorous scrutiny of costs and efficiencies in our tariff-protected industries than has hitherto been the case. In the face of mounting world opinion we will be able to justify a reasonable measure of tariff protection only if we show that we are making every effort to bring our real costs of production in Australia into line with world costs.
EMPLOYERS URGE "PAYMENT BY RESULTS".
In Australia, wage payments based on individual output have, an unfortunate history. The great bulk of employers has always strongly supported them -- in a questionnaire we recently circulated to some thousands of employers in Victoria, the answers showed nearly 100 per cent, of employers to be in favour of "payment by results". But, by and large, these systems have been bitterly opposed by the trade union movement. Today, payment according to output operates in a relatively small sector of total Australian industry.
JUDGE BEEBY'S AWARD.
Ever since the establishment of industrial tribunals, both State and Federal Courts have shown themselves to favour some form of "payment by results", but they have regarded its application to be a matter for voluntary agreement between employers and employees. The award of the late Judge Beeby in 1930 in the engineering and allied industries dispute is a classic statement of the history and merits and demerits of the contentions surrounding "payment by results" in Australia. It is a document of first importance and should be studied by all concerned with the future of Australian industry. Judge Beeby recorded his opinion that the employers' contention that Australian manufacturers could hold their own in the markets of the world only if they adopted the methods of their competitors was irresistible. His award gives a penetrating and learned analysis of the underlying reasons for the trade union opposition to "payment by results". In it he expressed his unqualified conviction that the industrial courts could provide and enforce safeguards and prevent abuses of such systems:
"Those who voice the official attitude of unionism assert that the 'cutting of rates' and the unfair speeding up of industry still exist, and refuse to admit that our system of industry furnishes proper safeguards. I have no hesitation in saying that this is a mistaken attitude. In every State of Australia exist means of creating machinery which will safeguard systems of payment by results from abuse. But that machinery cannot be used unless employers and employees approach the matter in a different spirit".
He asks the question: "Can any community in the present stage of human development agree to the standardisation of effort which is the avowed policy of a section of trade unionists?" He discusses the effect of standardisation of effort on the standards of life of the nation:
"Wage earners must realise that limitation of production, the setting of uniform standards of production for individuals in different industries, will not hasten evolutionary progress. Whatever theories as to economic reconstruction may be sound, those which result in individual deterioration can only lead to lower standards of life. Deliberate efforts to lessen or standardise output, resulting in deterioration of the individual, must be combated by all thinking men".
The conclusions Judge Beeby reached are, in substance, similar to those stated on this subject in the document "Looking Forward" we recently issued. In "Looking Forward" it is suggested that in view of the fact that high employment is regarded as a cardinal aim of post-war economic policy, and that adequate social insurance to protect the worker and his family against the effects of economic misfortune is universally accepted, a fresh foundation exists upon which employers and "the trade unions can discuss together the application of "payment by results" to industry.
CO-OPERATION URGENT.
We repeat here that co-operation between employers and trade unions for this purpose is a matter of urgent, inescapable necessity. The levels of efficiency of Australian industry, its competitive power in home and overseas markets, and the material well-being of the Australian worker -- all are at stake in the way this supremely important question is resolved.
ARTICLE IV -- MACHINES, MANAGEMENT AND PRODUCTION.
The accepted measure of industrial efficiency is the output of the individual worker in an hour of work. The higher this output the greater will be the total production of the nation, and the greater the national production, the more will there be for all the individuals contributing to it to spend and save and thus advance the standards of life of themselves and their families. The more also will there be for the state to spend on education, health, public works and other services for the benefit of all its members.
In the previous article it was maintained that the output and wages of the Australian worker could be substantially increased by relating directly his reward to his contribution, that is, to the amount and quality of the work he performs. Here is to be found at least part of the secret of the great efficiency of American industry and also of the rapid development of modern industrial technique in Russia, without which its people must have quickly succumbed before the early massive German onslaughts.
PRODUCTIVITY AND TECHNICAL EQUIPMENT.
But, whilst the output of the individual worker can be raised through the provision of adequate monetary and other incentives to maximum effort, it also depends, to a major degree, on the quality and kind of the technical instruments or tools of production with which he has to work. In fact, the overriding reason for differences in industrial productivity between the nations is to be found in the volume and efficiency of the capital equipment which they possess in relation to their respective populations. The output of the American worker is relatively high, largely because he has more and better machines and technical equipment to assist him in his work. The Soviet Government has been able to raise impressively the conditions and standards of the Russian people because it has provided the workers in farm and factory with the production tools which they formerly lacked. The Indian worker produces an insignificant result for his efforts, because he has practically no capital equipment to aid him. Mr. Colin Clark, the Director of the Queensland Bureau of Industry, has estimated that the capital per head in the United States before the last war was 44 per cent, greater than that in Great Britain. This discrepancy has almost certainly been widened since, and accounts, to a considerable extent, for the disquieting fact -- noted in the second article -- that the output of the American worker today is about double the output of the British.
WEALTH DEPENDS ON CAPITAL.
Of course there are many other forces besides the volume of capital equipment influencing differences in the standards of production and life as between the nations. One is climate, another natural resources, a third the size of the internal market. Systems of government may have some effect on national wealth and prosperity. But it is still true that the dominant cause is to be found in the kind of capital equipment and its volume per head of the population. Economic wealth depends on capital; if we would increase the former, then we must enlarge and improve the latter. A policy for maximum production for Australia must therefore be based on a study of the conditions which affect the improvement and the rate of increase of the capital equipment of the nation.
Among the many influences governing the accumulation of technical and mechanical aids to production, three are outstanding in importance -- first, the quality of the managements which preside over the fortunes and direct the operations of industry; second, the extent and nature of scientific and technical research; and, third, the economic and financial policies of the state. Of the three, the third is probably first in order of consequence, because state policy impinges so directly and forcefully on the other two. The next and final article in this series will be devoted to a discussion of the ways in which the state can promote the essential objective of improving and enlarging the capital equipment and productivity of industry. In this article, brief consideration will be given to the related matters of industrial management and research.
The task of increasing the worker's output and reducing costs through the provision of more and more effective aids to production is a large part of the province of the industrial manager. What, then, is the relative standard of industrial management in Australia, and how can it be raised?
INDUSTRIAL MANAGEMENT IN AUSTRALIA.
In the quality of its industrial management, Australia is at a disadvantage in comparison with the older and larger industrial nations, because of the obvious fact that its industrial structure is both young and small. There is no doubt that we have suffered severely in the past, and probably suffer to some extent in the present, from a shortage of experienced industrialists and business managers of the highest class. Too few in the ranks of our managers have had the close experience in difficult specialised trades and industries necessary to the most effective industrial generalship. Too few also have had the wider knowledge and education of industry in its many phases, which, except in the case of very exceptional individuals, alone gives that broader industrial comprehension and vision needed for initiating and successfully controlling larger-scale projects. As Australian industry has developed and increasing numbers of our business executives have gained experience of industry in overseas countries, this drawback has been reduced. At the outbreak of war there were in this country a number of large industries and efficient distributing establishments which were monuments to the courage and high business and intellectual capacities of Australian management. The sending of prospective managers to gain experience and to study at first-hand conditions in overseas countries is a policy that has always paid the best dividends, and is one that could be profitably pursued on a much larger scale in the future. Business organisations of any proportions should make it a firm policy to have at least one of their senior executives abroad every year investigating and acquiring knowledge of developments overseas.
EDUCATION AND MANAGEMENT.
Industry must depend, to a very great extent, for its supply of first-rate managers on the educational system. Anything done to improve this system and to widen the opportunities of higher cultural, scientific and technical instruction will tend to increase the flow of potential business and industrial leaders, it is our firm belief that the educational facilities of the nation should be vastly broadened in scope after the war. (4) There may still be truth in the idea that competent business men are born, not made, but if so it is certainly much less true under modern conditions than it has been in the past. If industry is to reap the full benefits of an enlarged and improved educational structure, then the business community must be prepared to give full recognition, in tangible status and reward, to the qualities which the best education can impart.
It is possible that the organisation of business, particularly at the higher levels of direction; may be such as to make it difficult for many of special ability and qualifications to exert their proper influence on industrial policy. There is a tendency for the dividing line between the executive staff and factory workers and technicians to be too sharply drawn, and, in turn, for the gap between the higher managerial posts and boards of directors to be too difficult to bridge. Exceptional ability, wherever it exists, whether in factory or office, should be more consciously sought out and encouraged, and no artificial obstructions should be allowed to hinder the rapid promotion of the more able men, if justified, to the highest, positions in the business.
BOARDS OF DIRECTORS.
The common accusation that boards of companies include many "guinea pig" directors, without expert knowledge or even general understanding of the industry's affairs, has, however, very little force in this country. An unbiased survey of the personnel of the boards of many of our leading companies will reveal that the great majority of their members are either specialists in one or other aspects of the business, or actually hold full-time executive posts. The highly scientific and technical conditions of modern industry do, however, make it desirable that special technical experience and qualifications should assume greater weight in the future in determining the constitution of company boards. This is not to say that there should not be a place for men of the broader type of experience and understanding. No board will be well-balanced and efficient without an adequate blending of men of this kind.
America provides certain valuable lessons regarding the constitution of company boards. Here it is very general practice for boards to be made up of high-ranking executives within the particular business. Directors drawn from outside are almost invariably used in the capacity of consultants on special aspects of the industry, for which task they possess the needed qualifications. While it may not be desirable to go as far as the United States in this respect, it is beyond all question essential in the interests of national productivity that boards of Australian companies should be recruited increasingly from those who have had close practical experience and expert knowledge of the industry concerned.
MANAGEMENT MUST BECOME "RESEARCH-MINDED".
That the standards of productivity and efficiency of Australian industry after the war will depend on the standard of managerial capacity and direction is axiomatic. Among other things industrial management in this country should become more "research-minded". The improvement of industrial equipment, the discovery of new and better products and methods of production will be determined to an important degree by the magnitude of our scientific and technical research. There is great need and vast scope for an expansion of the research activities of Australian industry. In fact, this must be done if we are to keep pace with industrial developments abroad. In the past, Australia, as a young country, has naturally tended to lean on the older nations in acquiring knowledge of new scientific and technical developments in industry. But during the war the industrial base of Australia, particularly in manufacturing, has broadened greatly and has given rise to ambitious hopes for the future. The time is now appropriate for our industries to become more self-reliant in initiating and applying the fruits of new scientific discoveries.
To say this is not to imply criticism of what has been done in the past. For a young country, Australia has made many notable contributions to original industrial knowledge. Scientific research is, in fact, already on a far more extensive scale than is generally recognised. This is amply proved by the fact that our per capita expenditure on research is possibly little less than that of Great Britain, with her much greater industrial resources and longer history of development. But we have now entered an intensively scientific era, and a new conception of the place and possibilities of research is needed.
U.S.A. SPENDING £70,000,000 A YEAR ON RESEARCH; BRITAIN £7,000,000.
One of the chief causes of the fact that, the productivity of British industry has lagged so far behind that of American lies in its failure to set aside sufficient funds for purposes of scientific research. The United States is spending annually £70,000,000 on research compared with an expenditure in Britain -- on the most liberal estimates -- of £7,000,000. Russia is spending on a scale similar to the United States -- perhaps even slightly greater. According to estimates made by Dr. Traill, the Director of the Scientific Liaison Bureau, Australia is spending on industrial research today something of the order of £1,000,000 to £1,600,000 per year, and this figure has been reached only because of the considerable expenditure during the war on research directly connected with defence -- the figure has been estimated to be £330,000. Calculations have placed research expenditure by private industry at roughly £120,000 annually. This is practically all attributable to a score or so of the major companies.
SIGNIFICANT BRITISH REPORTS.
Britain is well awake to the seriousness of the position manifested in these figures. During, and largely as a result of, the war a great revival of interest in industrial research has taken place. A number of important reports have been published, chief among which are those of the Federation of British Industries, the Parliamentary and Scientific Committee, and of Nuffield College attached to Oxford University. All of these statements give unqualified recognition to the need for a major expansion of research activities after the war. The Report of the Parliamentary and Scientific Committee states:
"It is now recognised that in the post-war period in Great Britain research and its application must be on a far bolder and more imaginative scale than in the period 1919-1939. We should certainly look forward to spending at least ten times as much annually after the war if we are to provide the basis without which neither our agriculture nor industry can effectively meet the needs of the future".
Among the important recommendations made by the Federation of British Industries there is the following:
"Every manufacturing firm should take stock of its position to ensure that it is devoting to research and development the maximum effort and funds commensurate with the nature of its problem. Wherever possible it should maintain its own research department; where, however, this is not possible it should, at least, entrust one or more suitably qualified individuals with the responsibility for keeping constantly under review the application of research to its activities, and create and maintain a special fund for such research and development of a magnitude compatible with its resources".
The scope of these articles does not permit of a detailed discussion of the many significant recommendations made in these reports. The broad lesson for this country is, however, plain and should be acted upon. The post-war Australia must be prepared to apply scientific research to its industrial activities -- and these do not exclude the sphere of distribution which comprises a very large proportion of the whole -- on a scale considerably greater than anything we have previously envisaged. That much fundamental reorganisation from the ground up will be necessary to this end hardly needs to be said. The flow of competent trained scientists must be increased and the facilities of technical colleges, universities and research institutions expanded and modernised. A change of heart, both on the part of governments and private industry, towards research will be needed.
Much difficult preliminary investigational work to match and co-ordinate the means to the end will have to be undertaken. It seems that an expert committee, comprising representatives of government, industry and scientific bodies might well be formed to study immediately this most important problem. This much is certain, that no policy for maximum production will meet the needs of the future unless it takes fully into account the vital place of scientific research in modern industry.
ARTICLE V -- THE STATE AND MAXIMUM PRODUCTION.
Whether or not the state engages directly in production itself practically every action it takes influences the standard of industrial productivity and therefore the size of the national income. There is little the state does, or even says, that does not affect the efficiency with which the existing capital equipment of the nation is used, the rate at which it is modernised and additional equipment is accumulated.
STATE NEGLECTING PROBLEM OF PRODUCTION.
But, whilst modern thought has come to assign a much more significant part to government in economic affairs, by some strange illogicality or oversight it has given little or no attention to the impact of state policy on levels of industrial production and efficiency. The state today is concerning itself very actively with the important problem of ensuring constant employment and minimum security for all its members, but it is ignoring the supreme economic task of all -- that of increasing the annual national output of goods and services. This omission becomes still more difficult to understand when it is appreciated that the size of this output will set limits to the magnitude of the state's own plans in social services, productive employment, housing, public works, education, and in all other fields of reconstruction.
The reason for this neglect may, however, not be far to seek. It has a deep-rooted historical source. Whilst it is easy for the detached observer to see that the whole community stands to benefit if production can be increased, sectional interests are not easily convinced that any share of the increased product will go to them. They incline to feel that a surer, quicker, and less painful method of getting a larger slice of cake is by acquiring part of the slice that previously went to some other section. And so the prevailing philosophy runs something like this: "Wages can best be raised by taking something away from profits. Conversely profits can be maintained only by keeping down wages. The interests of the city industries can be preserved so long as the prices paid for raw materials and food produced in the country are kept to a minimum. The lower the prices the retailer pays the manufacturer for his finished product the greater the profit he stands to make when he sells to the consumer. The more the consumer can be made to pay the more there is for all the producers to share up".
This is, of course, a very generalised picture and subject to many exceptions. But it is broadly true that the tendency has been, and is, to think in the negative terms of dividing the cake, rather than positively of the means by which the size of the cake can be increased for the good of all. The state, naturally enough, has not escaped this tendency.
DOCTRINE OF DIVISION FALLACIOUS.
That the doctrine of division is, in the long run, dangerously fallacious there is no doubt. The prosperity of the consumer is clearly basic to that of the producer. High wages are essential to ensure the volume of purchasing power necessary to reasonable and constant profits. Regular profits are. equally essential to encourage business confidence and the willingness to risk capital in expansion and growth and the improvement of industrial technique necessary to high wages. In the long run there can be no firmly-based prosperity for any sectional group or class of industry without the prosperity of all sections and classes.
This is a problem that cannot be satisfactorily resolved through plans and machinery. What is really needed is a change of attitude and approach. No plans or machinery of control will achieve much if the attitude of mind which inspires them is founded in unsound and illogical premises. And the state, more than any other institution in the country, requires a change in attitude towards the basic economic problem of production. In fact, it is all too clear that unless the state gives a lead in this matter we shall enter into the peace torn and inhibited by the destructive sectional antagonisms which marred the conduct of industrial and business relations before the war.
It is human enough if, under the circumstances of today, it is unintelligent, for particular individuals or economic groups to wish to gain advantages for themselves at the expense of other individuals or groups. But it is the plain duty and high prerogative of government to stand above the sectional wranglings and struggles and to state and follow unequivocably the policies necessary to protect the public interest.
PUBLIC INTEREST LIES IN MAXIMUM PRODUCTION.
In the economic field, the public interest plainly lies in maximum production -- in the greatest possible efficiency of managers and workers consistent with reasonable social demands of leisure, physical and mental health, and family responsibilities. It should be a primary post-war task of government to pursue unremittingly policies which lead to high efficiencies and output, and thus to oppose and control, without fear or favour, sectional practices contrary to this purpose.
In the statement of our policy, "Looking Forward", an attempt was made to define briefly this conception of the functions of the state:
"In the future, the state must at all times be ready to intervene whenever the common welfare is threatened by sectional or vested interests, whether of labour or capital, or otherwise. Policies of private business organisations, associations of producers, or trade unions, which have the effect of restricting the output of goods from which the community would obviously benefit, or of reducing efficiency and suppressing enterprise, must be the active and continuous concern of the state".
It is a matter of great urgency that governments in Australia should turn their attention to this most important aspect of post-war policy.
There is a powerful tendency -- and to say this is not to criticise any particular government, for it is not confined to Australia -- for the state to regard control of industrial affairs as an end in itself without any clear conception of the purpose in view.
Positive controls to protect the public interest in maximum production are clearly necessary. Of such a breed would be the type of control necessary to give effect to the definition of the state's function quoted above. But many government controls may have exactly the reverse result, and themselves be contrary to the responsibility of the state to provide the conditions necessary to maximum production. Government controls which restrict, hamper and discourage private enterprise are of this kind.
PRIVATE ENTERPRISE MAIN FACTOR IN POST-WAR EMPLOYMENT.
To make this point it is not necessary to take sides in the popular contemporary disputation on the merits of nationalised industry as compared with industry privately controlled. For many years after the war, as before the war, a large proportion of the total national effort will be socialised; a much larger proportion will be under private jurisdiction. This will be so because nothing else will be practicable, either from a political or an administrative point of view. Public opinion is not yet ready for any very pronounced move in the direction of nationalisation, however desirable it may or may not be. Moreover the administrative problems of transferring any considerable section of industry from private to state ownership would, under our democratic system of government, be so immense as to render any such process slow and difficult. The Australian Prime Minister, Mr. Curtin, in a brief statement of the government's post-war policy said:
"The government looks in the post-war period primarily to private enterprise to provide for industrial development, and to give employment".
It is therefore clear that for many years after the war private enterprise will make up a very substantial part of the industrial whole. This means that a great proportion of the goods and services on which the community will depend for its livelihood and comforts will be produced and distributed through business organisations privately owned and directed. If these goods and services are to be provided in increasing quantity and variety, at high quality and low prices, the state must give every encouragement and assistance to private enterprise to act with the utmost efficiency. The common interest plainly demands that the efficiency of private industry should be a main item on the agenda of the state's post-war policy. On the grounds of public welfare there is the strongest of prima facie cases against any controls which obstruct and hamper the productivity and efficiency of private enterprise.
Again we repeat that to argue thus is not to argue for or against the nationalisation, or part nationalisation, of particular industries. It is possible that an extension of the socialistic principle of control to certain industries now under private direction would give more effective results in service, cost and progress. But it is by no means certain. Will any change in the method of control lead to better service, higher output and lower prices? In all cases the pragmatic test of the public interest should be applied. Decisions should be taken only after the most thorough investigation and consideration of all the facts, and not on the grounds of abstract political principle-or economic ideology.
As we have already stated, government policy influences the level of productivity in private industry mainly along two channels -- first, by helping to determine the efficiency with which the existing capital equipment is used, and, second, by affecting the rate of its improvement, modernisation and growth.
OBSTRUCTIONS TO EFFICIENT USE OF CAPITAL EQUIPMENT.
Employers and organisations of labour can both obstruct the most effective use of existing capital equipment. Some of these offences against productivity have been indicated in "Looking Forward" and it would be outside the scope of these articles to deal with them in detail here. So far as employers are concerned, it must be enough to say that the business maxim of high production, expanding turnover and reduced prices is insufficiently observed in practical policy. The contrary policy of holding up prices and maintaining profits through restricted production, price agreements and reduced competition is, on the other hand, too common. (5) Labour offences fall chiefly into the category of "go slow" policies. The opposition of the trade union movement to "payment by results" -- dealt with in Article III -- is also a major cause of reduced efficiency and decreased production. In isolated cases there may be justification for these practices, but it is clear that, in the main, they are seriously detrimental to the public interest, and as such should be strictly supervised and controlled by the state.
These articles have suggested that post-war standards of production and consumption will depend on the rate at which the nation's capital equipment is expanded and improved. It is here that the state, more particularly through 'its taxation policy, can be a dangerously destructive influence or a constructive force for the common good.
MISCONCEPTION ABOUT PROFIT.
There is probably no greater misconception in popular economic thinking than that which underlies the approach of a big section of the public to the question of business profits. It is all too readily assumed that anything which reduces the level of profits must necessarily work to the common benefit. Than this general assumption nothing could be further from the truth, for it is, in fact, the exact opposite of the truth. There is, of course, such a thing as the exploitation of the consumer through the making of excessive profits. Where it exists, it is a legitimate field for the state's attention. But it is indubitably true that the rate of new investment in industrial plant and better technical methods is determined by the prevailing level of profits.
For this there are two reasons -- one minor and one major. The first and minor reason is that the public will be more readily inclined to save and place its savings at the disposal of industry for investment in new plant, when the level of profits is high and the return on the investment promises to be good. The second reason is that, under modern conditions, a large proportion of the total additions and improvement to industrial equipment is financed by means of company reserves -- that is, by that part of the profits left over after interest on their capital investment has been paid to the shareholders. The rapid development of business and the continuous modernisation of plant and equipment require ready and ample financial reserves after all current operating costs have been discharged. The retention in a business of part of the profits provides the means by which this can be done. There is nothing sinister in this process. On the contrary, for the state, through burdensome taxation, to disallow an adequate margin of profits for these purposes is merely to obstruct and slow up the whole rate of technical advancement and improved productivity. Not the employer or the investor but the wage-earner and the consumer stand to lose most from this policy. A positive purpose of the state should therefore be to ensure that the financial reserves of industry are entirely adequate after the demands of the treasury have been satisfied.
TAXATION FOR PROGRESS.
Up to the present stage of economic development, the state's use of the taxation weapon has been for the most part crude and uninspired. Taxation has been regarded chiefly as a means of raising revenue and of re-distributing the total national income more equitably between the poor and the rich, but seldom, if ever, as a constructive instrument of economic progress.
A policy for maximum production will require many sweeping adjustments to traditional ways of thought and methods of approach to the taxation problem. There is need for a more realistic appreciation of the needs of industry and a truer understanding of the directions in which the public interest lies. Some glimmering of what is required was shown in the last Commonwealth Budget in which belated recognition was given to the inability of industry during the war to maintain its capital equipment at full effectiveness because of labour and material shortages. But a great deal more than this will be necessary if the productivity of industry is to be raised to new levels in the years to follow the war. For example, the rate at which industry is allowed to depreciate its plant and buildings is an important factor in the whole. Part of the great productivity of American business must be attributed to the heavy rates of depreciation charged against existing equipment before payment of tax.
As an encouragement to technical progress there is also the strongest of cases for permitting all expenditures on research and development to be charged against company revenue before the assessment of tax. Under the latest budget of the British government industrial expenditure on research is to be entirely tax-free, and it is held that this, with other important concessions, "will make a substantial contribution towards industrial recovery after the war, and will pave the way for a continuous technical advance throughout British industry". The state might also contribute substantially to technical progress by providing special tax relief on the yield of new investment in capital equipment for several years after the investment has been made.
The scope for an imaginative and constructive use of the tax weapon is almost unlimited and provides a fruitful field for expert inquiry. There is a great opportunity for the state to mould and adopt its financial and economic policies to assist the public need of increased production. A major part of its post-war planning should be directed to this purpose.
ENDNOTES
1. The figures of government expenditure mentioned are based mainly on estimates used by the Director-General of Post-war Reconstruction, Dr. H.C. Coombs, in the Joseph Fisher Lecture delivered at the University of Adelaide in June, 1944.
2. Again it needs to be said that this does not necessarily mean longer hours or more onerous work, for the great body of Australian workers. It means a more efficient application of work through more enterprising management and trade union leadership.
3. In the statement of our policy "Looking Forward" it was recommended that the introduction of Incentive payments should not be allowed to disturb the principle of a minimum basic wage.
4. This is a task in which private industry itself has a very direct interest, and accordingly should assist to the best of its experience, position and financial capacity.
5. To say this is not to condemn all arrangements of this character. In heavily capitalised industries, and in tho case of many standardised consumer goods in every-day demand, price-fixing can be definitely beneficial to the public. Price determinations of this kind might, however, be subject to periodical review and confirmation by fin authority representing the state to ensure that the prices charged are reasonable, and do not have the effect of restricting- production or reducing efficiency in tho industry concerned.
