The Changing Paradigm: Freedom, Jobs, Prosperity
The New Paradigm
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.
Alan Wood misses the essential point on workplace relations.
(Opinion, 19/2). Almost any bargaining between employers and
individual employees will be lopsided (employers in general know
they could get someone else).
Unrestricted freedom to negotiate on hours, pay and conditions
ultimately leads to exploitation. It is only a matter of time
before the clock is turned back to the C19.
Should a man or woman really be forced back into working 12
hour shifts (or longer). Almost no one can remain efficient for
that length of time.
That the unions in their day sometimes went to extremes is
acknowledged but so too must be noted the extremes of employers
before unionism managed to curb their excesses.
It is government's role to stand between the often conflicting
requirements of employers and welfare of employees. The common
good is not solely served by the employer's competitiveness and
especially when Australia is competing with third-world countries
where employees' welfare and rights are frequently of little
Governments abdicating this responsibility are not showing
the leadership needed.
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.
The Harvester case is usually referred to as one of the key
elements in the development of the raft of benevolent laws and
social legislation---the 'New Protection' as it was called---which
Australian governments began to put in place in the wake of the
economic crash of the 1890s. These laws were intended to minimise
social conflict, especially conflict between labour and capital;
... to ensure a decent standard of living for workers and their
families; and more broadly through the system of tariffs and
economic protection, to encourage local industry and to maintain
Higgins' Harvester judgment linked wages to human need, more
than to profits or productivity.... It was also one of many measures
in support of a great social experiment, ... to build a peaceful,
egalitarian and democratic society without revolution or violent
upheaval. By and large that experiment was a tremendous success....
Harvester placed the welfare of the family at the centre of
social and economic policy from the beginning of Federation.
In a new nation concerned to minimise the divisions between rich
and poor and to lay a solid base for social stability this made
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'.
A I think I am close
to the mark when I say, even for men in regular work, the average
wage was not more than 5s.6d. per day, 33s. per week. This would
mean that the standard was raised by over 27 per cent in 1907....
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
It is argued that a minimum wage of significant size did not
become generally effective in NSW and Victoria until 1921, and
that the level of the wage was strongly influenced by---indeed
roughly equal to---Higgins' 1907 decision. It might be suggested
that the level of the basic wage was not too inappropriate because
unemployment as a proportion of employees was not high. But unemployment
was strongly concentrated in unskilled men and, within that group,
on those lower down the ladder of capabilities. Higgins thought
he was protecting the weak: in fact he was aiding the strong.
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
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