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April 2004 | |
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Interview: Terror Australis Unions: Graeme Beard's Second Dig Industrial: The Hell of Troy Organising: Miners Strike Gold Economics: The Accepted Wisdom History: Vicious Old Lady International: Out of Sight, Out of Mind Review: War Unfogged Poetry: TAFE
Postcard The Soapbox The Locker Room Politics
Something Smells
 War And PeaceGetting Away With MurderTerrorism
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Economics The Accepted Wisdom
******** The process of The narrow framework of the debate has been rigidified and accepted as "Economics" despite the way policies were developed and implemented after World War II, to the detriment of us all. Evan Jones' historical researches show that neither so-called Keynesian measures nor neo-classical orthodoxies were the theoretical underpinnings of post-war policy in Australia. The conventional wisdom amongst progressive economists holds that Keynesianism was responsible for the long boom. Orthodox economists think only of Keynesianism as a flawed policy framework that failed to halt the onset of crisis in the 1970s. Orthodox economists have crude interpretations of the past; economic and financial journalists today who pretend to inform us of economic policy debates pick up their history third hand. For them, the appropriate policy instruments are set in stone, being derived from appropriate theoretical considerations. The divide between macro and microeconomics illustrates this point. Economists of the acceptable variety only see the role government plays in microeconomic policy in a negative sense. That is governments interfere and upset the workings of the market. At the macro level, these same economists approve various broad brush approaches, such as interest rate setting, money supply adjustments as acceptable government roles, without stopping to consider the differing sectoral impacts, or if they do consider them, seeing the inequities as unavoidable consequences of necessary economic steps. Never let empirical data get in the way of good neoclassical theory has been a tried and tested approach of the mainstream economics profession. Jones' research on the Australian economic and the policy approaches of various key departments and personnel after World War II lead him to differ strongly from conventional wisdom. There was also a concern for the structure of the economy. Shortages of labour, materials and equipment exacerbated inflationary pressures, placing the inter- relatedness of the 'aggregate' economy and its structure before the policy- makers. Questions were asked of the economic structure. Was the economy developing in a proper manner? Was capital being used appropriately? Was it possible to channel scarce resources away from areas that were considered not high priority? Who was to decide these questions and through what mediums? A set of powerful controls provided instruments to implement the answers to such questions. These controls were hangovers from the War but had been maintained pragmatically but assertively to facilitate a smoother transition to peace. Most controls were essentially discriminatory, providing potential means for influencing the structure of the economy in desired directions. Douglas Copland foresaw the dilemmas that would arise during reconstruction. Delivering a paper, in January 1944, Copland noted: "If we wish to avoid the inflationary effect of excessive demand, and to promote a level of investment and distribution of income that will raise living standards in the transition period, and allow the foundations of a permanent structure to be built upon these ideals, we must continue to use controls which have served their purpose so well during the war. It will not be easy to maintain so virtuous a policy." Copland was prescient about the difficulty. The controls were formally available, but one finds apprehension regarding their assertive application in peace- time. Repressive macroeconomic measures in 1951/ 52 provide an excellent case study in the evolution of policy instruments for the control of the Australian economy during the long boom. The particularities of the policy- making environment in Australia, rather than any preconceived theoretical schema, played a large role in that evolution. Structural policies in practice The fine detail of policy debates in the late 1940s highlights that economic policy instruments were not derived ready- made from some theoretician's cookbook, as is implied in the ready attribution of the 'Keynesian' label to the period. Rather, the instruments evolved pragmatically. Some key 'macroeconomic' instruments received consideration - including tax increases, revaluation and interest rate increases - but were ruled infeasible for a variety of reasons. As a consequence, greater demands were made of other instruments. Moreover, in confronting what economists have subsequently conceived as 'macroeconomic' problems - unemployment, inflation, balance of payments difficulties - the policy- makers were conscious of their structural dimensions. Discriminatory instruments were viewed as not merely desirable by default, because of the unpalatability of various macroeconomic instruments, but because they were appropriate. Thus the Commonwealth Bank [the central bank] claimed: "A selective policy would be what we should like to have, but if a selective policy is not possible [because of inability to get agreement on the 'essentiality' of various industries], we are obliged to consider other methods, which are less satisfactory ...". Similarly, the Bank claimed that " ... generally restriction of credit is a blunt instrument not a sensitive tool". It is noteworthy that the Bank's orientation was not out of kilter with trends overseas. Finally, it was believed that the use of discriminatory instruments was not merely appropriate, but an integral dimension of an effective macroeconomic policy apparatus. As Richard Randall noted astutely in a Treasury memo, "to frame [a Central Bank] advance policy meant the framing of an industrial policy, the two being really different aspects of the same thing. However, disparate elements combined to ensure that discriminatory interventions involved an elaborate and often problematic process. First, there was the technical problem of adequate information, which was only tackled gradually and ultimately accorded low priority. Second, the fragmented division of responsibilities within the bureaucracy (coupled with its conscientious consultative procedures) implied that initiatives would be developed haltingly, and sometimes stalled. Inter- bureaucratic rivalry and competing visions compounded the effects of fragmentation. In the context of the late 1940s, Treasury, through Fred Wheeler, had administrative responsibility for the Investment and Employment Committee deliberations, but was the least sympathetic to structural solutions to macroeconomic problems. This Treasury perspective was enhanced after 1950, given the greater authority of Treasury over economic advice following bureaucratic restructuring under the Menzies government. Third, there was the difficulty of dependence on private agents for the implementation of some discriminatory policies, given that the demands of private profit would often conflict with the 'national interest'. This is pertinent to the dependence of the Commonwealth Bank on the trading banks for credit availability and direction, but also to the government's dependence on BHP for an expansion in steel production, then in short supply. Fourth, there was the political dimension - the difficulty of governments defending to particular constituencies discrimination in favour of other constituencies. Fifth, there was the important philosophical dimension, embodied in cultural mores and institutional practices. In particular, philosophical liberalism was manifest in a wariness of hands- on structural discrimination. There were two parallel consequences of this environment. The use of macroeconomic instruments gradually evolved with increasing disregard for their structural effects. This practice developed partly by default, because of the experienced difficulty of effecting some discriminatory actions. The culmination of this process was the 1951-52 'horror budget' (to be repeated in the repressive Treasury- induced measures of 1960 and 1974). However, discriminatory actions and controls continued to be used. The impediments to discriminatory action did not prevent such action from taking place; rather they prevented it from being applied more efficiently and effectively. Examples of such discriminatory actions included: * Capital Issues Control was in place until the election of the Menzies Government, and administered on terms of its own making. * The Commonwealth Bank pursued a qualitative advances policy after November 1947, ableit with inadequate advice from informed sources. * Dollar import licensing was in place continuously; so also were export controls on certain rural and mineral commodities. * Rent and some price controls survived until 1948 when, following a failed referendum over Commonwealth powers, they were handed to the States. * Rationing of 'essentials' survived - sugar (until 1947), meat (1948), petrol, butter and tea (1950). * The Menzies Government dismantled many of these controls after its election in December 1949, only to re-establish controls in the face of defence preparations (capital issues control, materials stockpiling, etc.) and economic necessity (comprehensive import licensing). The complexity of the evolution of the parameters of policy instruments after 1945 deserves emphasis because it has been ignored in conventional interpretations of post- war policy. A substantial literature, both official and academic, has arisen centred on an idiom of an aggregate macroeconomic perspective. Leading the way was a federal Treasury survey of the economy in 1956, the first of a continuing series The document displays a quintessentially macroeconomic perspective. The economic problem is conceived as a matter of matching aggregate demand with aggregate supply, while keeping costs under control. The growth experience of the decade since 1945 is described as "a spontaneous movement". "But apart from that general belief [that the economy ought to grow], it would be difficult to say that the movement has had any single source of inspiration, energy or sponsorship". It is acknowledged that "Governments have had a leading part in some sectors, such as immigration and basic development, and they have endeavoured generally to promote a context of favourable economic conditions". Yet by juxtaposing events against the absence of a (meaningless) 'general plan' of government, the character of the period has been obliterated - the strategic vision, the problems faced, the difficulties surmounted and the failures. There is a Hayekian flavour to Treasury's evaluation. It is remarkable that senior Treasury officials, given their intimate experience, could sanction this misleading representation of the immediate past. It is, of course, reasonable that a document produced in the mid- 1950s exhibit a more benign attitude towards matters of structure, when many of the earlier problems had been 'growth' zeitgeist provided the modus operandi. It is also inexcusable to ignore the continuing policy dilemmas concerning structure - the resource demands of defence; the controversial issue of whether defence materiel should be sourced locally or from the superpowers; the priorities being pursued under the comprehensive import licensing regime; Commonwealth policy towards State government imperatives for public works; the continuing shortage of steel driven by the divergence of the public interest from the private interests of BHP; policy towards the automobile and cognate industries with which a significant multiplier effect was associated; and so on. The multi-faceted problems facing the post- war policy- makers were of substantive general significance; however, the Treasury had written them out of history overnight. An academic example of the new macroeconomic emphasis is the 1963 volume, The Australian Economy, which carried an authoritative aura with its inclusion of the cream of Australia's economists. There is a token sectoral representation - agriculture attracts a separate chapter, but structural policy has been reduced to a discussion of competition and tariff policies (the latter an ahistorical excursion by Max Corden). Public Investment gets three pages. Import licensing is marginalised; the economic implications of defence preparation ignored. The elements that underpinned successive governments' developmentalism (public investment, sectoral subsidies, decentralisation, etc.) are seen through a refracted lens or are ignored. The contemporaneous and authoritative Vernon Report embodied a 'macro- micro divide equals policy- market divide' that was being replicated in the textbooks. Government controls occur at the non- discriminating aggregate level, and the market dictates the allocation of resources. In an introductory survey of 'the pattern of post- war development, the Report's interest in controls was restricted to a brief listing of price controls, without discussion of their impact. The Report immediately moved to the abstract: "Resources within the private sector in a free economy tend to be allocated in accordance with the expected profitability of various kinds of production. Movements of relative prices and costs help to control the composition of output by influencing demand, profitability, and hence production." (p.11). Such stylised representations have been interpreted by later generations as accurate reflections of historical processes; the historical record has thus been constructed implicitly to suit intellectual interests. We get competition at the microeconomic level (enforced by competition policy at the margin), and we twiddle the knobs at the macroeconomic level. The process of economic policy making has been narrowed and rendered mechanistic and antiseptic. A by-product of this intellectualising of policy history has been the notion that macroeconomic policy, specifically in a Keynesian mould and from a priori principles, was responsible for the post- war boom, and especially in the long- term maintenance of near- full employment. From the perspective of Keynesians, the period is generally looked upon as a golden age in which the policy- makers got the techniques and the ethics right. As we have since fallen from grace, the period is looked upon with nostalgia. Whether nostalgia is warranted depends upon having a more accurate rendition of the period. That requires a better understanding of the myriad structural policies of the period (and the forces that channelled such policies), and the pragmatic evolution of both structural and macroeconomic instruments from experience of their use in practice." See the full paper by Evan Jones, 'Macroeconomic Policy and Industrial Structure: Contested Parameters of Economic Policy in Post-World War II Australia', Report Number: ECOP2003-1, Sydney University, School of Economics and Political Science Evan is Associate Professor in the Discipline of Political Economy at the University of Sydney Evan will be presenting a seminar on the subject Nothing good happened in Australia before 1975': the closed economy/open economy duality in conventional Australian economic history'on 7th April 2004 at the University of Sydney.
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