The Might Have Beens

Christopher Pearson appears on Counterpoint on economic reform.

Economic history, as a discipline, has gone out of fashion in Australian universities.  Ideologically driven economics, whether of the left or the neo-con variety, has triumphed over nuts and bolts empiricism.  Students who want to learn about the role of wool and wheat and labour costs in the development of the national economy mostly have to search it out for themselves in textbooks written before they were born.

This is a great pity, not only for the economics profession but for anyone trying to get a handle on the real world consequences of public policy.

There was a memorable example of how a grasp of economic history can transform policy debate a few weeks ago, in an article Richard Wood wrote in The Australian Financial Review.

Wood was talking about the 1870s, the golden age of pre-Federation Australia.  At the time our per capita Gross Domestic Product was the highest in the world.  It was 50% higher than the United States' and 15% higher than Britain's.

As he said:  "Within a few years the twin disasters of industry protection and centralised wage fixation were established, and in the following decades the country's economic performance plunged.  Wealth produced bad policy ..."

Exploring that paradox, Wood's analysis goes to the heart of the malaise that kept The Lucky Country underperforming for the next century.  "Colonial politicians believed they would always have enough money to fund any policy decision they chose to make".

To put it another way:  the political class ever since has felt entitled to buy our votes with bad, self-indulgent policy.  With Labor featherbedding the proletariat or the Liberals offering middle class welfare.  In either case the political class cheerfully presided over a radical disjunction between bad policy and its baleful consequences.

What's more -- short of outright depression phases -- they've usually been able to borrow enough to delay or disguise those consequences, or else to blame them on the weather, market cycles or flights of capital.  To blame them, in short, on everything except the root causes.

The first decade of the last century, the early years of Federation, were the turning point.  In the end, Alfred Deakin and the Victorian protectionists defeated George Reid and the New South Welsh free trade lobby.  The Deakinite Settlement, with a white Australia policy and industrial arbitration leading up to the Harvester Judgement as its other planks constrained our future and capacity to grow for decades to come.

It's always instructive to think about the alternative scenarios, the Might Have Beens in our history.  Perhaps the aptest parallel with Australia in the decades before Federation is with California, another goldrush boom economy.

Had there not been a regime of tariff walls to protect local industries, imports would overall have been much cheaper.  The proletariat in particular would not have been sorely taxed to cosset primary and secondary producers into ever-more-uncompetitive practices.  By the middle years of the Menzies regime, the average level of tariff support was 35%.  And locally manufactured goods were by and large a watchword for second-rateness.

Without the white Australia policy, competitive non-Anglo labour would in practice have undermined any attempt at centralised wage fixation.  Unemployment as we know it would never have been an issue.  Self-employment, of the kind which is only now coming into its own, would have been as much of a norm as working for someone else.

We would not have had the economic absurdity of arbitral bodies deciding minimum wages, not on a worker's worth to his employer but on the hypothetical needs of a couple with three children.  Employers would not have been coerced into funding "a social wage", as a de facto arm of social security.  Unskilled workers in Hobart would never have been priced out of a job by fixed pay rates geared to the cost of living in Sydney.  We would also have had far earlier emerging, in the tradition of the Currency Lads and Lasses, what nowadays we call an enterprise culture and with it a much more adaptive, independently minded workforce.

Without the lazy politics of the Deakinite Settlement, Australia might well have become as rich, developed and diversified an economy as California.  We'd no doubt have a larger, healthier manufacturing sector.  We'd be mostly exporting steel products rather than iron ore.  We'd have a far stronger finance sector and less of a balance of payments problem.  We would never have let shipping and rail transport become the featherbedded and dysfunctional sheet-anchors on trade that they became for most of the last 80 years.

We would almost certainly have become major global suppliers of educational services much earlier and we'd be more likely to have the capacity and entrepreneurial spirit to spend up on research and development.  Given our proven track record of technological inventiveness, too often marred by a lack of follow-through funding, we might even have given Silicon Valley a run for its money.