The Changing Paradigm: Freedom, Jobs, Prosperity

The New Paradigm

Ray Evans

Before moving into the theme of this conference I need to discuss the word 'paradigm', and how it came into general conversation.

In 1962, an American physicist, Thomas Kuhn, published a book entitled The Structure of Scientific Revolutions, a book which changed the way we think about the history of science, and more recently about economics and other social sciences.

Kuhn had previously written a book The Copernican Revolution in which he discussed the overthrow of Ptolemaic cosmology by Copernican heliocentrism, a process which took more than a generation, and in which the church got deeply involved.

The Ptolemaic model of the universe placed the earth at the centre of the universe and had the sun, moon, planets and stars moving in extremely complicated orbits around the earth. As astronomical observations became more sophisticated, and knowledge of the movements of the planets and stars became professionalised, the Ptolemaic model became ever more complicated, as measurements and predictions were reconciled with the model.

The Ptolemaic model was a paradigm and the pre-Copernican astronomers accepted the mathematics which followed from setting the earth at the origin of their universe, and refining their formulae, and seeking to reconcile their predictions with heavenly events as they occurred. But the complexity involved was so great as to verge on chaos, and by shifting the origin of the cosmological frame of reference to the sun, Copernicus made a huge step forward in astronomy and in physics.

Setting the earth at the origin of the universe seemed natural enough, particularly given the Christian view of man, nature, God, and the relationship between them. I myself find the Ptolemaic view comfortable and reassuring and if I had been involved in church life during the period after Copernicus's death in 1543, I would probably have resisted the Copernican revolution. If I had been involved in the mathematics, however, it would have been a different story.

Copernicus set the sun at the origin of his universe, and the mathematics, all of a sudden, became very simple. Copernicus made one wrong assumption which caused a great deal of confusion. He assumed that the sun was at the centre of a series of circular planetary orbits. In fact the planets move in elliptical orbits around the sun which is located at one of the focal points of the ellipses. Because of this mistake Copernicus's opponents had some important ammunition to use against him and it was not until Kepler realised the elliptical nature of the planetary system that the Ptolemaic system was finally overthrown. The equations describing the motion of the planets then became very simple, and this huge simplification led in turn to Newton's discovery of the law of gravitation.

The most interesting point which Kuhn made about the Copernican revolution, and indeed for the other scientific revolutions which followed, was that the elites involved in these debates didn't suddenly switch from a Ptolemaic to a Copernican point of view. The Ptolemy crowd fought the Copernicans, and they enlisted allies within the church in the struggle. But it was a losing battle, because the Copernican maths was so much simpler that you could never sell the old product to a someone who had to choose between the old and the new. A generation or so later and no one could do the Ptolemaic calculations. It was a generational change---the rising generation of astronomers and mathematicians would not buy the labour-intensive calculations and the intellectual gymnastics which the Ptolemaic paradigm required.

It was exactly the same story with phlogiston and oxygen. The phlogistonists fought back hard against Lavoisier's disciples, but once again, it was a losing battle. Oxygen had so much explanatory power that, within a generation, all of the phlogistonists had literally passed away.

In Australia, we are in a battle over which understanding of the labour market is going to hold sway. The paradigm which has given us our labour market legislation and the institutions which have been created by that legislation, our trade unions, our arbitral tribunals, our employer organisations, etc, etc, is the Higgins paradigm, named after Henry Bournes Higgins, High Court judge, and at the same time President of the Arbitration Court established by the 1904 Commonwealth Conciliation and Arbitration Act, which purported to give effect to Section 51:35 of the constitution, which Higgins and Kingston had persuaded the 1898 Constitutional Convention to adopt.

Opposing that paradigm is the H R Nicholls understanding of the labour market. Nicholls had come to the Victorian goldfields in the 1850s as a teenager, and had subsequently earned a reputation as a radical journalist. But he clearly had a very good nose for humbug, and Higgins was full of pompous humbug. In his famous editorial of 1911, Nicholls described Higgins as a 'political judge' and in doing so summed up the whole process of setting prices in the labour market by fiat. Higgins believed that, in Australia, judges should set prices. In the late and unlamented Soviet Union, party officials and bureaucrats in Gosplan set prices.

This matter of prices, and whether they should be determined through the 'barbarous higgling of the market', to use Higgins' condescending put-down, or by political intervention of one kind or another, is central to this great debate. In all of the debates about labour markets there are, in the end, only two ways of setting prices, including labour market prices. The Higgins model believes in setting prices by political fiat clothed in the trappings of judicial omniscience. The Nicholls model believes that prices should be set by agreement between buyer and seller, and the implicit understanding is that the multiplicity of such agreements will determine what we call the market price. Also implied in that understanding is the knowledge that market conditions change, prices change with them, and people use market prices (or indeed politically determined prices) to make plans for the future.

The Australian economy is, at least in terms of the production of goods and services, a free market economy. A federal referendum was conducted in 1974 in which the Whitlam Government asked for a constitutional head of power to enable the Commonwealth to control both the prices of goods, and the prices of labour although, interestingly, that was not the language used in the debate, or in the legal language of the constitutional change. What was asked for was the power to control both prices and wages, the implication being that a wage was not a price.

That referendum was soundly defeated.

The Higgins paradigm is today under great pressure. Just as the Ptolemaic system required a huge investment of time and labour in performing astronomical calculations, the system we have in Australia of labour market regulation has become a huge burden on economic life. The manifestations of that burden are seen in our unemployment figures; in the time and labour involved in the day-to-day business of every employment relationship; in the shamefully low value of the Australian dollar; in the lack of investment in industries such as food processing where we have very great natural advantages; and in the time and expense taken up in court proceedings such as the recent Emwest Case, in which Justice Susan Kenny of the Federal Court ruled, contrary to everyone's previous understanding of the law, that unions have a right to go on strike at any time, provided it is with respect to an issue not specifically defined in the Agreement covering relations between the employees and the company.

Bit by bit, resentment against this increasingly intrusive, burdensome and costly regulation is growing, and it is reflected in the Coalition's attempt to repeal unfair dismissal regulations for the small business sector. It is also reflected in the row going on within the Labor Party over the role of trade unions within the Party. Trade unions are increasingly regarded, by young people particularly, as institutions which have well passed their use-by date, and the close connection between the trade unions and the ALP is becoming a political liability for the Labor Party.

Nevertheless, or perhaps because of it, there is currently a great deal of advocacy on behalf of the Higgins paradigm. Let me quote a letter recently published in The Australian which is characteristic of this advocacy. It is from a Ron Brown of Hornsby, NSW.

In this letter we start off with the 'imbalance of power' argument, the logical and inevitable conclusion of which ends up with the employees as slaves, and the employers as slave masters. (This imbalance of power argument is the last card which the Higgins believers have up their sleeve.) Union extremism is acknowledged but is mitigated by the alleged excesses of employers. The ancient Marxian theory of class warfare is referred to as 'conflicting requirements of employers' versus 'the welfare of employees', and finally the threat of cheap labour from overseas is brought to bear as the trump card requiring governments to 'show leadership', which is a euphemism for protectionism and distributing the rents from protection by setting the price of labour---first in the protected industries, and then throughout the entire economy.

A greater part of the economic burden imposed by arbitral tribunals and, increasingly, the Federal Court, on employers and employees (but mostly on employees) takes the form of regulation rather than direct price control of, say, hourly wage rates. But all of these regulations impose costs which have to be borne by employers, employees, and consumers of the products or services which are sold on the market. Unfair dismissal regulations is a case in point. So burdensome are these regulations that they are equivalent to a substantial reduction in the hourly rate which an employer can contemplate offering his or her employees. And this is a loss which the employee, wittingly or unwittingly, I think mostly unwittingly, has to bear.

From the point of view of a trade union official or a Democrat Senator such as Andrew Murray, the economic invisibility of such regulations means that they can pose as friends of employees without taking any blame for the loss of income which such regulation brings in its train.

So not only do our arbitral tribunals set minimum wages in a plethora of occupations. They impose, across the board, regulatory burdens which carry hidden but substantial economic costs which are born, in the main, by wage earners.

The recent literature coming from trade union officials striving to keep up their end of the debate is reminiscent of the endeavours of the Ptolemaic astronomers, who had to describe the planets doing somersaults in their tracks in order to keep observation in line with theory. Two recent articles are worth citing in this context. One by Bill Shorten, National Secretary of the AWU, published in the Herald Sun of March 12 last, entitled 'Working Hard to Make Work Fair', is a litany of complaint about the system and its failures. In particular he bemoans the way in which industrial relations have become 'politicised'. Mr Shorten should come to our conferences where he will learn that the sure and certain way to de-politicise industrial relations is to abandon the Higgins paradigm, embrace the Nicholls paradigm, and let people get on with their lives by allowing employees to negotiate their employment contracts with their employers, as they see fit. That is what the market is all about---freedom to do your own thing. It is also an extremely efficient way of generating jobs and prosperity.

Another is by Greg Combet, Secretary of the ACTU, entitled 'Pathetic excuse for low pay' was published in The Australian on March 7 last. The gravamen of his argument is that increasing the minimum rate at which people can legally work, has no unemployment consequences. That is an argument which will receive some close attention at this conference.

Far more important, however, is an article published in the March 2002 issue of Quadrant by Dr George Pell, Roman Catholic Archbishop of Sydney. It is entitled 'The Failure of the Family'.

In this essay Archbishop Pell argues that governments could and should do more to help families prosper. I agree with him entirely on this point, even though I think many of his proposals would make life more difficult for families rather than less. But what is particularly disturbing about this essay is to find that the Archbishop's first line of attack is to cite Higgins' Harvester judgment of 1907 as a model of wise and beneficent pro-family policy. I will quote some sentences of the Archbishop's essay to provide the essence of his argument.

Before criticising Archbishop Pell for what I see as lamentable ignorance concerning critical issues in Australia's economic history, I need to place on the record my admiration for him as a defender of the Roman Catholic Church, and of its teaching of the Christian Gospel. As an Anglican I wish we had more Anglican bishops with his confidence in the basic truths of Christian doctrine, and his courage to defend them in the public arena.

This makes his incursions into economic history, with his propensity to get the story completely wrong, all the more serious. No-one would take any notice of Archbishop Carnley if he tried his hand in this field. But Archbishop Pell, because of his high standing as a Christian leader, requires an answer.

In dealing with the actual impact of the Harvester judgment on the lives and fortunes of Australian families and their breadwinners (as opposed to the mythology surrounding it), we are fortunate to have the results of the work done by Colin Forster, a distinguished and careful economic historian, whose paper 'An Economic Consequence of Mr Justice Higgins' was published in the Australian Economic History Review in September 1925.

A number of preliminary points have to be made. The first is that Higgins' decision was soon overturned by the High Court which found that the Excise Tariff Act of 1906, which Higgins had presumed gave him the legal authority to make his award, was constitutionally invalid. That outcome was indeed fortunate for the unskilled worker upon whom Higgins had mandated a huge increase. He subsequently wrote in 1922 in his apologia 'A New Province for Law and Order'.

If that increase had remained a legal requirement in 1907 then a sharp increase in unemployment, particularly amongst the unskilled, would have followed soon after; just as we saw a sudden and disastrous increase in unemployment which followed the 1981-82 increases of similar magnitudes in the metal trades awards.

But Higgins' doctrines took hold in the minds of the arbiters of the State Wages Boards, particularly of NSW and Victoria, in the years which followed, and slowly these Boards, with unlimited constitutional power, and constrained only by fear of inter-State competition, began to regulate in the Higgins spirit.

After the Great War however, a mild deflation set in, and the squeeze between deflation and the awards laid down by the State Wages Boards began to bite. I quote the conclusion of Forster's paper.

The impact of unemployment was far more severe in the 1920s than it is today. There was no 'dole', and the only option for most of these men was to roll up a swag and look for casual work, or hand-outs, in the bush. Many of them, no doubt, were family men, and how those families coped with an absent bread-winner, and the absence of bread, is something Archbishop Pell might reflect upon. Certainly many of them were ex-servicemen, and the bitterness which unemployment generated amongst them became part of the political folklore which carried into the post-War period of the late 1940s. The argument that Harvester was a family sustaining doctrine is a cruel fantasy, and any government or tribunal with legislative powers that sought to emulate Higgins today, would merely repeat the tragedy which he and his disciples caused in the early 1920s.

I have been pretty tough on Archbishop Pell. I agree with his general thesis that much government policy, particularly tax policy, makes life much more difficult for families than would otherwise be the case. But the leitmotif of his Quadrant article, which is that a return to the policies of the Deakin settlement, notably protectionism, and arbitration of industrial disputes (which means prices in the labour market set by political fiat), would improve the position of Australian families, is a fantasy, and since it comes from such a prestigious source, it is a dangerous fantasy.

I referred earlier to the price setting arrangements which were established in the Soviet Union. There, economists located in the Gosplan offices were responsible for this function, and as an understanding of the implications of von Mises' arguments concerning the inherent incapacity of a socialist economy to generate prices for all the goods and services which are characteristic of a modern economy permeated through the West---it took forty years or more for that to happen---the question arose: Where did prices in the Soviet Union come from?

In the late seventies and early eighties, American economists began to travel to the Soviet Union and Gordon Tullock, an American economist who should have received the Nobel Prize for his work in public choice theory, took the opportunity, on a visit to Gosplan in Moscow, to ask that very question. Rather sheepishly his respondent took out a rather ancient Sears Roebuck catalogue from his desk and handed it over. Tullock didn't know what to make of this until it was explained that the Gosplan officials used the prices quoted for goods in the catalogue to obtain relativities between this and that item. They would then try to match the goods of the catalogue to what was available in the Soviet Union and then fix prices according to the relativities prescribed by Sears Roebuck. Where there was no match of product they just had to guess. So prices in the USSR were determined by Sears Roebuck.

What is extraordinary about the Soviet Union, in retrospect, was that it lasted so long, and was, for so long, such a very real threat to the West.

The extraordinary thing about our Higgins paradigm, is that it has lasted so long. It still remains a very real threat to Australia's future.