Australia fair

Terry Lane: Well here's a novel concept: surveys show that above a certain income level, we don't get happier as we get richer, but below a certain income level, we can be very miserable indeed. That being the case, if the people above the income-equals-happiness level could be persuaded to give up some of their surplus wealth for redistribution to the poor, then the nation's gross national happiness index would rise. Now this is a sort of a synopsis, and undoubtedly it doesn't do justice to it, but it's a sort of a synopsis of Hugh Stretton's new book, Australia Fair. His argument is that there is enough wealth in this country for everyone to live free of the anxieties inherent in poverty. It just needs inspiring leadership, and a marginal tax rate of 60 per cent that cuts in at $60,000 a year.

Hugh Stretton is visiting Research Fellow in Economics at Adelaide University, and that's the University where he was once Professor of History. Mr Stretton's long and distinguished career in public life includes 20 years on the board of the Housing Trust of South Australia, which is one of the most remarkable examples of rational planning in the nation's history. In fact the story of the Housing Trust of South Australia figures prominently in Australia Fair as an example of how rational planning can use private enterprise and unionised labour for the benefit of all. So when I recorded this interview with Hugh Stretton when he was in Melbourne, I asked him to tell us the story of the Housing Trust of South Australia and why it's so important as a model for social and economic development in a mixed economy.

Hugh Stretton: What makes it special as a model is that it's a neglected kind of very successful mix between public and private enterprise. What brought it on was the dismal experience of South Australia, like a lot of the world, during the Depression. Its chief difference was that it had a quiet genius as Auditor-General - funny to find such a man in such a place. In those days, kids from poor families couldn't get to university, but they could get into the teachers' colleges, which were free, and the teachers' colleges recognised brains, and sent them to the university at teachers' college expense, and he was one of those. He was a very bright man.

Terry Lane: What was his name?

Hugh Stretton: William Wainwright. And he reasoned, late '20s, through the Depression and into the '30s, that the state wanted to industrialise because it was poor, it had nothing much except agrarian industries, they were not doing very well, and he just had original ideas about the way to attract serious industrial investment and do it effectively. He didn't do anything really to what you and I would recognise as attracting industrial investment. He induced the government to create the South Australian Housing Trust - note 'Trust', not a branch of the public service - he didn't employ any public servants. A clause of its Act said that the government must never give it advice or instruction about policy, unless they first exposed that to both Houses of Parliament, which they never did.

Terry Lane: And it wasn't primarily to create welfare housing?

Hugh Stretton: No, it was to correct the great normal inefficiency in the bottom end of many housing markets, and more particularly he hoped that it was a way to create some common interest between employers and employed. What they did was have one public privilege: the government guaranteed their borrowing, so they got a low rate of interest. They borrowed all the money they needed, they used it to build between 2,000 and 3,000 a year, scattered over a state the size of Texas remember, not all in Adelaide city, but country towns, industrial towns, all built, or 95 per cent built, by competitive private enterprise, using strong unionised labour, and the houses they built were for sale into the market. You could buy them, you could rent them at cost rents, you could rental purchase them, which was a specially privileged way of becoming an owner, but it still paid the Trust back its money. This wasn't designed to yield much profit, but it paid its way, and it did just what he had in mind, because there was a trick disguised in all this.

At that time, we had a strong Industrial Relations Commission, it set the basic wage, and it indexed that basic wage and all the awards above it, to the cost of living in the locality of the state. We had seven different basic wages. Thirty percent I think was it 28 per cent or 30 per cent of that index was house rent, so Wainwright thinks, we can drop house rent at least a third, and some other costs of living will fall too; the index will stay low, this won't hurt the workers but because they would be getting the same real income, the same purchasing power as before, and if these houses are built in reach of suitable industrial centres, we can perhaps sell a bit of that land cheap to the industrial investors, but that's the only thing they can expect from us.

Terry Lane: So, within reach, meaning within walking or cycling distance of the factory?

Hugh Stretton: Yes, normally. So that's what they did, and think who they attracted.

Terry Lane: Well they attracted General Motors.

Hugh Stretton: They attracted General Motors.

Terry Lane: Chrysler, Phillips, Mitsubishi later on.

Hugh Stretton: British Tube Mills, some oil refineries. And they found that it worked, they found that over the next quarter-century at least, and some of them for longer than that, they had willing workers, living nearby, with low costs of living who had never been among the more rebellious of the Australian workforce, but they halved their rate of industrial stoppage in these conditions, there was such common interest between their new employers and their gratitude for well-disciplined, well-protected employment in easy reach.

Terry Lane: So the cost of labour went down but real wages didn't go down. Was that the genius of the scheme?

Hugh Stretton: The effect of it was that you could make a car in South Australia, rewarding everybody who contributed to making it with the same purchasing power as they would have had to make that care in Sydney. But for the proprietors that meant the car was made for a good deal less money than it would have cost you to make it in Sydney. Wainwright even worked out the average cost of transport of the products to the main markets, which were in the eastern capital cities. And all that left a margin of advantage, directly in money costs, and a big margin of advantage in low industrial trouble, worked, spectacular effect.

Terry Lane: Does the Housing Trust of South Australia still exist? Did it survive the Olsen years for instance?

Hugh Stretton: Yes and no. The people are still there, they've been removed from their independence into the public service about 20 years ago, and now there is no systematic correction of the fault of the housing market going on; it's behaving like other housing markets, and the remaining stock of the Housing Trust is indeed welfare housing. Very few people in it are paying cost rents for it. It's a sad end.

Terry Lane: Does the model have application to other areas of the economy?

Hugh Stretton: I believe it often could. I think a most absurd thing about a great many of the arguments you hear these days is the contrasting of state and market, as if they were opposite principles. State being oppressive and bullying and all top-down, and market being free and voluntary and productive, or if you're on the other side, market being the way the rich run the poor, and the state being the decent people to protect the poor.

Terry Lane: One of the points that you make in connection with telling the story of the Housing Trust of South Australia is that the housing market is peculiarly inefficient when it is set completely free. Now why is that? What is it about the housing market that makes it so inefficient?

Hugh Stretton: It depends on what you choose as your test of efficiency. It's not inefficient, if you don't mind the rich living in mansions, the skilled labour living perhaps as our middle-class do, and the poor living in grass huts. The house is a very solid chunk of investment. We even legislate, you're not allowed to build bad houses, you're not allowed to build unplumbed, too small, unsafe houses. We rightly require you build a decent object, and we should therefore rightly require one way or another, that every employed person should be able to afford one, within reason, within ordinary credit constraints and so on.

Terry Lane: Now one of the remarkable things about the development of the Housing Trust of South Australia is that it was probably at its most productive during the long, long reign of Tom Playford, a Tory Premier of South Australia.

Hugh Stretton: Not only that, he got in and stayed in by the most outrageous gerrymander in Australian electoral history. One country vote counted for about three times as much as any town vote.

Terry Lane: And he also was, by all accounts, a very authoritarian Premier.

Hugh Stretton: Not in all things, but he was also a very concerned Premier; he understood people, he wished well to all the people he governed as far as one can tell.

Terry Lane: So perhaps South Australia was unusual. Perhaps even amongst Australian States it was unique?

Hugh Stretton: It was and it had been unusually thoughtful and inventive I think. Some of the other states might dispute that. It was founded in a quite unusual way. The only one that didn't start as a penal colony, founded in a rather theoretical way about new systems of land distribution and land sale to attract colonists. And when it started a university as I love to remind people, somebody, I've never discovered quite who among its founders, knew that if you demanded the regular orthodox qualifications from academics before you hired them, you'd get the worst in a place like this at a remote end of the world that nobody had heard of. So you must instead bet on promise. Find out which of the young are truly talented and risk them. That's the way Australia got its first three Nobel Prize winners. They all graduated from Adelaide, they didn't win their Nobel Prizes here, but they were wonderful when they were here.

Terry Lane: So perhaps there was a long tradition of applying reason in politics and economics.

Hugh Stretton: I mustn't make too much of this.

Terry Lane: No. I grew up in South Australia; I don't remember it as being a particularly reasonable place.

Hugh Stretton: No, it may not have survived.

Terry Lane: But perhaps it was. Look Hugh, one of the things that you mention in passing in the book, and I think that this is important in the consideration of the world in which we live at the moment where the dogma of economic rationalism seems to be triumphant. You mention the fact that when somebody challenged Paul Keating about the long-term outcome of his economic reforms, he justified everything that had happened, on the grounds that, well when he and Mr Hawke took over the government in 1983, a small car cost the equivalent of $30,000, I think this was the figure that he put on it. And now look, at the end of 13 years of Labor reform, a car costs $15,000. Now that's the argument which is always used to justify the considerable disruption of people's lives in the economy: well in the end, the things are cheaper for the consumer. What's the answer to that?

Hugh Stretton: Just look at its costs: a couple of million unemployed. We soon won't be making any cars because the Chinese can make all of them cheaper. And there are other things of that kind. And we pay for them, without difficulty, by selling coal, the rate the Chinese are expanding their purchases of coal, there'll be a lot of cheap cars for maybe 30 years, then no more coal, and there will be unemployed and unable to pay even for Chinese imports. It's a myth to think that a national economy, just a large locality in the world, has a natural tendency to optimise its resources if you leave these to just market bargainings. It's not true. Competition is real and it's real between regions, between different resources of labour and natural resources. You can't do without government, in all sorts of ways of course, you couldn't have private firms without government, you couldn't have markets without government, you couldn't have money without government. But also you can't have a prosperous, fully employed performance without using one or other or a number of the methods of keeping your economy in balance, methods that only government can apply. You decide if you want to industrialise, that you will set a reasonable minimum wage for Australians to earn, and you protect some of the things they make if it's necessary to sustain that. You make judgments, you don't do that sort of privilege for everybody's product, you judge what we can afford to treat in that way, what we do better to import cheap from people who make it cheaply. But a decent and intelligent government - you need to be both, not just well-intentioned - will realise they have to make what is fair to call moral judgments between the costs and the outcomes of various protective measures and various hard market exposures too. There have been very few perfectly free trading countries that have prospered much, and the few that do are not really prospering with their own resources, they tend to be safe havens for western industries to operate further from their own authorities, or something like that.

"I have known big tycoons in both public and private enterprises, who undoubtedly were concerned with inventive, productive valuable things. They're also determined that these must pay, believed that they could, but that they have a beady eye on nothing but the money is only true I think in some cases where we have allowed what I call executive plunder to get out of hand, where executives who are not owners, are not under any serious share owner control any more, or any serious public control either, and the multi-million dollar rewards they're contriving for each other I think do unmixed damage to our business life."

Terry Lane: Probably depends on how you define prosperity. You quote, from The Financial Times, a description of the New Zealand economic experiment, and how, after years of radical change to the New Zealand economy, New Zealanders were worse off at the end than they were at the beginning.

Hugh Stretton: Indeed they were, they had 18 years of zero economic growth alone in all the world.

Terry Lane: But as I read that, it occurred to me that perhaps both The Financial Times and you were using the wrong measure of success. Because if you applied a Marxist test to the results of that experiment, then the outcome was very good, because it must have increased the profit, the surplus that the owners of capital were able to take out of that particular economy. Their aim was never to create full employment or prosperity for the proletariat, so perhaps it was a success.

Hugh Stretton: I don't think it was any better than the capitalist proceeds of the regimes before and after it. It was mistaken; it wasn't just making a judgment between the villainy of the bosses and the benefits of the workers. You are most prosperous, and both parties are very often most prosperous, when you are more nearly fully employed.

Terry Lane: But of course they were, the economic rationalists in New Zealand were advancing the argument that if there was complete deregulation, if everything publicly owned was sold off to private capital, then everybody would become better off. I am doubtful whether that was ever their intention at the outset. They didn't really think that that was going to happen. Therefore by some standards, the New Zealand experiment has been a great success.

Hugh Stretton: Only by one standard, that's the writers who've said, 'If you judge it by the extent to which the announced reforms were put into action', they really were. But on no general economic social or other ground could you call it a success.

Terry Lane: It strikes me that perhaps the greatest tragedy that has befallen us in Australia is that we speak English, and that makes us look to other English-speaking countries as models to follow, and in particular, the United States, and that seems to be the only other country of which we have any reasonable knowledge. But you draw our attention in the book to Norway as an alternative model. Tell us about Norway and why it's special.

Hugh Stretton: I'll do that if in return you'll let me quarrel with your view that our English language is a disadvantage.

Terry Lane: All right.

Hugh Stretton: Norway's a small country of people who speak the same language, share the tradition, feel very much of a group themselves. They just have arrived at what I think are very intelligent relations between what the state needs to do if you want among other things, a successful market economy. They have high social standards above the equality with which income should be distributed, and the care with which people without it should be looked after, things that are utterly familiar to us, even if they're not prevailing very well at the moment in our economy. Ideas which I think the Norwegians might well have learned in the last half-century, to some extent, from English-speaking countries. But I love repeating the example of the three oil policies. May I do that?

Terry Lane: Yes.

Hugh Stretton: Oil was discovered in the North Sea and off north-western Australia at about the same time. Three countries had to decide what to do about their new rights over under-sea oil. We let the normal private enterprises go find it and mine it and sell it. It does us an advantage, we sell some of it overseas and it improves our balance of payments. We regulate it in some respects for safety and honest dealing. The British went further than that; they created the British National Oil Corporation, which mined all the oil that is allowed to be mined out of the large British area of the North Sea. Sold it to Britain for use, but above all, overseas, at quite high prices, and that income poured into British use in various market ways. The British were better off by that much. When the oil runs out, they'll be back where they started, perhaps even a bit worse for having relied on it too much. The Norwegians also created a National Oil Corporation to monopolise mining it - and I must emphasise that doesn't mean it was mined by public servants, Britain and Norway alike. The public managers only have to know all the specialist engineers you need to get oil out from under the North Sea, hire them, it's all done by private enterprises competing for the work but done for the benefit of the nation. But Norway insisted that of all the revenue sold abroad, the returns should stay abroad, in whatever currency they were earned, they should be invested abroad, perpetually, and Norway should merely use about the 10 per cent of their output that they need themselves for their small population. So when the oil runs out, the British will be much poorer than they have been up till then. When the oil runs out the Norwegians won't notice that it has, because they'll have the same foreign income pouring in from the investments that the oil has earned for them. It's the same as if an individual with a bonanza of income of some sort, instead of spending it, invests it all. That's what they've been doing.

Terry Lane: Do you ever get the feeling that there is a certain inexorability that this dogma that we might call economic rationalism, is now so dominant, so triumphant, that we just have to sit and wait and see where it ends.

Hugh Stretton: No, I don't think that, though I know many people do, led of course by the people who believe in it and think that it will be beneficial. I've lived long enough and I'm an historian, so like any historian I perhaps have more examples in my head of human societies who've been in trouble, who've been in what looked like difficult trouble, but who have made effective changes of direction, sometimes suddenly, sometimes quickly, often quite effectively.

Terry Lane: By the application of reason.

Hugh Stretton: Yes - mixtures of reason and the dominant influence and that sort of thing. There are many examples.

Terry Lane: I should say, name one.

Hugh Stretton: President Roosevelt got into office, 1932 I think or thereabouts, at the end of a dreadful Depression, in which economic rationalism was rampant. And he took to sending for young men with bright ideas. First he sent for a young man called Jim Landes, from Harvard who wrote the most strict and enforceable corporate law the world had seen, and American industry, despite its ill reputation, was among the best disciplined for a generation after that. It worked. Come the Second World War, before America was in it, as soon as it opened, President Roosevelt understood that the American economy would be called on to supply huge supplies to the combatants. It would inflate - be over-employed and inflate - so he sent for another young man from Harvard, and said: we don't want any inflation. And J.K. Galbraith in his 30s, designed the price control of practically every article in the United States for the next six years, which saw it go through the war and take part in the war with zero inflation. Extraordinary, unthinkable achievements. Both of them somewhat simple in principle, but there were people about who could attract mass support for simple principles that worked, and there are many of those. The one I was talking about, about the South Australian industrial reforms was among those. And I have a Japanese colleague who is one of the great historians of the successful industrial revolution in Japan after World War 1, through the years that ran up to World War II. Very much a few intelligent planners who weren't socialists, but reflected on the conditions in which you could have prosperous capitalist society with the state doing what the state does need to do, quite a lot of intentional planning and intentional provision and aid to private industries and so on. It worked. They got very rich, very quickly.

Terry Lane: So you're an optimist?

Hugh Stretton: I know it can be done, so I don't know about optimist, but I'm a combatant; I think you should keep trying.

Terry Lane: Where do you place yourself on the political spectrum?

Hugh Stretton: On the left, but that's on a simple proposition that left means wanting to reduce our inequalities and right means willing to allow them to increase. I don't for a moment mean dictatorial left any more than I think of right-wing people as Nazis or dictatorships. That's a not too contentious way of sorting people out. But it can operate in very simple ways I think. The range of incomes from top to bottom differs very much in different countries, in different capitalist countries; the competition is as energetic and as productive in Sweden as it is here with much greater differences. It's not wrong to talk about competitive energies, but they're not all just competing to make more money at someone else's expense, they're competing to make better cars, they're competing to build better houses, and all sorts of things which they richly enjoy doing.

Terry Lane: But you point out in the book and again of course this is something, this was a feature of capitalism that Marx drew attention to, and that is the growth of that class of manager, the managerial class who are not themselves the capitalists. The capitalists being the shareholders of the company, but a managerial class arises which is not primarily motivated by the desire to make something new or to improve the product, or to improve the lot of the workers, we now have a managerial class which is mainly motivated by its own - I'm trying to find a word other than 'greed' -

Hugh Stretton: Plunder. Executive plunder you're talking about.

Terry Lane: Yes. And this in itself, the existence of the limited liability company would change the nature of capitalism and create a new class of bourgeoisie. Now when you look at that managerial class, do you have the same confidence in them that you do, say, for instance, in a true capitalist, the man who starts up a new business, and builds up a business and does have some sort of personal relationship with his workers? He's a far cry from the manager who has no personal investment in the company.

Hugh Stretton:I can only say that you find all sorts. I have known big tycoons in both public and private enterprises, who undoubtedly were concerned with inventive, productive valuable things. They're also determined that these must pay, believed that they could, but that they have a beady eye on nothing but the money is only true I think in some cases where we have allowed what I call executive plunder to get out of hand, where executives who are not owners, are not under any serious share owner control any more, or any serious public control either, and the multi-million dollar rewards they're contriving for each other I think do unmixed damage to our business life.

Terry Lane: When you're speaking to an audience of people who are predominantly on the economic and political right, what are the good qualities in that audience that you would appeal to?

Hugh Stretton: There are many good qualities in that audience; I'm not sure I could appeal to them all. The things that too many intellectuals jeer at, family values, not necessarily strict religions, but deep concerns for other people, the natural sympathy we have for one another, is as common in those ranks as in any others I think, and they're not all aware that it's great Bible should be Adam Smith's first book, The Theory of Moral Sentiments. There are many features of private enterprise which are hugely valuable: inventiveness, independent thought, competition if it's well regulated and lawfully done, they're all as valuable as the private enterprises claim. It's just that it's quite wrong to think that it can take over and do well, the normal functions of government, or the normal functions of household housekeeping, and other things like that.

Terry Lane: I'll read you a very touching paragraph from right at the end of hour book and get you to comment on it.

In 2005 most people expect Labor to lose the 2007 election. So why not lose it with an up-to-date program of full employment and other blessings? Better to lose with an inspiring program than as a frightened copy-cat. And if the pessimists are wrong, and Labor wins with a program worth having, victory would be sweet. But what follows would be better than sweet. There would be hard, demanding, risky political and institutional work attacked by able business and political and press opponents, headlined as dangerous to all that we stand for, but inventive, adventurous and with more than a dash of fun.

Have you spotted anybody in the Labor party who's likely to come up with this program?

Hugh Stretton:You never know where they're going to come from.

Terry Lane: I don't know. If you look at Gough Whitlam perhaps as the sort of political prophet who came up with that program, we saw him coming for a long, long time, didn't we?

Hugh Stretton: He was defeated but that does happen, I'm not always an optimist, but it's absurd to help the damage along by conceding that it's unstoppable. You're just helping them. Very important not to do that.

Terry Lane: Hugh Stretton, talking about his book, Australia Fair which has just been published by the University of New South Wales Press. And that was a conversation recorded when Hugh Stretton was in Melbourne for the launch of the book.

Hugh Stretton AC is a research fellow in economics at Adelaide University. Formerly, he taught History at the University of Adelaide and Oxford University. His new book is Australia Fair (UNSW Press) This is the transcript of his interview with Terry Lane on Sunday 2 October 2005 on Terry's ABC Radio National program The National Interest. Trproduced with kind permisssion.