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The market and the state in Australia



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EMBARGO: 1.00 PM THURSDAY 1 AUGUST 1991

SPEECH BY THE TREASURER, JOHN KERIN, TO THE IRISH-AUSTRALIAN CHAMBER OF COMMERCE, MELBOURNE, THURSDAY 1 AUGUST

THE MARKET AND THE STATE IN AUSTRALIA

Thank you for the invitation to talk to you today. This is the first real chance I have had since becoming Treasurer to give my own speech. Up till now, advisers, minders and officials have been telling me that I must talk about things like fiscal and monetary policy, international competitiveness, and the balance of payments. But today I can follow my Irish instincts.

It is becoming something of a tradition for Labor Treasurers to have an Irish background. This particular winning streak began with Bill Hayden in 1975 and continued on with Paul Keating after 1983. I am glad to be able to carry on the tradition.

I would like to talk to you today about the influence of the Irish in Australia and — indirectly — on some important elements of economic policy in the Labor Party. I am thinking, in particular, of the contribution that

Irish influence has had:

. in underpinning a concern for social justice, and

. in helping mould attitudes towards the economic role of the state in Australia, particularly towards the regulation of market forces.

It might surprise you that I think these issues are worthwhile discussing in detail. It might seem that these matters are rather marginal to current economic policy. But as I see it, a wide range of contemporary economic

issues — both in Australia and overseas -- involve judgements about social justice and about the economic role of the state.

. For example, just last week my colleague Michael Duffy and I announced a 12-month freeze on withdrawals from unlisted property trusts. This was a quite overt form of government intervention in one segment of the Australian financial market, but we made the judgement that it was necessary in the public interest. Interestingly enough, only one or two of the more committed free marketeers suggested that the intervention was

inappropriate.

. A second example of the relevance of ideas about the economic role of the state to current policy is in the field of industrial relations and wages policy. Since 1983, in cooperation with the trade union movement, the Government has introduced a wide range of reforms which have led to much greater flexibility in the Australian labour market. Yet there is still

a vocal lobby which calls for more sweeping deregulation of the labour market. For reasons which I will not go into today, I think that in this matter, the free marketeers have allowed ideology to overtake

commonsense. The main point I am making is that in this area, different views about the economic role of the state continue to fuel vigorous public debate almost every day.

. At the international level, too, a good deal of economic policy involves judgements about the appropriate degree of government intervention. Perhaps the most blatant example of this is the Common Agricultural Policy in Europe which has done so much damage in international

agricultural markets in recent years.

COMMONWEALTH PARUAME NT ARY U BRARY MICAH

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You can see, therefore, that the question of the appropriate economic role of the state is one which goes to the heart of much of current economic policy and practice.

SOME HISTORY

In considering the influence of the Irish on economic ideas in Australia, it is useful to recall a little history. From the earliest time of white settlement in Australia, the social division between the British and the Irish was significant. The government and the elite of the penal settlement in New

South Wales was almost entirely British. People of Irish origin or heredity on the other hand, who made up around one-third of the population, were mostly convicts.

This division endured in Australia throughout the whole of the 19th Century and well into the 20th Century. One important effect of this social division was that throughout much of this period, Irish-Australians laboured under a sense of grievance. They saw that rural labourers were often Irish, while

land-owning squatters were often British. In the cities, too, the bosses were more likely to be British than Irish.

It was with the formation of the Australian Labor Party exactly one century ago that the Irish presence in Australian politics became most apparent. The Labor Party was formed — so it is said — partly in response to the defeat of the maritime strikes in 1890. As a matter of fact, if the truth be known, we

are still debating whether the initial impetus came from Balmain or Barcaldine. But wherever it came from, it became clear that political action would be needed in support of strike action to achieve the goals that workers were striving for.

Behind these developments lay an idea of great importance: it was the belief that political power was the key to social justice. This belief has continued to underpin the activities of the Labor Party, the trade union movement, and many other groups working for social change in Australia throughout the whole

of the 20th Century.

Of course, dozens of different causes have been taken up at one time or another under the broad heading of 'social justice'. As just one example, recently the issue of superannuation has emerged as a major social justice goal.

ATTITUDES TO THE MARKET

There is a direct connection between this emphasis on social goals and attitudes towards the economic role of the state. The connection is that groups especially concerned about social goals in Australia have nearly always harboured considerable reservations about the impact of market forces. As a general rule, these groups have argued that unbridled market forces are often

unfair, frequently socially damaging, and that government regulation of one sort or another to manage market forces is usually desirable. In short, community groups in our society concerned about social goals are often

economic interventionists.

Suspicion towards what one might call 'the social consequences of the market' has been ubiquitous throughout history. Shakespeare's Shylock is a good example. Since I am talking about the connection between fairness and markets, I might say I think that Shakespeare's depiction of Shylock was most

unfair. After all, Shylock was doing nothing more than attempting to conduct efficient financial intermediation in the Venetian money market whilst minimising his risks.

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I might also observe that like one or two other financiers lately, Shylock was a bit imprudent. When his debt turned bad and he tried to call up the collateral, he found that he didn't have a legal leg to stand on. Compared to Shylock, the famous white-shoe brigade of real estate agents on the Queensland Gold Coast were smart investors. Free marketeers would no doubt say that Shylock's real problem was not the market, but that he did not take the

trouble to define his property rights correctly. It's a nice point, but the fact remains that Shylock got taken to the cleaners. The system let him down.

Suspicion of market forces remains widespread in many countries today. This is hardly surprising because for all sorts of reasons markets often work in an unsatisfactory way. This led the World Bank recently, in its 1991 World Development Report released just last month, to note that in developing

countries:

...markets cannot operate in a vacuum — they require a legal and regulatory framework that only governments can provide. And, at many other tasks, markets sometimes prove inadequate or fail altogether.

Much the same sort of suspicion of market forces is now looming as a major problem in Eastern Europe. Talking of moves towards a market economy, one Soviet official was quoted recently as saying

Where the West sees empty State shops and queues, our people see markets and cooperative shops filled with goods money can buy, but they can't afford. We are moving into the market economy, but no one likes the process, and some people are getting quite rich out of other people's misery.

It was doubtless problems of this sort which recently led several economists at a conference on the work of the great economist Adam Smith to say that:

It may indeed be the case that no other great social institution of anything like comparable importance is so imperfectly understood and so inadequately appreciated as is the market.

Now in talking about these things, I hope I do not give the impression that I secretly harbour anti-market instincts. I do not. My central point is an entirely different one — it is one which I hope some of the more enthusiastic free marketeers will think about. There is an important lesson to be drawn

from the fact that suspicion about the social consequences of the market is widespread. The lesson is that an important goal for most people is social justice. Free marketeers need to recognise this. Social justice is an entirely legitimate goal. And if the community regards it as important — which it does — then it should be a major goal of economic policy to ensure

that our society is a fair one.

What do these comments imply about the reliance of market forces in Australia? Does the importance of social justice goals imply that we should not rely on the market so much? Some people draw this conclusion, but my own view is that it is quite mistaken to develop an anti-market stance. Rather, what we need to do is develop pro-market policies which go hand-in-hand with

social justice. It is very important that those of us who are pro-market recognise this need. If we don't, we are likely to find all sorts of interventionist nostrums being invented in response to the community demand for social justice.

There are two main ways in which we can ensure that pro-market policies go hand-in-hand with social justice.

. First, there needs to be sensible recognition of the fact that the operation of market forces will often need to be tailored to be consistent with social goals.

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. And second, it will be easier to convince the Australian community that pro-market policies are a good thing if. there are other, effective, programs which properly address important social goals.

These are important points, so I will say a little more about each of them.

TAILORING MARKET FORCES ^

As far as the need to tailor market forces is concerned, it seems to me that it is often desirable to guide market outcomes to meet social goals, provided it is done with care. As a matter of- fact, we do this all the time — think of food safety regulations, controls over standards of both public and private

transport, export regulations of many kinds, and so on.

Many of these controls have been introduced to ensure minimum safety and health standards, but all sorts of other social goals have led to controls being imposed on markets as well. These other social goals include such things as protection of the environment, the reduction of discrimination

against minorities, and in some cases (such as the media) even the promotion of competition to encourage freedom of expression in our community.

I suggest to you that it is obvious that social goals of this sort are important, and that it will often be reasonable to tailor market forces to help achieve these goals. I realise, of course, that in saying this I am advocating the imposition of controls on the market from time to time. But

rules, in their place, are needed to guide human behaviour. After all, even Gaelic football has rules!

On the other hand, it is certainly easy for regulation to get out of hand. During the past decade the free marketeers have done us a service by questioning the rationale of much government regulation. I agree that when government regulation doesn't help to achieve sensible goals, it should be

done away with. As a general principle, it would therefore be a good idea to constantly subject the regulatory system in Australia to a few simple tests. We should ask:

. First, what are the specific benefits of the regulations? Often these are unclear, or have become outdated.

. Second, we should require a listing of both the benefits and costs of regulations. This is necessary so that we can see whether the objectives are being achieved at reasonable cost.

. And thirdly, it is useful to ask what the alternatives are to regulatory controls. Sometimes the same social goals can be achieved more effectively in other ways.

ALTERNATIVES TO REGULATION

This brings me to the second point that I mentioned earlier. Given that important social goals exist, we need to understand that the Australian community will expect governments to attempt to promote these goals. It is true that controls on the market will often not be the best way to do this. But it is also true that unless it is clear that other and better policies are

in place to achieve these goals, anti-market interventionist nostrums are bound to be produced by all sorts of well-meaning people.

The implication of this — which many free marketeers do not seem to understand — is that often the effective implementation of pro-market policies and good social welfare programs go hand-in-hand. Commentators from the so-called New Right who are so keen on both deregulation and small government fail to see that these goals are frequently in conflict. Often

there would be more support for deregulation if it were clear that governments were prepared to pursue major social goals in other ways.

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The same is true for moves towards the privatisation, of major public sector enterprises. Efficiency is important. I certainly agree that large public enterprises which supply services to the public should become more efficient.

On the other hand, in the enthusiastic rush to introduce so-called 'user pays' principles we need to weigh the social costs of this approach. Often the social costs of the adjustments involved are quite substantial. And often it is much easier for wealthy people to cope^ with the changes than for poor people who are living close to the margin.

I have been quite conscious of this during the past few days at the Special Premiers Conference in Sydney. The changes that the Federal and State Governments have been discussing will — over the longer term — yield very

substantial economic benefits. But the benefits will only accrue as the result of change. And in the short-term, change can be hard to cope with — especially if you are unemployed.

The point that I am making is this: it is all very well for policy-makers to be enthusiastic about the so-called 'dynamics of structural adjustment', but it sometimes seems to me that structural adjustment is something that we all expect that somebody else should face up to. There would be more community

support for industry reform and for structural adjustment if it were clear that the costs of the changes involved will not fall disproportionately on the poor.

EFFICIENCY AND THE MARKET

As I see it, there is no contradiction in expecting good economic policies to be directed towards both improvements in productivity and in social justice. In fact, since the time of Adam Smith, good economists and good policy makers have worked

for improvements in both efficiency and the distribution of income. The greatest economist of the 20th Century, Maynard Keynes, summed it up when he said that

The political problem of mankind is to combine three things: economic efficiency, social justice, and individual liberty.

Perhaps the most important reason that in the final analysis there is no contradiction between efficiency and fairness is that unless a country has an efficient economy, the majority of people within that country will be poor. It is no accident that as a general rule, the richer industrialised countries of the world are much fairer than poorer developing countries. Across the

sweep of human history, the most effective anti-poverty policy ever implemented has been sustained economic growth. It is growth which has brought increased social justice to hundreds of millions of people on our planet.

Environmentalists should be pro-growth too. At least, if they don't like the word growth, they should certainly support improvements in productivity. In order to protect the global environment, we will need continual improvements in productivity. And by and large the improvements in productivity that I am

thinking of will be needed in rich countries rather than poor ones. It is the energy-guzzling industrialised countries who are the worst polluters of the world's environment, not developing countries. It is a form of fantasy to think that we can persuade China or India to curb their consumption of energy whilst we use up far larger amounts.

The simple rural dreamland of Arcadia does not exist in the real world. It is silly to think that either industrialised or developing countries will voluntarily reduce standards of living to conserve energy. Rather, it is continued growth that will help us achieve the sorts of social goals — such

as a better environment — that we are all aiming for.

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Within Australia, this is one of the main reasons why it is the policy of the Labor Government to encourage improvements in productivity and in international competitiveness. In the final analysis, all of the social goals that we are aiming for — a better environment, higher levels of safety and health, better working conditions, increased superannuation, and so on —

represent improvements in our real standard of living. By far the best way to pay for these increases in our standard of living is through improvements in national productivity.

MAIN THEMES

I began my comments by referring to the influence of the Irish in Australia. Perhaps much of what I have been talking about can be summarised by saying that looking back over our history, the Irish influence has made a significant

contribution to bringing about a sense of balance and fairness in Australia.

It's not surprising that many Australians are suspicious of the notion that something rather vague called 'market forces' should be given free rein in our economy. Economists might say that there will be an increase in economic freedoms if the market is given freer rein, but many others suspect that there will be a loss of political and social freedoms. They fear that the term

'market forces' is simply another way of saying that multinational corporations and international banks will gain more influence in Australia.

I understand these fears, but I am hopeful that our sense of balance will help us find the sensible middle ground. We cannot afford to be anti-market or too relaxed about the need to lift levels of productivity in Australia today. The

free marketeers are right about this.

But neither should we forget our basic sense of fairness and egalitarianism either. We therefore need to get the balance between market forces and government regulation right. The world balance is the key to this. The right

balance at any particular time will always be a matter of judgement.

As I say, it is the middle ground that is important. Bill Hayden and Paul Keating as previous Irish-Australian Treasurers did well in finding the middle ground. I can promise you -- as the third in this line of Irish-Australian Treasurers — that I will be aiming to do the same.