One Image, Two Pictures

The Harold Clough Lecture for 2004,
delivered at The Western Australian Club,
Perth, 6 April 2004.

Ladies and Gentlemen

It's an honour as a creature from a land far to the East to be in Western Australia, a land that perhaps can be described as the "Middle Earth" of entrepreneurship in our vast continent.

Since the Second World War, the name Clough has been one of those names always at the centre of Western Australian entrepreneurship, not just physically in WA, but also using WA as a springboard into global markets which are sometimes free and sometimes not so free.

My first task here is to thank Harold Clough and the Clough family.  Not only are you dogged "doers" but you also recognise, in tangible ways, the need to think about, protect and expand the systems that enable free markets to function.  Your support clearly demonstrates the Clough family's long and durable commitment to free market defence.  The Harold Clough lecture series honours that commitment.

To an outsider, one thing that Western Australians seem to have consistently demonstrated is an intuitive sense that entrepreneurship can thrive only in free markets.

And free markets are what I'll be talking about today.  The second of the two pictures in the industrial relations image that I want to expose and discuss is the anti-free-market picture.

When free markets operate, they are funny things.  Free markets are about the business of getting on with business.  People who "do" free markets focus all their energy on the intricacies of the doing.  And so they should!  But it's not often that the same people who "do" the "doing" spend time, energy and resources thinking about and protecting the very systems that enable free markets to exist.  Here's the inbuilt self-destructive tendency of free markets.

Free markets systems are fragile because they are no more than thin lines of commonly-held ideas running through our collective minds.  In the necessary entrepreneurial obsession with "doing", we frequently fail to protect and maintain the systems that let us get on and do.  In being free, free markets contain the seeds of their own possible self-destruction.

I've hung around the Institute of Public Affairs and become heavily involved because I'm impressed with the 60-year plus tradition of dogged obsession with protecting free markets.  We have proven ourselves fearless and continues to place itself at the cutting edge of debate on free market ideas.  And being at the cutting edge has often put us at odds with powerful institutions -- particularly in recent times when the most powerful establishment institutions can best be described as "new age conservatives".  And new age conservatism is not pro-free market.  It seems odd to discover that, right now, to be pro-free market is to be anti-establishment!

In having the privilege to present this, the sixth lecture, I hope that I can make a contribution to that free market defence.  Because even though my topic is the thorny area of industrial relations, in fact I'm talking about free markets.  Free markets are the second picture in the industrial relations image -- although most of the time we see only one side, the "workers' rights versus the bosses' privileges" picture.

I'd like you to look closely at the image I've borrowed as the theme for this lecture.  You will, of course, see two women -- an old one facing side-on and a young woman facing away.  When you look, you will tend not to see both women at once, but rather will shift focus, first on one woman and then on the other.  Industrial relations is like this.

Industrial relations has two pictures contained in the one total image and our minds tend to focus on only one at a time.  But unlike the two-women image, in Australian industrial relations we have been culturally trained since the time of Federation to see only one picture, the workers versus bosses arguments.  My attempt today is to assist you to see the second picture with some clarity and once grasped, to alert you to new developments that threaten the very core structures of free markets.  My belief is that if you understand the second picture, then you will be better placed to run your businesses and defend them against new emerging threats.  But as I show you the second, please remember that both pictures exist with equal strength within the one total image.

I'll also explain the second picture by looking at its bits.  I'll break it down.  A lot of what I'll display will be quite familiar.  However, a warning!  I've got some R-rated stuff.  Experience has taught me that once I've exposed these bits, many people who operate in, and benefit from free markets, react against that exposure.  The ideas I'll present often confront prevailing perceptions of career paths, concepts of the existence and nature of a firm, how an economy is supposed to operate, personal worldviews of self-worth and egos.  Quite frequently, exposure of the bits produces annoyance and sometimes even simmering anger.

As obvious as it may seem, the first bit to understand is that industrial relations is about institutionalised, legalised and moralised price-fixing.  Normally, the fixing of wages through industrial relations tribunals is sold as a protection mechanism for exploited or exploitable workers.  That is one picture.  But the other, equally powerful picture is that industrial relations tribunals and systems are the legalised mechanisms in which free, fair and competitive pricing is constrained from operating.

Under the Trade Practices Act, businesses are prevented from colluding to fix or control prices.  Business persons who collude to fix prices risk jail sentences.  But what is the price of any good or service?  At its core it's an accumulation of the inputs of labour

In a highly simplified example, a bucket of dirt is dug from the ground.  Someone is paid to dig the dirt.  The dirt is transported.  Someone is paid to ship the dirt.  The dirt is transformed into steel through multiple processes.  Many people are paid at each point to do the processes.  The steel is turned into machines.  Many people are paid to make the machines.  The machines return to dig more dirt, or ship the dirt, or turn the dirt into steel and then make more machines.  People are paid to do each bit.  It's called an economy.  But at each step through the Australian economy, the price of labour is institutionally controlled and fixed through industrial relations institutions and processes.

The outcome is that the dominant item underpinning most prices for goods and services -- that is, labour -- is controlled.  And inevitably the complex institutionalised processes of legalised price-fixing through industrial relations is deeply at odds and in conflict with the anti-price-fixing and free-trade objectives of the Trade Practices Act.  Here are the two equally powerful pictures within the one image.

It is illegal for business persons to collude to fix prices.  But not only is it legal, it is required for business persons to collude through the state to fix labour prices.  We are a confused society.

But apparently it's heinously wrong for anyone to point this out or encourage discussion on it.  To do so is R-rated -- as I have discovered on more than one occasion.  Let me explain.

Towards the end of the Cole Commission inquiry into the construction industry, the Commission invited submissions discussing the interface between industrial relations and trade practices law.  The Trade Practices Act specifically prohibits the Act from applying to employment matters.  We made a submission suggesting that this prohibition creates a legal mask that enables malpractice in the construction industry to be institutionalised.

In a counter-submission to the Commission from another organisation, the statement was made that the Trade Practices Act exemptions are "the very foundations upon which Australia's industrial relations system is built".  Further, the claim was that removal of the exemption would "cripple a private employer's human resources activities" and "prevent employer associations and unions effectively representing the collective interests of their members".

The position put by us has excited considerable and often angry responses and demonstrated that this comparatively and normally dry topic in fact cuts to the heart of opposing interpretations of what it means to have a free society.  It is a fact that the anti-price-fixing objects of the Trade Practices Act and the price-fixing objectives of industrial relations law are in direct conflict.

The ways in which these opposing objectives are played out through our institutions, our businesses and our commercial dealings affect every one of us in our ability to trade, take risk, make profit, earn reward, earn an income, obtain a living -- in short, to be entrepreneurial.  Further, the opposing objectives and conflicts that play out between the institutions that sit on either side of the debate identify Australia as a constrained free market.

Let me give two very practical and current examples of how free-market destruction in Australia operates.

Number One:  Over the last few years, industrial relations law has taken one extra, but giant, leap into the area of trade practices law by imposing direct pricing controls over commercial contracts within one sector of the economy -- the clothing industry.

The clothing trade has been bullied into accepting new legislation in NSW and Victoria that controls prices at every level in the chain of contract manufacturing.  The legislation makes retailers and every manufacturer throughout the chain responsible for payments to the workers at the beginning of the contract chain.  The "code of practice" established through law stipulates the price to be paid for every process of manufacture -- from sewing a button to stitching a sleeve cuff.  Any work that is contracted out to another party must be reported to the Industrial Registrar and the union, with copies supplied to these bodies of each contract and all contract prices.  This is systemic, legalised price manipulation and control within an area that would normally be illegal price control under the Trade Practices Act.  The ACCC, however, has given its blessing to the legislation.

Quite recently a small business, contract manufacturer was fined $20,000 for breaches under these price-fixing processes.  In the action brought by the union, there was no evidence presented of complaints by the workers or of any underpayment or alleged exploitation.  The "crime" of the small company, Lotus Cove, was to fail to adhere to the bureaucratic requirements to register their contracted-out contracts with the Industrial Registrar and the union.  In the domestic clothing manufacturing industry, the freedom to engage in commercial contracts has been destroyed under the subterfuge of workers' rights arguments.  Commercial contract relationships are now controlled through Stalinist-like bureaucratic processes.

Number Two:  Recently, one of Australia's most eminent business observers and commentators stated that Australia has great potential with niche manufacturing.  Surprisingly, he identified the opportunity to manufacture high quality, fashion-branded clothing to the rising wealthy Chinese class as one of those emerging niches.  He emphasised, however, that flexible labour arrangements (which does not automatically or necessarily mean cheap) are critical to success.  In the current environment, the notion of Australia selling clothing into China might seem odd.  But we sell navel oranges to California and noodles to Japan and it's worth contemplating a potential market of, say, 10 million Chinese millionaires wanting Australian clothing.  Some niche!  But with a Stalinist-like industrial relations bureaucracy controlling every minute contract transaction down to the price of sewing a button, not only are the transaction costs unsustainable, but the creativity and entrepreneurship needed to realise the potential are crushed.  The niche potential has no hope of even being thought about, let alone being realised.

The end result of this control of commercial contracts is a diminution of entrepreneurship in those sectors of the economy where the process is applied.  And have no doubt, it is a process seriously on the agenda for application across every sector of commercial activity in Australia, both Federally and by the States.  The call centre industry is currently targeted for application of this process as are the media monitoring and market surveying sectors -- and more are being lined up.  Watch for indicator words such as "sweatshop" and "code of practice" to help identify when your sector is targeted.

But, apparently, we are not allowed to talk about it openly in the way I am today.  To do so is to invite intimidation from some industry sectors who believe that appeasement in the face of this anti-free market agenda is the only way to limit political damage.

Another aspect of the two pictures in one image is the area of competition.  Once again, the Trade Practices Act is supposed to be a primary defender of competition.

A principal catch-22 of free markets is that although people must be free to pursue opportunities, when given this opportunity, most people aspire to become monopolists.  That is, people want the benefits of being able to compete but don't like it when their business is subject to competition.  This is a natural and expected piece of human behaviour that should not surprise or shock us.  The art of free-market management is to maximise entrepreneurial opportunity but to forever frustrate monopoly achievement.  In Australia, the Trade Practices Act has monopoly frustration as one of its key objectives.

However, although not spoken of and not formally contained within industrial relations legislation, the informal processes that surround industrial relations work toward the limitation of competition and the creation of monopoly.  The processes are quite straightforward.  Let me give a simple example.

In one market area with which I'm familiar, a dominant player has an Enterprise Bargaining Agreements (or EBA) with pay rates some 30 per cent above those of the relevant Award.  All of its much smaller competitors operate on the industry award.  The dominant player last year unofficially complained to the union that this situation was not fair and that they couldn't compete.  Union membership in the industry is almost solely with the one dominant player.  The union has now launched a campaign to increase the award rate -- and they will succeed.  This will not result in increased union membership amongst the award-based businesses, but the pay-off for the union is that it will solidify the union presence in the dominant player's business.  The pay-off for the dominant player -- when the award rate is increased -- is that it will limit the capacity of its competitors.

Competition limitation is a significant and familiar part of the history of industrial games in the WA mining industry.  The great battle in the Pilbara during the 1980s and 1990s was, in large part, about competition between the three iron ore mines in the Pilbara and the limitation of competition between them through industrial relations processes.  When Charles Copeman and his deputy Herb Larratt broke the back of the processes it was instructive that their greatest difficulties were not with the workers or the unions, but with a powerful business-government establishment.  The business establishment dumped on Charles and his team, pressured them to cave in and never really forgave them for their success.  But Charles and his team led the way for an explosion in the productivity, profitability and expansion of the WA mining industry from which WA continues to benefit.

This limit on competition is an important aspect of how big business is done in Australia -- it used to be called the "industrial relations club".  It is one picture in the total image that needs to be grasped if the business of doing business in Australia is to be properly understood.  For many people, it's also an R-rated topic.

Make no mistake:  unions and some businesses actively collude under the mask of industrial relations to limit competition.  It's a systemic process operating in the commercial construction sector, but only partly uncovered by the Cole Commission because of a dark curtain of silence.

And I've been personally chastised for stating this.  The argument put against me is that businesses that collude with unions don't want to collude, they simply have no choice.  There is substantial truth to this.  Mafiosa rules, rule.  But the fact is that collusion does occur.  Let's not pretend it doesn't.  But for the most part it's legal while it's covered within employment law and practices.

The final bit of the second picture I want to discuss is the myth of the employer-employee relationship.  And it is this bit of the second picture that seems to attract the greatest level of R-rated reaction -- although no-one has yet made threats against me!

Since the 1930s, the principal academic and economic concept of the modern version of the firm has been wedded to the idea of the employer-employee relationship.  The employer boss controls the firm through the command-and-control mechanisms of the employment relationship, thus enabling transaction-cost management.  This leads directly into industrial relations systems in which employer organisations are supposed to exercise control or influence over economic activity through their part in the IR institutional frameworks.

But the fact is that, in the main, the employer-employee relationship is an illusion.  Only in small business does the employer-employee relationship truly exist.  In every area outside small business, the employer is principally a legal figment of our collective imaginations.  The employer is, in reality, a hierarchically-structured bureaucracy in which delegated employees play the part of being the employer.

At the pointy end of the employer bureaucracy are the human resources and industrial relations professionals standing in front of CEOs, GMs, CFOs, Boards and all the downstream executives and managers.  When this bit of the "employer" picture is realised and accepted, the true dynamic of employer-employee relationships is seen for what it essentially is, namely, one of employee-employee relationships.  The people who allegedly represent and act for the employer are in fact employees who, in their decision-making behaviour, will always and must be expected to be motivated more by "employee thoughts" than "employer thoughts".  Further, when we consider employer representative associations, the associations are themselves run by employees whose behaviour and motivations must be expected to be more along the lines of employee interests than what we think of as the collective interests of employers.  There are exceptions to this where industry associations see their role and clearly act to protect free market operations within their particular industry sectors.

In this context, the game of industrial relations is not one of the employer boss against the employee worker, but rather a complex process of manoeuvrings over who captures the spoils of the firm and how they are distributed.  In fact, industrial relations is an attempt to govern relationships between multiple classes of employees.  It's employee-employee warfare, not employer-employee warfare.

Remember, however, we are looking at two pictures within one image, so the employer-employee relationship is not without some significance.

What are the implications of the employee-employee warfare under industrial relations?

First, we should not be surprised by the behaviour of executives who seem to obtain positions of control within a firm and then either rip-off the firm or cause it to fail.  Corporate financial misappropriation is mostly a product of employee behaviour.  And the greatest financial disasters are normally caused by the employees who are at the top of the bureaucratic tree and who allegedly act as "employers".  Given recent problems in the likes of HIH for example, we would do well to consider this systemic downside of employment.

Second, we should realise that unions are run by employees of unions, not union members.  It should be expected that union employees will act with "employer" employees to find mutual self-benefit, one for the other.  Personal career positioning and income enhancement should be an expected motivation of each party in negotiations that will drive them together.

Third, we shouldn't pretend that all players in the game are benevolent.  There are high levels of genuineness, integrity and truthfulness operating amongst many of the players but, equally, the rules of Machiavellian subterfuge normally determine the winners and losers.  Because of the employer myth, industrial relations is a game in which nothing is ever what it seems.  Double play is always at play.  Apparent enemies are often in coalition.  Apparent coalitions always have enemies within.

These rules apply to every side, but we pretend they don't.  Our pretence makes us foolish.

So why talk about this?  Isn't what I've described simply the reality of the way serious business is done in a small economy?  Doesn't this process benefit Australia because a small economy needs to make sure it's properly organised under a national plan?  The answer traditionally has been "yes" -- that the economy needs to be organised like this through powerful coalitions of businesses, unions and governments.

But at the same time this marks Australia as not a truly free market society.  It's the mark of an orchestrated economy.  And orchestrated economies restrict the creative potential of their people.  If we wish to see the development of a truly shared and expanding wealth, free markets have proven thus far to be the system that takes us there.

So my primary point is that industrial relations in Australia must be understood for the other picture that it is -- an institutionalised, anti-free-market system.  Understand this second picture and industrial relations takes on a new and clearer perspective from which policy debates and business processes and actions can be approached.

My warning is that we are in a new era in which industrial relations has expanded into new territory by moving against core structures that enable free markets and thus business to operate.  There are great dangers to the national economy and individual business viability in this development.  Let me explain.

Our afflicted manufacturing friends at Lotus Cove who suffered the $20,000 fine for failing to report their contract arrangements are a stark example of the new game.  The fining of Lotus Cove demonstrates that we are not dealing with a new theory but rather a new reality.  And the end game is the de-construction of free markets through multiple processes which control commercial contracts and thus business operations under labour and other laws.  It's no joke!  It's no light matter!  And it's happening now!

I'll summarise some of what is currently occurring.  We are witnessing the removal of the right of independent contractors to be independent contractors.  We are seeing corporations being declared to be employees.  We have industrial manslaughter legislation and codes that breach key principles of criminal justice by declaring that corporations as collectives can act criminally.  We have the invention of "co-employer" ideas within legislation that effectively destroys contract law by allocating commercial liability and responsibility where no contract exists.  We have plans afoot by governments and aspiring governments to totally prevent the Trade Practices Act having any interface with industrial relations law.

And why are we seeing these developments?  There are a number of reasons, but two statistics tell us a good deal.  Only 18 per cent of the private-sector workforce are now union members.  Yet 28 per cent of the private sector earn a living without being employed.  Non-employees work under the many forms of engagement generically described as "independent contracting".  These two figures indicate a massive shift in the nature of work from 20 years ago.  Industrial relations in the private sector is being replaced by non-industrial relations.  So those who oppose this social and work trend -- often at a deeply ideological level -- need new agendas to halt and reverse the trend.

And who are the coalitions forcing this new agenda?  Look again at the clothing industry.  The "end game" in the clothing sector was created under the auspices of the front, or umbrella, organisation Fair Wear.  Its campaign funding came from the following groups:

• The Uniting Church in Australia -- New South Wales Synod and Assembly
• The Mercy Foundation, NSW
• The NSW Department of Industrial Relations
• The Australian Federal Government
• Asian Women at Work Inc
• Sisters of Charity Foundation Ltd
• Australian Manufacturing Workers Union, NSW State Office
• Labor Council of NSW
• Federated Municipal and Shire Council Employees' Union of Australia
• Flight Attendants Association of Australia, Domestic/Regional Division
• Textile, Clothing and Footwear Union of Australia, NSW Branch
• The Stegley Foundation

Activist campaign training was provided by Greenpeace.  Industry associations co-operated in a process of appeasement thinking that they could manage the situation, but that very appeasement resulted in the industry finally being captured.

In looking at these groups the new anti-free market coalitions can be identified.  They include, for example, remnants of the liberation theologists in the Catholic Church and their activist like-minded partners in other churches.  There are governments which under normal circumstances appear to support free markets, but which work against free markets under the mask of industrial relations.  There are Greens who view free markets as a system responsible for ecological destruction.  And there are those more familiar entities within the union movement who have difficulty servicing their members under free market rules.  There are Machiavellian organisations, including some tax-free trusts, who give the pretence of being pro-business.  Each of these entities has come together, each with its own motivations and self-interest, in a new common cause against free markets.  We are witnessing a battle between a new broad church of regulators (the new age conservatives) and the rights of consumers.

What we once thought was industrial relations is no more.  It continues to have elements of the old game but it has also expanded and has new forms and new objectives.  This is my alert to you all.

This is why the dual pictures in one image is important.  As traditional industrial relations continues to play out its usual games with many of the same outward processes and forms of language, we must at the same time recognise that industrial relations is not just a workers versus bosses issue.  We must also see and address industrial relations within the context of free market defence.  And we must learn to recognise that a new anti-free-market game is at play which constitutes a massive expansion on traditional industrial relations.  And the new game has as its central objective the destruction of the basic structures upon which free markets rely.

We need to recognise that if these old and new anti-free-market agendas succeed, then competition will be rorted, prices will be fixed, new forms of monopoly will be created, creativity and entrepreneurship will be devalued and shared prosperity will be diminished.  The stakes are high.  This affects us all and we must approach this new era with our eyes wide open.

Once again, to the Clough family, my thanks for the opportunity to present "One Image, Two Pictures".  I trust my thoughts contribute to clarity rather than confusion and help throw light on pathways forward.  In addition, if I've been truly successful, I hope I've sparked as many questions as I may have answered!