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IpaReviewThe Institute of Public Affairs

289 Flinders Lane, April

Melbourne, 3000 June

Telephone: 63 6558

Vol. 31 No. 2

Editorial — AT A CRITICAL POINT

The Australian economy is poised at acritical point. The next six months willbe crucial in determining whether we willre-establish the conditions essential forstability, recovery and the resumptionof growth in 1978; or whether the econ-omy will slide further into the morasses ofinflation, unemployment and internationaluncompetitiveness.

There are some good signs. There areindications, faint as yet, of returning con-fidence on the part of businessmen andthe consuming public.. But this confidencecould easily be dissipated. Although in-flation, for the moment, seems to beslowing, the September quarter resultswill be awaited with trepidation, whenthe effects on prices of the last two wagejudgments and the November devaluationwill manifest themselves.

The wage and price freeze whichwas greeted with remarkable acclaim bythe majority of the community — has

IPA Review — April-June, 1977

been destroyed by the May decision ofthe Arbitration Commission. This time,at least, the Commission seems to be outof touch with the public mood. A largepart of the community would probablyhave welcomed a continuation of "thefreeze", for it has come instinctively torealise that this is the only way of gettingrapidly on top of inflation. The Aus-tralian people, when it comes to thepoint, have a keen nose for the realities.They have begun to understand that, un-less and until inflation is beaten, theeconomy will not be restored to health.

It is safe to say that people generallyare no longer impressed with the prin-ciple of indexation — that every timeprices rise, wages should follow in roughlythe same proportion. They feel that thisprocess will ensure the indefinite pro-longation of the inflationary spiral, andthat this will mean that, in the end, allwill lose out. Indeed, the mood of the

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public today is remarkably akin to theclimate of opinion which existed duringthe last great post-World War II inflationin the early 1950's. The quarterly adjust-ment of wages to prices at that time —although it applied only to the basicwage and not the total wage — wasresulting in a futile leap-frogging processin which wages were chasing prices, andprices were responding to wages. Inflationwas running at all-time record levels.This caused the Arbitration Court toterminate the quarterly cost-of-livingmechanism, and it did so in a climate ofoverwhelming public approval.

The Arbitration Commission itselfnow has serious doubts whether indexa-tion should continue, at least in itspresent form, as evidenced by its decisionto conduct a comprehensive inquiry intomethods of wage fixation.

At the risk of patting itself on theback, the I.P.A. feels entitled to drawattention to two things.

First, right from the time it was firstmooted, we fought the principle of in-dexation, insisting that whatever earlybenefits it might bring in the way ofintroducing some order into wage adjust-ments, it would, in the end, lead to theperpetuation of rapid inflation.

Second, once it became clear that thiswas what, in fact, was happening, weargued that inflation could only be de-feated decisively by imposing a tem-porary ceiling on annual wage increases— we suggested a figure of 4 per cent:in other words a near wage-freeze. In themeantime, that is, during the temporaryperiod, the Prices Justification Tribunalshould continue in order to exercise aclose supervision over prices.

The unanimous decision by the headsof all Australian Governments in Aprilto introduce a voluntary three-months

26

wage-price pause amounted to a nearacceptance of the I.P.A. position and toa vindication of the stand we had taken— almost alone.

It is clear that, in the remainder of thisyear, wage policy and budgetary policywill be crucial if the economy is to berestored to the path of sustainable econ-omic growth.

On this there are broadly two schoolsof thought. One, which has fairly wide-spread support, is that the economyshould be stimulated immediately bysubstantial tax cuts, which would alsoserve the purpose of curbing wage de-mands and thus inflation. This schoolcould fairly be described as the "deficitdoesn't matter" school. This viewpoint isbacked by the A.C.T.U., some sectionsof business and quite a few economistsand media spokesmen. The Labor Oppo-sition would go even further. It hassuggested that tax reductions should beaccompanied by large increases in gov-ernment expenditure.

To the other school the deficit is all-important. This school therefore opposeslarge tax cuts for the time being andurges a tight rein on all Governmentspending, Federal and State. It also sup-ports a severely restrictive wage policy.This is the line taken by the FederalGovernment and its senior advisers. It issupported by many economists outsidethe public service.

According to this view, the two basicconditions precedent to a sound economicrecovery are the further reduction of realwages and a fall in interest rates. Realwages must continue to decline until theprofit share of the Gross National Producthas been restored to a level which willencourage businessmen to undertake newinvestment. During 1976 profits increasedquite markedly, but the overall profit

IPA Review —April-June, 1977

73,

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share still falls far short of its historicallong-run "norm"; moreover, presentprospects are not such as to causebusinessmen to go wild with excitement.

Interest rates are crucial. While interestrates remain at present high levels, thereis no prospect of a sound well-basedrecovery. They will remain at or nearthese levels until it is clear that inflationhas finally been brought under control.Interest rates are not something that theGovernment can alter at will, as manypeople seem to believe. They are theproduct of underlying economic forces,particularly the level of spending in theGovernment sector.

When interest rates start to fall, therewill be a resurgence of confidence amongbusinessmen and investors, and amongthe consuming public. Projects which atpresent are not viable will becomefeasible and the people will be moredisposed to spend their hoarded-upsavings, particularly on housing and con-sumer durables.

The I.P.A. supports this line of reason-ing and therefore the stand taken by theFederal Government and its Treasuryadvisers. It is imperative, in our view,for the Government to place the strictestcurbs on spending and to be strongenough to say "no" to the numeroussections — including people within itsown ranks — irresponsibly clamouringfor increases. In the 1976/7 Budget theGovernment made a serious mistake inproviding for a real increase in expendi-ture on education — a vested interestsector which is clearly ripe for the axe.(In real terms education expenditure perhead of population is eight times what itwas before World War II and five timesexpenditure in the early fifties).

The Government has now announcedits intention of restricting education ex-


penditure to the same real level as in1976/7. This has brought strong protestsfrom highly placed educationists. Theattitude of these people is one of ir-responsibility and should be viewed withalarm. One would think that highlyeducated people would realise morereadily than most that if inflation is tobe beaten, every section of the com-munity must be prepared to make itscontribution. There is a clear need foreducationists to demonstrate their con-cern for government funds to be wiselyand not wastefully spent.

The policy of wage and budgetary re-straint described above will not producea recovery tomorrow morning. That mayhave to wait for another six months,possibly longer. The interim periodshould be regarded as one for establishingthe foundations necessary for a strongsustainable expansion of the economy.

Only when the economy provides foran increase in the resources available willit be possible for real wages to rise andfor government spending to increase inthe directions deemed desirable.

In other words, real wages must con-tinue to fall now, in order that they canbe increased later on. Further substantialtax concessions must be resisted now, inorder that they can be made later. Gov-ernment spending must be restrictednow in order that it may be expandedlater.

The alternatives proposed by suchpeople as Mr. Hawke, who seems toclaim a kind of superhuman infallibilityin economic matters denied even to LordKeynes, are a recipe for disaster.

The crux of the Hawke argument isthat a revival of consumer spending,which is necessary to economic recoveryand a reduction in unemployment, willnot occur unless the level of real wages

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is maintained. This argument is fallaciousin two respects. People have ample fundsin savings accounts and elsewhere whichthey can spend if they . wish. They arerefraining from doing so because of theirfear of continued inflation. The moreimportant second flaw in the argumentis that businesses cannot afford to em-ploy more labour while wage costs con--tinue to rise. (In the last few weeks theyhave been faced with an addition ofnearly $10 a week in average wages).

What Mr. Hawke and those who thinklike him are really arguing for amountsto more inflation. Even if such a policygave a temporary illusion of recovery,the recovery would peter out before ithad barely begun. It would lead straightto a collapse of internal confidence, thefurther impairment of Australia's com-petitiveness, a decline of confidence inthe economy on the part of overseasfinancial interests, and, in the not distantfuture, another devaluation of the Aus-tralian dollar — a prospect to bedreaded. It would amount indeed to anabandonment of economic sanity.

Mr. Hawke and many of his col-leagues do not understand — or at anyrate are not prepared to concede — thatan economy such as Australia's, in whichnearly three-quarters of all jobs are pro-vided by private enterprise, will simplynot function effectively unless there is aprospect of healthy profits. It is profitsthat induce investment; it is investmentthat provides jobs; it is investment thatmakes possible higher productivity; andit is higher productivity, and only higherproductivity, that provides the basis forhigher real wages and better socialservices.

The Arbitration Commission's faith inindexation, in the adjustment of wages toprices, seems to be on the wane. It is to

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be hoped that out of the inquiry it isabout to conduct, some method of wagefixation will emerge which will give pre-eminent importance to the part of produc-tivity in establishing wage levels. Wewould then be on the way to a sound andconstructive system of wage fixation.

In the meantime, through the remain-der of this year, it is absolutely essentialthat the Commission should adopt a hard-line stance on wage increases. We do notbelieve that this would prove to be in-consistent with the Commission's re-sponsibility to promote industrial peace.Moreover, the Commission could rightlypoint out that if real wages are to rise in1978, only minimal wage rises are pos-sible for the rest of 1977.

On its part, the Commonwealth Gov-ernment, no matter what the pressuresupon it, must not weaken in its resolutionto reduce the Budget deficit.

One consideration should be para-mount in the minds of Cabinet when theBudget strategy is being finally decided.It is that overseas financial centres willbe watching the Australian Budget thisyear with more than usual interest. Anincrease in the deficit, or even a failureto substantially reduce it, is certain to beviewed sourly, and could be taken as anindication that Australia has abandonedthe fight against inflation. This couldprecipitate another run against the Aus-tralian dollar resulting in the certainprospect of a further devaluation. Theeconomic consequences of this are tooappalling to be contemplated.

But more than that, a devaluation,and its accompaniment of continued in-flation, would almost certainly set thestage for the defeat of the Governmentat the next election. Those in the Govern-ment ranks who are urging a lessening ofthe restraints might ponder upon this.


INVESTMENT THROUGH

THE LIFE OFFICES

The following figures taken from theAustralian Bureau of Statistics showthe total premiums received by the LifeOffices over the last six years and com-pare the percentage change over eachprevious year with the percentagechange in the C.P.I.

1970-71

TotalPremiumsReceived

$'000796,217

% Changefrom

PreviousYear

Changein CPI

1971-72 933,578 +17.2 + 6.81972-73 1,055,340 +13.0 + 6.01973-74 1,146,143 + 8.6 +12.91974-75 1,313,167 +14.6 +16.71975-76 1,465,752 +11.6 +13.0

It is clear that the life insuranceindustry has been undergoing a negativegrowth rate in real terms since 1973,a conclusion which is reinforced byfigures showing the increasing numbersof surrendered policies and the negativerate of growth in assets.

The figures give credence to the con-cern shown by the Life Offices' Associa-tion as reflected in their campaign forgovernment legislation to help reversethe trend. The two questions that ariseare, firstly, what is causing the decline,and secondly, is government assistance ofany kind compatible •with current eco-nomic policy.


There can be no doubt that persistentinflation is a major cause contributing tothe disincentive to invest in long-termcontractual funds. Individuals arespreading their funds and looking forshort term security and non-contractualsaving through such avenues as: short-term debentures, notes and governmentsecurities, Australian Savings Bonds,savings bank deposits, building societyaccounts, and deposits in credit unions.

This is clearly detrimental to growthby life offices, but more important, lifeoffices have played a major role over thelast twenty years as a source of locallong-term investment funds to industry,and the negative growth of the lifeoffices affects adversely the businessenvironment which needs to make thekind of long-term investment planswhich are so necessary for economicrecovery.

Put simply, inflation affects the levelof interest rates which have a markedeffect on profitability. This, in turn,affects the demand for investment funds.As the A.N.Z. Bank said recently:

"In particular a reduced level of in-flation would enable interest rates tobe lowered and greatly enhance theoutlook for local and overseas invest-ment in construction and basic re-source developments, with significantflow-on to the whole economy."

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The Government's determination tobeat inflation by closing the budgetdeficit is matched by its awareness of theneed to encourage investment, as evi-denced by the emphasis given to invest-ment allowances since it came to power.Critics of the Government's "obsession"with closing the deficit have rarely con-ceded that investment allowances havethe immediate effect of widening thedeficit. The point is that the apparentwidening of the deficit in this case canonly be justified because the resulting in-crease in productivity will off-set theinitial inflationary effects and in timecontribute towards closing the deficitand promoting economic recovery.

Under the circumstances it is un-fortunate that the effects of inflation onthe growth of the life offices and theconsequent lessening of their ability tocontribute to investment funds has beenexacerbated by the previous govern-ment's fiscal aggression. There is astrong case for amending at least someof Labor's legislation which has un-necessarily contributed to the decline inthe growth of the life offices.

Labor's Fiscal AggressionThe particular legislative actions re-

ferred to are the changes in the IncomeTax Assessment Act in the Budgets of1973/74 and 1974/75 and the adoptionof the general rebate in the 1975/76Budget which was introduced in sucha way as to reduce the incentive to buylife insurance.

In using its muscle against the lifeoffices, the Labor Government was notattacking a few of the more disreputable19th century-style industrialists — ifthere are still such people around — itwas disadvantaging 3 million individualAustralian policy holders. Almost 70 percent of all life business undertaken in

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Australia is through mutual life insur-ance companies and a mutual companyis a co-operative, not a Welsh coal mineof the 1920's. Even those life companieswhich are not mutuals distribute about97 per cent of their surplus to policyholders in the form of bonuses.

The effective change in the special for-mula under which life offices had beentaxed for more than 40 years has costpolicy holders, during the last threeyears, an estimated 350 million dollarsin lost bonuses. Where is the justifica-tion for this attitude towards threemillion Australians trying to provide fortheir own and their families' future —especially when the principal benefici-aries are orphans and retiredpeople? A more fundamental questionis this: Where is the justification fordissuading all Australians of the valueof thrift and foresight through con-tractual saving?

The answers to these questions lie inthe deep-seated socialist ideal of equalitywhich can be achieved through a redis-tribution of wealth from the rich to thepoor. Such a vision of the future has,in the past, been a useful ideal for cor-recting gross injustices inbuilt in society,but as that vision progressively becomesreality it is becoming clear that inlegislating to make all people equal, therights and privileges of all individualsare being reduced to the same minimallevel. A new ideal is needed, and it liesin the belief that the rights and privilegesof the more affluent should be madeavailable to everybody. Governmentaction through welfare and educationshould be directed to those who need itso that the poverty line can be eliminatedand the underprivileged raised to a posi-tion where the rewards of hard workand thrift are within the reach of everyable-bodied citizen.


The general rebate continues theprocess of erasing the poverty line anderoding the curse on the underprivileged,but to argue that the gap between therich and poor is widened by the abilityof the rich to take advantage of conces-sional rebates for insurance premiums, isto overlook the fact that we are rapidlyreaching a stage where most of the popu-lation can afford to take out ample lifeinsurance. In educating the formerlyunderprivileged in the advantages of aprosperous life we need to encouragethe virtues of thrift and foresight — notdiscourage them.

Coalition Government Record

The Government is clearly determinedto beat inflation and lead the countryout of economic recession. Essential tothis policy, as the Government has shownit knows, is the encouragement ofdomestic investment, and one of themost encouraging signs of impendingeconomic recovery can be seen in thenumber of plans for large-scale invest-ment released over the last few months.Since December, 1976, some ten ormore projects in the mining sector havebeen announced which, if they were togo ahead, would involve a total invest-ment of over 2 billion dollars.

The mining sector has traditionallylooked overseas for investment capitaland, whilst there are those who woulddecry foreign ownership, there is nodoubt that many of the developmentsthat have taken place would not havebeen possible without a large measureof overseas ownership.* But if Aus-tralians are to play a maximum role inthe provision of funds for our owndevelopment, and if we are to extendthe potential recovery into other sectors,then something needs to be done about


the growth rate of the funds of our lifeoffices.

As Mr. Wran, Labor Premier of NewSouth Wales, said recently:

"The other crucial factor (apart fromgovernment finance policy) is to en-courage a recovery of investment inthe private sector."One might have expected a Liberal/

National Party Government to have re-versed the previous Government'saggressive legislation against the lifeoffices at the first opportunity. In fact,the contrary was the case. Indexation ofpersonal incomes was introduced in May1976 together with a lift in the generalrebate, but there was no correspondingincrease in the amount allowed for theindividual components of that rebate —or in the $1,200 overall limit applicableto combined life insurance and super-annuation contributions. This made iteven harder for such contributions toqualify for any taxation relief.

The August 1977 BudgetThe unique position of life offices in their

primary function of receiving premium in-come and investing it on behalf of policyholders makes taxation of life offices anextremely complex question which canonly be dealt with as part of a com-

*In fact, the degree of foreign ownershipis considerably less than many econo-mists have suspected. The IndustriesAssistance Commission's Report onPetroleum and Mining Industries sug-gests that during the period 1964-74,share issues accounted for about 30 percent of capital raisings by the miningsector and debt capital accounted forthe remaining 70 per cent, 57 per centof which was raised overseas and 43per cent locally.

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prehensive tax reform programme. Buteven if, in the coming Budget, the Gov-ernment still feels unable to introducesignificant tax reforms — a long-awaitedcommitment which the Governmentnevertheless has been wise to defer —at least some tax changes along thefollowing lines are needed to arrest thenegative growth trend of life office funds:1. Since the concessional allowance

figure of $1,350 was indexed — it isnow $1,525* — it follows that thecomponent parts should also beindexed. For most taxpayers — allbut 8 per cent according to "TheAustralian" editorial of 18th May,1977 — the actual expenses in thecategories concerned (life insur-ance premiums and superannuationcontributions, medical and hospitalexpenses, medical fund contributions,education and self-education ex-penses, rates and land tax) do notexceed this limit. Tax concessionsserve a useful function in relation topersonal expenses where choice andfreedom of the individual is import-ant, but this advantage is lost whenthere is no incentive to increase sumsspent on concessional items. The$1,200 concession for life insuranceand superannuation payments has notchanged since 1967. (On to-day'smoney values this concession wouldnow be about $3,000). It would be

*This figure applies for the 1976/77 financial year.

consistent with this proposal toreduce the general rebate to a morerealistic level and make a correspond-ing adjustment to the overall taxscale.

2. The current legislation discriminatesagainst self-employed people — in-cluding many small businessmen —in regard to the $1,200 concessionfor life insurance and superannuation.The self-employed person should betreated as a combination of employerand employee and be allowed taxdeductions for superannuation con-tributions for schemes "providingreasonable benefit" — to quote anofficial criterion of the Tax Com-missioner.

If such action were taken it wouldincrease the flow of funds into and notout of private investment. It would helprestore the incentive for long-term con-tractual saving and hence tap a majorsource of private funds for investment.It would encourage people to providefor their own future, and in so doingreduce the government need to makeadditional welfare provisions.

Finally, it would facilitate the financingof economic recovery and complementthe Government's existing investmentpolicies. The good signs which aresurfacing in the mining sector will, allthe sooner, become apparent in othersectors.


A BASIC FIRST LESSON INECONOMICS

There has been, since the end ofWorld War II, an almost universaladoption of Keynesian economic prin-ciples by governments of all persuasionsthroughout the western world.

Keynes proposed a policy which wasspecifically designed to deal with thekind of situation that existed during theGreat Depression. It was a deflationarysituation.

This means that the value of moneywas rising — quite the reverse of theinflationary situation that we have todaywhere the value of money is falling.

Prices were falling — not rising asthey are today.

Those who had jobs were able to buymore and more goods with their wages— not less and less as they are today.

When wages, the major cost ofindustry, remain static, when unemploy-ment is increasing, and when prices arefalling, then businesses tend to collapse.

Keynes' solution was obvious andbasically simple. In a deflationary situa-tion, a government should adopt "infla-tionary" policies.

An awful lot of nonsense is talkedabout inflation. The fact is that inflationis one of the most documented of eco-nomic phenomena. We know exactlywhat it is. Every period of inflation inthe history of mankind, from theEgyptian Pharaohs to the present day,has been associated with governmentscheapening the value of money by in-creasing the growth of the money supply.

Karl Marx acknowledged that if youdouble the supply of money you halvethe value of money. Prices double andwages double, and the wage earnerachieves nothing by having twice asmuch money in his pocket.

To achieve a situation in which thevalue of money remains constant a gov-


ernment would only increase the supplyof money by an amount justified by anincrease in national production per headof population — assuming a staticpopulation — and that means an increasein productivity.

When a government increases thesupply of money by spending more thanit receives, then that is, by definition,inflationary.

Keynes' answer to a deflationarysituation was very basically this. Gov-ernments should spend more than theyreceive. They should operate a deficitin the budget and thus increase themoney supply. They should stimulatethe economy by spending and create jobsto reduce unemployment.

What Keynes' followers have donein recent years is propose the samepolicy in a situation of inflation. Tosuggest that the deficit does not matterand that we should spend our way outof this recession is to pile inflation uponinflation. We do not need to create in-flation — we already have it.

In baring the bones of economictheory in this way, it is, of necessity,impractical to discuss all the inflationaryinfluences. The mechanics of cost-pushand demand-pull inflation, and theeffects of external influences such as thesudden increase in the price of oil, areall properly a battlefield for the aca-demics and professionals. But it never-theless remains true that the effect ofsuch economic movements is, sooner orlater, to influence governments towardscoping with the situation by increasingthe supply of money beyond that justifiedby an increase in productivity.

We have witnessed in the last thirtyyears a curious marriage between social-ism and Keynesian economics. Eventhose of less radical non-socialist persua-

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sions have engaged in extended periodsof flirtation with this post-war pheno-menon. One does not have to look farfor the reason. Politicians gain power bypromising benefits to the people. Deficitfinancing is a heaven-sent means wherebyexpensive social reforms can be paid forand delivered. It has been convenientfor all politicians, and well-meaningsocialists in particular, to overlook thelong-term effect of such activity.

In no sphere of economic activity canmore be given than can be affordedwithout facing inevitable bankruptcy.The benefits achieved through deficitfinancing are short-lived simply becausethe consequent inflation reduces monet-ary values. Perhaps the most alarmingeffect of such irresponsible governmentactivity has been to create a generationof people who have grown up to believethat governments are capable of givingaway such benefits without due regardto the costs.

It would now take a brave govern-ment to reverse this trend, but there arehopeful signs. The recent economicsummit meeting in London attended byPresident Carter issued a joint com-munique which said, in part:

"Inflation is not a remedy to un-employment but one of its majorcauses."

All governments of the major westerncountries are thus agreed that unemploy-ment cannot be solved without first solv-ing inflation. President Carter himselfhas a stated policy of closing America'sBudget deficit by 1981 — it takes thatlong to undo the extended years of built-in damage caused by inflationary policiesbased on deficit financing.

We, in Australia, also have a govern-ment determined to close the Budgetdeficit, although there is a danger thatthey may soon feel obliged to pander to

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demands to stimulate the economy inorder to win votes to gain re-election.Australian governments do not have theadvantage of America's 4 year term topursue long-term policies.

In Britain there is a Labour PrimeMinister who, perhaps too late, expressedhis disillusionment with Keynesian eco-nomics when he said recently:

"We used to think that you couldjust spend your way out of a recessionand increase employment by cutting taxesand boosting government spending. I tellyou in all candour that that option nolonger exists and that insofar as it everdid exist, it worked by injecting infla-tion into the economy".

This confession of Mr. Callaghan'sechoes the words of our own formerLabor Federal Treasurer, Mr. Hayden,when he tried to repair the damage ofthe Whitlam years:

"It is not possible to provide moreand more government services withoutultimately having to pay for them viaincreased taxes. Restraint needs to beshared throughout the whole community.There must be a community will tocombat inflation".

If the Australian Labor Party reallywant to promote "a community will tocombat inflation" then they must bepolitically honest in admitting thedisaster of their own Keynesian economidpolicies — and persuade the A.C.T.U. todo likewise. If ever there was a timefor the whole Australian community toback a government's anti-inflationaryeconomic policy, it is now. Any re-versal of policy will merely postpone theday of reckoning when such a policywill be continued through to its conclu-sion at some future date, and in themeantime Australians would continue tosuffer while the rest of the world getson top of inflation and unemployment.


THE JAPANESEBREAK-THROUGH

Japan is an industrial power secondonly to the United States in the freeworld. She is Australia's biggest exportmarket taking $2,400 million of Aus-tralian goods in 1975. It is importanttherefore for Australians to know asmuch as possible about Japan's remark-able economic progress. This article re-views a book "How Japan's EconomyGrew So Fast" published by the Brook-ings Institution, Washington, in 1976.The authors are E. F. Denison andW. K. Chung. The Brookings Institutionis a well known independent organisationdevoted to non-partisan research andeducation in economics, government, for-eign policy and the social sciences.

The authors' research benefited greatlyfrom its integration into another Brook-ings Study on "How the Japanese Econ-omy Works" and from the co-operationof the Japanese authorities. It is a veryworthwhile book. Some readers may bedaunted by the wealth of statistics. Butthis indicates the depth of the researchand analysis.

The book reflects the authors' admira-tion for Japan's economic achievements.Yet it stresses that the extraordinaryrapid growth of the Japanese economy,in the post-war period, was made possibleto a significant extent by the economicbackwardness of Japan in relation to theUnited States, at the beginning of theperiod.

The war deprived the Japanese Empireof much of its land area. Japan lost nine-tenths of its merchant marine, one-fourthof its housing, and one-fifth of its in-dustrial plant. In all about one-fourth ofthe national wealth vanished in 1941/45.It was not until 1953 that Japanese out-put regained its pre-war peak.

Since then Japan has been the"miracle" economy. From 1953-1973


total national income multiplied 5.43times and national income per personemployed 4.06 times. This growth per-formance is unmatched in any othercountry, free market or socialist, pro-vided one excepts some of the oil Statesand Israel, whose economies were stimu-lated by unusual economic factors. Therapidity with which output increased inJapan after World War II surprisedJapanese and Western observers alike.

Although post-war Japanese growthwas broadly based, manufacturing showedthe way. The growth of various manu-facturing industries is shown in the fol-lowing table. The "leading sector" wasmachinery — which includes electrical,transport, equipment, automobiles andprecision instruments.

PRODUCTION INDEXES OFMANUFACTURING INDUSTRIES

(1953 = 100)

Industry 1961

All Manu-

1971GrowthRate %

P.a.

facturing 311.4 1056.9 14Iron and Steel 337.2 1060.0 14Machinery 516.0 2489.6 19.6Chemicals 302.7 1200.5 14.8Petroleum and

Coal Products 404.4 1926.9 17.9Rubber 315.8 743.2 11.8Paper and Pulp 275.6 665.0 11.1Textiles 210.7 463.6 8.9

The closing of the Suez Canal in 1956created a booming demand for supertankers and Japan soon became theworld's leading ship builder. Japan's pro-duction increased from 500,000 grosstons in 1955 to 12,000,000 tons in 1971— almost half the world's tonnage. Japanhas become such a dominant ship builderthat the EEC is trying to persuade Japanto reduce its number of launchings.

By 1972 Japan had replaced France as

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the world's largest motor-cycle manu-facturer. Passenger car production grewmore than 155 fold from 1955 to 1970,as the Japanese aided by cheap labour,technical competence, and economics oflarge • scale production moved into over-seas markets and became the secondlargest producer after the United States.

In the mid-1950's hardly any Japanesepeople owned vacuum cleaners, washingmachines, refrigerators, and televisionsets. In the 1970's nearly everyone did.The production of TV sets increaseddramatically from 137,000 in 1955 toover 13,000,000 in 1972. By 1967Japan was the world's largest producerof TV sets, radios, cameras, and sewingmachines, and held or was approachingsecond place in washers, refrigerators,cleaners, and watches.

The enormous growth in the sales ofthese products stemmed from the in-creasing affluence of the Japanese, lowerunit costs, and price reductions, madepossible by sharply rising volume. Dom-estic and export markets expanded at analmost incredible tempo.

Steel production grew rapidly to supplythe needs of shipbuilding, automobiles,consumer durables and the constructionindustry. Steel ingot production leapedfrom 7.7 million tons in 1953 to 97million tons in 1972 and shipments ofHamersley, Mt Goldsworthy and MtNewman iron ore increased rapidly tofeed the Japanese blast furnaces.

As one would expect the authorsdevote many pages to a considerationof the factors which enabled Japan toachieve its spectacular growth rates.

The largest contribution to growth wasmade by capital investment which in-creased at an annual rate of 9.2%. Thiswas made possible by the increase innational income (or output), a rise in

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the proportion of income saved and arelative decline in the price of capitalgoods. The level of Japanese gross privatesaving is extraordinary, exceeding therate of any other major country. It aver-aged 28.8% in Japan 1961-71, com-pared with 15.8% in the United States.

Japanese business has sought to dupli-cate the production conditions and theuse of capital, found in efficient Westernfirms, particularly those in the UnitedStates. The effort to raise output perworker, appears to have been pursuedmore consciously and energetically thanin other countries.

Yet the investment in capital perworker in Japan 1960-71 was less thanin the United States, France and WestGermany. But Japanese labour was be-coming much more expensive relative tocapital and the incentive to increase theuse of capital was great.

The next largest contribution togrowth was made by advances in know-ledge — improvement in the techniquesof production, business organisation andmanagement. The Japanese people areexceptionally receptive to new and foreignideas. Workers resistance to the intro-duction of labour saving proceduresseems rarer than in most Western count-tries. And with management determinedto reduce costs by innovation, this canbe an important advantage. Employeeco-operation was also encouraged by alabour relations package that includedguaranteed employment to the age offifty-five for permanent employees oflarge companies, and paying employeesmuch of their compensation in semi-annual bonuses. Other factors helped too— an unusual degree of paternalism,employee loyalty to the enterprise andunions organised on a company ratherthan an industry-wide basis.


The standard of education made animportant contribution. By 1970 about10% of the work force, male and female,had received an average of ten yearseducation and over 9% of males hadreceived a university education.

Management is a key element inefficiency. A characteristic feature ofmanagement in large Japanese firms isdecision making by consensus. Althoughit may delay decisions, it is said to facili-tate wholehearted implementation by allconcerned.

Economies of scale made possible byexpanding home and export markets werethe third largest source of Japan's growth.Longer production runs for individualproducts became possible and almost allindustries did large transactions in buy-ing, selling, and shipping.

Rather surprisingly, labour is rankedfourth as a source of growth. The Japan-ese work force increased by 31% to 51million in the years from 1953 to 1971.The work force was then equal to 65%of the population aged fifteen years andover. While the working week has beenshortened in most countries, reduction inhours in Japan was only moderate. Thereductions which did take place were al-most entirely offset by higher output perhour, the consequence of reduced fatigue.In 1971 the work week for non-agri-cultural wage and salary earners was 51.1hours for males, about 8.7 hours longerthan in the U.S.

Although the Japanese population isroughly only half that of the U.S. thetotal number of hours worked in thebusiness sector (including agriculture)was equivalent to no less than 91% ofthe number worked in the U.S. This isthe result of having a much larger per-centage of the population in the labourforce, lower unemployment, a smaller


percentage of people working in generalgovernment, households and institutionsand far longer average hours.

Although average hours worked inJapan were about 25% longer than inthe U.S., national income per hourworked was only 44% of that achievedin the U.S.

The book makes only passing referenceto the Japanese trade unions. Withoutdoubt they contributed to the Japanesesuccess story, because they are produc-tivity conscious. It is surprising also thatthe authors do not mention the JapanProductivity Centre which has sent manyproductivity teams overseas in search ofnew ideas. Over a period of twenty yearsthe Japan Productivity Centre has pro-moted the philosophy that productivityis a belief in human progress, a ceaselesseffort to apply new technology and newmethods for the welfare of mankind. Itis concerned with the spirit which aimsat constant improvement, the training ofminds and attitudes of the people whichdetermines whether the nation will realisehigh productivity and an affluent life, orlow productivity and poverty.Can the Japanese Growth Rate beSustained?

The authors of this book have con-fined the scope of their study mainly to adescription of the actual post-war growthof the Japanese economy. National in-come grew at a very high rate of 9.56%p.a. in the period 1961-71. The authors'estimates show that future growth rates inJapan will be lower.

The Mitsui Bank in its monthly reviewfor November, 1976, says that Japan'seconomic growth has begun to slowdown. Its findings are based on estimatesfor the period . 1975-85, of the EconomicPlanning Agency and the Ministry ofFinance. The Bank gives a number of

37

reasons why future growth may be slower.1. Resources and energy problems. Raw

materials accounted for 79.7% ofJapan's imports in 1975. Oil repre-sented 34% of imports. The steepescalation in oil prices was a severeblow to the Japanese economy. Japanis concerned about the shift in controlover resources from the consumingcountries and multi-national enter-prises, to the producing countriesunder the pressure of "resourcenationalism".

2. Owing to pollution and environmentproblems some industries have founddifficulty in finding sites for newfactories in Japan and they have beenforced to look for sites overseas.

3. Japanese technology has reached alevel equal to that of other majorindustrial powers and the tempo oftechnical innovation is destined toslow down.

4. The growing instability of the worldeconomy is very disturbing to Japanwhich relies so largely on importedmaterials and export sales.

5. Inflation, especially soaring prices ofprimary products and higher labourcosts.

In the post-war period Japan's exportsincreased at about double the rate of theincrease in world trade. The Mitsui Bankbelieves it will be difficult for Japan'sexports to continue at this rate of in-crease in the future. They say that exportsof ships, passenger cars and steel aredestined to decline.

Global demand for container ships islikely to increase with the expansion ofworld trade. However, the demand fortankers is bound to mark time because ofthe expected standstill of oil consumptionand the increasing rate of oil transporta-tion by pipelines.

38

Therefore, the Bank expects Japan'simports of metals and coal will tend todecrease. It is obviously too early toassess the repercussions on Australia asa leading supplier of raw materials toJapan.

Labour troubles in Australian minesand ports is a matter which greatly con-cerns the Japanese. Australians cannotafford to lose to other countries any partof this vital market through short-sightedfolly. Australia's economic future is likelyto be bound up with Japan and alsoChina, whose emerging power should bea feature of the next fifty years.

About seven years ago Herman Kahnpublished a book "The Emerging Japan-ese Super State". He forecasts that withina quarter of a century Japan could takeover from the United. States as the great-est economic power in the world. Kahnsaid that Japan will probably pass theU.S. in per capita income in 1980 andin total GNP by the year 2000. Thiswould make the Japanese the richestpeople on earth.

In the light of events it may be thatKahn's forecasts are over-optimistic. ButJapan's economic success can be expectedto continue because the productivity driveis strong, management is able and welltrained, and above all because of thededication of the Japanese people andtheir sense of obligation to their em-ployers and the nation.

The expectation is that growth willcontinue, but at a slower pace. Thegrowth rate will probably be higher thanin other developed economies but slowerthan in the past."How Japan's Economy Grew So Fast"—Edward F. Denison/ William K. ChungPublished by

The Brookings Institution,1775 Massachusetts Avenue,

N.W. WASHINGTON, D.C. 20036


The Institute of National AffairsPapua New Guinea

The I.P.A. has been kept informed of the formation of theInstitute of National Affairs in Papua New Guinea. Thefounders of the I.N.A. believe that private enterprise can playa valuable role in the development of Papua New Guinea.

The aim of the I.N.A. is to foster the development ofPapua New Guinea by contributing to public knowledge ofissues which are important to private enterprise. This is to beachieved through the following activities.

(a) Objective research on behalf of private enterprise.The findings of such research are to be communicatedto businessmen, Government policy makers, leadersof the national workforce, educational institutionsand other interested members of the community.

(b) Encouraging an exchange of information and pointsof view between private enterprise, the Governmentand the national workforce.

(c) The preparation and publication of information andcommentary aimed at improving an understandingof the national economy.

OFFICE BEARERSPRESIDENT: Mr. B. McLellan,

N.G.I. Trading Pty. Ltd., Lae.

SECRETARY: Mr. J. Wylie,

South Pacific Brewery Ltd.,Port Moresby.

TREASURER: Dr. K. Palmer,

Dept. of Finance,Port Moresby.

The I.P.A. believes that Australian companies and in-dividuals with an interest in Papua New Guinea would wishto support this worthwhile venture.

Director of Research (see Advertisement on back cover)

IPA Review — April-June, 1977 39

LOVE THOU THY

LANDby

Prof. J. B. Condliffe

Professor Condliffe is an American citizen born and brought up in Aus-tralia and educated in New Zealand. After serving in the First World War hereturned to the University of Canterbury as Professor of Economics in 1920. In1927 he became Research Secretary of the Institute of Pacific Relations atHonolulu and later moved on to the University of Michigan. From there hewent to Geneva where he wrote the first six World Economic Surveys for theLeague of Nations Secretariat. In 1937 he was appointed to the London Schoolof Economics, and prior to the outbreak of the Second World War he moved tothe University of California where he taught till his retirement in 1958.

Professor Condliffe is active in retirement and has worked in associationwith the Indian National Council of Economic Research and the StanfordResearch Institute. He has published many books and received many honours,including his election as Honorary Life Member of the General Labourers Unionof New Zealand, early in his career. In the 1977 Queen's Birthday Honours listfor New Zealand Professor Condliffe was awarded a K.C.M.G.

I hope you will forgive me if at first Iseem a little sentimental and reminiscent.My main purpose is to speak about thefuture — not the past. But I was bornin Melbourne and have very happymemories of my childhood in Bendigo.Though I went to school and college inNew Zealand and have lived in manycountries since then, these early memoriesare still vivid. I am now a citizen of theUnited States, but I no longer take muchstock in nationalism. I suppose youcould describe me as Kipling describedthe Royal Marine Corps — a bit of ablooming harumphrodite, soldier andsailor too. I try to see the world as awhole; but I shall never lose my affec-tion for the land of my birth.

Of course Australia now is very differ-ent from what it was 85 years ago when

I was born. Elgar wrote Land of Hopeand Glory for the good Queen's Jubileein 1897 and in my youth we were movedby Dame Clara Butt's magnificent con-tralto as she sang "God who made theemighty, make thee mightier yet". Wesang Rule Britannia without ever imagin-ing that in our lifetime Britannia wouldcease to rule the waves. I saw the firsthorseless carriage and the first movie thatcame to Bendigo. Since then I have livedthrough many critical events in manylands and some of them at close quarters.As I recall them they all seem to havea common origin in the activities of scien-tists and engineers. The collapse ofLondon's dominance over world trade,money and economic development, thedecline of the Royal Navy and the dis-integration of the Empire, the enormous

40 IPA Review — April-June, 1977

growth of the United States and theRussian challenge to its power, the auto-mobile, the telephone, the airplane, thecomputer, the beginnings of the nuclearage and space exploration — all thesehave come in my lifetime and they areall the result of the application of scien-tific discovery to practical affairs. Eco-nomists and political scientists and his-torians came in after such things hap-pened — not before.

Old men are always tempted to bereminiscent — not to say garrulous —and we all cling to the ideas imbibed inour youth. But Tennyson had the rightattitude to history when he wrote:

Love thou thy land with love far broughtFrom out the storied past, but usedWithin the present and transfusedThrough future time, by power of thought.This I shall try to do tonight. But

first I should add that I have also livedthrough a transformation of the discip-line in which I was trained. When I wasa graduate student at Cambridge in 1918,I heard Keynes give the lectures thatmade him famous when he wrote theminto "The Consequences of the Peace".I shall never forget the terrifying lineshe quoted from Thomas Hardy's Dynasts.They seem even more pertinent now thanthey did then.

Spirit of the Years:Observe how all wide sight and self-corn-.

mandDeserts these throngs, now driven to

demonry,By the Imminent Unreeking.Nought remains but vindictiveness here amid

the strong,And there amid the weak an impotent rage.Spirit of the Pities:Why prompts the Will so senseless —

shaped a doing?Spirit of the Years:I have told thee that it works unwittinglyAs one possessed, not judging.Like all my generation I was deeply

influenced by this extraordinary man.


But I have since watched, with increas-ing dismay, the evolution of economictheory, which now deals mainly withnumbers and symbols rather than goodsand services. In his later work which hepresented as "The General Theory" butwhich was really an attempt to solveBritain's depression problem, Keynesdealt primarily with monetary theory ina nationalist setting, belittling its inter-national consequences. He ignored themicro-economic analysis of the market-place. If he were alive today I believehe would stand aghast at the use of histheory by the neo-Keynesians. He oncerebuked one of these disciples by saying"the difference between you and me isthat I'm not a Keynesian". It is theattempt to apply his doctrines in totallydifferent circumstances that has led usinto our present dilemmas.

I do not pretend to foresee the future.Nor do I have any direct line to thePower that shapes our ends. I haveheard it said that those who do have sucha line find it increasingly difficult to dis-tinguish the Deity's voice from their own.

So I do not know what is going tohappen to the £ or to the $A — orwhich currency will be next to fall —because I don't know what the politiciansand their advisers — or the Labor lead-ers — will do next.

I do know, of course, that the exchangerate of any currency is a ratio. Anygovernment can set a value on its cur-rency; but not on the other currencies inwhich this value is expressed. So thereis no such thing as free floating in thecurrency market — this is a dream ofmonetary theorists and even in Australiawe do not live in "the dreamtime". Inthe harsh world of monetary reality,governments try to negotiate levels atwhich their currencies can be maintained.

41

In periods of inflationary stress, the re-sult is often competitive depreciation. Sothe international trader shares the fate ofGilbert's billiard sharper — condemnedto play "interminable matches; on acloth untrue, with a twisted cue, andelliptical billiard balls".

I do not presume to advise those whomust manage not only international butdomestic production and commerce —except perhaps by quoting the lines thatRobert Bridges wrote in his "Testamentof Beauty".

We sail a changeful seaThrough halcyon days and stormAnd when the ship laborethOur steadfast purpose tremblesLike as the compass in a binnacleOur stability is but balance and conduct liesIn masterful administration of the unfore-

seen.I have recently seen the advice offered

by a distinguished American economistthrough the media. It seems to showthat McLuhan was right when he saidthe medium is the message. Some of youmay recall Bairnsfather's cartoon in whicha charlady said, "My husband, 'e toldme" and the other lady replied " 'E mustuv give yer a gargled version of it".

It is possible, however, to foresee somelong-run changes because they begin tobe evident in practices that cannot nowbe reversed. Primarily they are caused bythe progressive enlargement of humanknowledge and its application to the con-trol of natural forces by science and in-vention. This has been so throughouthistory. The invention of the stirrupenabled the Mongols to conquer most ofAsia and eastern Europe because theirhorsemen could sustain the thrust of along spear at full gallop against evenarmored infantry. In the 15th centurybetter built ships and increasing know-ledge of the stars enabled the seamen ofwestern Europe to venture out of sight

42

of land and so to discover a new world.Three centuries later Adam Smith pro-tected James Watt against persecution bythe equivalent in his day of trade unionmonopoly. So steam power on land andsea enabled British trade and investmentto spread over the globe.

We are now passing through anotherclimactic period of history, accompaniedas always by wars and rumors of wars —and by monetary disorder. In the Eliza-bethan age, the European powers foughtfor access to the fabled riches of Asiaand the newly discovered Americas. Themonetary inflation of the time led mybenefactor Sir Thomas Gresham to re-state the truth first enunciated by theBishop of Lisieux in the 14th century —that bad money drives good money out ofcirculation. This, the oldest economiclaw, still operates. The I.M.F. sells goldand issues S.D.R.'s which are not evenpaper money but merely accounting sym-bols.

In the Elizabethan period of worldstrife, the ancient city states yielded theirpower to the centralized nation-state.England led the way and won the strugglefor sea supremacy.

British trade expansion and nationalconsolidation were continued in theperiod of the Industrial Revolution.Nelson's victories set the seal on those ofDrake. What made these victories pos-sible was the increased productivity thatresulted from England being an asylumof freedom, welcoming the immigrantswho fled from religious and political per-secution — and the ideas and inventionsthey brought with them. First in agricul-ture. And then came the mechanical in-ventions and Adam Smith's protege —James Watt — and steam power.

So it is today. Science has opened newfrontiers. It has always been so sincePrometheus stole fire from the gods. Be-


cause of improved communications andthe harnessing of new power, we live ina shrinking world, but one which hasvast potential for improvement of livingconditions — or for a holocaust of des-truction. How we use our newly de-veloped control over natural forces willdetermine the kind of world our grand-children will inherit.

Some developments seem inevitable.First, let me state what may seem to youa paradox. Nationalism has never beenas powerful as it is today, but it is fight-ing a losing battle. The forces of national-ism have never been so strong, but theyare struggling to survive. The world isdivided into more nations than ever be-fore. The United Nations is morenationalistic than its predecessor, theLeague of Nations. And nationalsovereignty is claimed over a far widerrange of individual and social activities.It has been extended beyond the land tothe adjoining coastal waters and we arein danger of losing the freedom of theopen seas.

Nationalism has also been extended tocontrol of the resources beneath the sur-face of the land and the sea. It is curiousto reflect that these concepts of propertyand national sovereignty which lie behindour energy and raw material problemswere developed in Europe. In thecolonial age no one expected that thepeople who lived or roamed wherepetroleum and minerals were later dis-covered would he able to hold their dis-coverers to ransom. Their discovery andstill more their extraction and use are theproducts of science allied with invest-ment. A good argument could be madethat the Western peoples who found thesenatural resources and developed themhave at least some property right in them.

But a few — a very few — of thedescendants of the people who roamed


and hunted or led their camels overthese lands have been trained and edu-cated in the West, and they now applyWestern concepts of property andsovereignty to the lands. The Indians ofNorth America and the Maoris of NewZealand are trying to regain their landrights.

This might not have proved trouble-some to us if we had educated andtrained more of them. But most of thesecountries were divided among thecolonial powers by drawing lines on themap without regard to tribal boundaries.The more humane colonial powers ruledthrough the tribal chiefs and tried to pre-serve tribal institutions but did little toeducate the masses of the people. In factit was the oil companies who in recentyears did most to introduce their workersto modern science and industry. This iswhy the Saudi Arabs exercise a moderat-ing influence in the energy situation — amiddle class now numbering hundreds ofthousands has grown up through the ad-mirable system of worker training in theoil fields.

Contrast the situation in African coun-tries where a handful of foreign-educatedleaders claim the same rights for peoplewho still live in a pastoral age. Sover-eignty exercised on a democratic basis isonly too likely to result in tribal conflictas we see now in Angola and Rhodesia.The issue of such conflict can throw upstrange characters like Amin and Khadaflirather than cultivated and intelligent menlike Nyerere and Kaunda. Plato wouldhave called this form of democracy mob-rule. And indeed I believe he would havethought the same about the Americanemphasis on the introduction of parlia-mentary institutions to peoples who havenot had to win them over centuries ofstruggle.

43

These questions must ultimately beresolved by some modification of theconcepts of national sovereignty and pro-perty. So my paradox is that whilenationalism is now so strong, it is fightingagainst its impending modification ordestruction. These manifestations ofnationalism in fact signal the onset of itsdeath-throes.

Science and invention are making thenation-state obsolescent. Embryonicworld government is already with us inmany areas of economic activity. Com-munications have developed to the pointwhere we can no longer live in isolation.National governments may proclaim theirsovereignty but they have already lostcontrol of vital functions — of whichmoney is not the least important. Airtraffic is regulated by international agree-ments administered by a cosmopolitanbureaucracy. Health is a matter of inter-national concern. Multi-national corpora-tions now dominate international tradeand have a powerful impact on manyareas of domestic production and trade.Their activities escape national regula-tion and often taxation. I.B.M., for ex-ample, was able to develop specializationof its European factories, making partsin one country and assembling them inanother, while keeping within the quotasand exchange restrictions imposed bynational governments. It was able to doso because of its admirable system ofinternal and intracompany communica-tion. Communication is the key!

Despite their imperfections, theirfailures in some areas to adapt to localneeds, their obsession in some cases withquick profit and the bribery that has re-sulted, there is no doubt in my mind thatthe Multi-National Corporations willgrow in importance and will be self-regulating in large measure. Ultimatelycodes of conduct will develop as the Law

44

Merchant developed out of the practicesthat the medieval merchants found usefuland profitable in the long run. Ultimatelythese codes may be enacted into law —national and international — but this isless important than the efficient andhonest behaviour of corporations in theirown best interest as well as those of thehost countries.

I have one more major point to make.It was succinctly stated by Alfred Mar-shall, the great 19th century economistand teacher of economists — includingKeynes. Marshall was a mathematicianas Keynes was; but he dealt with thebasic realities of economic organization— what we now call micro-economics —and above all he was a humanist, con-cerned with human beings and their wel-fare. He once wrote that "the only im-portant thing to know about money isthat it isn't important". By this he meantthat money in any form — metals, orpaper, or credit — was only the measure-tape by which to compare and sum upthe goods and services which are the realobjectives of human desires and efforts.

The most dangerous legacy thatKeynes has left us is the concentrationon monetary measurements of economicactivity — to the exclusion only toooften of the intangible but very realvalues that Marshall was concerned with.The satisfaction to be gained from honesteffort, quality of workmanship, the con-sumer's appreciation of lasting beautyhave been almost lost. The ultimate re-sult of this econometric valuation wasdescribed to me by Geoffrey Crowthermany years ago when he said "My peoplehave ceased to connect reward witheffort".

Governments can increase the moneysupply and thus stretch the measure-tape.There are, as Keynes showed us, somecircumstances in which an expanded


money supply may increase real demandfor goods and cause a temporary increasein the return to labor and capital. Butthese gains are fleeting and always con-stitute transfers of purchasing powerfrom one social group to another. Thosewho gain are those able to contract newdebt. Those who lose are the dis-advantaged — the old and the young, thesick and the poor. Inflation of the moneysupply is the cruellest form of deceit yetdevised. The speculators and monopolistsprofit from it and among the entrenchedand privileged monopolists are those whocontrol the supply of labor to criticaleconomic services. The rank and file oflabor never wins in these encounters.

The money illusion operates bothnationally and internationally. The eco-nomic development of the poorer peoplesof the world cannot be bought by whattheir leaders call "transfers of resources".It can come only from national effort toimprove productivity. The richer peoplescan help by working with them to im-prove the efficiency of labor and makeit familiar with modern technology andits instruments. Little is gained bymonetary grants except perhaps increasedpopulation.

Nor can unemployment be cured inthe advanced industrial countries bygovernment expenditures on makeworkprojects. The problem is mainly struc-tural. We have created large groups ofpeople unable to operate in the new tech-nology for lack of rudimentary skills, andhave sapped their will to work by whatis euphemistically called welfare. Themarket for routine manual and clericallabor constantly shrinks.

The fact is that attempts to solve oursocial and economic problems bymanipulating monetary measurementshave failed and we must get back to the


fundamentals and rethink our educa-tional systems, learn again the values ofhonest work at all levels and face thefuture rather than the past. It will notbe long before money will disappear asa medium of exchange — replaced byelectronic transfers. We shall need todevise a new standard of value. It willprobably not be gold; but it certainlycannot be the national credit systems thatdisplaced gold. The gold standard wasdenounced and renounced because, asSchumpeter argued, it prevented poli-ticians and bureaucrats from increasinggovernment expenditures beyond whattheir country could afford. Their cur-rency relations could not be maintainedwithout borrowing, so the internationalfinancial system staggers under a cumu-lative load of indebtedness, much ofwhich can never be repaid. The advancesfor economic development and such loansas Britain is now raising to continuelevels of consumption beyond its produc-tive powers can never be repaid at theirreal value. They must be written downin real terms by further inflation or re-pudiated or forgotten like the debts ofthe first World War.

These may perhaps seem to you thepessimistic conclusions of an old manlamenting a bygone age; but I am notinterested in what has gone and cannotbe recalled. Nor am I trying to denigratemy economic colleagues, even though Iagree with R. H. Tawney's remark that"you take economists far more seriouslythan they take themselves — or at leastthan they take each other".

What I have tried to say is that we arein the beginning stages of one of thosegreat revolutionary periods in which wemust construct new and more viable in-stitutions. They will necessarily be inter-national. The age of nationalism isdying. But it will not be a unitary world.

45

The functions of government will bedivided and decentralized. There will beno world capital and no world parlia-ment; but many technical agencieslocated in different regions and staffed bytechnicians rather than clerks. Money aswe know it will be replaced by creditcards with electronic controls. But therewill still be need to standardize a measureof value (or purchasing power) that willbe stable and yet flexible — an inter-national unit of account, perhaps thecomposite of the exchange rates of severalnational units.

There are many ramifications of theseconclusions. One is the shift of theworld's centre of economic gravity. Fiftyyears ago I wrote a little book which Icalled "The Third Mediterranean in His-tory". The Atlanticists ridiculed myarguments and argued that Asia couldnever industrialise because it lackedfuels and raw materials.

But it is Europe that lacks fuels andenergy and Europe is now well on theinternational road with the CommonMarket — not to mention the SovietUnion which has swallowed so manynation-states. About 25 years ago, anaval officer seconded for study read tomy seminar a paper on the Soviet ver-sion of geo-politics. Instead of the worldisland controlling the world ocean, theyreversed the basic thesis, arguing that inthe air age, the world ocean controls theworld island. If you look at a topo-graphical map of Eurasia you can under-stand this thesis. The mountain chainsthat run from the Pyrenees through theAlps to the Himalayas have only onesignificant break — through the Dardan-elles and the Suez Canal. The mineralsof Africa and south Asia, the oil of theMiddle East, and the minerals of Aus-tralia and Latin America can be reachedonly through this gap — or from Vladiv-

46

ostok. Moreover the only possible de-fence of sea passages in the air age re-quires depth. So, in the Russian theory,the strategic centre of the world is notCzechoslovakia, as the Germans argued— but Australia.

I could make the same argument aboutthe new ice age which some scientistspredict. Even a slight lowering of tem-peratures would reduce the ripeningperiod for grain in the marginal areassuch as Canada and Khruschev's virginlands in central Asia. It is not surprisingthat Russian and Japanese shipping in-creases in the Pacific and may soondominate not only the fishing industries,but the trade routes. Nor is it an acci-dent that Russian strategy focuses onareas that may control the sea-routes,particularly for oil.

Australia has a vital stake in the shiftof economic activity from the Atlantic tothe Pacific. Indeed it has a central roleto play. With its wealth of minerals andthe quality of its people it is truly ahappy country — Australia Felix. Butit could also be a tempting target. It isinconceivable to me that it can developand defend its resources by its own iso-lated efforts. Inevitably its future islinked with that of the other great Paci-fic powers. The prospective shortage ofessential minerals is more serious andlikely to last longer than the threatenedshortage of energy. But you must re-member that these shortages are costrelative rather than absolute. Your ironand uranium, and nickel and bauxite aremarketable only as long as you do notprice them out of world markets. Andthis is not only an economic question. Ifyou cannot control costs to make yourempty lands productive and your miner-als marketable, you may find that otherpeoples may appropriate and work themto meet their own urgent needs.


ITALIAN EDITION OF "FACTS"

The I.P.A. is producing a future edition of "Facts" in aseparate Italian edition. If this experiment succeeds then it isintended to add this edition to our regular publications andinvestigate the possibility of producing editions in otherforeign languages.

It would help us to assess the need for foreign languageeditions of "Facts" if you would kindly complete the question-naire below and return it to:—

Institute of Public Affairs,289 Flinders Lane, Melbourne, Vic. 3000.

1. How many foreign speaking migrants are employed inyour organisation or attend your school?

ItalianGreek •

Other (please specify)

2. Do you think a foreign language edition of "Facts" wouldbe of benefit to your migrants? If so, how many copieswould you be prepared to distribute?

ItalianGreek

Other (please specify)

3. If you were to distribute a foreign language edition of"Facts" how would this be done?(a) Mailing direct to families(b) Distributed by hand(c) Left in a pile to be picked up(d) Used as part of an education or training programme

IPA Review —April-June, 1977 47

4. Would you prefer to see one multi-language edition of"Facts" which would include English, Italian, and Greekto be published specifically for the benefit of migrants?Please answer YES or NO.

5. If the I.P.A. were to produce a ten-minute video-tapeversion of each edition of "Facts", either in English or ina foreign language, would you find this useful in yourteaching or staff training programme?

English :Italian :Greek :

Other (please specify) :

6. Any other comments.

Name

Address

48 IPA Review —April-June, 1977

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