Accountability in the new Millennium: Accountability to Whom, For What and Why?

Keynote Address to the the CPA's Congress 2000,
Sheraton Hotel, Perth, 3 May 2000

INTRODUCTION

Over the last decade and half there has been a veritable revolution in the level and breadth of accountability in corporate Australia.

Corporations -- in both the private and public sector -- have become much more responsive to achieving value for shareholder's and more focused on core activities.

Naturally, shareholders have been amongst the major beneficiaries of this process -- a groups which now represents well over 50 per cent of the Australian population.

Society as a whole has also benefited greatly.  The enhanced focus on maximising returns for the shareholder lies behind the large improvement in productivity growth achieved over the last decade by the corporate sector and the economy as a whole.  It also lies behind corporate Australia's increased level of international competitiveness and profitability.  And it has produced a marked improvement in the level and quality of investment -- which augers well for the future.

Importantly, the increased focus on shareholder value has contributed to a fairer, more open society.  It has reduced the potential for both management and influential interest groups to capture corporations for their own advantage and at the expense of shareholders.

It has -- in conjunction with reductions in tariffs and through the introduction of competition policy -- broken down the positions of privilege and special advantage.

It has allowed -- indeed encouraged -- a large number of additional people to become part of the shareholder class.

The focussing of corporate activity on maximising shareholder value has not been achieved at the cost of the social or environmental considerations or at the expense of regional development.

The general government sector -- the sector with prime responsible for collective decisions -- has undergone a parallel process of reform aimed at obtaining greater value for money, greater focus on outcomes and reducing the scope for program capture.

Importantly, it has not shirked its social or environmental responsibilities.  The amount of funds allocated to these responsibilities has increased substantially over the last two decade in all areas of government.  Moreover the pursuit of value for money has allowed these dollars to go further than they would have in the past.  In addition, the increased targeting and monitoring of budgetary expenditure has ensured that the dollars went for the intended purposes.

The enhanced focus on the bottomline by government business enterprises (GBE's) has greatly reduced taxpayer subsidies and freed-up funds for social purposes.

Governments have also put in place a panoply of regulations designed to enforce sound environmental, social and ethical practices by corporations.  In other words, the rights and responsibilities of corporations and their shareholders with regard to the environment and society have been more thoroughly codified in the laws of the land.  As a result, they have been incorporated in the accountability processes.

Corporate Australia has also contributed to the environmental and social well being of the country in the most effective and appropriate way, which is by creating wealth, jobs and opportunities.

It has also, by and large, embraced the community's desire for greater conservation and protection of environmental resources -- for proof one need only peruse the environmental statements of our major mining firms and visit their sites.

Of course there is long way to go in many areas, particularly in the public sector.  Nonetheless, much has been achieved.  Shareholder and society at large are the better for it.

THE CHALLENGE

Not everyone is pleased with this process.  Many managers and workers have lost power and have been adversely effected by the pursuit of greater shareholder value.

Governments have seen their ability to use GBEs as cash cows greatly diminished and many public servants have lost power over the public purse.

Most of these -- private sector managers, workers, politicians, public servants -- though lamenting the change, accepted it as either irreversible, inevitable or in the public interest.

There is, however, a challenge afoot led by some academics, management consultants -- including the accounting fraternity -- and non-government organisations.

The challenge comes under various headings including:

• stakeholder capitalism;
• business ethics;  and,
• triple bottom line.

These approaches differ to some degree.

The aim of stakeholder capitalism is to provide so-called stakeholders -- most typically unions, local political leaders, environmental activists, charities and social activitists -- with rights over the resources and operation of companies on a par with those of the shareholders.

The aim of the business ethics movement is to impose ethical standards -- which have more to do with the promotion of wider social ideals rather than business practice -- on corporations.

The triple bottom line approach is to have corporations report on environmental and social outcomes in concert and on a par with financial outcomes.

The movements, however, have a common set of general aims.

First, they do not seek to overtly overthrow capitalism, but rather to control and direct it for the so-called greater good.

Second, they aim to use the corporate accountability mechanisms to impose social objectives or collective ideals on corporations.

Third, they seek to give rights to thirds parties on a par with those of shareholders and as such, they seek to reduce the priority given to shareholder value.

These movements are seductive.  They are craftily packaged and offer an almost endless supply of work for consultants, accountants, NGOs, and management.

They are invariably packaged as a new, middle-of-the-road approache to solving the age-old problem of getting a better mix of social and individual goals, that is, a new approach to the "new economy".

The truth is that they are a return to the past.

What is proposed is a model of corporate governace which was the norm in Australia in the past:  that is, corporations which put the interest of stakeholders such as government, unions, suppliers, and management on a par with shareholders;  corporations in which stakeholders -- particular workers and government -- have an direct input into management decisions;  and corporations which give equal weight to non-financial social considerations.

Although the movements are centred in the UK and the US, their ideas are based on a corporate ethos common to Europe and Asia.

Their fundamental aim is to transform the Anglo-American model of capitalism -- with its focus on maximising shareholder value and rights -- to a more social democratic, stakeholder model common in Germany and Japan.

The irony is that these movements are gaining strength at the time when European and Asian companies are rapidly adopting the Anglo-American model.

These new movements do differ in some areas from the approach in the past.

First, the old socialist ideal that government must occupy the commanding heights of industry has been jettisoned.  Overt socialism is dead.  Instead, the aim of these movements is not to nationalise the corporation but simply to control it.

Their aim is not to throw-out the accountability mechanisms but to use them to obtain and enforce control.

Although the movements' aim is to promote the interests of many of the old players -- concerns such as unions and factory closures -- they have introduced a new set of players and issues.

The chief new stakeholders and prime proponents of the movements are the NGOs -- the shelf proclaimed representatives of civil society.

Indeed, the ultruistic, general-interest mien of the NGOs is one of the most seductive aspect of these movements.  The view put forward is that in the past, companies may have been captured by groups seeking selfish, personal gain, but the new movements are different, as they focus on doing good for the greater good.

This is, however, at best simplistic.  First, the movements include many of the same old players and issues.

Second, many of the NGOs and other advocates are far from benign or acting for the general good.  Many advocates are what is aptly known as "watermelons" -- green on the outside but red on the inside.  That is, they are old left-wing opponents of the capitalist system dressed up in new green clothes.  Moreover, many of these groups are both unrepresentative of, and unaccountable to, the broader community they claim to represent.

Third, although many proponents of these movements do not seek remuneration, they do seek influence and control -- and who needs money when you share control over a multi-billion dollar corporation?

Another appealing aspect of these movements is their focus on wider social and environmental issues.  In the past, the focus of interest groups was on day-to-day issues such as wages, jobs security and local development.  These new movements retain an interest in these issues but focus more on broader objectives such as protecting tropical rainforests, overcoming poverty in the third world, and protecting human rights.

But, as they say, "the road to heaven is paved with good intentions".  The ideal may be noble but what counts is achieving it.  If attempts to achieve noble end only undermines a valuable institution -- such as a corporation -- or otherwise fails to achieve its aims, then the exercise is hardly a noble one.

One thing is certain, these movements will create a great deal of work for many people.  The question however, is, will this work be productive or destructive.

I fear the latter.

These movement are threats in a number of ways.

First, they seek to undermine the rights of individuals shareholders.  They seeks to impose social or collective rights on corporations and to elevate these objectives to the same status as those of shareholders.

The pursuit of such objectives must come at a cost to shareholders.  Collective goods are not free;  they cost money and resources to produce.  By definition, the shareholders are not the main or even primary beneficiary of these goods.  Yet the aim is to have shareholders pay the money, produce the goods, and all free of charge.

Second, the movements will severely undermine the efficiency of the corporate sector and the economy as a whole.  These movements seeks to give third parties rights over the operation of corporations and to elevate these rights on a par with those of shareholders.  Under the existing system, shareholders rights are paramount and it is the primacy of shareholders rights and the pursuit of these rights by management that drives the capitalist system.

They will dull or distort the search for profit, so growth will slow, jobs disappear, unequal distribution of income will increase and the capacity and interest in protecting the environment will wane.

Under the stakeholder system, choices will need to be made between the rights of shareholders and the rights of so-called stakeholders.  This choice will necessarily dull the incentive to maximise profit as stakeholders do not share in the profit and therefore will not be interested in achieving it.

Risk taking will be lower under a stakeholder system, simply because some stakeholders get little benefit from the higher profit it may yield.

Under the stakeholder system, resources will not be shifted to the highest valued use, because some stakeholder will not allow it.  For example, the existing workforce will use their "stakeholder rights" to stop firm closures or downsizing even if these changes are necessary for profit.  Local communities will also use their "stakeholder" rights to resist relocation of a firm even if there are important gains to the larger community.  The "local society for the preservation of the spotted owl" will claim a stakeholder right to block a dam or a pipeline.

Of course, under the existing system there are impediments to the free flow of resource -- workers have rights to redundancy.  The social impact of projects must be considered and the environmental impact of a project must be ascertained and comply with the laws of the land.  However, in the end, it is the rights and responsibilities of shareholders that prevail.

Third, the stakeholder systems will impose a heavy burden on management and undermine its ability to function in an appropriate and accountable manner.

Under the existing system there are always conflicting desires -- between, for example management, workers and owners -- but in the end, the owners' rights usually prevail.

Under the stakeholder system their is no hierarchy of rights and an almost endless list of "rights holders" with conflicting desires.  Therefore, a stakeholder system requires a mechanism of choosing amongst the competing rights holders.

For example, in a plant relocation decision, a choice must be made between the rights of present employees who will have their lives disrupted by the move, and potential stakeholders and residents in the new locations whose employment prospects and life chances will be badly damaged if the move does not take place.

The system of adjudication of rights would necessarily be political in nature -- since the stakeholders rights are collective rights -- each having an equal right to be heard and having their views considered.  As a result, the decision-making process will necessarily be costly, unpredictable, and focused on equity rather than efficiency, transparency or profitability.

Fourth, a stakeholder system will spur destructive rent seeking behaviour.

Under the stakeholder system, rights to control over a corporation, and the benefits that flow from these rights, are on offer without payment but simply by making a stakeholder claim.

Accordingly, people will expend a great deal of resources lobbying and otherwise trying to acquire these free but highly valuable goods.  This not only wastes resources but bogs down management.

The problem of rent seeking is compounded by the unrepresentative and unaccountable nature of many of the proponents.  In the past, stakeholder representatives were generally appointed by, and accountable to, stakeholders.  They were union leaders, local politicians, or managers of local suppliers.  The new movements are driven by NGOs where the link between the executives and the members or ideas they claim to represent is more tenuous and open to fraud.

Indeed, the claims by many NGOs to represent the environment, the world's poor, women and the third world are without substance.  Not only is such representation impossible -- given the diversity of views and interest within these groups -- but these NGOs make no effort to put in place the necessary process to be representative.  As a result, many of their so-called stakeholder claims are bogus.

Fifth, these movement attempt to force corporations to do things for which they are unsuitable.  For example, they demand that managers of businesses determine wages so as to bring about a more equal distribution of income, which in reality is impossible to achieve.

It is also inappropriate to hold corporations responsible for providing charity, addressing third world poverty or addressing human rights abuse in China and other global ideals.  These are problems that go far beyond the power of the corporate sector and are best addressed through other means.  They can even back-fire.  For example, inducing firms not to operate in China because of the latter's poor human rights record could well augment rather than help solve the problems.

WHAT TO DO

It would be a serious mistake to ignore some of the requests and ideas that lie behind these movements.  During the last 50 years, many large companies have gone bankrupt or have been taken over because they failed to respond to social, political, economic or technological change.  There has been a sharp increase in the value placed on environment by society.  Corporations now play a much larger role in society than they did in the past and the world is increasingly global.

However, it would be wrong -- both for companies and society -- to accept their main argument and solutions.  They are flawed and would send us back to the past.  They would create privilege, undermine people's property rights, undermine wealth and economic growth and eventually undermine our capacity and willingness to redistribute income and protect the environment.

Instead, first, we should continue with the process of improving corporate and public sector accountability, focusing on ensuring greater shareholder value.

Second, corporations should establish quantifiable standards, and report on these to stakeholders, on the range of environmental and social impacts under their direct control, including worker safety, pollution, resource conservation, and community impact.  Many companies are, of course, already doing this.

Third, corporate Australia needs to take a more active lead in intellectual debate about the legitimacy of business.

Fourth, the accountability spot light should be firmly placed on the NGO sector.

These organisations play an increasingly pivotal role in society, including the representation of stakeholders.  Yet their systems of governance, accounting standards, level of transparency and reporting standards are often rudimentary.  Moreover, many claim representative status without even trying to put in place the necessary processes.  Even though ethical standards of many of these organisation are above reproach, others have ethical standards which, if adopted in the business of public sector, would result in prison.

In short, it is also time for civil society to become accountable.

Public Good Conservation -- Impact Of Environmental Measures Imposed on Landholders

Submission to the House of Representatives Standing Committee
on Environment and Heritage Inquiry, May 2000.

INTRODUCTION

The Standing Committee raised four issues:

• What is public good conservation?
• Impacts of conservation measures and their costs
• Financial assistance for conservation by landholders
• Sharing costs of conservation by all Australians

Public goods are best thought of as goods from which people cannot readily be excluded.  As a result, unlike food, warmth and shelter, their provision cannot easily be left to individuals pursuing their own separate interests.  Clean air is often cited as the classic example.  The notion of public goods conservation with respect to land can be divided into two categories:  maintaining the productivity of the land by measures that will automatically affect all landholdings in a particular area;  and preserving native flora and fauna which may compete with normal concepts of land productivity.

The first of these is a long-established issue.  The general success over many centuries in maintaining the productivity of the land is due to ownership of land having been vested in individuals, thus creating powerful incentives to maintain and enhance its productivity.  The legal obligations and rights of different property owners allow conflicts to be resolved where their activities impinge on each other.  Private interests have broadly conformed to public goods as a result of these mechanisms.  They may diverge where adverse impacts from features that are highly diverse and difficult to measure.  River pollution from use of fertilizers is an example of this.

The second concern -- preserving native species -- is a more modern one.  In the past, elimination of many such species may have been considered a public good, just as was drainage of wetlands (then known as swamps).

Public goods can be addressed using two broad routes:

• Maintenance of the rule of law based on individually-owned and tradable property rights so that just trade-offs are made where there is conflicting interests.  This can be built upon in several ways but should not be undermined.
• The alternative approach is regulatory determination of the uses of property;  a variation of this involves the use for regulatory purposes of the incentives -- fees and rewards -- that are automatically present with property rights.

THE RULE OF LAW BASED ON PROPERTY RIGHTS

THE NEED FOR EXCLUSIVE PROPERTY RIGHTS

Individuals will seek to make intensive use of free inputs whilst economising on inputs for which they have to pay.  As a result, where the free input has a value, society will not be making the best use of its factor endowments such as land.  Property which is unowned will lead each individual to maximise his own benefit with little regard to the ongoing value of the resource.  Failure of the individual to take the value for himself will simply mean others will do so.  Baden and Stroup ⁽¹⁾ liken the process to five young boys sucking soda from a glass -- the law of capture prevails and no conservation control or temporal allocation of the depletable resource is possible.  If the asset's ownership is vested the owner will attempt to maximise its present value, taking into account future alternative uses.  By ensuring that others are excluded, a landowner can determine whether the property merits conservation or modification;  whether it warrants spending resources to improve its fertility, accessibility, aesthetic qualities etc..

For this reason, Hayek maintained "The aim of the rules of law is merely to prevent, as much as possible, by drawing boundaries, the actions of different individuals from interfering with each other." Drawing of boundaries and further defining them as the need arises has been a major force in allowing efficient trade to take place on the basis of separate pursuit of the individual's own interest.  Boundary drawing and minimizing communal, and especially unowned, property allows the assignment of appropriate values to different inputs.

This boundary drawing has allowed normal legal recourse to adjudicate rights that are in collision.  Over hundreds of years, litigation has established the priority of rights and obligations.  It has also allowed the allocation of these rights to become modified to account for changes in community standards.  Thus, during the nineteenth century, courts gave a greater priority of rights to productive uses of goods than to non-productive, a diversion from a neutral law that was perhaps justified by the public priority placed on increasing income levels.  Some such similar priority is seen today in many developing countries where forest clearing is claimed to be placing an excessive value on immediate over longer term income and national welfare.

BENEFICIAL OUTCOMES FROM PROPERTY RIGHTS PROTECTION

Legal definitions of rights and responsibilities based on firmly understood property rights have been major forces for economic progress while ensuring the sustainability of production.  Faith in this process has often been shaky.  Thus, Theodore Roosevelt in 1911 said,

"... the time has come to enquire seriously what will happen when our forests are gone, when the coal, the iron, the oil and gas are exhausted, when the soils have been further impoverished and washed into streams, polluting the rivers, denuding the fields and obstructing navigation."

Yet not one of Roosevelt's anxieties have proved well founded.  Economies have become increasingly, not decreasingly productive.  World development has clearly proven sustainable.  Over the past 100 years income of OECD countries as measured by Gross Domestic Product has increased more than 20-fold and income per head has quintupled.

If we look at agricultural output, we find even more encouraging signs.  In the past forty years, Australia's farm production has increased by 130 per cent.  Performance in other countries has been comparable.  Table 1 offers some quantification of this in Australia.

Table 1:  Average % Increase in Volume of Farm Output

1951-1962	1962-1972	1972-1982	1977/8-1998/9
4.0	3.5	1.0	2.6

Source:  ABARE

Even though many claim we are approaching the limits to increased productivity, and a downturn is imminent, in recent years, output has continued to increase faster than inputs ⁽²⁾.

These facts suggest scepticism is warranted with regard to a recent report published by the ACF and NFF ⁽³⁾.  The report calls for annually an additional $3.7 billion of government spending and a total $6.5 billion.

The report claims that, currently, degradation costs at least $2 billion each year, and is increasing at an accelerating rate.  It estimates the investment expenditure it advocates has the potential to generate a 6.5% annual return, for the next 100 years.  The bulk of the benefits are in forestry and the report envisages a 20 fold growth in that industry.

SECURE PROPERTY RIGHTS:  THE KEY TO PROSPERITY

The reasons behind the generally satisfactory out-turn are well known.  Property rights offer individuals an unparalleled incentive to gauge immediate and longer term costs and benefits against their own preferences.  Having these costs and benefits self-contained with the property owner has proven far superior to any other form of ownership.  Its supremacy over its main rival, government determination of use, has been unambiguously demonstrated with the collapse of socialism over the past decade or so.

Indeed, the overwhelming cause of England leading the world’s economic take-off of recent centuries was painstakingly documented by Tom Bethell ⁽⁴⁾.  Bethell showed this was due to the security over property rights that the English and, to a lesser extent, other Europeans enjoyed.  Secure property rights allow basic human goals to be pursued by allowing those who are successful, frugal or hard-working to enjoy the benefits without having to share them, giving them much greater incentive to create wealth and preserve the value of assets.

Codifying the English implied property rights, the US Constitution under the Bill of Rights (Amendment 5, 1791) established the inviolability of property rights (called takings) from government seizure.  This was adopted in the Australian Constitution (s 51 xxxi), although in a form that required an activist High Court shortly after the turn of the last century to fully define.  In Australia, the provisions do not extend to State constitutions (and the Lucas case in the US demonstrates, in some people’s eyes, that property rights are imperfectly protected in that country ⁽⁵⁾).

De facto takings occur where governments adopt zoning laws to prevent certain crops being grown, thereby denying the landowner of the best possible use of the land.  The High Court’s "discovery" of native title in Mabo 2 also led to a considerable attenuation of property rights as they were previously understood.  Nonetheless, Australian property rights have largely retained their value and certainty notwithstanding the various assaults on them by governments and a politically active judiciary.

Any departure from a property-rights approach to ensure a more sustainable productivity needs to be carefully founded on sound principles.  The experiences of countries that have emasculated individual property rights (e.g. the former Soviet Union) or whose governments have not had the capacity to ensure the upholding of the owners’ rights (e.g. much of Africa) does not offer hope of finding promising approaches that do not include a pre-eminent role for property rights.

The foregoing suggests that financial compensation is essential for any property rights that are taken.  This accords with several sound principles, including:

• placing a direct impost on budgets, thus avoiding he misapprehension that a taking is costless and injecting a discipline into government to select priorities regarding goods that warrant such a taking;  this also allows an accurate measure to be made of the costs of conservation measures;
• providing compensation conforms with equity;
• in the absence of conservation, perverse outcomes are likely;  thus it is said in the US that the Endangered Species Act -- which often paralyses income producing activity on private land once such a species is discovered -- leads to the three SSS’s;  Shoot, Shovel and Shut-up.

USE OF PRIVATE PROPERTY TRANSACTIONS TO ACHIEVE A PARTICULAR OUTCOME

Superimposed on this property-rights platform on which the rule of law can arbitrate conflicting interests, is the possibility that one party can resolve a conflict by buying out the property of another.  Where the interests of parties clash, one option is for one party (or set of parties) to buy the opposing interests.  This occurs not infrequently in urban real estate where a property owner may buy out an adjacent property that may have been developed in a way that would potentially (but legally) reduce his enjoyment of his own property.  The purchaser may either retain the adjacent property or re-sell it with a caveat on its use.  Other private efforts, sometimes by single individuals, in the US have been important in preserving eagles, and even the native bison.

The Nature Conservancy in the USA is a major participant in strategies whereby clubs of interested parties operating through the law and property rights system to promote beneficial outcomes..  The Nature Conservancy obtains subscriptions from donors and buys land holdings to preserve certain features or species that would otherwise be lost.  Sometimes the organisation buys a "hold-out" stake in an area which may be scheduled for changed use in order to influence the nature of the change to preserve or enhanced the values favoured by it, as the agent of its donors.

In Australia, environmental organisations have generally eschewed such approaches, preferring instead to use the funds at their disposal for advocacy purposes.  This is a pity.  Advocacy generally means seeking others -- the private owner or the taxpayer -- to fund their goals.

REGULATORY DETERMINATIONS OF THE USE OF PROPERTY

The reflex action to the issues of public goods is to impose a regulatory solution.  A public good often means a good that all will share in automatically–it is not practicable to exclude all from use of the good.  The regulatory solution however has three major disadvantages:

• there is no yardstick on which to judge the real demand for particular public goods, and the strength of feeling in favour of it.  Market research techniques, often called contingent valuation, were thought to offer promise in this regard but tended to throw up results that were highly improbable.  Thus, a study conducted on the value of disallowing mining in Kakadu revealed an apparent value per hectare for "clapped out buffalo country" far in excess of that of the Sydney CBD.
• it disregards the dispersion of that demand;  the preservation of tracts of land as "old growth" forests is unlikely to be valued similarly by different people and if the withdrawal of land from other uses is entailed in this, the benefits are unevenly spread.  Commonly, environmnental benefits are valued more by the more affluent members of the community and regulatory moves (which are seldom costless) therefore have implications for many people’s notions of equity.
• regulatory solutions often fail to provide the incentives to meet the objective to which they are targetted.  This is because the (government) custodians lack the motives of individual gain that underpins the benefits brought by property rights and because governments tend to be poor managers and allocators of funds due to the distorted connection between incentives, consequences and decision-making.

A timely reminder of the disadvantages of regulatory solutions to conservation is offered by the recent fires in the forests enclosing the Los Alamos nuclear research facility has illustrated some of the deficiencies in having government agencies seek to preserve areas in a "natural" state.  The fire, although due to a controlled burn that went wrong, was a consequence of attempting to preserve forests in a way that is no longer possible.  As Robert Nelson, Senior Fellow in Environmental Studies at the Competitive Enterprise Institute and author of the forthcoming book, A Burning Issue:  A Case for Abolishing the U.S. Forest Service has said,

Unless it is removed mechanically, most of the wood will have to burn eventually.  Consequently, an abundance of dead and dying trees due to the long time absence of fire results in fire intensities that cause enormous damage to soils, watersheds, fisheries, and other ecosystem components.

Some parallel deficiencies of government-controlled Australian national parks are well documented.  These include lack of care and infestation by feral cats, pigs and vegetation like blackberries.  Where the forest service is able to combat fire, this often stores up greater problems for the future.

Totally private forests with recreation as the main income earning feature are not a ready option in Australia, since the abundance of "free" government national parks crowds out most private provision.  Nonetheless, a number of "exclosure"-based parks, particularly those operated by Dr Walmsley, appear to have been successful.

SPECIES PROTECTION

The previously mentioned ACF/NFF report National Investment in Rural Landscapes calls for expenditure of $8.3 billion ($7.1 billion in public money) for non-commercial or biodiversity plantings and $722 million (all of it public money) for rangeland retirement for biodiversity.  While the report has the merit of apparently fully compensating land owners for foregoing their income levels in the pursuit of these public goods, it can be criticised in two respects:  first the level of urgency may be exaggerated;  and secondly, it makes no efforts to explore private means of pursing the target.

THE EXTENT OF THE PROBLEM

In terms of extinctions, the report notes that since European settlement some 20 mammals have become extinct and suggests that 97 plant species are also known to be extinct.  While any species loss is a matter of regret, two factors need to be considered in addressing these sorts of numbers.

First, the extent of the loss comprises about 7 per cent of the pre-European mammals and a tiny fraction of the 25,000 plant and 40,000 plus other vegetation species identified in Australia.  The loss was not caused by deliberate extirpation but as a consequence of new species.  The previous isolation of Australia made it inevitable that native species would be vulnerable to competition of new strains.  Other isolated areas like Hawaii and the south west of the US suffered comparable species loss.

Secondly, species loss largely occurred in the period prior to 1920.  In that period, the premium on species preservation was much weaker than it is today.  If it has not been arrested, species loss has certainly been considerably reduced in recent decades.  This casts doubt on the estimates of future loss ("3329 plant categories threatened" and an estimated "50% of Australia’s woodland birds will become extinct") in the ACF/NFF report.  Such figures also seem to be considerably higher than those in the OECD Environmental Data Compendium, 1999, which records 1,085 plant species as threatened out of 25,000 (or 4 per cent) and 50 threatened bird species out of 777 (or 6 per cent).

MAKING USE OF MARKET MECHANISMS TO PRESERVE SPECIES

Owned species with market value are not in danger of extinction.  Vesting of ownership of species presents a potentially useful way of recruiting the market system to promote environmental goals.  At present many Australian fauna are devalued because they have no market value, hence they are often considered vermin.

Outcomes overseas present pointers to a more hopeful win-win approach.  With Kenyan elephants, protection in national parks under government ownership has resulted in the excessive hunting of creatures that have valued properties but are also a nuisance;  by contrast, southern Africa’s herds are vested with villages who ensure their protection to take advantage of tourism and the outcome has been far superior in terms of preservation.  Those with the property right or its franchise equivalent will assume an automatic role of policing against poachers (who would be seizing their property).

Such experiences present useful indicators for Australian policy.  Overseas demand for Australian birds and wildlife is high and "harvesting" the wildlife could promote its sustainability while:

• ensuring against excessive taking
• ensuring humane collection and transport

Such solutions are inhibited by current ideological attitudes against commercialising wild life and these need to be combated.  There is scope for gain (including gain in rural employment levels) by deregulating and franchising.  This scope should be explored, especially since such measures could contribute to species preservation and protection without impositions on the taxpayer.

LIMITS OF INDIVIDUAL PROPERTY RIGHTS AND USE OF MARKET MECHANISMS

In many cases the environmental values cannot be maintained by private action.  In the case of much pollution, for example, non-point sources it is impracticable to measure the individual causes and voluntary actions may be impracticable.

However, there is an over-abundance of voices calling for regulatory action to combat imperfections.  Salt encroachment in dry land areas (especially in Western Australia) and in the Murray Darling system is presently the object of considerable attention.  Real though these issues are, a sober judgement on the need to take action is suggested by their ostensibly modest impact on overall levels of agricultural productivity (see Table 1).

If regulatory measures are to be taken, these are best done through use of market-based instruments.  Tradeable rights are one such instrument capable of being employed in the case of wildlife preservation.  Taxes are another means of using market-based incentives.  In principle, there is little difference between the two methods.  Both encourage behaviour under which costs are minimised with the stimulus of a financial incentive.

Taxes, for example on river pollutants, have been very effective in cleaning inland waterways in the US.  Tradeable rights to pollute have the same effect (placing a quantitative limit on pollutants and allowing the price to determine itself, rather than setting a price for polluting and allowing the quantity to set itself).

The dominant issue for Australia is the health of the Murray-Darling system.  Governments have struggled to overcome salinity and other degradation in this system for decades.  Some prospect for improvement is evident with appropriate pricing levels being introduced for water use.  A superior approach, in view of the importance of property rights (and current water users and their bankers clearly consider they have firm rights to a level of water use) is to vest ownership of the water at an aggregate level considered to be appropriate for the recovery of the waterway.  Trading in these rights should be permitted and this would ensure the water is used for its most valued purposes.  It would allow farm and other output to be maximised while reducing the public "bad" level of salinity.

This use of quasi-property right solutions is likely to yield far superior outcomes than micro-regulating farm and water use.

CONCLUDING COMMENTS

The Australian Constitution, like the American, incorporates the view that individual freedom should prevail alongside a limited role for government.  Section 51(xxxi) requires that if the government acquires property from any State or person, it does so on just terms.  Just terms have been defined by the High Court as "full and adequate compensation" where the acquisition is a compulsory taking.

However, section 51 (xxxi) only applies to the Commonwealth.  It does not bind the States nor do the States have "just compensation" clauses in their own constitutions.

DECLINING SUPPORT FOR PROPERTY RIGHTS

There has been a substantial decline in support for upholding the security of private property rights by the courts and by governments of all levels over the last 50 years.

This decline has not led to ignoring these property rights altogether.  Rather, it has led to the narrowing of the definition of property rights, a widening of the definition of "public use" and the limiting of the grounds for compensation.

When governments expropriate property outright, taking title from the owner, courts relying on Section 51(xxxi) generally require governments, at least the Commonwealth government, to compensate owners for their losses.  The modern problem does not lie there.  The problem lies with governments taking part of the use of the property while leaving title with the owner.  Courts have been reluctant to award compensation in such cases because they have failed to grasp the principle of the matter -- due, in part, to an unwarranted deference to the regulatory state.

The central principle is that property is not a singular concept.  Property is a bundle of rights and different owners can co-exist by owning different services on the same piece of land––the normal case in Australia for mining rights and is also found with water rights.  But if any of these rights is taken away the owner is deprived of something.

Contrary to this reality, takings law has clung to the idea that only if the entire bundle is taken does the government have to pay compensation.  This all-or-nothing view enables government to extinguish nearly all uses through regulation -- and hence to regulate nearly all value out of the property -- yet escape the compensation requirement because the all-but-empty title remains with owner.

This is clearly wrong.  Compensation should be required when government takes any right -- whether partial or full title.

WHEN IS COMPENSATION REQUIRED?

It is preferable to answer the question when is compensation not required?  Rather than the question when is compensation required?

Compensation is not required

• First, when government acts to secure rights -- when, for example, it stops someone from polluting his neighbour's land -- it is acting under its police powers and no compensation is due to the owner, whatever his financial loss, because the use -- pollution -- was wrong in the first place.  Since there is no right to pollute, we do not have to pay polluters not to pollute.  The relevant question is not whether value has been taken by regulation but whether a right has been taken.
• Second, if governments act to provide the public with some good and that act does not take a right, then even if it results in a financial loss, no compensation is due.  For example, if a government builds a public housing estate and neighbouring property values decline, no compensation is due because the action took nothing that they owned.  The neighbours own their property and its uses.  They do not own the value in their property.

Compensation is required when governments act not to secure rights but to provide the public with some good -- for example, a wildlife habitat or the preservation of historic buildings -- and in doing so take away some otherwise legitimate use.

The principle is quite simple:  the public has to pay for the goods it wants and takes, just like any private person would have to.

PROMOTING INCREASED PRIVATE PROVISION OF PUBLIC GOODS

Although public goods benefit us all, a great many such goods are freely provided by individuals—many may gain enjoyment from a neighbour’s flower garden but nobody would chip in to maintain it.  In fact people are very often unable to obtain all the benefits from a purchase or action but the market system still operates without an additional massive transfer of notional benefits.

Hence it makes sense to leave room for those placing a higher priority on public goods conservation to do so of their own volition.  It is also more admirable for those with strong environmental preferences to use their own monies to fund the provision of public goods rather than campaign to have government force the taxpayer to fund them.

In addition, the need to provide funding for public goods could be reduced by allowing ownership and trade in wildlife species.  Particularly in the case of the major fauna—exotic birds, frilly necked lizards, koalas etc, there is a ready demand both for observing the species in situ and for specimens.

---

ENDNOTES

1.  Baden R and Stroup J "Property Rights and Natural Resource Management" Literature of Liberty Vol II No 4, September-December 1979

2.  There is frequent concern about sustainability of present productivity trends.  Thus, Bartle in the NFF publication, Reform Autumn 2000 notes that the WA Salinity Plan is estimated to expand to cover 32% of the land area from the present 9% in the coming decades.  The numbers however refer to affected land which in the main remains productive.  Like other parts of Australia, WA land productivity has not shown signs of falling.

3.  National Investment in Rural Landscapes, NFF and ACF, May 2000

4.  Bethell, Tom, The Noblest Triumph, St Martin’s Press, New York, 1998.

5.  Henry N. Butler Regulatory Takings after Lucas, Regulation, (1993 #3)

The Loyalty Trap

In most societies, loyalty has always been morally esteemed and deemed worthy of reward.  Disloyalty has resulted in social banishment.  But far from being a good, loyalty is most often a tool used by the cunning to entice the unwitting into surrendering power.

Within firms, is loyalty a good or a bad?  In the modern business environment, loyalty has been a dominant operational imperative thought necessary for success.  Yet a second, competing model is emerging in which relationships are built on professionalism rather than loyalty.  The new professional relationship paradigm threatens to outperform loyalty, though not necessarily to destroy it.  Loyalty is so psychologically ingrained that it is considered to be the glue that holds a firm together.

The idea of loyalty has its roots in the blood, mud, death and comradeship of the battlefields of every war since the birth of modern civilisation in ancient Greece.  Wherever a nation has existed, loyalty has been demanded.  It has been accepted that without loyalty a nation could not survive external assault.  It is not surprising then that loyalty should be a modern business catch-cry, because for the first 70 years of the 20th century the business of conducting business was dominated by men whose approaches had been molded by the experiences and demands of war.

Business in market economies has largely been seen as a war involving winners and losers.  Loyalty has offered a prime conceptual framework for managing the firm for competitive war.  The principle structure adopted has been that of class.  Firms would invite people in and people would apply to become part of the firm.  Individuals would be assessed for skills and abilities and slotted into formal, rigid class structures inside the firm.  Incomes, status and decision-making prerogatives were all determined by the class structure.

This idea of micro class structures in firms, based on qualifications and acquired formal skills, replaced ideas of macro class structures built on inherited position.  The 20th century firm has been a scientifically created, sophisticated version of the traditional class system through which the lord of the manor managed his estate in medieval England.  But in business your position in life is not determined by birth but by which part of the firm's hierarchy you are assigned to.  The better-known class structures of old became hidden within the class structures of the firm.

Within this class structure a simple set of rules applied that were meant to operate for the mutual benefit of the firm's members.  The demands on the individual were simple:  do the tasks allotted to you and above all conform to the hierarchical structures of the firm.  In short, be loyal to the firm above all other considerations.

An individual's willing conformity or loyalty has often been more highly prized than success at allotted tasks.  After all, mistakes at work can usually be corrected by other employees.  And the firm's selection processes were surely so good that hiring inappropriate individuals could hardly ever happen!  If an individual failed consistently over time, the individual could be reallocated to more suitable tasks.  The system would protect the individual from occasional lapses but was not itself threatened by individual task failure.

However, lack of loyalty was cancerous and threatened to bring down the edifice.  Exposing weaknesses inside the firm or questioning its hierarchical structures threatened the entire system.  So, in return for loyalty, the firm would provide the employee with protection from the harsh realities of the war that was conducted daily between firms.  The loyalty payoff included financial security, longevity of engagement, security in retirement and a sense of place and purpose in the firm's class structure.

This dominant management model has been highly successful.  Great industrial monoliths, larger than many nations, have been created.  The principles of command and control, dependent as they are on loyalty driven mindsets, have enabled spectacular and complex organisations to form contributing to a 20th century explosion of material well being.

But loyalty has never been solid.  The trashing of corporations that began in the 1980s, with mergers, acquisitions, and downsizing, has sent the clear and unforgiving message that firms can and will be loyal to individuals only while its suits their purposes.  In reality this has always been the case.  Firms can be loyal to employees only while economic circumstances enable them to afford it, a lesson learnt by the Great Depression generation.  When a business goes broke, that's the end of the loyalty pact!

Loyalty has always been sold to employees as a positive.  But it has always had sizable, never-to-be-mentioned personal downsides.  Loyalty has always required the willing sacrifice of the employee's sense of and desire for freedom to the higher demands of the organisation.  Nothing is more completely lost than what is willing discarded.  Liberty thrown away creates a gaping, unresolved emptiness in the individual's heart.  In this environment, loyalty generates a culture of silence, fear, transference of blame and gouging of personal integrity.  For example, most people feel uneasy when the system requires them to ignore corruption.  Most people chafe at the limitations on their ambitions that the corporate hierarchy imposes on them.  Ultimately, the loyalty system creates a culture of subservience to the whims and personal ambitions of the corporate elite.  Such a culture makes it impossible for an organisation's performance to realise the greatest combined potential of its personnel.

Above all, the loyalty thought necessary to a firm's performance has acted to dull performance by suppressing accountability.  When loyalty is demanded, accountability becomes diffused and lost.  All the signals in the loyalty-driven organisation say "the buck stops somewhere else".  Accountability that has been diminished by loyalty causes errors, corruption, and general underperformance that has to be absorbed and accepted.  Loyalty causes the firm's systems to be corrupted and incapable of solving internal problems.

Systems cannot fix problems.  Only the people in systems can do that.  Demands for loyalty suppress people who would otherwise keep the organisation operationally active, intact, alert and reactive to problems.  A huge amount of informal conversation revolves around problems at work caused by people higher up on the firm's status ladder but which can't be brought to the attention of anyone even higher up or are already being connived at by them.

In the latter part of the 20th century, substantial changes in people's thinking began to emerge.  Not change by way of cataclysmic earthquake, but by the steady gouging of new landscapes by altered river patterns.  The working generations of the late 20th century were dominated by people who had had no involvement in war or the armed forces.  The organisational demands of war were not among the life experience of these generations.

Peace is a marvellous, civilising gift.  It allows for the flowering of the human spirit.  The resultant flowers may not always be of universal liking but at least the human spirit has a chance.  And in a sustained environment of peace and expanding, shared wealth, people's desires change.

The negatives of loyalty produce a major psychological dysfunction.  As loyalty limits ambition and demands conformity to class structures inside firms, frustration emerges as a dominant but suppressed human emotion.  As long as people are prepared to accommodate frustration, loyalty can survive.  But generations molded by peace have low tolerance levels of frustration.  People want more.  They want to explore the inner self, to find the thing that drives them, to risk and to create.  They are less accepting of failure and negative behaviors in those around them.  In short, the peace generations have become entrepreneurial and, as entrepreneurs, people find pathways to greater financial success and personal satisfaction.

Individual entrepreneurship is the primary threat to loyalty, a threat that firms must understand, study and accommodate if they are to survive.

How then do firms address an environment without loyalty?  Simple!  They embrace it.

Don't ask for loyalty.  Ask for a business relationship.

The firm without loyalty expectations is one in which promises that cannot be kept are not made.  Typically, these firms do not seek or offer longevity in engagement.  They do not offer a class or career structure.  They offer people the chance to make their own career.  They do not seek to tie people to the firm.

The firm not requiring loyalty wants professionalism instead, from the office cleaners as much as from the CEO.  Professionalism is not a status reserved for an educated, highly paid elite.  Professionalism is a state of mind.  It transcends the tasks to be done and the formal skills required.  Professionalism is confidence in one's ability to perform, to demand clarity in the performance expectations and to accept only those performance expectations that can reasonably be met.

But how does a firm function if loyalty is not demanded to a structure that binds the body together?  Simple!  Living without loyalty does not mean living without structure.  It does mean accepting that the structure is not all-powerful;  that the firm is not bigger than the individuals who work for it.  It means having a structure that is itself open to question and sanction on a daily basis.  It means the elimination of arrogance.  So the firm without loyalty does not seek to create and enforce culture.  It accepts that culture is a product of the people in the firm and as the people change and come and go, the culture changes.  Community and culture is not something that is made, it simply emerges and evolves.

Above all, the firm without loyalty has one focus and one only:  the delivery of results to match the needs of its markets.  This focus is not limited to the outer edges of the organisation, where direct interface with markets is thought to occur.  It does mean the deep penetration of market focus into every recess of the organisation.

Do such firms exist?  Probably not, but many firms are well down this path.

Are loyalty driven firms dead?  Not at all!  The success that loyalty firms have achieved cannot be ignored.  But the loyalty mindset is under pressure.  Loyalty-structured firms now face competition from firms that look to different people paradigms.

In management thinking, loyalty has achieved a quasi-divine status.  To challenge loyalty is to risk bringing down the wrath of the high priests of social and business engineering.  Yet loyalty has an undeserved reputation.  Its negatives have become apparent and are being rejected.  The outcome can be maturity in the personal relationships operating inside firms, a maturity that promises greater dignity for people and improved performance for organisations.

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The Conceits of Conspicuous Correctness

Prior to the European invasion and settlement, there were around 300 Aboriginal language groups in Australia.  They were extremely varied in religious outlook and local practices.  The language of the Tasmanian Aborigines, for example, had been separated from any mainland language longer than English and Persian have been from their common linguistic roots.

Unlike the Melanesians of the Torres Strait Islands, none used settled agriculture more complex than stone fishing traps.  However sophisticated some of their cultural practices may have been, for reasons which may well have been a rational response to their environment and its limitations, they had not participated in the Agricultural Revolution of the Neolithic era.  As Geoffrey Blainey has pointed out, the arrival of the British of the early Industrial Revolution in 1788 probably represented the greatest gulf ever encountered between human societies.  A journey in technological and organisational sophistication that it took the British 40 centuries to travel, Australian Aborigines have had to traverse in less than two -- and during the most rapid social and technological changes in human history.

The impact of European arrival, with their accompanying diseases, on epidemiologically isolated peoples was devastating.  But disease was simply the most deadly of a series of devastations.  There were massacres (some with Aborigines on both sides:  joining the police force or becoming a stockman were one of a very limited number of ways indigenous skills could find employment in the invading commercial society), dispossession and deportations.

The obvious physical characteristic of different skin colour was tied to the cultural gulf and used to justify excluding Aborigines from full participation in the new society being created.  This, and their nomadic hunter-gatherer approach to land use, had the further convenience of devaluing any possession claims.  The Aborigines confronted an immensely more powerful invading culture.  On top of the enormous inherent technological and organisational gulf, explicit legal barriers were put in place, making the gulf even harder to bridge.

Policy has since faced a serious bind.  Abolishing the legal barriers did not mean the gulf in skills, organisational arrangements and understanding was bridged.  As Ron Brunton points out, you cannot achieve industrial-society life expectancies with hunter-gatherer notions of good health practice.  But acknowledging that gulf easily lead policy makers back to special arrangements.  In the end, one set of rules for all is the only proper way to show inclusion, yet does nothing to deal with the specific problems.

These are not easy issues for policy to confront.  Unfortunately, they are made even less easy to deal with now that showing (very narrowly defined) "concern" for indigenous Australians has become a prime form of displaying one's moral splendour among journalists, academics and other commentators.  Truth and open inquiry is sacrificed to the status-seeking of conspicuous correctness.  Discrimination becomes the catch-all explanation of Aboriginal disadvantage, since that creates the appropriate drama of mascots, targets and approved solutions for the conspicuous correctness game to be played out.

Having been colonised for their land, indigenous Australians are now being used for the patronage opportunities of the Aboriginal industry and the moral display opportunities of the indigenous-concern game:  a mutually-supporting arrangement.

A fine example of the conspicuous correctness genre is provided in the recently (November 1999) published Concise History of Australia by Stuart Macintyre, Ernest Scott Professor of History and Dean of the Faculty of Arts at Melbourne University.

There are 38 illustrations in the Concise History.  Thirteen, or more than a third, are of Aboriginal subjects.  It could be, of course, that Aborigines are regarded as particularly photogenic:  exotic images with which to titillate foreign readers -- the book is part of a Cambridge University Press series.  Alternatively, it could be the author parading how much he shares their pain.  Any reader of the History -- which Professor James Griffin has labelled "Olympian, self-gratifying, baby-boomer history" and drawing attention to its rosy-hued rendition of indigenous cultures -- can only conclude that the latter is the case.

It tells you much about this History that the Index provides references on 25 pages to "communists" and "Communist Party" yet the Index lists no specific references to Anglicans, Presbyterians, Methodists, Lutherans or Jews and the only specific reference to Catholicism listed are three references to the Catholic Social Studies Movement.  The Index lists eleven references to Christianity in general, overwhelmingly concentrated in the early colonial period with the last reference referring to the impact of Darwinianism:  presumably the point at which intellectuals no longer had to treat Christianity seriously.  Henry Lawson's influence gets more serious treatment than that of Christianity.  By contrast, the first page of the Index lists 151 references to Aboriginal matters on 60 pages including six for Aboriginal spirituality.  But, then, concern with Aboriginal matters gets top-rank conspicuous correctness points, while taking Christianity seriously is a major negative.  As the lack of coverage of Catholic experience indicates, the book demonstrates that the Irish have been abandoned as a mascot group by cutting-edge "progressivism".

The fact that Aboriginal Australians are marginally more likely than the rest of the population to identify as Christian highlights how ridiculous this self-indulgence passing as serious history is (71.5% to 70.9).  Only 2.06% of Australian Aborigines (themselves only 2%t of the general population) identified as followers of a traditional Aboriginal religion (ABS Catalogue Number 2034.0).

Then there is Macintyre's treatment of the Mabo case.  Even though the crucial decision was not handed down until 1992, right at the end of the period covered, the case is clearly totemic for Macintyre.  He mentions it on pages 34, 35, 263, 264 and 276.  Yet he cannot get basic facts right.  On page 263 he says

In 1992 the High Court determined that Eddie Mabo, a Torres Strait Islander, had common law rights in his land on Mer Island.  The High Court did no such thing.  The High Court found, 6 to 1, that the common law of Australia recognised native title.  The specific claims were determined by Justice Moynihan of the Queensland Supreme Court, who found against Eddie Mabo.  These claims were not appealed to the High Court, so Mr Justice Moynihan's findings stood.  Most of the original claims of the Mabo case (in which Eddie Mabo was not the only plaintiff) failed:  a revealing fact of some significance to native title's wider prospects.

For Professor Macintyre, the myth of Mabo is more important than the facts.  If the primary validator of your intellectual output is something other than truth, then truth will be sacrificed for it.  One only has to see the operation of media coverage of, say, the Hindmarsh Island concoction or the "stolen generations" issue to see that.  (The Hindmarsh Island concoction does not get a mention in Macintyre's History, but there are references to removal of Aboriginal children on eight pages).

The Christian religious identity of over 70% of Aboriginal Australians is something Macintyre would presumably class as the sad legacy of colonialism:  the choice of a mere 2 per cent, "authentic" -- that is, conforming to the pattern most useful to fashionable moral posturing.

But Aboriginal Australians are not mere props in a public play of self-congratulation.  Only treating them as they are shows them genuine respect.  And one thing they are, in the main, is Christian.  They are not noble eco-savages, with some purer, pristine mysticism, nor of inherently nobler moral fibre.  They are making a way in the world like the rest of us.

Scion of a wealthy family, a committed Christian when young, a member of the Communist Party in adulthood (after Hungary and the Prague Spring), Macintyre is almost a walking caricature of the modern progressive intellectual.  The contrast between Macintyre and his predecessor Geoffrey Blainey (himself a prominent victim of the conspicuous correctness game in attack mode) is quite stark.

As Peter Ryan pointed out in the March Quadrant, Blainey has the gift of making history accessible and interesting.  Blainey makes history serve the reader:  he makes history an engaging story.  He makes it our tale, a tale of how we came to be, and came to be as we are.  When he taught at Melbourne University, students flocked to his lectures.

Macintyre seems to me to make history serve his own ends, the ends of the writer.  His is a history of Australian failings, problems and inadequacies, with achievement glimpsed amongst the wreckage.  But failings provide such better props.  Through them, the reader is invited to revere the author's moral grandeur.  While Blainey expands the appeal of history, Macintyre is left bemoaning the decline of student enrolments.

Blainey's approach produces history with an audience of thousands.  Macintyre's produces history with a vanishing audience.  Propping up the "progressive" ego via conspicuous correctness is a vacuous activity, all the more because it has become such a common self-indulgence.

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Regulating Biotechnology: Some Questions and Answers

Biotechnology Backgrounders

Summary

Forty years ago James Watson and Francis Crick discovered the molecular structure of DNA and, from the early seventies, biotechnologists progressively learned more precise ways of introducing genes into plants and animals.  Although by cross-breeding and selection most domesticated and cultivated species have been changed radically from their wild forebears, technology which became referred to as "genetic engineering" or "recombinant DNA (r-DNA) technology" allowed the incorporation of novel characteristics which traditional breeding cannot achieve.  The term "genetically modified" came to refer to matter that carries genes introduced by "gene splicing".

Australian governments currently face considerable pressure to regulate further the use of r-DNA technology and its products.  If the Federal Government should err in one direction, Australians could consume dangerous substances and the environment could be degraded -- including being invaded by varieties of weeds that are particularly pestiferous.

If it were to get it wrong in the other direction, it would cause a decline in our industries' competitiveness thereby reducing Australian living standards, prevent the production of cheaper food and fibre, deny effective treatment to ill people, and encourage our scientists to take their skills elsewhere.

Therefore, before assuming the best or the worst, Australians should learn what genetic modification is and put its rewards and dangers in context.

Twenty-eight questions often raised in debate about the use of recombinant DNA follow.  I am indebted to Altered Genes edited by Richard Hindmarsh, Geoffrey Lawrence and Janet Norton for the questions.  The responses are my own.  Such is the stuff of debate in a liberal society!

QUESTION:  Is the new biotechnology significantly different from long-established methods of genetic modification by cross-breeding, selection and the practice of employing irradiation to induce mutation?

RESPONSE:  It is different in these respects:

1. it allows us to introduce or remove single genes instead of large blocks of DNA, thereby enhancing precision in the genetic improvement of plants and animals, and mitigating much of the hit-and-miss and associated risk common to the more traditional methods;
2. because the need to back-cross to eliminate unwanted traits is avoided and outcomes have become more predictable, much more change is made possible;  and
3. it allows us to introduce genes from species other than that of the host. ⁽¹⁾

QUESTION:  Might not genetically modified (GM) foods contain harmful carcinogens, allergens or other poisons?

RESPONSE:  Yes, but not because they are genetically modified.  Most plants contain substances which if ingested in sufficient quantity would kill us.  But long before we eat too much we lose our appetite for the particular substances.  All GM foods are assessed to see if they are unsafe.

QUESTION:  Even if GM foods are perfectly safe, shouldn't genetically modified products be labelled as such, giving consumers the choice of whether to eat them or not?

RESPONSE:  In Australia, New Zealand, the US, Canada, the European Union and Japan, foods that contain GM products that are not "substantially equivalent" to existing food products must be labelled as such.  (The term "substantially equivalent" was developed by the Organisation for Economic Cooperation and Development and the World Health Organisation to identify foods that are "compositionally and nutritionally similar within the limits of normal biological variation in edible varieties of plant".) ⁽²⁾

The Australian New Zealand Food Standards Council -- made up of health ministers from all States and Territories, the Commonwealth and New Zealand -- nevertheless intends to expand the mandatory labelling of foods that contain genetically modified material so that it includes those that are substantially equivalent to existing foods.  Its rationale is not official concern about health risks but an attempt to satisfy demands made by members of the public that foods containing GM material be identified.

It is not clear, however, that the intended broadening of the labelling requirement to include substantially equivalent foods will benefit most people.  Those people who want to know whether their purchases contain or may contain GM material, and are prepared to pay what it costs to provide that information, will provide the demand for a profitable niche market similar to that which exists now for "organic", halal and kosher foods.  The proposed mandatory labelling policy will:

• Imply that there is a health risk with GM food, where none can be detected by experts;
• Eliminate the differentiation between GM products which are "substantially equivalent" and those that are "substantially different" (GM modified products are so widespread and food chains so complex that most foods would need to carry a warning stating that they might be affected by the new biotechnology);
• Be costly (tracing back and describing the degree and nature of possible "GM contamination" could add appreciably to the price of, in particular, those foods most needed for a healthy diet); ⁽³⁾  and
• Discriminate against packaged food, as the labelling requirement will not apply, for instance, to food served in restaurants. ⁽⁴⁾

As long as consumers are willing to pay for their knowledge, they have a right to know.  However, the case for compelling those who do not wish to bear the cost of labelling GM foods to subsidise those who do is no greater than it would be for compelling uninterested parties to pay for identification of grains treated with fungicides, fish caught with nets, meat killed in abattoirs that do not adhere to certain religious rites and so on -- through a very long catalogue.

QUESTION:  Might it not then be appropriate to label foods that have not come in contact with the new technology, in the same way that organic, kosher and halal foods are currently identified?

RESPONSE:  Yes it might, and it is worth noting that such labels are voluntary -- nobody is forced to label their food "halal".  Before labelling provisions along such voluntary lines are introduced, producers of non-GM foods would need to agree on definitions and arrange for certification -- as the organic farmers have done.  There is no reason to restrict product differentiation whatever the differentiator may be -- as long as it is the truth.  It is another matter to require such differentiation -- thereby legitimising claims that such differentiation is appropriate -- when there are no specific health or other dangers to justify doing so.

QUESTION:  Is the information we get from scientists reliable?

RESPONSE:  Not necessarily.  There is such a thing as bad science and scientists are as prone to the temptation to self-promote as are other people but, to the extent that they remain within their areas of expertise, information derived from them is considerably more reliable than the opinions of laymen, salesmen and promoters.  Of course, when hard scientists venture into the social sciences they should be treated as laymen.  And, of course, science can be misused.

QUESTION:  Can scientists predict every consequence of genetic engineering?

RESPONSE:  Absolutely not, but neither can every consequence of any human activity be predicted.  A significant feature of experimentation with r-DNA is that the experiments are more thoroughly monitored than with most experimentation, including genetic development by longer-established means.

QUESTION:  Is media coverage of biotechnology biased in favour of the scientists' perspective?

RESPONSE:  From current information it is impossible to say.  Tiffany White's apparently wellconducted 1995 survey of the Sydney Morning Herald's coverage indicated that it was, but a similar survey of the Internet would surely reach the opposite conclusion and so would a survey of the ABC or the Melbourne Herald Sun.  The important fact is that both pro and con arguments are readily available to any serious student of the topic.  The important question that remains is whether either or both sides are resorting to misinformation, exaggeration or irresponsible hyperbole.

QUESTION:  What hope, if any, does genetic engineering hold for the elimination of chronic shortages of food for the world's poorest people?

RESPONSE:  It will not affect those causes of malnutrition such as the absence of stable property rights, price control and warfare that are to be found within the several communities' social systems.  It will, however, increase yields in many instances and reduce the necessity for expensive inputs, particularly herbicides and insecticides but also arable land itself.  Therefore, food and fibre will cost less.

QUESTION:  Can we trust the Australian regulatory procedures to protect us?

RESPONSE:  No regulatory system can guarantee absolute safety.

Australians have, nevertheless, experienced very few episodes like the recent South Australian one of unsafe smallgoods where there was a death.  Our food standards are based on international best practice, underpinned by an appropriate mixture of sound science and precaution.  Issues relating to human health and safety are subject to a fully transparent, risk-based assessment process.  Australian regulatory agencies actively participate in work to develop principles, guidelines and standards carried out by international organisations such as OECD, Codex, WHO and FAO.

Whether the good record is attributable more to regulatory rigour than to the commercial incentive not to offend customers is beside the point.  The fact is that, in Australia, commercially available foods are exceptionally safe and GM foods are assessed even more rigorously than are non-GM foods.  Nevertheless, anti-rDNA activists are calling for further restriction of commodities that have been genetically engineered (process regulation) rather than assessment of all commodities against established standards (product regulation).  And there seems to be widespread, if lukewarm, support for process regulation -- at least in the case of foods.  Governments often feel obliged to regulate to placate such sentiments.  Even so, it is hard to see how such a change would in fact improve food safety when it would divert resources and attention from the dangers themselves to the processes.

Safety also relates to protection of the environment and public health.

The case for regulating research and the release of new products is generally accepted, that is, for restraining the cowboys.

Several biopharmaceuticals are produced from recombinant organisms and the regulatory system, including clinical trials, is well understood, transparent and widely accepted.  It does, of course, increase drug costs materially.

Commercially available products are regulated by a system that will comprise the existing regulators with a legal remit to cover some aspects of genetically modified organisms (GMOs) and the products derived from them.  The relevant authorities are:

• The Australia New Zealand Food Authority (ANZFA);
• The Therapeutic Goods Administration (TGA);
• The National Registration Authority for Agricultural and Veterinary Chemicals (NRA);
• The National Industrial Chemicals Notification and Assessment Scheme (NICNAS);  and
• The Australian Quarantine and Inspection Service (AQIS).

There will also be a new Office of the Gene Technology Regulator (OGTR).  OGTR will supersede the existing arrangements under the Genetic Manipulation Advisory Committee (GMAC) which advises on research and environmental release of GMOs.  It will also cover any gaps where no other regulator has responsibility.

The system works, although many people claim that it works less well than it should.  It has well-established procedures, precedents and qualified staff.  It is, however, complex and arcane.

QUESTION:  Plant variety rights legislation and the Trade Related Aspects of Intellectual Property Rights (TRIPS) treaty among World Trade Organisation (WTO) members are objected to on the grounds that there should be "No Patents on Life".  Are property rights in living things fair?

RESPONSE:  Most people accept private ownership of plants and animals and the slogan plainly is not intended to be taken literally.  The issue must be whether private property rights in varieties of flora and fauna, preventing free access to the genetic material, are appropriate.  But even here, private ownership is of long standing -- stud breeders own sires and charge for services for instance.  These breeders' property rights are not protected by patent but by ownership of the animals with the superior genes.  That a different process should enforce the relevant property rights would seem not to involve a major difference of principle.

QUESTION:  Is the biotechnology industry engaging in bio-discovery or bio-piracy?

RESPONSE:  It is sometimes erroneously asserted that, in the search for drugs to treat human ailments such as HIV, pharmaceutical companies such as AMRAD are patenting the medicines of indigenous peoples.  It is similarly claimed that, in the search for better foods, food manufacturers such as Nestlé are patenting the foods of indigenous peoples.  All that a commercial supplier can do, however, is to patent processes by which the traditional medicines and foods are rendered more useful for human employment.  There remains the question of whether indigenous or other commercially unsophisticated people are always adequately rewarded for assistance that in due course leads to the creation of intellectual property.

QUESTION:  Is private property in living things in Australians' economic interests?

RESPONSE:  Yes it is.  It is true, as opponents of plant variety rights claim, that most of the world's species tend to be concentrated in the tropics and in Australia and that, provided the law does not prevent it, this biodiversity is a source of potentially valuable genetic material.  Governments do have a role in protecting especially rare biota.  Like Australia's mineral resources, however, it is of only potential value until it is discovered and developed.  Even if such a strategy were morally justifiable, Australians do not have the capacity to conduct a hold-out strategy, that is, to deny others access to genetic material by demanding the high prices for it that can be achieved only by maintaining a monopoly.  We should be instructed by our costly failure to do so with wool, where the opportunity appeared more readily available.

QUESTION:  What, if any, are the economic advantages/disadvantages that Australian producers might gain/suffer from the Australian regulatory environment?

RESPONSE:  Australians have a natural advantage, based upon the availability of relatively cheap farmland and a considerable bank of know-how, in the production of several agricultural products.  Although declining in relative terms, agriculture remains a significant part of our economy and a major contributor to exports.  Were Australian farmers to be denied productive advantages available to foreign competitors, Australian agriculture would not, as some have implied, become unprofitable.  It would, however, become smaller (retreat to the more profitable paddocks) contributing less to gross domestic product.  Average Australian living standards would then be lower than they might have been.  Conversely, if Australian farmers were to enjoy a more favourable regulatory environment than that of international competitors, then Australian living standards, as they are conventionally measured, would be enhanced.  Similar arguments apply to other Australian industries, not least the bio-medical industry, where we have also developed some competitive advantages at least at the discovery end of production.  Therefore, the case for restrictive regulation needs to be based on factors that do not readily enter the commercial equation -- in economists' terms, upon externalities.  Australian producers probably also gain access to some markets from a "clean and green" image.

QUESTION:  Will farmers benefit from biotechnology or will the large companies that own the intellectual property appropriate all the benefits?

RESPONSE:  Farmers will benefit.  Farmers are not compelled to use the new technologies and patented seeds and, if they do not voluntarily employ them, then the companies will have nothing of value.  Whether farmers benefit to the economically optimum extent will depend on whether there is adequate competition between seed merchants and between chemical producers.  These organisations will, however, be subject to the normal provisions of the Trade Practices Act.

QUESTION:  Since there is considerable resistance to GM food in many countries, might Australia do better by banning GM production and catering for a large niche market?

RESPONSE:  As in domestic markets, it is unnecessary to ban GM production to cater for a GM-free preference in overseas markets.  To tap these markets, respected certification of GM-free product would be needed, just as there is certification for organically grown product and for much of Australia's meat export now.

QUESTION:  What, if any, are the advantages/disadvantages that Australian consumers might gain/suffer from the Australian regulatory environment?

RESPONSE:  Regulations impose costs, restrict choice and raise prices.  They can, however, if wisely drawn, greatly reduce the cost of gathering the information needed to choose wisely.  For instance, it suits the average shopper to know without inquiring about the manufacturer that her purchases will not contain harmful levels of E. coli or salmonella.

QUESTION:  What, if any, are the advantages/disadvantages that Australian researchers might gain/suffer from the Australian regulatory environment?

RESPONSE:  Scientists need to know that they will be able to carry through inquiries that may take many years to complete.  They, therefore, have a considerable interest in a stable regulatory environment -- in economists' terms, they have an interest in the absence of "sovereign risk".  Further, as much as the rest of us, they like to profit from their efforts.  Most researchers, however, have a considerable advantage that people who have invested in physical capital do not have:  they can migrate, taking their intellectual capital with them.  Such is the nature of a national "brain drain".

Product developers will also be required to carry the direct financial costs of regulation.

QUESTION:  What is the risk that plants that have been genetically modified to resist certain predators will become super-weeds reducing the yields of other crops or reducing biodiversity?

RESPONSE:  There is already a tendency for plants introduced for pasturage or accidentally in animal food to invade bushland to the detriment of natural species.  Stronger plants may do so more readily.  The GMAC now and the OGTR in the future will assess these risks to prevent such adverse effects.  Further, if GM plants should spread to the detriment of people or the environment, then litigation seeking compensation for loss is possible.  Fear of judgments which award damages would restrain the careless propagation of potential "super-weeds" but it would also inevitably curtail the beneficial employment of biotechnology.  The damages awarded to successful litigants are likely to be no more even and predictable than in other product-liability cases.

QUESTION:  Will "clean", that is, weed-free, crops deny wildlife its foods and nesting places?

RESPONSE:  Whatever the effect in Europe where wildlife has become adapted to agriculture, in Australia where wildlife is well-adapted to the bush and is in no way dependent on grazing on and nesting in farmers' crops, this concern should not be a major issue.  What is more, non-GM maize crops, for instance, are typically sprayed with insecticide eight to ten times and this is likely to have a more significant impact on non-pest insects than GM technology targeted at species that attack the crop. ⁽⁵⁾  Further, to the extent that yields are increased, the area needed to be cleared and cropped will be less than it otherwise would have been.  Because most agricultural products sell into global markets, it cannot, however, reliably be predicted which countries will benefit.

QUESTION:  Cotton has been genetically modified to "kill its own pests" (Bt cotton) and soybeans to withstand applications of glyphosate (Roundup), a broad-spectrum herbicide.  These technologies have enabled cotton and soy growers to reduce the number of pesticide/herbicide applications dramatically.  Similar modifications of other crops and for other herbicides are expected.  Will the pests and weeds of these crops in time develop resistance to the plants' newly inbuilt resistances and to glyphosate and other herbicides?

RESPONSE:  Yes they will, but there is no reason to believe that they will do so more rapidly than at present and maybe less rapidly because a resistance management strategy for Bt cotton, for instance, has been encouraged by GMAC and NRA.

Species' abilities to adapt depend on many factors but are maximised at high but incomplete levels of kill.  Herbicide-resistant rye grass is a current problem for wheat growers.  There is thus no end in sight for farmers' struggles to stay ahead of the many bacteria, viruses, fungi and weeds that prey on their crops.  Each new breakthrough, however, provides a window of opportunity by which yields are increased and unit costs reduced.  Since farmers must compete, the ultimate benefit accrues to consumers and, in order to prosper, individual farmers must stay abreast of their competitors.  In spite of the adaptability of weeds, pests and diseases, the real prices of foods and fibres have fallen dramatically this century.  Plant breeders and farmers using the windows of opportunity as they have opened have raised worldwide living standards.

QUESTION:  Is reducing the number of pesticide and herbicide applications environmentally beneficial or harmful?

RESPONSE:  Reduced usage at least reduces the potential for damaging spray drift, run off and seepage to groundwater -- and even if the herbicide or insecticide is non-toxic, the detergents in the formulation can be toxic, for example, to frogs.

QUESTION:  Does biotechnology have the potential to assist sound environmental management directly?

RESPONSE:  Yes, very great potential.  A GMO has already been employed to clean up oil spills.  The use of biotechnology techniques is hoped to induce sterility in selected introduced species, such as the rabbit, and to develop more salt-tolerant plants to revitalise land lost to salt encroachment that is such a serious problem in Western Australia.

QUESTION:  Does genetic engineering lead inevitably, probably or even possibly to eugenics, that is, to the management of human offspring?

RESPONSE:  None of these three.  Eugenics is possible now and has been attempted by people with more arrogance than sense.  Genetic engineering is merely one technique that might be employed by some future eugenicist.  One day, genetic engineering may well be used to avoid conditions such as Down's syndrome and muscular dystrophy but that is not what people mean by eugenics.  Further, should that day come, genetic manipulation might be seen as a better alternative to the currently widespread practice of abortion or a lifelong institutional existence.  For the foreseeable future, manipulation of the human genome in ways that can be passed to future generations is forbidden in Australia and there is no clamour that the ban should be lifted.  The only type of genetic manipulation of the human genome currently permitted is gene therapy to treat diseases such as cystic fibrosis and cancer.

QUESTION:  Will genetic research and the identification of genetic defects, abnormalities or tendencies lead to an invasion of privacy, refusal of life insurance, or denial of employment opportunities?

RESPONSE:  So long as our society remains subject to the rule of law, these possibilities will depend on the rules and societal norms our society adopts concerning the uses to which personal genetic information may be put.  The issue is one that our lawmakers must address.  The probability that they will do so in ways that are not to everybody's liking is, however, not a good reason to inhibit research that has the potential to yield further considerable benefits.  These benefits will probably include not just the treatment of genetic disease but also of disorders such as cancer and the development of more effective vaccines -- both of which are already well advanced.  The greater danger is, perhaps, that in the event of our society not remaining liberal and civilised, the records will assist ethnic cleansing or some other variant of eugenics.  All comprehensive records, including those of Medicare, the tax office and passports, face this objection.  Nevertheless, the sad truth is that ethnic cleansers have never been much inhibited by the quality of their databases.

QUESTION:  It is argued that developments in biotechnology are immoral.  Might it also be immoral to inhibit these developments?

RESPONSE:  Yes it might.  Biotechnology's manipulation of r-DNA has already produced benefits for the ill and the production of human necessities.  There is every reason to believe that it will continue to make possible the production of less costly and more nutritious foods, the treatment of debilitating human ailments and environmental redemption.  There is also the broader consideration that, while there can be no guarantee that the accumulation of knowledge and access to new products will continue to benefit mankind, great benefit has been the tendency so far and it appears to be accelerating.  One consequence has been that worldwide life expectancy, although very unevenly spread, has increased enormously in the past 100 years. ⁽⁶⁾  The moral implications of every case must be assessed on merit but it is surely not moral knowingly to deny such obvious benefits to needy people without adequate reason.  What is more, there are very many examples of scientific effort in one area, such as space travel, having unexpected benefits in others.

QUESTION:  Is biotechnology interfering with God's design?  If so, is this moral?

RESPONSE:  We do not feel competent to answer this question and only in passing note that the Jewish Torah and Christian Bible at Gen. I:  28 admonishes man to subdue nature and have dominion over every living thing that moveth upon the earth.  There appears to be no concern among mainstream Christians.  Indeed Bishop Sgreccia, Vice President of the Vatican's Pontifical Academy for Life, following a two-year study by his members, has said

We are increasingly encouraged that the advantages of genetic engineering of plants and animals are greater than the risks.  The risks should be carefully followed through openness, analysis and controls, but without a sense of alarm. ⁽⁷⁾

QUESTION:  Is it more or is it less safe for research and development to be in private, for-profit hands than in the hands of governments?

RESPONSE:  There is a place for both public and private research.  The more basic the research and the wider its application, the more it takes on the characteristics of a public good for which no market can form and which must therefore be funded from taxes.  At the other end of the scale, where research is likely to result in marketable products, there is an economic advantage in having R & D conducted by people who must be mindful of consumers' interests.  Safety is not affected by the source of funds but by separating those who are regulated from their regulators and by the climate of self-discipline of the researchers.  Equally, the quest for profit or for research grants could weaken that discipline and on occasion each has.

QUESTION:  Since we cannot be totally sure of anything, shouldn't we take precautions?

RESPONSE:  Yes, but risk is a fact of human existence that cannot be avoided.  All precautions entail costs and there is a high correlation between living standards and life expectancy. ⁽⁸⁾  Since we can't do everything, precautions should be ranked with every other expenditure of human effort and undertaken when the risks warrant.  People who start at every hare, squandering nervous energy and attention upon low-probability risks, can easily become victims of their own neurosis.  Crying "Wolf" entails the near-certainty that real hazards are ignored -- for instance, to worry about what you ate for breakfast while driving your car (badly) does not usually aid survival.

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ENDNOTES

1.  FAO (1989), Biotechnology for Livestock Production, United Nations Plenum Press.

2.  Jones, David (1996), "Safety, Regulation and Innovation in the Food Sector", Current Opinion in Biotechnology, 7, pages 262–264.

3.  A KPMG study commissioned by ANZFA estimated the cost of mandatory labelling to be in the vicinity of $3 billion in the first year and $1 billion in each subsequent year.

4.  See Australian Food and Grocery Council (1999), "Backgrounder:  Biotechnology Overview".

5.  Kellow, Aynsley, Review, September 1999.

6.  Global average life expectancy at birth for men was 65 for men and 69 for women in 1997, for Australia they were 76 and 81 respectively (World Development Indicators 1999/2000, World Bank).  In 1900, life expectancy at birth for Australians was 51 for males and 55 for females (Vamplew, W. (ed.), (1987), Australians:  Historical Statistics, Fairfax, Syme & Weldon Associates).

7.  St Louis Review, 12 October 1999.

8.  Examination of GDP per capita and life expectancy for 132 countries from World Development Indicators 1998 (World Bank), shows a positive correlation of 0.62.