The Australian Financial Review
12/11/98

Pure theory held
hostage by the facts

Des Moore's recent proposals for Australia to scrap its historic industrial relations regulations have provoked hostile responses from the Right, the Left and even the rationalists. John Carroll, Roy Green and Wolfgang Kasper air those criticisms.

John Carroll
So Des Moore is at it again. For the last decade he has played missionary carrying the message of laissez-faire fundamentalism to the barbarians.
With the ideological purity of the Inquisition combined with a doctrinal simplicity that would have made even those puritanical Spaniards blush, he has chanted the one-word slogan, Deregulation, in response to virtually every socioeconomic problem which has beset Australia.
For many years we impure ones were lectured on the virtues of New Zealand - for it had wielded the free-market broom far more rigorously, and to what wonderful economic effect! New Zealand isn't mentioned any more-
Now it is the US. We are told that the minimum wage safety net is irrelevant, and the US proves the case. Just look at its low unemployment figures! We are not invited in study American scales of inequality, nor the misery and squalor rampant in its large cities. Too many facts should never be allowed to blur a pure doctrine.
We have been urged though the Rationalist era to open Australian manufacturing to the bracing wind of international competition. tile Government withdrawing. Well there would be some casualties, such is the nature of a capitalist economy - and it is - but healthy new green shoots would sprout from the ashes.
Indeed some did, but still the external deficit on manufactured goods - imports over exports - has risen and remorselessly risen. This was against the prediction - but pure theory should never be held hostage to facts.
It is, moreover, our large and g-owing overseas debt which continues to prohibit economic boom arid thereby play the key role in impeding job creation. Looked at with a certain detachment - what economists call a medium-term perspective - the significant event of 1999 was a cultural sea-change, marked perhaps most decisively, in the week after the Australian Federal election, by the IMF announcing that governments should begin imposing controls on the flow of global capital. The Economist had earlier flagged the same message.
The demise of the Rationlalist era has thus been signalled, an era that had lasted a quarter-century, from the stagnation problems of the early 1970s which had ended the quartercentury Keynesian Golden Age.
We are inevitably now returning to some form of mixed economy philosophy, encouraging sectional government intervention. But it is not in tile nature of fundamentalism to believe in history, nor read its cues.
So Des Moore advocates further radical deregulation of the labour market at the very moment when the culture - which has some sensitivity to reality - is moving in the opposite direction.

John Carroll co-edited Shutdown: the Failure of Economic Rationalism in 1992. He recently published Ego and Soul: the Modern West in Search of Meaning.

Roy Green
It has been said that governments should never hold a royal cornmission unless they know the result. A first glimpse of Des Moore's paper suggests that the same now applies to studies of the Australian labour market.
The fundamental flaw in the paper is the flaw in neoclassical orthodoxy. This begins from the premise that prices arid quantities are determined simultaneously in all commodity markets, including factors of producdon such as labour. Optimal outcomes are achieved when these markets are in equilibrium.
According to the theory, unemployinent results from wages in excess of market clearing levels. The policy prescription is to cut back wages by removing impediments to the operation of supply and demand in the labour market Inevitably, these impediments a-re min I imum wage regulation and trade unions, which are depicted as rent seeking cartels.
There are several problerrus with this theory. The first was pointed out by Keynes, who showed that equilibrium may fail short of the full employment level of output, leading to persistent involuntary unemployment. This cannot be solved by cutting wages, which simply reinforces demand deficiency. Nor will reductions in interest rates be effective if, as Keynes put it, they are "pushing on a string".
The second problem is that low wages are.usual1v associated with low productivity and low skills. It is generally acknowledged that Australia must opt for the high skill, high productivity path to become globally competitive.
The third issue is what kind of society Australia wants. Even if Des Moore is right in saying that lower wag. es will generate more employment, the impact will fall largely on those who are already low paid. The shift to an American style "two tier" workforce will be accelerated, with a huge increase in the numbers of working poor.
The suggestion that the victims of this policy may be compensated by tax credits does not bear close scrutiny. The economists who want to deregulate the labour market and top up low pay with welfare are also those who call for cuts in taxes and spending. On the face of it, the policy does not add up.
The debate on unemployment is an important one, not least because it is a terrible waste of people and resources. The key task for government is to craft a policy mix of demand management and supply side measures that will successfully reposition Australia in the world economy. The preoccupation with minimum wages is a distraction.

Roy Green is director of the Employment Studies Centre at the Univenity of Newcastle

Wolfgang Kasper
Two recent proposals to trade off income tax subsidies to the poor Tor a commitment by central wage fixers not to mandate pay increases for low-income eamers -one by five economists led by Professor Peter Dawkins, and now one by ex-Treasury official Des Moore - have probably. registered no more than 2 on the political Richter scale. Nonetheless, they deserve comment.
The fundamental logic and evidence on job creation are uncontroversial: High wage costs arid regulated work practices haniper job creation. Any sort of labour-market intervention hamstrings the pursuit Of better productivity by millions of market participants. This pursuit imposes considerable information-search costs on competitors who cannot foretell whether their expense will be rewarding. Little wonder that workers and employers try to shirk competition, supporting the competition-hampering IR system.
Vote-seeking governments oblige with regulations, and dispense handouts to the worst-hit victims of the market failures they create. This weakens the international competitiveness of Australian jobs, as all surveys demonstrate.
Can the proposed trade-offs appease the IR apparat and overcome the handicap of dysfunctional labour markets? No! Australia's well-endowed economy will generate first-class growth and job-creation only when we cultivate first-rate labour-rnarket institutions. This means little more than clear health and safety regulations, the freedom to contract one's labour without political interference, and the freedom to associate (join unions or not).
The Workplace Relations Act 1996 is far too clever and Byzantine to work; it failed the waterfront test abysmally. We need a law which can be readily understood by fish shop owners and which inspires their trust to create more jobs.
Another concern about the trade-off proposals by Moore and the Dawkins-5 is the tax cost. Higher taxes are disincentives for workers and employers Add to this huge costs of monitoring and adminisiration of such a detailed scheme for hundreds of thousands! And beware of simplistic "instrumentalism", for there are always numerous deleterious side effects in such clever social engineering.
But what about equity? Can people be granted tile freedom to work? Your answer lies with your preference: Do you want to live in an economy where all have a job, but some a low income and where the incomes of the lowest-paid grow by 5 per cent, or in an egalitarian economy where the lowest-paid workers, if they can get a job, have income increases of 1 or 2 per cent?
Regulation, Accords, quasi-judicial IR interventionism guarantee the latter. It has been tried. It has failed. Why not trust the free-market afternative, and decide after 10 years whether the poorest quarter of our fellow citizens are better off, more self-reliant and cheerful?
I once lampooned Australia' regulatory-egalitarian approach as the "Tibetan strategy" to make the point that everyone can be made equal - equally poor, until we lose our sovereignty to a more dynamic neighbour.
Do we really want another 2 years of second-best fiddling that will perpetuate dysfunctional labour markets and politicised, divisive redistribution battles?
The Dawkins-5 and Des Moore have drawn attention to the urgent need of making labour markets more responsive to rapidly changing circurnstances and less subject to ill rigidifying political influences of th "IR industry".
But experience has shown tha complicated administrative scheme and continuing adherence to ill "wage justice mantra" are definitely not the way to labour market flexibility and high employment

Wolfgang Kasper a professor of econornics at the University of New South Wales, is co-author of Institutional Economics - Social Order and Public Policy, just published by Edward Elgar.