Public Interest or Vested Interest

'Public Interest or Vested Interest'

Don M Swan

First let me say how honoured I am to be invited to speak to the H R Nicholls Society, a society whose work I admire. Unfortunately, when Barrie Purvis invited me to consider joining, I was deeply committed to a much smaller and far more exclusive group: I was a Queensland Liberal.

In recent months we have been observing the responses of a cluster of institutions under siege. Not a pretty sight, but it has been fascinating to watch. It is not yet three years since the Commonwealth Government had a Bill before the House of Representatives which, amongst other ambitions, sought to establish a labour court, with exclusive jurisdiction in industrial relations matters and to be staffed entirely by those with 'industrial relations experience'.

That Bill was the outcome of the deliberations of the Hancock Committee, whose members included George Polites and Charlie Fitzgibbon, as well as Vice Chancellor, as he then was, Keith Hancock. If it had passed through the parliament the rule of law in Australia would have been dealt a grievous blow, and this society has published many attacks on the Hancock Report and on its legislative infant, fortunately still-born, the 1987 Industrial Relations Bill.

Well, that Bill was withdrawn five days after the July 1987 election was announced. I note with great interest that Ian McLachlan claimed recently in the Australian Rural Times that, and I quote,

'We, and no one else, knocked out the 1987 proposed Industrial Relations Bill---the Prime Minister withdrew it five days into the election campaign after a high profile campaign by the NFF.'

The photo of Ian McLachlan accompanying that article is a public relations triumph. It portrays as fierce a Scot as ever plunged a dirk into a rival clansman. So, any members of the H R Nicholls Society who might have thought that their work had had something to do with the unceremonious dumping of the Bill, and the responsible minister, will have to console themselves with the reflection that success has many fathers, and failure is like an orphan at a father and son picnic.

Since that momentous backdown, the pressure on our labour market regulators has steadily increased. The source of that pressure is not so much the arguments put forward by the members of this society, but the continuing deterioration in Australia's economic fortunes. A very substantial body of opinion in the country believes that the liberation, 'deregulation' to use the economists' jargon, of the labour market is fundamental and essential to any prospect we have of arresting Australia's economic decline, and of giving us some hope for the future.

There is a parallel here with New Zealand, and from them we could have learnt the right priorities. During the Mont Pelerin Society conference in Australia, about August 1984, executives of the Treasury and Reserve Bank of New Zealand were eagerly awaiting an inevitable change of government with a view to introducing reforms to the financial markets which they knew to be critical to New Zealand's wellbeing. It may have been obvious to some, but it was not then to me, that something was missing from this scheme. Roger Douglas, out of office, certainly out of favour, later admitted that his biggest mistake was not giving labour market reform higher, if not top priority, for the reforming processes of which he was the main architect. A lesson Australia has not learnt.

The growing strength of the argument that labour market deregulation is essential for the recovery of our economic health does present a problem for those people who obtain their livelihood from working as labour market regulators. The better the livelihood, of course, the greater the problem, because without being cynical, one has to say that people act to benefit themselves.

The words which have come to summarise the pressure for freedom in the workplace are 'enterprise agreements'. Thus the battle for control of the industrial relations debate, and of the processes of change, is the battle for ownership of those words 'enterprise agreements'.

So we see that the Federal Treasurer, at least when in Tokyo, is all for enterprise agreements. Given the significance of the Keating-Kelty axis in legitimising the ALP government, and the magic which that partnership is supposed to be able to bring to bear in containing inflation, and bringing about economic restructuring, such an admission is close to heresy, but it does show how important those words, 'enterprise agreements', have become.

Our industrial relations regulators have had to come up with a strategy for containing an idea which threatens to destroy their institutions. An interesting parallel can be found in contemporary Europe. Twelve months ago the reunification of Germany was unthinkable. Today, everyone except Margaret Thatcher supports German reunification. The problem with German reunification is that it will turn the European Community, even more visibly, into a greater German co-prosperity sphere, which may be quite satisfactory for the Germans (as evidence of which we have the booming German stock market for the quarter ending December), but will certainly not please the French. German reunification brings back into sharp focus all the problems of Bismarck's fateful legacy, the German hegemony over Western Europe.

The bureaucrats in Brussels now have a similar problem to our own Industrial Relations Club apparatchiks. Their answer is to support German reunification but only under the aegis of the European Community and its bureaucrats. Likewise the IR Club members support enterprise agreements but only under the aegis of the club. I use the word 'aegis' deliberately; it is derived from the mythical shield of an ancient god, and few creatures play god more often than the IR Club.

Their argument has been that without the supervision of the arbitral tribunals, the public interest will be ignored and unions and management will get together to rip off the public. This is the contemporary version of the old Chifley rhetoric of 'sweetheart deals'. Employer organisations have expressed the concern that such sweetheart deals will be used as precedents within the Club, leading to the leapfrogging process which has become the essential feature of the doctrine of comparative wage justice.

There is no doubt that these arguments have made considerable headway. Employer organisations, in particular, have been pressing them on government and opposition parties, and this conference, which will discuss the theory of 'public interest' is timely.

The people who have been brought up in the Higgins traditions of 'just prices', 'comparative wage justice', and the explicit preference for bankruptcy, or voluntary liquidation, rather than market-based wages, continue to refuse, just as Higgins refused, to come to grips with the realities of a world where the law of supply and demand holds sway.

It is important to explore the sort of world inhabited by those who have grown up in the Higgins tradition and are heirs to the Higgins legacy. It is the ordered, stationary world of the mediaeval village in which people were born into a fixed station in life; in which prices were set by JP's: and sumptuary laws constrained you in what you could wear, and how you could be buried. Everybody knew what everybody else's business was,

This is, of course, a caricature of mediaevalism, but those who reacted angrily to nineteenth-century liberalism, in which upstarts could make fortunes in a lifetime, or less, set up as a foil to the economic hurly burly of Victorian times a vision of a quieter society, heavily influenced by mediaeval notions of order, hereditary privilege and obligation, stability and predictability. This mediaeval counter attack on nineteenth-century liberalism was very successful. An example of this success is the extraordinary measure of legal privilege granted to the trade unions in the UK in 1906 and Australia in 1904.

There is a verse in the hymn 'All Things Bright and Beautiful', now usually omitted, which sums up this vision:-

'The rich man in his mansion
The poor man at his gate:
God made them high and lowly
And ordered their estate.'

Our modern civilisation began as people became dissatisfied with mediaeval constraints, defied law and prescription, sold things at illegal prices, opened shops at illegal hours, wore clothes made of illegal fabrics, were buried in illegal woollen shrouds and illegal wooden coffins, provided services deemed immoral, made illegal, but never unpopular, and moved to rival lords, or far-off cities in search of better conditions.

The Higgins era in Australia began when the Sunshine Harvester Company, in applying for tariff protection under the new Commonwealth Act, had to obtain a certificate from Higgins' Court of Conciliation and Arbitration that the wages paid in the Sunshine plant were 'fair and reasonable'.

To have the opportunity to decide what was fair and reasonable was pure joy for Higgins. He summoned the housewives of Sunshine and required them to tell him the details of their household budgets. They, most regrettably, did not tell him to mind his own business.

So we read, in 'A New Province for Law and Order', of the Sunshine housewives' weekly shopping list of 1906, which, when added to Higgins' ideas of what was required for the working man's extramural expenditure, (precisely how a judge of his status could determine what a working man's extramural expenditure was, is unclear), totalled up to 42 shillings. This shopping list thus led, in due course, to a mandatory increase in the wages for unskilled labour of over 20%.

In those days the Australian pound was tied to the gold standard, and inflation was zero or even negative. It took the breaking of the nexus to gold, and the inflation of the First World War to reduce the level of unemployment, amongst the unskilled, to the level which prevailed prior to Higgins' Harvester judgement.

The tariff which the Sunshine Harvester Company sought was modest enough by today's standards. Its significance, however, was reaffirmed by the announcement by ICI Botany just three weeks ago, that the end of tariff protection required the rapid implementation of an enterprise agreement in order to achieve an urgently required boost in productivity.

The tariff was, and is, a government sanctioned transfer of income from the shareholders and employees of export and import competing industries, to the shareholders and employees of the protected industries. The concept of public interest in placing some limits on the size of that transfer is evident enough, but the size of that transfer is not determined by conditions in the industry, not determined by hours in the industry, not determined by wages in the industry, but by the tariff itself.

The ability of employees to successfully demand a monopoly rent of some kind, over and above what the market will pay, is determined entirely by the capacity of those employees to exclude new entrants into the industry.

A highly protected industry, no matter how protected, is basically a cost plus operation.

This truism was demonstrated with complete clarity during the airline pilots' strike. The airlines, faced with deregulation and the prospect of competition from new entrants who could write entirely new contracts with pilots, as well as other staff, were able to recruit foreign planes, foreign staff, and break the monopoly which the Pilots' Federation had established over the decades of the two airline agreement.

The deep, close connection between the prospects of deregulation, the threat of competition to the duopolists, and the imperative of breaking the pilots' monopoly cannot be over emphasized.

The construction or maintenance of a monopoly in the supply of goods is illegal in Australia. Indeed, under the Trade Practices Act, the possession of a dominant market share (however temporary that might prove to be) is illegal. The airline pilots' dispute shows, once again, that even under conditions of current duopoly, it is the real prospect of new entrants which determines behaviour. If new entrants are forbidden then labour and capital between them will share the monopoly or oligopoly rents. If new entrants can contest the market then those rents constitute an irresistible temptation to new and ambitious competitors.

The fundamental principle which should guide our thinking in this debate is based as much on good manners as on economic argument. What people earn in a market in which there is freedom of entry, is no one else's business.

It is a feature of societies suffering from economic decline that people feel justified in demanding to know what everyone else in the community is making. Directors and executives of public companies now see their salaries commented on in the press. Our politicians have to file the most detailed records of their own and their families' financial affairs. Full frontal financial flashing has become obligatory rather than left to those without manners who wish to flaunt their good fortunes. There is no sense of indecency anymore.

This prurience is the consequence of a society in which government is taking large amounts of money, resources, capital, from some people in the community and giving it to others. The more monetary transfers which take place, through government's powers of taxation, tariffs, export controls, business regulation, etc, the more do peoples' financial affairs become necessarily part of the public domain. The politics of envy becomes the dominant driving power in political life, and the tax informer becomes ubiquitous.

I harp a little on this because this situation is inimical to the concept of commercial confidentiality, and the confidentiality of the terms and conditions of enterprise agreements should be their most important attribute. Terry Ryan, the Policy Director for the NSW Farmers, gave an excellent analysis of the significance of confidentiality in the December issue of the NSW Farmers Primary Report. As he pointed out, the industrial relations atmosphere and arrangements within an enterprise, are one of its most important assets. It is this often intangible quality which enables a firm to build up its human capital at the expense of its competitors. Nothing could bear more heavily on success in a highly competitive environment than that.

Right now, under the umbrella of award restructuring, my company is negotiating new agreements with unions representing most of our employees. The critical question is whether to opt for a company agreement, an enterprise agreement, or an industry agreement. Traditionally, industry agreements provided a comfort blanket. The test now is to construct a framework to support instinct, that is an enterprise agreement.

It is because of the need for confidentiality that the contemporary labour market regulators have to be kept out of this new zone of freedom. Their culture is that of mediaeval prescription, a world in which competition is regarded as destructive of the social order. That culture cannot survive in a competitive world and if it should continue to be given legal privilege and standing in Australia it will drag us all down. It cannot be emphasized enough. What people earn is their business. And this should apply from the bottom to the top.

Some politicians would challenge my assertion of the right to privacy in these matters, It is, after all, a bourgeois concept. It has been demanded of the Leader of the Opposition that he predict, under a coalition government, the 'aggregate wages outcome'.

Unfortunately Mr Peacock, like the Sunshine housewives of nearly ninety years ago, when asked of details of their household budgets by that interfering busybody Justice Higgins, has not replied, 'it's none of your damn business'.

Theoretically one could add up the aggregate wages outcome by going through the computer listing of everyones' incomes which the Tax Office might well make available, and extrapolating a little. This obsessive interest is justified on the fallacious ground that this Keynesian concept, 'aggregate wages' is causally related to inflation.

For decades Australian governments have clung tenaciously to the fiction that arbitral tribunals and trade unions are responsible for inflation. It has been a very convenient fiction because, whilst it has been believed, governments have been absolved of responsibility for their great sins of debauching the value of the money under their control.

However, one of the things we can now say with total confidence is that Say's Law has been rediscovered---it applies to money. We can say, also with total confidence, that as a result of the work of Milton Friedman, and many others, who have rediscovered the role of money in the last 40 years, that inflation is always caused by manipulation of the monetary system, and that trade unions and labour tribunals have nothing whatever to do with it.

That the Commonwealth Government bears the sole responsibility for our inflation was demonstrated last year when Mr Keating uttered those immortal words concerning the Reserve Bank: 'They do what I say'.

The argument that wages are linked to inflation is a total nonsense and cannot provide grounds for everyone needing to know what everyone else is earning.

There are, however, some situations where there is a legitimate public interest in people's remuneration. If the salary applies to a public office such as judge, or parliamentarian, then that salary and its appropriateness is a matter of public concern. But these offices, and the salaries attached to them, are not germane to the attempts by our arbitral tribunals to secure their future.

That argument hinges on their self proclaimed capacity to defend the public interest against collusion by labour and management. If the industry concerned is one in which there is no freedom of entry for new contestants then the temptation for collusion is very real, and there is need for a mechanism for limiting the monopoly rents accruing to the monopolists.

There are, regrettably, many industries in Australia in which entry is forbidden. We have a record of experience with which we can consider the effectiveness of our arbitral tribunals in containing monopoly rents.

The waterfront is an industry in which new entrants into stevedoring must obtain the blessing of the Waterside Workers Federation. That blessing has been bestowed upon nobody. The monopoly rents which accrue to the average waterside worker, mostly in the form of a quiet and easy life, were calculated by Paul Houlihan at the last H R Nicholls conference to be worth $125,000 per head. This is over and above their wages.

Electricity supply is another industry in which a proclaimed natural monopoly has to be underpinned by a statutory barrier to new contestants. Sir Arvi Parbo, at the BCA's debt summit last week, quoted IAC figures suggesting that productivity in Australia's electricity supply industry was 25% less than comparable organisations overseas. Most electricity supply industries around the world have statutory monopoly protection of some kind, so this evidence suggests that our arbitral authorities have a worse record than any other comparable country in constraining monopoly rents.

Telecommunications, railways, water supply, airports, wheat marketing, are more industries where monopoly is entrenched by legislative decree. Primary and secondary education is a very large industry where competition is confined to 25% of the marketplace. The answer to monopoly rents in all of these industries, as in the waterfront, is for statutory tradeable ownership rights to the capital stock in these industries to be established and put into the capital markets. In other words 'privatisation'.

There are no industries, at least in the conventional sense of that term, in which a genuinely natural monopoly, unassisted by legislative or regulatory protection, requires some outside body to regulate wages and conditions in order to protect the public interest. What is required is the removal of those legislative barriers to new competitors.

The pressures for labour market reform which the H R Nicholls Society has articulated, would have fallen completely on barren ground if our economy was growing strongly and competitively. However, every month, as a new set of current account deficit figures add to our national indebtedness, the power behind the arguments which this society has been putting forward, increases.

It is very difficult for people who have been conscientiously and painstakingly administering an extremely complex system of price controls (which is what our labour market regulators are, in effect, doing) to admit that their activities are not merely pointless but positively harmful. I have never met any of the ladies and gentlemen who make up the list of deputy presidents and commissioners so I cannot speak from first hand experience of their dedication and public spiritedness. I do know that Paddy McGuinness has written fulsomely of Deputy President Jim Staples, of the now defunct Arbitration Commission.

In his great work on Australia's economic history, written sixty years ago, Edward Shann suggested, and I quote:

'The arbitration courts have been led on, pushed on, and drawn into an increasingly elaborate rule over industry very widely defined. Men may be expected to discover and brood over anomalies when benevolent justice may thus be moved to essay their correction. But industry and commerce are very complicated, and one may, in recent years, mark a certain weariness in the economic Titans of the court.'

Since Shann penned those words the number of Titans has multiplied greatly, and the labour of regulation is spread over very many people. The consequences of their decision making are really understood only by those in export or import competing industries. If every Australian competitor hobbles in the egg and spoon race only on the domestic racetracks, no-one can see that anything is amiss. But on the international racetracks, Australian competitors, although hobbled, have to compete with unconstrained contestants.

That is why the public interest will not be served by the vested interests of the regulators.