THE RELATIONS BETWEEN BUSINESS AND GOVERNMENT as evidenced in the protracted negotiations which accompanied the acquisition of the
Victoria Park racecourse site by Nuffield
{Australia) Pty. Ltd., 1945-1948.
Robert Clark
Degree: Master of Business Administration.
Date: July l, 1966. The purpose of this thesis is to outline the changed role of government in economic management.
The basic argument is that capitalism requires central guidance, and if this central guidance comes from government, as, in our society, it does, government automatically assumes the role of indispensable partner to business.
Government, in its day to day interference in social life, is seen as the manifestation of Adam
Smith's ~nvisible hand', the maintainer and ensurer of effective demand. The basic role of government, it is argued, is an economic one, and the effectiveness of a government policy is in terms of the addition it makes to national prosperity and the standard of living enjoyed by the community.
Private enterprise is seen as the main sector producing wealth. The standard against which the private business undertaking is to be measured is its profitability. The responsibility of private enterprise is production. The responsibility of government is the maintenance of effective demand.
Chapter 1 argues the reasons why government has been called upon to increase the quantity and degree of its interference in economic activity. Chapter 2 is concerned to provide a theoretical basis for the emerged society. This is done by outlining three theories pointing in three different directions: laissez-faire capitalism; communism; and planned capitalism.
Chapter J interprets the theories of Chapter 2 into policy, and points up the degree and kind of intervention demanded by the theories examined.
Chapter 4 argues the roles of government and business as the producers and distributors of wealth, by reference to Australian government policies, and interprets social legislation as being primarily economic in its intentions and effect.
Chapter 5 is a case study. Using the previously defined role of government, and the stated policies of the post-war Commonwealth Government, it presupposes to narrate the history of the purchase of the Victoria Park Racecourse for the establishment of a motor vehicle plant. The reservations to the scheme on the part of the Commonwealth and State
Governments are examined, as well as the reasons for the eagerness for the purchase on the part of the representatives of Nuffield (Australia) Ptyo Ltd.
Mr. George A. Lloyd and Lord Nuffield. J.
LIST OF CONTENTS.
PAGE
THESIS SUMMARY 1
CHAPTER 1 THE DIALECTIC OF THE EMERGED 5 SOCIETY
CHAPTER 2 THE THEORETICAL BASIS OF THE 17 EMERGED SOCIETY
(a) Adam Smith & Laissez Faire 21
(b) Karl Marx & Socialism 32 (c) John Maynard Keynes and Economic Pluralism 41
CHAPTER J THE ROLE OF GOVERNMENT 50 (a) Adam Smith's Concept of the Role of Government 52 (b) Karl Marx and the Role of Government 66
(c) John Maynard Keynes' Conception of Government's Role 71
CHAPTER 4 THE POST-KEYNESIAN SYNTHESIS 78 (a) The Roles of Government and Business as the Producers and Distributors of Wealth 80
(b) Social Legislation as a Means of Preserving Effective Demand 86 4.
LIST OF CONTENTS (CONTINUED) PAGE
CHAPTER .5 CASE STUDY - NUFFIELD AND THE 9.5 VICTORIA PARK RACECOURSE
(a) Government Policy 9.5
(b) Background of the Motor Vehicle Industry lOJ
(c) The Nuffield Bid 109
(d) Government's Attitude 122
(e) Agreement 12.5
BIBLIOGRAPHY 129 CHAPTER lo
THE DIALECTIC OF THE EMERGED SOCIETY.
On Monday, July 6, 1964, under the auspices of the British Institute of Management, and at the Hall of the Merchant Taylors' Company in Threadneedle
Street, London, Sir Robert Menzies, Prime Minister of
Australia, delivered the First Baillieu Lecture. It was entitled: The Interdependence of Political and
Industrial Leadership in the Modern State. In it he said:
"Today the management of state affairs cannot be artificially confined in its scope. Politics and industry are deeply involved with each other, acting and reacting upon each other. The qualifications of the modern statesman will be in adequate or incomplete unless he is conscious of the problems of industry and the impact upon these problems of political policies and actions. This is not just to say that there has been a change in political outlook; it is also to say that there has been a change in industrial outlook. Neither change is as yet complete."
Industrial problems are no longer regarded as purely private matters. Business problems are no longer resolved by private decisions made in a framework of unfettered competition. The climate in which business decisions are made is in large 6. provided and defined by government.
The intermingling and interdependence of business and government is a recent phenomenon, and three prime causes can be recognized as contributing to its appearance.
1. The divorce of ownership from management
created the need for a new class of person 1 the professional manager. Ownership is
legitimized by the tradition of private
property rights. Management, on the other
hand, has no such fundamental and social
raison d'etre. In order to harness its
social usefulness, it has been necessary
to bind its power by economic and legal
constraints.
2. The general acceptance of Keynesian economic
theory has made it mandatory for governments
to control the natural fluctuations of the
business cycle. Acceptance of the
desirability of full employment, the
1 welfare state', and universal suffrage
have combined to reinforce this mandate.
1 Burnham, James: The Managerial Revolution (Pelican, 1962), p.74. 7.
J. As the world has become more complicated by
international trade and finance, by economic
theories and policies involving total societies
and affecting almost every individual in a
society, and by social demands more and more
concerned with economic welfare, governments
can no longer afford to be passive observers.
We talk today of a 'corporate system' in the same way as we do a 'feudal system'. The corporate system in Australia when compared with the United States of
America is embryonic. Yet this embryp has all the physical attributes manifested by its larger and older relative. It has attracted to itself a combination of traits and powers which distinguish it from other
systems of social and economic organisation, and it is because of the catholic nature of its traits and the magnitude of its powers that government has been
called upon and seen fit to define more specifically
the boundaries within which it shall operate. The
corporate system is regarded as worthwhile, basically, because of its effectiveness as a method of property
tenure and as a means of organizing economic life.
The corporate system rests upon two developments,
each of which has made possible an extension of the 8.
area under a uni£ied control. The £actory system,
the basis 0£ the industrial revolution, brought an
increasingly large number 0£ employees under a single management. Then the modern business, equally revolutionary in its e££ect, placed the wealth 0£
innumerable individuals under the same central control.
The independent worker who enters the £actory becomes
a wage labourer surrendering the direction 0£ his
labour to his managerial master. The property owner who invests in a modern business surrenders his wealth
to those in control 0£ the business, and has exchanged
the position 0£ individual owner £or one where he becomes the recipient 0£ the wages 0£ capital.
The separation 0£ ownership £rom control produces
a condition where the interests 0£ the owner and the ultimate manager may, and o£ten do, diverge. By the use 0£ the market £or securities, each business assumes
obligations towards the investing public trans£orming
it £rom a legal method clothing the rule 0£ a £ew
individuals into an institution nominally serving the
interests 0£ investors who have entrusted their £unds
to its enterprises. New responsibilities towards
owners, workers, consumers and the state thus rest
on the £ew shoulders 0£ those in control. 9.
The modern business has worked a revolution it has divided ownership into nominal ownership, and the power formerly joined to it into nominal power. Out- wardly this change is simple enough. Men are less
likely to own the physical instruments of production
and more likely to own pieces of paper known as stocks,
shares, bonds and other securities. Beneath this lies
a more fundamental change. Physical control over the instruments of production has been surrendered to
centralized groups who manage property in bulk. These
centralized groups are neither property owners, nor
are they democratically elected by those over whom
they wield power. In order to countervail many of
their activities, and reduce the potentialities of
their power, government has, of necessity, bound the
business community with legal and economic sanctions.
Another change - revolutionary rather than
evolutionary - has taken place this century. That is
the change in economic theory. Given impetus by the
Great Depression it came to fruition in Lord Keynes'
The General Theory of Employment, Interest and Money.
Pre-Keynesian economic theory and practice was
based upon the irrefutability of Say 1 s Law of Markets,
which held that the act of producing goods provided the 10. purchase price, neither too much nor too little, for buying them. Thus there was the invariable
equivalence between the value of that which was produced and the purchasing power to buy that production. A requirement of Say 1 s Law and the classical system of
economic organisation was competition. This was fundamental to the design of the system and, if present in a sufficiently rigorous form, it was also enough. As time passed the degree and kind of competition that was necessary tended to become more and more rigorously
specified. Adam Smith contented himself with distinguishing competition from monopoly by its
consequences. Towards the end of the nineteenth
centry writers began to make explicit what had previously been implied: viz, that competition required
that there be a considerable number of sellers in any
trade or industry, and these sellers maintain informed
communication with each other. This crystallised into
the requirements of many sellers doing business with many buyers; each well informed as to the prices at which others are buying and selling; and, most important
of all, no buyer and no seller large enough to exercise
any control or an appreciable influence on the common ll. . 2 priceo
By the early decades of the twentieth century the definition of competition was gradually accommodated to the requirements of a model economic society. It became not a definition that described reality, but one that produced ideal results. The aim of economics ceased to be that of interpreting the real world, and became the building of a model of an ideal society.
"Man cannot live without an economic theology - without some rationalization of the abstract and seemingly inchoate arrangements which provide him with his livelihood. For this purpose the competitive of classical model had many advantages. It was comprehensive and internally consistent. By asserting that it was a description of reality the conservative could use it as the justif ication of the existing order. For the reformer it could be a goal, a beacon to mark the path of needed changeo Both could be united in the central faith at least so long as nothing happened to strain unduly their capacity £or belie£. 11 J
The capacity of the classical model to solve the problem of efficiency was what endeared it most to economists. Efficiency is a fetish of economists, and in the beginning there was a strong humanitarian
2 Galbraith, J.K.: American Capitalism {Pelican Books, 196J) Ch. 2.
J Ibid, p.Jl. 12. reason for this preoccupation - poverty. For the businessman and the politician, on the other hand, the main appeal of the competitive model was its solution of the problem of power. Man is a creature loath to acknowledge responsibilities affecting the incomes or property of other men. This is rationalized into the belief that a man does not seek to control - he seeks to serve. This belief is held in the face of one of the fundamental teachings of psychology: inherent in most men is a desire for power.
Power presents an awkward problem for a society which abhors its existence, disavows its possession, but values its exercise. The businessman is not disturbed about the use of authority of which, by hard work and merit, he has become the custodian; he is alarmed by its misuse by government. The liberal views the exercise of private business power with concern.
The competitive economic model provided an almost perfect solution to the problem of power. Given its rigorous prescriptions of competition, there was little scope for the exercise of private business power. And with the private exercise so circumscribed, there was no need for public authority to regulate it. The man who lJ. seeks to exploit his consumers by high prices is brought to grief by his own greed; his customers desert him for one or other of his numerous competitors who are not exploiting anyone. Similarly the wage-earner will not stand exploitation. Failure to obtain the going rate will cause him to join a firm where the going wage is paid.
In the classical model, intervention by the state in the economy was excluded with equal vigour whether the motives of the state were assumed to be malevolent or benign. Well-intentioned or not, intervention was at best redundant, at worst harmful.
The theory of capitalism as outlined in the classical model was vulnerable on two points economic statistics and economic theory. The system, to be useful, had to work. Competition had to exist as defined in the system. Two death blows fell almost simultaneously in the decade of the 'thirties'. The first blow was the Great Depression. The second, the new economics of Lord Keynes. Government inherited the problem of restarting business activity, and the new economics gave it the tools with which to carry out this task.
Whatever could have happened domestically in the 14. absence of government intervention, it is apparent that international trade is today so involved with government
trade and services 9 trade treaties, international conventions and export inducements, and business is so dependent on the activities of public business under takings, that one could not survive without the other.
"••• it is still the practice of many economists and financial writers to regard capital expenditure in 1 the public sector' and in 1 the private sector' as if they were referring to two mutually exclusive and indeed actively competitive zones. Nothing could be more wrong. When private capital is laid out upon capital expansions of industry, this is done on the assumption that public capital expenditure will be made to provide the streets or roads, the water services, the lighting services, the schools, the means of public transport, the housing without which an extended industry could not hope to carry on. I would be prepared to say that in my own country, the overwhelming bulk of expenditure in the so-called public sector is basic expenditure in the private sector. 11 4
One of the recommendations of the Vernon Report is that the Australian Government should set up a committee to advise on economic growth modelled on the Economic
Council of Canada. This recommendation is a
4 Sir Robert Menzies: The Interdependence of Political & Industrial Leadership in the Modern State; First Baillieu Lecture, July 6, 1964. recognition of the increasing complexities of national and international economic activities.
Neocapitalism in the Western World underwent a significant mutation in the first years of this decade.
These were the years of the Kennedy brain-trust takeover in Washington, the world-wide infatuation with French planning, and the establishment in the United Kingdom of the N.E.D.C. Some of this enthusiasm subsided very quickly. The Kennedy wave retreated before a tide of
Texam empiricism, and some of the infatuation with French planning turned to disenchantment. But many of the changes stuck, with the result that economic management has altered irrevocablyo Most Western governments that had not already done so conceded in the years 1961-63 the case for co-ordination by face-to-face agreement, rather than by the machinations of an anonymous market or the long-term plans of the major economic agents, vizo their own departments and the big corporations making massive slow-maturing investments.
This change of heart has been variously expressed: by the establishment of full-blown planning commissions in countries like Italy; or by the more discreet planning bureaux in strongholds of laissez-faire like Belgium; or by a strengthening of mixed business-government 16. advisory bodies as in the U.S. In 1961 New Zealand set up its Monetary and Economic Council on the advice
0£ a Royal Commission not dissimilar to the Vernon
Committee. The £act that it has been ignored by
Wellington policy-makers does not detract £rom in£ormed recognition that such bodies are necessary in our complex and complexing world.
Typically, Australia has le£t it late to recognise the bene£its that can accrue £rom planning. One does not have to accept the extreme view 0£ Pro£essor H.W.
Arndt that, 'consultative planning• (or 'indicative planning' as it is called in France) is wasted e££ort and that 'imperative planning', which requires en£orceable targets, is the only way to achieve e££ective co-ordination, in order to acknowledge that planning is airerequisite 0£ the modern economy.
The involvement 0£ public good in private enterprise grows in direct proportion to the size 0£ the dominant business enterprises. 17.
CHAPTER 2.
The Theoretical Basis of the Emerged Society.
The economic structure of any society, and the
changes which it undergoes, are major influences on economic thinking.1 Most economic historians share this conviction, though they rarely state it explicitly.
Reluctance to accept this proposition arises partly because it is most often put forward as the sole determinant, and partly because it is difficult to demonstrate which is the cause and which the effect.
It should be emphasized that the economic factor is a major factor in a more generalised chain of causes, this casual chain being long and devious. Nor can one deny that ideas, in their turn, influence economic practice and policy. Indeed, in the short run, as
Keynes remarked, the vapourings of some obscure scribe may have an altogether disproportionate effect on current policy. In the development of a doctrine, the
evolutionary stage reached by the existing social order
is of outstanding importance.
One of the most striking aspects of economic theory
l Heimann, Edward: History of Economic Doctrines (Oxford U.P., 1959) Ch.2. is the recency of its divorce from other social sciences and philosophy. The first publication of Adam Smith's
An Enquiry into the Nature and Causes of the Wealth of
Nations was in 1776. This is generally held to be the first work concerned solely with economic matters.
Economic thoughts and theories were propounded before this date, of course, but not as separate and distinct theoretical investigations. The Greek and medieval
Christian philosophers had evinced interest in the oikonomia the problem of organising the oikos or household the community of those co-operating under 2 one roof. In Roman law the household was the cell of social life. The higher and more inclusive organisations in both ancient and medieval times were considered extensions of the household. The city-state, the lord of the manor, or the king of the realm, was responsible for the welfare of the community in much the same way as the head of the family was for members of the house- hold. In return he was entitled to a member's loyalty.
Like the household, these were planned economies.
The discussions and conclusions of Aristotle and
2 Ibid., p.22. St. Thomas Aquinas were confined in a framework of general rights and duties, with a view to securing a socially optinn.un result.3 Economics, in such a context, is applied ethics.
The medieval concept of the world as a universal cosmos was shattered by sudden and rapid advances in scientific knowledge, and by the rise of the nation- state. One empire gave way to a multiplicity of national territories, whose authority was no longer derived from a Supreme Being. The state claimed to be absolute; its sovereignty neither derived from nor subject to any authority higher than itself.
The bourgeois economy was at first dependent on the guidance of the state, and as a consequence economics became a branch of political theory. Thus economics could not manifest itself as theory, only as policy.
By the end of the seventeenth century the new state was beginning to be regarded for what it was: the creature of economic power no less than its master.
Though the changes in economic policy were less rapid than those in political philosophy, state regulation of
J Ibid., p.2J. 20. economic li£e was breaking down.
The decline 0£ state intervention went hand in hand with the disappearance of monopoly and the growth of competition. The cause and reinforcement of both these tendencies was the growth of industrial production.
It was left to Adam Smith and David Ricardo to bring order to the still chaotic state of economic enquiry, and to explain the mystery of order in apparent dis-order.
The laissez-faire economy as described by Adam
Smith lasted, with changes both major and minor, and with the kind of development that takes place with evoluntionary growth, for a century and a half. Though there were cries of dissent, notably from Karl Marx, the system was basically as described by Smith.
It took world war and a world-wide depression to sound the death-knell to the free economy. The competitive society of the nineteenth century gave way to the corporate society of the twentieth. But its birth was premature. Without a name, and without the paternal guidance of a comprehensive theory to steer its development, the young infant suffered a number of childhood afflictions.
The emerged society discovered a philosophy in the works of John Maynard Keynes. In many respects this 21. new phi1osophy was simi1ar to that of the Mercanti1ists, the exp1ainers of the nation-state. This is not a1together unexpected. The competitive society was based upon the assumption of a mu1tip1icity of producers and a mu1tip1icity of buyers. The corporate society,
1ik.e the nation-state, is based upon the assumption of a sma11 number of 1arge producers, and a sma11 number of 1arge buyers.
Competition, as defined in the economics of the c1assicists no 1onger exists, despite the strainings of some governments to revive it, and the desparate1y futi1e tub-thumpings of businessmen to persuade the genera1 popu1ation that it is sti11 their safeguard. The competitive economy has been rep1aced by the corporate economy; and competition by pseudo-competition. But the change is as yet incomp1ete. In some industries, particu1ar1y agricu1ture, competition is sti11 workab1e.
However, in others such as the heavy industries requiring immense capital expenditure and investment, the deve1opment is a1most at the fina1 stage.
(a) Adam Smith and Laissez-Faire.
The core of Smith's theory of va1ue and distribution is contained in Book 1 of the Wea1th of Nations. It opens with a discussion of the advantages of division 22. of labour, which is understood in the sense of specialization of tasks within an industry. It is not until later, in Book V, that excessive specialization is admitted to have some disadvantages. But 'division of labour' may also mean the separation of different trades and their concentration upon the production of single goods. This sense of the phrase soon comes to overshadow the earlier conception. Indeed, the whole of Book l is constructed around the grand theme of the social division of labour: the economic system is, in essence, a vast network of interrelations among specialized producers, held together by "the propensity 4 to truck, barter, and exchange." The last paragraph of chapter l makes this plain enough.
The division of labour, Smith maintains, is not the creation of the human mind, but rather the consequence of the interaction of developing man and his environment. We are told that -
"the certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he may have occasion for, encourages
4 Smith, Adam: An In uiry into the Nature & Causes of the Wealth of Nations Irwin, 19 J. Voll, p.ll. 2J.
every man to apply himself to a part icular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business." 5
The characteristic faith of the eighteenth century in the powerful influence of nurture as against nature explains why Smith neglects to cite the accommodation of different natural aptitudes as one of the advantages of division of labour; but the territorial division of labour is ignored without any apparent reason. In
Chapter J he points out what is almost self-evident, that the division of labour is limited by the extent of the market. 6 In this chapter he foreshadows the later discussions of the limits of increasing returns to scale, and emphasises the economies brought about by improved means of transport and communication.
Up to this stage of his thesis, exchange is considered solely as barter. He now introduces money, and use value is distingued from exchange value by the water-diamond paradox.7 Smith appears to have been in two minds about the problems he was posing.
5 Ibid., pp.12-lJ. 6 Ibid., p.14. 7 Ibid., p.22. 24.
"In order to investigate the principles which regulate the exchangeable value of commodities, I shall endeavour to shew, ltFirst, what is the real measure of this exchangeable value; or wherein consists the real price of all commodities. HSecondly, what are the different parts of which this real price is composed or made Upo
11 And lastly, what are the different circumstances which sometimes raise some or all of these different parts of price alone, and sometimes sink them below their natural or ordinary rate; or what are the causes which sometimes hinder the market price, that is, the actual price of commodities, from coinciding exactly with what may be called their natural price. 11 8
This confuses two very different sorts of question:
What is the best measure of value, and what is it that determines value? His ensuing discussion lacks startlingly in clarity, a fact that Smith recognised as he apologises in advance for its obscurityo9
In Chapters 6 and 7 he takes up the traditional problem of value theory: Why are relative prices what they are? At any moment, the market price is determined by supply and demand. But as these forces work themselves out, there is a constant tendency for the market price to
8 Ibido, p.22.
9. Ibid. , p. 23. be reduced to a 'normal', or as Smith says, 'natural' 10 level. What he calls 'market price' and 'natural price' are identical with what Marshall calls short-period and long-period price. Like Marshall, Smith is primarily interested in how prices are determined in the long-run.
To motivate his ultimate explanation, Smith constructs a simple model in which only one factor of production is used to produce commodities. In this one-factor world, relative prices are governed by relative labour costs, and even the premium paid to skilled over unskilled labour is no more than a payment for the labour involved in extra training. This argument is designed to show only that the exchange value, in the real world, cannot be determined solely by the labour expended in its production. The value of a commodity is the sum of the normal amounts payable to all the factors used in making it - wages, rents and profits, the 'natural prices of labour, land and capital.
Essentially, Smith's is a cost-of-production theory of value, but because he has no consistent theory of wages and rent, and no theory of profit or pure interest, his explanation is one in which prices are explained by prices.
10 Ibid D ' p O 44 D 26.
Looking carefully at Smith's examples of price determination, 11 he always assumes implicitly that the
'natural price' of a commodity does not vary with its
rate of output. He is, then, assuming that the industry
in question produces under conditions of constant costs:
to make two units of an article costs exactly twice as much as to make one. This is the case where the long
run supply curve of the industry is perfectly horizontal
and the level of 'demand governs the quantity produced but has no influence on price.'
Presenting Smith's argument graphically, (Fig.(1)),
consider the following:
"When the quantity of any commodity which is brought to market falls short of effectual demand (the short-run supply curve shifts from S.R.S l to S.R.S. 2), all those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither, cannot be supplied with the quantity which they want (ql). Rather than want it altogether, some of them will be willing to give more (P2). A competition will immediately begin among them, and the market price will rise more or less above the natural price according as either the greatness of the deficiency, or the wealth and wanton luxury of the competitors, happen to aminate more or less the eagerness of the competition •• a
11 Ibid., Oh.VII.
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"When the quantity brought to market exceeds the effectual demand (S.R.S.l, shifts to S.R.S.3), it cannot be all sold ••• The Market price will sink more or less below the natural price (£all to P3), according as the greatness 0£ the excess increases more or less the competition 0£ the sellers, or according as it happens to be more or less important to them to get immediately rid of the commodity••• "When the quantity brought to market is just sufficient to supply the effectual demand and no more, the market price naturally comes to be either exactly 9 or as nearly as can be
judged o£ 9 the same with the natural price. The whole quantity upon hand can be disposed of £or this price, and cannot be disposed of £or more. 11 12
It will be noted that Smith thinks 0£ demand and supply as referring to peoples willingness to buy or sell at a particular price rather than at all possible prices.
The former is expressed in actual amounts desired or offered, the latter in a schedule 0£ amounts, each corresponding to a different price.
In the course 0£ Chapter VII, Smith defines the prerequisites of competition. The common usage 0£ the term •competition• as denoting rivalry is reflected in his remark that a reduced supply leads to competition among buyers, which raises the price, while an excess 0£ supply leads to rivalry to get rid 0£ the surplus, which causes the price to £a11.13 He makes clear that he is
12 Ibid., pp.45-46
13 Ibid. , p. 48. 29. aware that competition deprives the participants in the market process of the power to influence price and that the larger the number of sellers, the greater the obstacles to 'combinations'. In the course of Chapter
VII he mentions not only these, but also perfect information and perfect mobility of resources as prerequisites of competition. The only addition the modern textbook would add is homogoneity of product.
Returning to Chapter V, Smith here is concerned not with value theory, but welfare economics, and in particular, index numbers. The real price of a good or service is its purchasing power over other goods; its nominal price corrected for changes in the value of 14 money. Smith corrects nominal values for changes in money wage rates rather than changes in the level of prices, a procedure adopted by Keynes. In the short run, it makes little difference if one corrects for price changes or wage changes, but the choice of a deflator becomes a serious matter in the long run, for, as the productivity of labour rises, prices will normally fall relative to wage rates. Unlike Keynes, Adam Smith
14 Ibid., p.26. JO. did not want to measure real income over long periods of time. His choice of the labour standard was dictated by his conception of the nature of economic welfare, not by any conviction that money wages are less subject to variation than prices in general. Smith tried to go deeper than comparing the relative economic positions of people in different societies and over timeo He associated improvements in welfare with a reduction in the sacrifices required to obtain a slab of real income.
Labour is irksome, and an individual's wealth is naturally measured by the ability to command other people's products, but the pursuit of wealth under a division of labour is motivated by a desire to save one's self from disagreeable labour, and instead, impose it on otherso The question of whose labour is sidestepped by referring curtly to the bargaining of the marketo
The balance of Book I need not concern us here.
Book II, Chapter I deals with capital accumulation as the mainspring of economic progress. The introduct:kn lays down the concept that capital is, in essence, a stock of unfinished goods which enables the producer to span the time between the application of inputs and Jl. the emergence of final outputs.15 He differentiates between circulating capital and fixed capital, circulating capital being those goods which yield a profit by being sold, while fixed capital takes part in the production process without being sold.16
Chapter J introduces the concept of productive labour, followed by a eulogy on saving and a hint of
Say's law. He distinguishes between productive and unproductive labour on the basis of activity that results in capital accumulation, and the unproductive use of savings in service industries catering to the demands for luxuries. Though the distinction between productive and unproductive labour is unfashionable, it is always made during wartime when it is made the basis of drafting some people and deferring others.
The only other section dealing with economic theory of the Wealth of Nations that is the concern of this outline is to be found in Book IV. In Chapter 2 of this book he presents a simple argument in favour of free trade.17
It can never pay an individual to produce himself what
15 Ibid., p.211.
16 Ibid
17 Ibid., Vol.ii, pp.2Q-J6. 32. he can buy more cheaply from someone else. He enlists
the powerful motive of self-interest to show that the general welfare if best promoted by removing all restrictions on imports and exports. Intending only their own good, men are led by an "invisible hand" to further social ends. The underlying thesis is that the interest of the community is simply the sum of the
·interests of the members who compose it: each man, if left alone, will seek to maximize his own wealth, therefore, all men, if unimpeded, will maximize aggregate wealth. This doctrine of spontaneous harmony of interests, on examination, turns out to be identical with the concept of perfect competition; the "invisible hand" is nothing more than the automatic equilibrating mechanism of the competitive market, the foundations of which we have seen, Smith had laid earlier.
(b) Karl Marx and Socialismo
The first volume of Capital is framed so as to bring out the essential nature of profit as a surplus value produced by labour. Marx begins with the distinction between use value and exchange value, and immediately
lays down the proposition that goods exchange at ratios 33. that are the reciprocals of the ratio of labour required 18 to produce them. The problem is approached in
Aristotelian fashion by the question: What have commodities in common by virtue of which they can be equated to one another as exchange values? This element, common to all products, must, firstly, be capable of quantification; and secondly, cannot have exchange value. If either of these prerequisites are not met, then nothing will be explained.
Marx does not state the conditions under which competitive rates of exchange correspond to the labour embodied in commodities: equal capital-labour ratios in all industries and constant costs of production. But the assumption of constant costs in embodied in the concept of "socially necessary labour". Value, Marx says, is determined by the man-hours required to produce a commodity. The intensity of effort, however, is not constant from man to man, or from time to time. To overcome this problem, the concept of "labour time requisite for producing a use value under the extant social and average conditions of production, and with
18 Marx, Karl: Capital (Dent & Sons, 1962), p.7. J4. the average degree of intensity and skill of labour1119 is used.
Apart from the intensity of effort, there is also the problem of labour of different skills. Marx decides to treat skilled labour as a multiple of unskilled labour, and takes unskilled common labour as the fundamental value-creating unit.20 Later, he defends
·this procedure by the argument that the 'production' of skilled labour involves the expenditure of labour time in the form of training; skilled labour is more valuable than unskilled labour, and they exchange for one another according to the man-hours required to produce them. 21
The assumptions of homogeneous labour and a given wage structure - for this is Marx's argument - are perfectly legimate first approximations. Proper criticism of Marx is that he nowhere relaxed these assumptions to ask how relative wages themselves are determined. He has simply defined a situation where the conditions of equilibreum have been reached, without explaining how they have been achieved, or how the amount of "socially necessary labour" is determined.
19 Ibid., p.7. 20 Ibid., p.lJ. 21 Ibid., Ch.7. 35.
Marx sets the stage for the solution of the riddle of surplus value by looking at exchange and productiono22
The exchange of goods begins with a sale and ends with a purchase. The production process begins with a purchase and ends with a sale. The problem facing Marx is to explain how a surplus is created by turning money capital into commodities and back into money againo He cannot argue that goods are bought below their value and sold above it, for then the sum of all individual gains would be zero. He argues that, in a capitalist economy, it is not labour that is bought, but labour power, "a commodity whose use-value possesses the peculiar property of being a source of value 11 • 23 The value of labour power is determined by the labour required to produce it - the labour required to produce means of subsistence. Since labour is physically productive, it follows, Marx suggests, that the value of labour's output will exceed vhe value of labour's services.
Hence the existence of surplus value, and its compatability with exchange of equivalents. But the contrast between labour and labour power is only a
22 Ibid., Ch.4.
2J Ibid., p.192. J6. terminological abstraction. Moreover, Marx fails to point out that competition provides no mechanism to reduce the "market price" of labour to its "natural price."
The labour theory of value, as such, does not guarantee that labour power will sell at its value.
It was Marx's intention to show that the average rate of profit, calculated on total capital invested, hides the true nature of profit: viz, its sole dependence on capital expended to purchase direct labour services. In Volume I, we are told that surplus value accrues to each capitalist in accordance with his outlays on labour. But, since capital-labour ratios differ between industries, while the rate of profit tends to be uniform, it cannot be true that profits in each industry depend solely on wage capital. It is quite clear that Marx thought he had actually demonstrated that total profits equal total surplus value, but the assumption that each worker generates a constant surplus requires proof to be credible. And the proof is not forthcoming.
Marx's theory of surplus value provides the framework on which he bases his analysis of economic development under capitalism. The essence of the capitalist system, in his view, is the division of the 37. population into two classes: capitalists, who own the means of production; and workers, whose only asset is labour power. The available supply of labour power and the existing means of production are capable of producing a flow of commodities greater than that needed to maintain the supply of labour power and the stock of equipment intact. The economy can produce a surplus over and above the value of the subsistence needs of workers, and the value of raw materials and depreciation of equipment used up in production. This surplus is reaped by capitalists as profits, interests and rents, and is, according to Marx, attributable only to the application of labour.
In Marx's model, aggregate employment is determined by the size of the capital stock and the state of technology. At any particular time, because capitalists are competing with each other for profits by the increased use of machinery in the production process, the supply of labour exceeds the volume of employment that capacity utilization of the existing stock of capital equipment can provide. Redundant labour, - the
"industrial reserve army" - competes with the employed labour force and tends to press wages down to the subsistence level. J8.
The value of the total product produced in the economy during any period is the sum of three components:
(1) constant capital (c) the value of plant and
raw materials used up in production;
(2) variable capital (v) - the value of labour
power expended during the period; and
(J) surplus value (s)
The rate of exploitation is given by Marx as the . s ra t 10 ... He expresses this as a division of working V time into the time in which labour works for itself, and the time it works for capitalists. Thus, if s l, labour takes one half of its working time to -V = produce the value of its means of subsistence, and half is taken producing surplus value. For simplicity, assume variable and constant capital each turnover once during a period, then s is the rate of profit on C + V invested capital, and c is what Marx terms the "organic V composition of capitai. 1124
24 "The composition of capital is to be understood in a two-fold sense. From the outlook of value, it is determined by the proportions in which it is divided into constant capital, or the value of the means of production, and variable capital, or the value of labour power, the total amount of wages ••• I term the value composition of capital••• the 'organic composition' of capital". Ibid., p.675. 39.
The goal of capitalists is to increase the mass of surplus value which they receive. With a given labour force this can be achieved by raising the rate of exploitation. There are three ways of accomplishing this.
(1) The working day can be extended.
(2) The wages paid to labour can be reduced
below the subsistence level. But this
can only be done temporarily if the labour
supply is to be maintained.
(3) The economic surplus accruing to the
capitalist class can be increased by raising
the productiveness of labour. This involves
a change in technology.
In the Marxian model, technological improvements take place at a rapid rate, and industry becomes more capital - intensive. To take advantage of technological progress, capitalists require a large stock of capital, and the only way they can increase the capital stock is to save. They must not consume all the economic surplus.
Marx contends that, in the development of capitalism, increasing the productivity of labour is the major way
in which attempts are made to increase surplus value.
The two alternatives have definite physical limits. 4o.
To increase the mass of surplus value, the capitalist must increase c. To increase profits, he can increase c, or c + v. If these are the ends of capitalism, and
Marx maintains they are, then each capitalist discovers he can accumulate only by reinvesting his profits.
Some will, by virtue of size, thrift, or some other advantage, be more successful at accumulation than others.
Those who are least successful join the ranks of the
11 industrial reserve army". The number of capitalists is thus diminished, but the revolt of the working class grows as they grow in number, and are united within fewer and fewer industrial undertakings. They are disciplined, organized and united by the very mecha:rism of the process of capitalist production itself.
"Capitalist monopoly becomes a fetter upon the method of production which has flourished with it and under it. The centralized means of production and the socialization of labour reach a point where they prove incompatible with their capitalist husk. This bursts as under. The knell of capitalist private property sounds. The expropriators are expropriated." 2.5
2.5 Ibid. , p. 846. 41.
(c) John Maynard Keynes and Economic Pluralism.
The logical starting point in an outline of Keynes
General Theory of Employment, Interest and Money is the 26 principle of effective demand. The adjective
1teffective 11 is used to designate the point where the aggregate supply curve intersects the aggregate demand curve.(Fig.2) Other points on the aggregate demand curve are not effective in determining the actual volume of employment. "Effective" is also used to distinguish between mere desire to buy and the desire plus ability to buy. Only the latter has economic significance.
The term "demand" as used by Keynes refers to aggregate demand of the whole economic system, and must be distinguished from the demand for the products of individual firms and individual industries. Since the output of the entire economic system cannot be measured in simple physical units such as tons or bushels, Keynes uses the amount of labour employed as the measure of output as a whole. As more labour is employed, more output is produced and total proceeds increased.
26 Keynes, John Maynard: The General Theory of Employment, Interest and Money, {MacMillan, 1957) Ch.J. 42.
t z ~ ~ ~ ~ ~
~ D 0 ~p 0 w V 0 ~
z
N EMPLOVMENT
DD - The Aggregate Demand Schedule: The proceeds or receipts (P) expected to be forthcoming for output produced by varying amounts of employment (N).
ZZ - The Aggregate Supply Schedule: The proceeds or receipts (P) which will just induce given amounts of employment (N). 4J.
In a business-enterprise economy where profit is the motive to produce, each business-man will employ the number of workers which will yield him the greatest profit. A certain minimum amount of proceeds will be necessary to induce employers as a whole1D offer any given aggregate amount of employment. The aggregate supply schedule {or function) is a schedule of the minimum amounts of proceeds required to induce varying quantities of employment. At the point where these two curves intersect, the point of effective demand
{E in Fig.2), entrepreneurs maximize their expected profits. There is no reason to assume that this point will correspond to full employment. According to Keynes, this will occur only if investment demand equals the gap between the aggregate supply price corresponding to full employment and the amount consumers, in the aggregate, choose to spend for consumption out of income at full employment.27
Assuming, as Keynes does, the aggregate supply curve to be given, the thesis of his General Theory is that employment is determined by the propensity to consume and the amount of investment at a given time.
27 Ibid., pp 25-26. 44.
The propensity to consume (or consumption schedule) represents the stable relationship assumed by Keynes
to exist between the size of the national income and
the amount that will be spent by the public for . 28 consump t ion. The consumption schedule follows the
conventional maxim: When income rises, consumption
also rises, but less than income. Consequently, to
increase employment, investment must rise to fill the gap between income and consumption.
An essential part of Keynes' theory is the
assumption that the propensity to consume is relatively
stable in the short run. If this assumption is valid,
the amount of community consumption varies in a regular manner with aggregate income. What the actual schedule
of the propensity to consume will be at any time depends
on the established customs of the community, the
distribution of income, the tax system and other factors.
Effective demand for investment is more complex
and more unstable than effective demand for consumption.
Investment means producing more than is currently
consumed, and takes the form of adding to the wealth of
28 Ibid., p.90. society. The inducement to invest arises from the expectations 0£ businessmen that investment will prove profitable. Since expectations are based upon precarious estimates of the future, the volume of investment is apt to fluctuate widely. Businessmen will borrow or invest up to a point where the expected return from new investment is equal to the cost of borrowing funds with which to carry out the investment, as this is the point at which profits are maximized.
The expected profitability of new investment is called the marginal efficiency of capita1, 29 and this and the rate of interest determine the demand for investment.
The marginal efficiency of capital is characterized by short-term instability and a tendency towards long- term decline. Fluctuations in the margiml. efficiency of capital are the fundamental cause of the business cycle. The transition from expansion to contraction is frequently highlighted by the gyrations of the stock exchange, whose fluctuations are objective proof of the instability of the marginal efficiency of capital.
29 Ibid., p.135. 46.
Since every new investment competes with every old investment, there is a tendency in the secular long run for the growing abundance of capital assets to cause a decline in the rate of returno This tendency may be offset by unusual circumstances, such as those characterizing the western world during the nineteenth century when rapid growth in population, the existance of great undeveloped geographical frontiers, technological innovation and invention provided unprecedented demands for new capital, and forestalled a fall in the rate of return on capital.
The other factor which determines the volume of investment, the rate of interest, depends upon the liquidity preference and the quantity of money.JO The former is the demand aspect and the latter the supply aspect of the price of money. Liquidity preferences refers to the desire of people to hold some of their assets in the form of money, and the quantity of money to the amount of funds in the form of coins, paper currency, bank deposits outstanding in the hands of the publico
30 Ibid., p.167. The type of liquidity preference which is important in relation to the rate of interest is that arising in relation to the speculative motive, which Keynes defines as 11 the object of securing profit from knowing better than the market what the future will bring forth 11 • 31 Quite apart from the need for money as a medium of exchange, people hold money as a store of wealth. This is a type of speculation, as it implies a belief that conditions will change in a way that will allow them to convert their money into earning assets on better terms at a later date, and on terms that will offset any earnings that might be made by parting with liquidity now.
Chiefly responsible for this type of preference is uncertainty regarding the future rate of interest. The lower the interest rate goes, the greater the incentive to hold wealth in the form of money becomes, because there is an increasing danger of capital loss through a slight rise in the interest rate. In the long term, the rate of interest will be especially sensitive to liquidity preference because uncertainty about the future increases at something like a geometric rate as the
Jl Ibid., p.170. 48. future becomes more distant from the present.
Although the public does not control the quantity of money, the banking system does. All the public can do when it wants to hold money and there is no more money is bid up the rate of interest. BuD banking authorities are in a position to answer this demand by increasing the supply, and thus prevent the rate of interest from rising.
It is possible from this cursory survey to indicate some of the relationships between these main elements of his theory. Employment depends upon effective demand, which is determined by the propensity to consumer and the inducement to invest. Investment tends to increase either with a fall in the rate of interest or an increase in the marginal efficiency of capital, or both. An increase in the general level of economic activity will increase the demand for money as a medium of exchange, and, by draining the amount of money available as a store of value, increase the rate of interest unless the monetary authorities and banking system act to increase the total supply of money. Even though the quantity of money may increase, the rate of interest, nonetheless, may rise as a result of an unfavourable shift in the attitude of wealthholders toward liquidity. Expectations of rising future yields from capital assets will tend to raise the marginal efficiency of capital and thus raise investment and employment.
Although rising investment will usually be accompanied by rising employment, this need not happen if the propensity to consume is falling. On the other hand, a rising propensity to consume can give rise to increased employment. As a rule, however, the propensity to consume is stable in the short run.
Finally, increases in investment bring about increases in income, and out of larger income there arises a still greater demand for consumption which leads to still further increases in income. Once set in motion, movements of income and employment tend to be cumulative. These cumulative movements account for the fluctuating nature of employment. Actual fluctuations will not, as a rule, range from one extreme to the other.
The actual range depends on the strength or weakness of the propensity to consume and the inducement to invest in the prevailing circumstances. 50.
CHAPTER J.
The Role of Government.
It is often said that the capitalist economy is distinguishable from other forms of economic organisation by its being more competitive, but this distinction is not entirely satisfactory. The strict meaning of competition seems to be the pitting of one person against another, with special reference to bidding for the sale or purchase of a product or labour. Though this kind of competition, no doubt, is widely evident in the capitalist economy, one might say that it is only secondary - an accidental consequence from the more fundamental characteristics of modern industrial life.
There is no one term that will express these characteristics adequately. They are a certain independence and habit of choosing one's own course for oneself; a self-reliance; a deliberation and yet promptness in choice of action and judgement; and a habit of forecasting, and perhaps even attempting to mould the future with reference to one's own distinct aims. These activities may, and generally do, cause people to compete with one another. On the other hand they may, and this seems to be becoming more the rule 51. rather than the exception, tend in the direction of co-operation and combination - evidence the tendency towards collective ownership and collective action.
These are quite different from those of earlier times because they are the result not of passive drifting into association with one's neighbours, but of active pursuit, because they are conducive of the attainment of one's own ends.
The term 'competition' has gathered about itself a certain aura of righteousness. This is in contrast to earlier times when it implied rather selfishness and indifference to the well-being of others. It may be true that there is less deliberate selfishness in modern business than there was in the business of a previous time, but this is hardly the reason for the increased preoccupation of both businesses and governments to regard economic competition as the trademark of a free society. The apologist could say that it is deliberateness and not selfishness that characterises the capitalist economy.
If competition were contrasted with energetic and unselfish co-operation, then the best forms of competition are relatively evil, and in a world in which all men were perfectly virtuous, competition would be 52.
as out of place as would unselfish co-operation. But
then so would be the institution of private property
and every form of private right. But in the responsible
conduct of business affairs, governmental affairs, and
economic policy, it is not only naive but also folly to
ignore the imperfections of human nature.
Men, even businessmen, are no doubt capable of
much more unselfish service than they at present render,
and one of the supreme aims of the practical economist
is to discover how this latent social asset can be
developed most quickly and turned to profitable account
most wisely. This does not mean that he should decry
competition, socialism, communism, or any combination of
these creeds without analysis. He is bound to retain a rautral attitude to any particular manifestation of these
three forms, or any other form, of social organisation
until he is sure that, human nature being what it is,
the restraint of any one of them would be more anti
social in its workings than in its use.
(a) Adam Smith's Concept of the Role of Government.
If any Classical Economist were asked the question:
To what end is economic activity to be directed? or:
By what criterion is its ultimate success to be judged?
the answer would be a universal: consumption1 There 53. are four main reasons for this response. In the first place, Adam Smith and his successors were unequivocally opposed to any fostering of producer interests as such.
They thought this involved sectional privilege, and would therefore damage the community as a whole.
Secondly, it is to be understood that consumption means not only consumption now, but also consumption in the future. 1 The classical theorists have sometimes been criticised for the fact that in making consumption the end of economic activity, they ignored the desirability of creating productive power. However, due to the stress that most of them placed on the importance of accumulation, the suggestion that they did not consider the importance of increasing productive power seems to rest of crude misunderstanding. The distinction between productive and unproductive consumption was devised to reinforce just this emphasis.
Thirdly, consumption meant not only consumption by individuals, but also by government services such as defence, the benefit of which is indiscriminate.
Finally, it must be recognised that this consumption,
regarded as the end of economic activity, was limited to
1 Smith, Adam: op.cit., Vol.I, pp.255-270. 54. a single community - the nation-state. Rarely i£ ever was a criterion other than national advantage used in judging policy. They would have regarded a measure good £or the world at large, but harmful to their own community, as opposed to the policies uheir theory underlined.
The specific contribution 0£ the Classical Economist is the recommendation 0£ what Alfred Marshall called the
System 0£ Economic Freedom. 2 Given a certainframework
0£ law and order, and certain necessary government services, they conceived that the objective 0£ economic activity was best achieved by a system 0£ spontaneous co-operation. As producers and owners, individuals should be left free to use their labour power, their property, their capital, in ways which, in their judgement, would return to them the maximum reward in terms 0£ money and satisfaction. As consumers, citizens should be free to buy that which most pleased their fancy. It is the impersonal mechanism 0£ the market which, in their view, brings about harmony from the individual decisions and actions 0£ di££erent people.
2 Marshall, Alfred: Principles 0£ Economics (MacMillan, 1930) p.10. 55.
This belief in the System of Economic Freedom rested on a two-fold base: the desirability of freedom of choice for the consumer; and belief in the effective ness, in meeting this choice, of freedom on the part of producers.
As far as the consumer is concerned, he is held to be the best judge of his own interest. Interference with free choice involves coercion, and therefore pain.
Moreover, government is less likely to make a satisfadory choice than the individual himself.
The argument in favour of freedom for producers is more complicated. Emphasis, is laid, in the first place, on the desirability of harnessing the machinery of production to the powerful and ubiquitous force of self-interest - self-interest meaning oneself and one's immediate and intimate circle to whom obligation is spontaneously acknowledgedo
"••• man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another .56.
the far greater part of those good offices which stand in need of. It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages." .3
While the motive for production is taken to be self-love, the guidance of this motive, so that it meets the interests of all concerned, is believed to be brought about by the mechanism of the market and the force of competition. Given the necessary conditions of demand, if the supplies available in any market can command a price which brings to producers gains higher than they can get elsewhere, and if markets are free, there is an incentive for producers to move in, withdrawing resources from other markets where the value of what they supply is less, and increasing the supply where the value of what they produce is more.
1The quantity of every commodity brought to market naturally suits itself to the effectual demand. It is the interest of all those who employ their land, labour or stock, in bringing any commodity to market, that the quantity should never exceed the effectual demand: and it is the interest of all other people that it 4 should never fall short of that demand. 11
.3 Adam Smith, op. cit., Vol.I, p.11. 4 Ibid., p.46. 57.
When it is realised that, for Smith, the division of labour, and consequently productivity and production, are determined by the propensity to exchange, or in other words the characteristics and size of the market, the implications for government economic policy are apparent •
.Adam Smith recognised that the 11 economic 11 order when left to its natural course was often marked by serious conflict between private interest and the interests of the general public. This would seem to suggest that there was an important sphere of activity in which government interference with private interest might promote the general welfare. However, in his one deliberate and comprehensive generalisation dealing with the proper functions of government, 5 Smith made it clear that he would narrowly restrict its activities.
11.All systems either of preference or of restraint ••• being ••• completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of man. The sovereign is completely discharged from a duty, in the attempting to perform which
5 Ibid., Vol.II, Ch.9. 58.
he must always be expose~ to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superin tending the industry of private people, and of directing it towards the employments most suitable to the interests of the society. According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common under standing: first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting as far as possible, every member of the society from the injustices of oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain, because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society." 6
Even here, however, he grants to government a somewhat wider range of proper activities than in many scattered dicta throughout the remainder of the book where he was principally condemning specific government actions, and was not really giving consideration to the wider problem of the proper range of governmental activity.
The Wealth of Nations was a tract for the times - a specific attack on certain acts of government which
6 Ibid. , p. 213. 59.
Smith was convinced on both a priori and empirical grounds, operated against national prosperity and individual welfare. These were such things as bounties, duties and prohibitions on foreign trade, apprenticeship and settlement laws, legal monopolies, and laws of succession hindering free trade in land. It would appear that Smith's primary object was to secure their termination. His wider generalisations were invoked to support the attack on certain related political institutions. To a large degree everything else was secondary. Smith made many exceptions to his general argument for laissez-faire, but his interest as a reformer and propogandist was not concerned with these.
When considering in general terms the proper function of government he in fact forgot about the exceptions.7
There is no doubt however that Smith believed that there was a strong presumption against government activity beyond its fundamental duties of protection against foreign foes and the maintenance of justice. His philosophical speculations about a harmonious order in nature made it easier for him to propound a laissez-
7 Spengler, Joseph J., & Allen, William R.: Essays in Economic Thought (Rand McNally & Co., 1962)Ch.10, Viner, Joseph: Adam Smith & Laissez-Faire, p.Jl9. 60. faire policy. It is clear that to Smith the activities of government in the maintenance of justice are an essential part of the order of nature in its full development, and that such activities are not interference with the system of natural liberty.
But, at the same time, Smith did not regard government itself as part of the order of nature and its activities as 1 natural 1 as those of the individuals whom it governed. The general presumption against government intervention was largely the product of direct inference from experience. Against those particular activities of government, which he subjected to special attack, Smith thought he had specific objections, and he drew sufficient evidence from their operation to condemn them. To justify activities other than those of defence and the maintenance of justice,
Smith believed it was necessary to credit government with a better knowledge of his best interest than the ordinary man himself was endowed with. Smith was not altogether alone in his attack upon the governments of the day. The standards of honesty and competence with which Smith was acquainted were unbelievably low, not only in comparison with those of the Western world today, but even in comparison with earlier periods in English 61. political history.
In the Wealth of Nations discussion on government's function of "erecting and maintaining certain public works and certain public institutions118 is merely incidental to an interpretation of the financial aspects of government. He nowhere purports to give a complete list of the public works proper to government, but he mentions highways, bridges, canals and harbours.
However, in discussing the propriety of particular projects, he completely ignores the criterion he lays down in the beginning of his discussion, namely, the impossibility of their being conducted profitably as private enterprises.
The modern issue of government participation in commerce and industry is dealt with almost solely from the viewpoint: can government make a net revenue out of it? He takes coinage for granted as a government function without considering any possible alternative, and approves of government operation of the post office on the grounds of the government's ability to manage it with successful financial results. Disapproval of governmental ventures into business seems to be based
8 Adam Smith; op. cit. Vol.II, p.21J. 62.
on the assumption that government is a poor trader
and a poor manager.
In the Wealth of Nations Smith made use of a rich harvest of facts gathered by personal observations in
England and Europe, by conversation and correspondence with keen and intelligent observers of the current scene, and by wide reading in a miscellany of sources. Smith kept close contact with this factual material and never departed from it for long. However, he still retained
the right to make sweeping generalisations, but was unable to bring these and run-of-the-mill factual data into altogether harmonious relations.
With reference to government institutions other
than public works intended to facilitate commerce, Smith opposed legal monopolies in general, though he conceded
the validity of a temporary monopoly when a trading
company undertook risk and exp~nse to establish a new
trade with some remote nation. He indicated his
approval of the institutions of patent and copyright
for the same reason.
Despite the formal limitations he imposed, Smith
in various places in his work made important concessions
to the possibility of government promotion of the general
welfare. In stray, but not infrequent, contact with 6J. facts apparently hostile to his principle of natural order and natural liberty, he recognised that public works and institutions could benefit the national economyo
He often forgot the principle, and went beyond the limits set in his formal discussion to the proper activities of government, and in many instances supported government restrictions on private initiative where neither justice nor defence was involved. Where the full aim was to improve upon the direction which private iniative gave to the investment of capital, the
course of commerce, and the employment of labour, Smith was amenable to government interventiono He supported
the compulsory registration of mortgages and approved
of colonial laws which promoted agricultural progress by checking the engrossment of lando
Several concessions to the Mercantilist policy of
regulation of foreign trade were made and he admitted
that there are circumstances under which export
restrictions, for instance on corn, may be warrantedo
He approved of a moderate export tax on wool, arguing
that this would produce revenue for the government, and
simultaneously provide domestic producers with an
advantage over foreign competitors in the manufacture of
woollens. 64.
Adam Smith was neither interested in nor approved of taxing power as an instrument of social reform. He approved of luxury taxes, witness his support £or heavier highway tolls on luxury carriages as against freight wagons, and a heavy tax on distilleries as a sumptuary measure against spiritous liquors, especially if accompanied by a reduction in the tax on the
"wholesome and invigorating" liquors of beer and ale. 9
He lent mild support to the principle of progressive taxation:
11 It is not very unreasonable that the rich should contribute to the public expense not only in proportion to their revenue but something more than in that proportiono 11 10
Though he at no time embarked on a general discussion
of the possibilities of voluntary co-operation, he made
it clear that he did not hope £or much good to come from
joint stock companies. His own experience indicated
that this kind of organisation of ownership did not work in practice. The only type of voluntary co-
operation in which Smith saw a high degree of effective
ness was an association of merchants and manufacturers
9 Adam Smith; op.cit. Vol.II, p.365
10 Ibido, p .335 exploiting the consumer or of masters exploiting the worker. It should be noted, however, that his policies were directly antagonistic towards this form of association.
He believed that the general welfare was best served by individual initiative applied in competitive ways to promote individual ends. Consequently the greatest effort in his presentation was the case for individual freedom, rather than an exploration of the possibilities of service through government.
It is not only unfair but also incorrect to use
Smith as the typical example of the classical approach to the function of government. As Professor Robbins points out in his Theory of Economic Policy, there is not a single classical theory, but a number of economic theories and hence a number of economic policies heaped together under the single name classicism.11 Nonetheless, until the advent of the new economies of Lord Keynes the theories of the so-called classical economists pointed almost unwaveringly to a policy of non-intervention by government.
11 Robbins, Lionel: The Theory of Economic Policy {MacMillan, 1953), Chapter II. 66.
(b) Karl Marx and the Role of Government.
Marx was much more than an economist. He was a revolutionary who used the study of political economy as an instrument in a political struggle. His own
claim was that it was necessary, through a study of political economy, to discover the laws of social development, and thus acquire a theoretical weapon, without which he regarded political action as condemned to be impotent.
Marx lived at a time when Germany was emerging from a state of economic backwardness and political reaction. The lateness of this development made
Marx see the German growth against the background of an already established new society elsewhere. The experience of English industrialism, and the trade unionism it had produced, as well as the French post revolutionary struggles, served as an inspiration and as a backdrop against which to interpret the social and political conflicts of Germany herself. Utilitarianism,
early English socialism and the beginnings of German radicalism stimulated the young intellectuals with whom he came in contact to debate problems of political
emancipation.
The second great influence on Marx was Hegelian 67. philosophy. Marx was interested in the laws of movement of society, in the principles which determined social
change. He rejected Hegels conservatism while trying to maintain the Hegelian dialectics, infusing into them the economic £actors he regarded as the sole determinants of social changes. When he came to study economics, these philosophical doctrines provided a sociological framework £or his economic theories: the economic interpretation of history and the doctrine of class struggle.
Marx stated that man is a social producer of his means of livelihood. Social production involves certain social relations, the quality of which will depend upon the degree of development of the social productive powers. These social relations constitute a structure, on which is built a superstructure of political and legal institutions, of ideas and modes of thought which reflect the existing economic structure. To understand these
institutions and ideas in their existing form and in
their continual change, one has to study the economic
structure that has given them birth. Political economy
is the study of the anatomy of society - the social
productive relationships which constitute the economic
system. 68.
This statement points to the fundamental principle
of society, as well as the contradiction within it which
is the cause of social change. The principle is the
social relationship entered into be men for the purpose
of social production, a relationship appropriate to a
given development of productive power. Society is
able to make the fullest use of these productive powers,
and increase themo But this increase in productive powers brings them into conflict with the social
relationships which they have createdo Sooner or later
man will alter these social relationships to allow the
expanding productive powers their full scope. Political
and legal institutions will change, and so will ideas.
Thus, social change involves, at some stage, a political
revolution to complete the preceding evolution - the
abolition of one political superstructure and its
replacement by one more appropriate to the new economic
order.
According to this philosophy of history, change
is necessitated by some contradiction inherent in the
existing economic system. Political economy, Marx
sees, is primarily concerned to discover this
contradiction. The basic contradiction of capitalism
is the increasingly social, co-operative nature of production made necessary by the new powers 0£ production which mankind possesses, and individual ownership 0£ the means 0£ production. It shows itsel£ in the existence 0£ two classes: capitalists arrl. workers.
There is a basic antagonism between these classes, which Marx attempts to prove theoretically in his doctrine 0£ surplus value. Basically, this doctrine is one which £ormalizes the notion that the rich man lives by exploiting the poor. A second doctrine, inherent in his theory, is that the state is an executive committee £or managing the a££airs 0£ the governing class as a whole. These two simple ideas underlie all Marx 1 s thought. The struggle between labourers and capitalists, which is the present stage
0£ evolutionary development in capitalist societies, is a stage - the last stage - 0£ humanity's march towards a classless society. The historic mission 0£ the working class is, by victory in its struggle with capitalism, to make an end to class altogether.
In this classless society, Marx sees the state as an extension 0£ the people. He lays down a de£inite state policy, aimed mainly at the "revolutionising the mode 0£ production. 1112 In advanced countries, the
12 Marx, K. & Engels, F.: Mani£esto 0£ the Communist Party (Foreign Languages Publishing House, Moscow, 1959) p.73. 70. measures most generally applicable are:
11 1. Abolition of' property in land and application of' all rents of' land to public purposes.
11 2. A heavy progressive or graduated income tax.
11 3. Abolition of' all rights on inheritance.
11 4. Confiscation of' the property of' all emigrants and rebels.
11 5. Centralization of' credit in the hands of' the State, by means of' a national bank with State capital and an exclusive monopoly.
"6. Centralization of' the means of' communication and transport in the hands of' the State.
11 7. Extension of' factories and instruments of' production owned by the State; the bringing into cultivation of' waste lands, and the improvement of' the soil generally in accordance with a common plan.
11 8. Equal liability of' all labour. Establishment of' industrial armies, especially f'or agriculture.
11 9. Combination of' agriculture with manufacturing industries; gradual abolition of' the distinction between town and country, by a more equable distribution of' the population over the country.
11 10. Free education f'or all children in public schools. Abolition of' children's factory labour in its present form. Combination of' education with industrial production, etc., etc. 11 13
13 Ibid., PP• 73-74 71.
Eventually, in the course of development, Marx saw class distinction disappearing, and with production concentrated in the hands of the whole nation, public power losing its political character.
"Political power, properly so called, is merely the organized power of one class for oppressing another. If the proletariat during its contest with the bourgoise is compelled, by the force of circumstances, to organize itself as a class, if, by means of a revolution, it makes itself the ruling class, and, as such, sweeps away by force the old conditions of production, then it will, along with these conditions, have swept away the conditions of class antagonisms and all classes generally, and will thereby 14 have abolished its own supremacy as a classo 11
Consequently, Marx saw the state ceasing to be the means of one class oppressing another, but rather an association free of class antagonisms, and organised for and by the proletariat, 11 in which the free development of each is the condition for the free development of a11. 111 .5
(c) John Maynard Keynes' Conception of Government's Role.
Keynes was in the true tradition of the British economists who, since Adam Smith, and with the possible
14 Ibid., po 74
1.5 Ibid., Po74 72.
exception of Malthus, never questioned the efficacy of private property as the foundation of the economic
system. Smith and Recardo were champions of a new
liberalism which, in their time, was founded on laissez-faire. Keynes differed from his liberal predecessors in the extent of intervention his programme
entailed. He was the first in this tradition to
explicitly repudiate laissez-faire, though the spirit of individualism is as apparent in his writings as it was in the writings of the nineteenth-centry economists.
Of government participation in economic life, he
says:
"Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem to the nineteenth century publicist or to a contemporary American financier to be a terrific encroachment on individualism, I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the conditioning of the successful functioning of individual initiative." 16
16 Keynes, John Maynard: op.cit., p.J80. 73.
Keynes was essentially a defender 0£ capitalism.
He o££ered governments a larger degree 0£ control over
the economic process, and a larger degree 0£ operation
than the 'old fashioned' economist, but his motive was
to save capitalism, not destroy it. Keynes wanted governments to assume responsibility £or demand.
Otherwise, he could not see the system surviving. He
claimed it was possible to have more government activity and more private activity, i£ unemployment could be excluded. And above all, Keynes would not remove
the foundations 0£ capitalism: free choice; the driving force 0£ the quest £or profits; and the allocation 0£ resources in response to the price incentive. These ingredients 0£ his economic philosophy are confirmed in his last book: How to Pay
£or the War.
The principle 0£ aggregate demand £or resources
lies at the basis 0£ his attack upon unemployment, and
this received greatest emphasis in The General Theory.
It is inevitably associated with the theory 0£ economic
expansion the relation between investment and
consumption and the rate 0£ interest - which was a
recurring theme throughout all his writings. It was
also associated with the belie£ that the frictions and 74. rigidities in the economic structure would not allow
the necessary adjustments in costs and prices to take place in a changing economy, without a greater degree of control than was contemplated before the Great
Depression.
Aggregate demand was seen as, at one and the
same time, the source of total income, and the basis on which the volume of employment is determined. If demand is insufficient to employ all resources, income will be lower than need be. As demand falls, so will income. The key is to maintain income at the level appropriate to give high employment of resources.
Since income is determined by demand, it is important to recognize the component parts of aggregate demand.
These are: total consumers' demand for goods and
services; the demand of government and public bodies for goods and services; the demand of private enter- prise and government and public bodies for new
capital goods or private and public investment; and
the net effect of domestic employment of the foreign balance. The object of policy is thus, Keynes
argued, to watch the movements in the value of these
component parts of demand and ensure, as far as
possible, that aggregate demand remains fairly constant 75. while money incomes remain constanto If' this is done, stability of employment will ensue.
Prior to Keynes, the policy of governments was to
cut down its own demand for goods and services at a time when private enterprise was reducing its
commitments for new investment, thus reducing consumers 1 demand for goods and services. Such a practice
inevitably made matters worse. It was assumed that
this act would enable some fundamental adjustment to
take place to costs and prices, and allow private
enterprise to rediscover its enterprise and start the process of investment againo
But Keynes took an opposite view. He held that,
to cope with the situation, the government should deliberately expand its commitments to make up the deficiency in aggregate demand caused by the lapse
on the part of private enterprise. This represented
a great advance on pre-existing governmental practices
and policies.
Keynes was preoccupied mainly with employment.
With no 'invisible hand' or self-equilibrating
mechanism, he proposed that the main task of government
is to ensure that those people in a community who wish
to work are able to do so. 76.
"The outstanding fault of' the economic society in which we live are its failure to provide full employment and its arbitrary and inequitable distribution of' wealth and incomes." 17
These are not different problems. Arbi1mry and inequitable distribution of' income leads, of' necessity and via the average propensity to consume, to unemployment.
Given a background of' control, government has a number of' weapons at its disposal with which to attack the problems of' employment. It is, itself', a large spender and the most important single recipient of' income. It is in a position to vary both its income and expenditure, if' it has the necessary control of' banking and investment, and the courage to exercise
that coJi.trol. But it can't do this if' it retains
the view that its budget must be brought to balance every year, and if' it regards reasonable public investment as deficit financing. No self-respecting private business
organisation, about to embark on a plan to double its
capacity and increase its capital would think it was
setting out on a course of' 'deficit spending.'
There tends to be a misunderstanding among people,
17 Ibid., p.372 77. including businessmen, that the practical reform measures of Keynesian economics lead to socialism. It should be
emphasised that the Keynesian reforms do not infringe upon the rights of private individuals to own producer goods. The most important characteristic of a socialist
economy is that private property rights do not exist over producer goods. The socialist approach visualizes the state as the full entrepreneur which replaces entirely individual capitalists. The Keynesian vision is one where the state acts as a balancing force, serving only to supplement the behaviour of individual capitalists. 78. CHAPTER 4.
THE POST-KEYNESIAN SYNTHESIS.
Keynes' great contribution was to adapt economics to the changing institutional structure of modern society. Economics had failed to keep pace with the developments of science, of government, of changes in the market-place, of organization by groups (particularly business), and with general institutional developments.
Up to 1936 economics belonged to the vanished age of competition. The nineteenth century was a century of capital deficiencies, of full employment, and of transitional unemployment. The twentieth, pre-Keynes, was one in which monopolies, rigidities, unemployment, excessive saving, deficiencies in demand and over production were tolerated, even encouraged. The post-Keynesian twentieth century is one of economic stability and high employment for the developed countries, brought about by an expanding role in the management of the economy for governments, and an expanding role in the creation of wealth for business.
What has happened over the last thirty or so years is that the free-enterprise system has been made to work.
Something has been added in definition. No longer does
1 free enterprise' exclude government regulation or 79. government limitation of business; it sees the function of government as setting the frame within which business is to be conducted rather than running business enterprises. Nor does it exclude government management or government ownership of natural monopolies or of industries producing exclusively for national use; it is obvious that Australians do not regard the Snowy
Mountains Authority, or Qantas, or T.A.A. or the N.S.W.
Government Railways as incompatible with their belief in free enterprise. Even proposals for the nationalization of natural resources or banking, while not cordially received, are not felt to do too great an injustice to the basic principle.
Nonetheless public enterprise is seen as the exception, not the rule, and special safeguards and special justification are needed in the creation of these exceptions. Outside of this limited sphere, according to the tenets of free enterprise as popularly understood, productive resources are to be in the hands of privately owned organizations.
This concept also implies the acceptance of profit
as the motivating and controlling force in business
actions. Profit also is seen as the end of business decisions. The production of wealth is the role of the so. private business undertaking, the distribution of wealth the role of government. It implies that the consumer decides what he wants to buy, and that prices are determined in the market place. It further implies that there is a reward for enterprise, but that this reward is related to the total needs of the community.
This thesis is concerned with the political analysis of the corporation, that is as an economic unit organizing human efforts to a common economic end. The essence and the purpose of the corporation is not seen in the human relationships between members of the corporation and between the corporation and the citizens outside of it, but in the efficiency of its economic performance.
(a} The Roles of Government and Business as the Producers and Distributors of Wealth.
"The competitive model of a capitalist economy allowed ••• for rythmic increases and decreases in prices and production and even for occasional bouts of unemployment. It did not contemplate the possibility of catastrophic and enduring depression. Economists, and through them politicians, businessmen, and the public, were insulated from the need to think of such a tragedy by the benign theorem that the act of production provided the purchasing power for all that 1 was produced at approximate full employment." l Galbraith, J.K.: American Capitalism (Pelican, 1963} p.76. 81.
But a depression did come, and it was as catastrophic and enduring as any predicted by the opponents 0£ capitalism.
Yet, at the same time, it was obvious that the £ree enterprise economy was an e££ective and e££icient way to organize an economic system to produce goods and services.
The problem was not production, it was consumption.
According to Say's Law 0£ Markets, the act 0£ producing in itsel£ generates demand. The act 0£ producing and selling does undeniably place a revenue in in someone's hands. The $2,200 spent on a Holden re-emerges to someone, whether in the £orm 0£ wages, corporate or dealer pro£its, dividends, commissions, salaries or wages, payment to B.H.P. £or raw materials or in some other £orm. It is open to the receiver to spend or not to spend this revenue, as he sees £it.
The part spent provides no problem. It is the part that is not spent that causes economic ills. According to the classicists, the rate 0£ interest automatically adjusts to take care 0£ this saving. In the real world, there is no such sel£-equilibrating mechanism.
Implicit in the rise 0£ big business capitalism was the possibility that it had created a structure that departed so £ar £rom the competitive model that it could not work. Two courses 0£ action are open. 82.
The incentives which, under the capital model, were presumed to guide businessmen to a socially desirable behaviour could be replaced by some kind of central guidance which would ensure desired results. The other alternative is to remake business enterprise so
that it conforms more closely to the preconceptions of the model. Obviously the latter, removes one of the fundamental bases of capitalism - the quest for and the free use of profits.
If, in order to work, capitalism requires central guidance, and if this central guidance comes from government, government automatically assumes the role of indispensable partner to business. To many people, even thirty years after this proposal was promulgated, the remedy is as damaging and unwelcome as the depression it presumed to eliminate. Though the businessman might profit in a primary sense from the new role of government, his prestige has suffered. Where, in economic life, people looked to business decisions as the ones that
shaped their destiny, they now have to regard government decisions as well, or, even worse, instead.
The notion of an excess of savings or a deficiency
of investment or more accurately, but more awkwardly,
of efforts to save and intentions to invest - defines 8J. the nature 0£ government intervention in the modern conununity. By public borrowing or expenditure, or the appropriate changes in taxation, government can make up £or a deficiency in private spending. G.M.H. still decides what cars to produce, what prices to charge, how to advertise them, i£ and when to build a new plant, when to change a model, and how many workers to employ. But it can be assumed that, ceteris paribus, it will be able to sell more cars because employees on public works projects receive a weekly wage, and are able to pay, even i£ on time, £or a new Holden.
The government has always taxed: to reduce taxes and so release money £or spending or, perhaps, to adjust taxes to £all more heavily on income that is likely to end up as redundant saving involves no radical departure. To spend £or the express purpose
0£ absorbing savings and raising the level 0£ output and employment in the economy is far from revolutionary.
The post-Keynesian system has involved a less than revolutionary change in the relation 0£ the government to the economy. Nonetheless, it has implied an important one. For a doctrine that excluded government, it has made government indispensable. It has opened the way £or a large expansion 0£ government 84. services and activities - activities that would have been anathema forty years ago. This is a result of a new and very important concept of social waste which has followed in the General Theory's train. If the normal tendency of the economy is towards full employment, then the use of labour and other resources by government 'is at the expense of their use by the private sector. The building of a post office, or a bridge is at the expense of private consumption or investment. But if the normal tendency of the economy is towards less than full employment, no sacrifice on the part of the private sector is involved. The labour, plants and materials that are used would otherwise be unemployed. They are wasted if someone did not employ them.
The attack on the doctrine of the marriage of the supply of saving to the amount of investment by way of the interest rate destroyed the old faith. The fact that government must play a positive role is acknowledged in the following extract.
11 1. Full employment is a fundamental aim of the Commonwealth Government. The Government believes that the people of Australia will demand and are entitled to expect full employment, and that for this purpose it will be able to count on the co-operation of servicemen's associations, trade unions, employers' associations and other groups ••• 85.
11 3. In peace-time the responsibility of Commonwealth and State Governments is to provide the general framework of a full employment economy, within which the operations of individuals and business can be carried on •••
11 5. The policy outlined in this paper is that governments should accept the responsibility for stimulating spending on goods and services to the extent necessary to sustain full employment. To prevent the waste that results from unemployment is the first and greatest step to higher living standards. But if our living standards are to increase to the greatest extent possible, we must produce as efficiently as possible the goods that are wanted.
11 6. There will be no place in this full employment policy for schemes designed to make work for work's sake ••• 11 2
Two points are noteworthy. The first is that the
Commonwealth Government assumed the responsibility, along with the State Governments, for 11 stimulating spending on goods and services." In effect, this was an acknowledgement of the fact that it was the only institution capable of maintaining effective demand.
The second point that is worthy of note, and this is implied rather than explicit, the Commonwealth and
State Governments saw businesses and individuals as
2 Commonwealth of Australia: White Paper on Full Employment in Australia {May JO, 1945) p.ll. 86. the producers of the community's wealth, and recognized no obligation of their own to enter this area of activity other than to "provide the general framework of a full employment economy."
(b) Social Legislation as a Means of Preserving Effective Demand.
Governments can, by varying rates of taxation and
social benefits, have an extensive and immediate influence on the money available for spending by the private sector of the economy. It can influence both consumers and investors. Government also provides public services,
such as education, health, public works designed to build up the infrastructure of national assets the
assets essential to private enterprise, and to a high
and rising living standard.
Not long ago, production was thought of as giving
rise to incomes out of which people spent on the goods
and services produced. Since producers are assumed
always to maximize production in order to maximize
profits, it was argued that there was no scope for
government intervention or regulation to raise the
level of production and employment. It was al so
argued that laissez-faire policies promoted the
protestant ethic, and ensured the virtue of self
reliance in all but the most hardened or the least- 87. equipped mentally and physically. This view found clear expression in the words of the then Mr. Winston
Churchill, who, in his 1929 Budget Speech as Chancellor of the Exchequer, said:
"It is the orthodox Treasury dogma, steadfastly held, that whatever might be the political or social advantages, very little additional employment and no permanent additional employment can, in fact, and as a general rule, be created by State borrowing and State expenditure. Some State expenditure is inevitable, and even wise and right for its own sake, but not as a cure for unemployment." 3
Explicit in this statement is the belief that economic man has no control over his economic destiny. Implied is that some social legislation may be worthwhile for its own sake - that it can be justified on moral and humanitarian grounds - but that as an economic policy measure, it is useless.
It is now apparent that a government, in order to manage an economy, must be able to manage expenditure decisions. It needs to know who makes expenditure decisions, and how these decisions can be influenced.
3 Drohan, N.T. & Day, J.H.: Readings in Australian Economics (Cassell, 1965), eh. 3, Downing, R.I.: The Uses of Social Accounts in the Australian Economy, p.43. 88.
On March 25, 1942, the Joint Committee on Social
Security published its Third Interim Report, entitled:
Consolidation of Social Legislation and Post War
Unemploymento In it they recognized that unemployment is a national problem and a national responsibility.
The report stated that it was the responsibility of the
State to ensure "full-time employment for all efficient and able bodied persons seeking it, 114 as well as to provide, either through taxation or through unemployment insurance, regular payments to the involuntarily unemployed in the form of unemployment benefits.
The basis of a policy of high employment in a country with a high and rising standard of living is outlined below.
1. A basic minimum level of public investment
should be maintained, so that the economy will
have the constant stimulus of an element of
national expenditure devoted to development
works, and the production of capital goods
that private enterprise does not and cannot
4 Consolidation of Social Legislation and Post War Unemployment; Third Interim Report from the Joint Committee on Social Security; March 25, 1942- Po74. produce. These capital goods and public
works should cover a wide range of what may be
called 'collective goods' that will have
enduring benefits to the community as a whole,
and will translate increased productivity into
rising standards of living.5 It should be
emphasised that the intention should be to
maintain a basic minimum, rising as productivity
and national income rise. Nor would it preclude
the possibility of expansion if private investment
languished and unemployment rose, but the proposal
is that a high level of public investment should
be an integral part of the workings of an economic
system in modern progressive communities, as well
as a make-weight for the deficiencies of private
investment.
2. The proportion of national income devoted to
current expenditure on health, education and
national security should be maintained at a
basic minimum. This ensures a national
5 Public investment of this kind before the war was about 15% of total investment, and a little less than 4% of national income. At this level it was too low, evidenced by the level of unemployment. 90.
minimum standard of living in all circumstances,
and it also ensures that the level of private
consumption will not fall below a basic figure.
J. Private investment being the most variable
component of national expenditure, it should
receive special treatment. An advisory board
consisting of representatives of government and
business is a desirable first step. Its function
would be, in the first instance, to advise against
undue expansion of private investment. Some of
the variations in private investment are caused by
its inherent tendency to over-expansion at certain
times. An advisory board could keep itself
informed of probable changes in national expenditure,
and a check to over-expansion or insufficient private
investment can be administered through the banking
system and the capital market.
4. The maintenance of a basic level of public
investment necessitates a comprehensive and national
planning of public works of all kinds. Such
machinery can ensure that adequate planning will
be done, and it can also be used to expand public
works programmes if it were required by a
sudden and serious fall in private investment,
and in the level of national expenditure. 91.
5. A policy of high employment imposes certain
obligations on the banking system and the capital
market to co-operate with government. Variations
in the volume of investments by changing the short
term rate of interest are too slow in their
operation, and too limited in their scope to
meet all situations. What is required is that
banking policy and government policy be co-ord
inated to ensure the greatest stability possible
in the level of national expenditure.
The argument presented, it will be noted, is based upon the assumption of a closed economy.
In 1945, the Commonwealth Government specified its responsibilities 11 for stimulating spending on goods and services to the extent necessary to sustain full employment." 6 It was further specified that "full employment can be maintained only as long as total expenditure provides a market for all the goods and services turned out by Australian men and women, working with available equipment and materials, and fully employed after allowing for the need for leisure. 117
6 White Paper on Full Employment in Australia, JOth May 1945 - p.ll.
7 Ibid O ' p. lJ • 92.
In the White Paper on Full Employment in Australia,
1945, the component parts of total expenditure were defined as:-
(a) Private consumption expenditure. (b) Public expenditure on current services. (c) Private capital expenditure.
(d) Public capital expenditure.
(e) Expenditure from overseas.
It was recognized that some of these items are more likely than others to start fluctuations in employment.
Private consumption spending is closely related to total incomes and changes substantially only if employment and incomes themselves fluctuate. Public expenditure on current services arises from established policies, and apart from long-term changes, does not fluctuate substantially.
On the other hand, a great deal of private capital expenditure is unstable, because it depends on personal judgements of business prospects, which are corstantly subject to revision in the light of changing circumstances.
Also, prior to 1940, public capital expenditure fluctuatedo
This was because governments believed it was necessary to economize in bad times. They tended to reduce capital expenditure when private spending fell. The fifth 93. item, expenditure from overseas, is also variable, depending in large part on the health and well-being of the country of the purchaser.
It is obvious that the item, private capital expenditure, is the most critical section of effective demand. First, it is itself large, and second it is inherently liable to fluctuation, depending as it does on the judgements of businessmen. Finally, it is important because it has a direct effect on the level of private consumption spending of those employed in the capital goods industries; and a further indirect effect because the reduction of the consumption spending reduces the employment, incomes and spending of those normally employed in consumption goods industries.
In large part, social legislation in this country has been aimed at maintaining private capital expenditure at a high level, a level compatible with high employment and a high rate of growth.
Dr. Coombes defined the following as conducive to a high rate of growth and a high level of employment: 9
9 Drohan, N.T. & Day, J.H.: op.cit., Ch.14; Coombes, H.C.: Maintaining Stability in the Economy; 94.
11 (a) when the population is growing £ast •••
11 (b) when there are substantial lags in the degree to which modern knowledge and technology have been e££ectively applied;
11 (c) when there are skilled workers, technicians and managers to apply this knowledge and technology;
"(d) when there is a high rate 0£ savings (including a capacity and willingness to borrow and/or receive aid £ram abroad) or alternatively a willingness to bear heavy rates 0£ taxation;
11 (e) when there exists the entrepreneurial capacity to recognise the opportunities which exist £ram the combination 0£ the available resources and to apply them to socially useful purposes;
11 (£) when the international exchange available £ram reserves, £ram borrowing or £ram current exports is adequate to maintain a balance in international payments, despite increasing imports." 10
10 Ibid., p.2490 95. CHAPTER 5.
CASE STUDY.
NUFFIEID AND THE VICTORIA PARK RACECOURSE.
(a) Government Policy.
In 1944 the Commonwealth Government issued an invitation to the automobile industry to manufacture
a complete car in Australia. The invitation was
accepted by four North American Companies: Chrysler
Australia Pty. Ltd., Ford Motor Company of Australia
Pty. Ltd., General Motors-Holden 1 s Ltd., and Inter national Harvester Co. of Australia Pty. Ltd. The plans of these companies for manufacture within the
country all received official endorsement.
The fundamental aim of the invitation was part
of the plan to secure a diversified industrial economy,
and at the same time provide employment for the
planned intake of skilled and semi-skilled migrants
after the war was over. The considerable industrial
development and potential for development released
during the war years reinforced the need for domestic
production of the more sophisticated products of
industrial economies. Added to this, the economic
events and circumstances created by the war in most
countries of the world indicated that the first par~ of any economic planning should involve the rebuilding and rehabilitation of home industries, and the satisfaction of the more pressing items of domestic demand.
That this would be a lengthy process is recognized by the following extract.
"In many factories, the transfer from war to peace production cannot be accomplished overnighto Machinery; used for war-time production will need to be altered, added to or replaced, and time will be required 1 for other industrial re-adjustmentso 11
There was the need not only to satisfy domestic demand, but also to expand the market for Australian goods by export.
"While the Government realizes it is necessary in the first instance to meet the needs of the consuming public in Australia it has consistently advocated that where possible manufacturers of secondary industry goods should now strive to place portion of their output in overseas markets." 2
At the same time as encouraging industry generally towards capital investment, the Commonwealth Government
1 White Paper on Full Employment in Australia; May JO, 1945 para lllo
2 Statement by the Prime Minister {Rt. Hon. J.B. Chifley) in the House of Representatives, Feb. 18, 1948 - Hansard vol.19, p.7. 97. was concerned that suf'ficient in the way of resources and manpower should be channelled towards the construction of houses. The State governments restricted industrial building, and, with the approval of the Commonwealth
Government, made available to business a considerable number of former war-time factories surplus to defence requirements. In not more than the two years to
December, 48, two hundred and nine leases and sixteen sales of such buildings were successfully negotiated, employing in the vicinity of 41,000 people.3
A further policy, adopted by the government in
Australia, was one of decentralization. At the second joint meeting of the Secondary Industries Commission and State Liaison Officers in November, 1944, formal discussions of a Commonwealth-aided decentralization policy begano 4 The advantages of decentralization in Australia were stated to be that it would promote better living conditions for a considerable number of people, that it could be used as a preparation for
3 Ibid.
4 Division of Industrial Development, Ministry of Post-War Reconstruction: Memorandum of the Work of the Secondary Industries Commission, 1943-1949, October, 1949, eh.III. 98.
defence, and that it would provide better employment
opportunities in extra-metropolitan areas.5 It was conceded that there was a strong case £or joint
Commonwealth and State action since the Commonwealth has responsibility £or general economic planning as well as £or defence. The problem of decentralization was stated to involve decentralization from the metropolis to the country in New South Wales and in
Victoria, the expansion of industry and development
of new industry in the less populated States, and
the preferential direction where possible of
immigration to the smaller States. 6
"The aim should be to obtain a net economic advantage as well as social and defence advantages." 7
Even though there was a general acceptance of
the principle of decentralization it was obvious that
some sort of incentive should be provided to make
decentralization attractive and that care should be
taken in the selection of industries encouraged away
from the metropolises.
5 Ibid.
6 Ibid.
7 Ibid., eh.III, Section 2. 99a
"In the long run, factories situated at a distance from their principal markets and sources of raw materials will be handicapped in competition with others in the larger centres of population. In many cases, particularly when transport costs form small proportions of the values of the raw materials and finished products, this handicap may not be significant, and may be outweighed by permanent advantagesa In general, the problem of decentralization is similar to that involved in a national policy of protection: both are effected at the expense of increased costs, but both are considered to yield social benefits that make it worthwhile to carry the extra cost. In both cases, net benefit to the community demands careful selection of the industries to be protected or decentralized, so that excess costs may be minimized." 8
A policy of decentralization pointed up the necessity for a freely available automobile at a
time when world demand for automobiles was considerably
in excess of supply. Unlike countries which are
small in area or which have extensive rail and canal
systems, Australia's distances are vast, the rail
system, even in 1966, is not closely knit, and the
country has virtually no internal water transport.
The structure of rural production and the planning of
new and the development of old towns and cities was
8 Annual Report of Tariff Board for year ended June JO, 1948 - p.28. ioo. dependent upon the availability of cars and trucks.
It was seen that development would be largely stultified if these were not easily procurable. Also, the building of an industrial economy could best be achieved by the introduction of domestic industries which required a range of manufactures and raw materials for components and parts. The motor industry was ideal in this respect, because it required a variety of supporting industries. It was also a means of attracting large amounts of capital to Australia. Perhaps most important of all, it was necessary for a company establishing motor vehicle manufacture to import management and organizational skills, items which the country badly needed.
The first barrier to the production of an
Australian car that had to be overcome was the Motor
Vehicle Agreement Act. This Act, brought in by the
Menzies Government in June, 1940, gave sole rights on car manufacture to one firm: Australian
Consolidated Industries. While the Act was in force, no one but W.J. Smith and his A.C.I. could legally make a car in Australia. Ben Chifley in September,
1944, then Minister for Post-War Reconstruction, initiated legislation to repeal the Act. The repeal 101. became law on May 14, 1945. It removed the legal barrier to the making of an Australian car.
In October 1945, J.J. Kennedy, Comptroller-
General of Trade and Customs, sent a 'letter of
invitation' to the managing directors of all firms
engaged in car assembly and manufacture, or likely to be
interested in such work, in which he invited them to
submit proposals to the Government for the manufacture
of complete motor-vehicles in Australia. The letter read:
"Commonwealth of Australia. Department of Trade & Customs, CANBERRA. A.C.T.
5th October, 1944.
11 T. & C. 44/3694.
"Dear Sir,
I have no doubt you are aware of the desire of the Government to establish the motor vehicle manufacturing industry in Australia including the manufacture of the chassis and the engine.
"Following consideration by a special Sub-Committee of Ministers of various aspects of the matter including a re-examination of measures proposed by the previous Government to achieve a similar object, Full Cabinet recently approved of recommendations of the Special sub-Committee in the following terms -
11 1. The Motor Vehicle Agreement be repealed.
11 2. The Motor Engine Bounty Act be repealed. 102.
11 3. All interested parties be invited to submit proposals for the consideration of the Government.
"4. When considering the proposals received, the question of utilising Government factories for the production of the component parts on a scale adequate for the maintenance of the factories as efficient units for future defence production should be examinedo
11 5. If satisfactory proposals are not received as a result of the invitation to interested parties, the Government should set up a Corporation to manufacture a complete car.
11 6. With a view to decentralization financial assistance be given to enable freight equalisation to be effected.
11 The purpose of this letter is to inform you {as one who has previously shown interest in this matter) of the objectives and most recent decision of the Government, and to ascertain whether you are interested in the matter of submitting manufacturing proposals to the Government for consideration. In the latter event, I am directed to invite you to submit proposals to me in such detail as you find it possible or convenient. All information will be treated as strictly confidential and will be submitted to the Cabinet by my Minister.
11 I should welcome an early acknowledgement of this letter, together with an indication of whether you contemplate the submission of proposals at a later date.
11 Yours faithfully, {Signed) J.J. Kennedy Comptroller-General" lOJ.
The sentence that caused the greatest stir was, of
course, that one that read: "If satisfactory proposals
are not received as a result of the invitation to
interested parties, the Government should set up a
Corporation to manufacture a complete car. 11 That was
interpreted as a threat aimed directly at everyone in
the motor industry. Most people concerned were convinced
that it was no idle threat. Chifley was so determined
that an Australian car should be made that he would most
certainly manufacture cars as a national project if the
industry did not take up his request.
(b) Background of the Motor Vehicle Industry.
It was recognised in the early stages of the war
that the war-effort suffered because the country lacked
that type of wide-range industrial organisation the
motor car requires. In 1945 it was felt that the
prerequisites for local automobile manufacture were here,
and that cars would be available in scarcely the numbers
required unless they were made domestically.
This was not a new project with the Commonwealth
Government. The motor industry began with motor
body-building as a result of government measures to
conserve shipping space during World War 1. Even
though the first Australian motor bodies were produced 104. in 1900, and duties were imposed on imported car bodies in 1902 to encourage this embryonic industry, there was not much local production before 1914.9 At this stage in the development of the automobile the body was an elementary thing to produce, involving very little in the way of management or technical skill. The majority of cars were of the open touring type, and were made of simply constructed body-panels which were largely hand-shaped and then fastened to a wooden frame. War-time import restrictions forced a situation where two out of three cars had to be imported without bodies, 10 and the industry really had its beginning at this time because of the import and shipping situations.
To ensure that the new industry survived the removal of war-time restrictions on imports, the duties on bodies of all kinds were increased in the 'twenties, most of them by more than one hundred per cent. It took time for local producers to adjust to the increase in demand, but by the early 'thirties the
Australian industry was meeting requirements.
9 Hunter, Alex (ed.): The Economics of Australian Industry (M.U.P. 1963) contribution by Maxcy, George: The Motor Industry, p.501. 10 Ibid., p.503. 105.
During the 'thirties overseas companies had
considered chassis and engine manufacture in Australia uneconomic, and had resisted government attempts to
induce them to undertake it. Consequently a policy
of encouraging local assembly of chassis was adopted,
and preferential tariff treatment was given to unassembled chassis imports. Significantly, Ford
and General Motors established assembly facilities not long after this policy was implemented. Even
though few chassis parts were manufactured in
Australia, b¥ the late •thirties ninety-five per
cent, by value, of all chassis imports were unassembled.
Early in the history of the industry automobile manufacturers failed to follow up sales of vehicles with adequate supplies of spare parts. This provided
an opportunity for local industry to mae into parts manufacture. But the 1930 Scullin Tariff really
laid the foundation for parts manufacture when it
made replacement parts subject to a prohibitive rate.
The consequence of this government action was to allow
a number of established firms to exploit the replacement
market on a much larger scale. They were now in a
position to sell to vehicle manufacturers themselves,
as well as to the public, under their own brand names. 106.
Some of the supporting industries had their beginnings at this time also. Components, such as
tyres, batteries and spark plugs, which had a demand
of a recurring nature were found suitable for domestic manufacture. Those which required neither large
capital outlays nor major alterations in plant layout
and equipment because of changes in design, such as
springs, bumper bars and shock absorbers, were also manufactured within the country. These, too, came under the protective wings of the tariff.
The effect on the American vehicle producers was
to accelerate their involvement in the Australian
industry. The tariffs discriminated heavily in
favour of British producers, and the U.S. companies
felt that the best way to ensure their continued
domination of the market was to get behind the trade
barriers. General Motors took over Holden 1 s Motor
Body Builders Ltd. in South Australia, and Ford
established its own body-building plant in Geelong.
Consequently, at the outbreak of World War II these two
companies between them controlled the bulk of the
local body-building capacity.
During this period British manufacturers showed
no interest in local manufacture. They continued to 107.
rely on independent body-builders, such as T.J. Richards
& Sons Ltd. and Ruskin Motor Bodies Pty. Ltd., for the
supply of body panels, and local distributors to provide
assembly and sales facilities. Because of their preferential tariff treatment, U.K. engines and chassis
continued to be imported.
The effects of the Second World War on the Australian
economy and the changes wrought in the industrial
structure caused an alteration in attitude. This change was brought about because of a number of factors, not the least being Australia's post-war exchange position,
and the skilful use made of it by the government to
achieve local manufacture. 11 During and after 1945 there was an acute shortage of dollars, a situation which at the
time appeared to be of lasting duration. Sterling, on
the other hand, was relatively plentiful. Inevitably
there were severe restrictions on the import of goods
requiring dollars, and it appeared that unless something
drastic was done by the American companies the country's
vehicle requirements in the immediate post-war years
would be met almost exclusively by British producers.
The government indicated its willingness to assist
ll Ibid., p.505. 108.
companies with approved manufacturing programmes by making additional exchange available £or the importation of components, and by making tariff concessions on
such imports.
Reappraising the market, the American companies found that demand had increased considerably in the
six years of the war. Before the war, the local market was about 55,000 per year, plus about 25,000 commercial vehicles. The post-war market was seen to be considerably in excess of these figures. Not only was there a war-time lag to be made good {even before the war there were insufficient new vehicles registered to provide £or replacement, and the average age of cars on the road was increasing), but, in addition, there was every reason to anticipate a
sharp upward trend in car demand as incomes rose and motoring facilities were extended. By the end of
the war there were approximately 800,000 vehicles
of all types registered in Australia, and well over
450,000 of these were more than ten years old. Indeed nearly 350,000 were 15 years old or more. The volume
of replacement demand, quite apart from any increase
in the net number of vehicles on the road, called £or
an unprecedented number of new registrations. 109.
As far as British manufacturers were concerned, the
situation was very different. They were, to a large
extent, unhampered by import restrictions - Australia had considerable sterling reserves - and were able to
increase their share of the market from some 40 per cent,
in the years before the war to about 80 per cent in 1949.
(c) The Nuffield Bid.
It was against this background that an advertisement
appeared in Australian newspapers on May 2, 1945. The heading was: 11 Nuffield Organisation Forms Australian
Company, £1,000,000 Capital."
The new company was to be a wholly owned subsidiary
of Morris Motors Ltd., Cowley, England. Mr. George A.
Lloyd, Lord Nuffield's personal representative in
Australia was appointed Managing Director. The
announcement stated that the decision to form such an
enterprise was the result of conferences held between
Lord Nuffield, the then Prime Minister, Mr. Curtin.,
senior cabinet ministers, and the Secondary Industries
Commission.
Lord Nuffield made it clear that he favoured a
plan that envisaged the production in Australia of a
complete car as a final objective, a process1hat could
well take ten years to achieve. Meanwhile, it was 110.
intended that Nuffield (Australia) Pty. Ltd. should manufacture motor vehicle bodies and gradually extend
its activities to all phases of the automobile industry.
This plan was in direct contrast to the desires of the Commonwealth Government, and through them, the New
South Wales State Government. Chifley was keen to see an Australian car produced in the short run - three to five years. Also, the Commonwealth Government, while determined that the motor industry should be established in a relatively short time, and full employment should be a characteristic of the post-war Australian economy, were equally determined that the resources available within the country should be directed towards socially useful and economically profitable purposes. "There will be no place in this full employment policy for
schemes designed to make work for works sake ••• 1112
In an interview in London in which he discussed
the project, Lord Nuffield stated that he could see no hope of the enterprise being commercially profitable.
12 White Paper on Full Employment in Australia, May JO 1945 - p.11. 111.
"I predict some people are going to lose a packet of money building cars in Australia, and I shall be among them••• I am only going on with it because I want Australians to use British cars rather than those of our foreign competitors." 13 At this interview he revealed that the plant to
assemble and manufacture cars would be located in
Sydney. He stated that the Federal Government had
given him to understand that it would permit him to
take over a government munitions factory for this 14 purpose. A seven month Empire tour "more than ever
convinced him that the right kind of car for Australia
{was) a small or medium-sized English car of eight to
ten horse-power. 1115 His intention, then, was to assemble
in Sydney the Morris 10-horsepower four-seater saloon,
the most popular of all in English light-cars.
He commented on the Australian Market:
"Her population is seven million but when you allow for all people who are not going to buy cars at all - the aged, the very young, and those who cannot afford a car in any case - what does the market really amount to? I don't know, but if you could sell one car for every three persons in the country you would be doing
13 An interview in London with Edward Axford, reported in The Sydney Morning Herald, June 5, 1945. 14 Ibid. 15 Ibid. 112.
remarkably well. Obviously it is going to be a very small field for the manufacturer compared with Britain's 45 million people or the United States 131 million.
"You have to remember that the Australian market is to be shared on a competitive basis by several manufacturers. We have heard of investigations, if not actual proposals, by three organisations other than our own - General Motors, Ford and Chrysler. All I can say is that it is going to be a costly business 16 and some people are going to lose money."
At about the same time, in Sydney, Mr. G.A. Lloyd made a statement that, provided a suitable location
could be found, the factory of the company would be
situated in the Sydney metropolitan area.
In line with the Government's policy of decentralization, strong representation had been made by the governments of Victoria, South Australia and
Queensland that the plant should be located in their
States, and also by the New South Wales Government
that it might replace the war plants at Orange or
Bathurst. The last of these suggestions was rejected because, it was claimed, transportation costs of both
raw materials and finished product to and from such
16 Ibid. 113.
country centres made the proposals impossible. Sydney,
it was stated, suited all the company's requirementso
Mr. Lloyd also indicated that even though a number of
sites were in mind, the location of the proposed factory was still an open question.
Mro James Kirby, Technical Director of Nuffield
(Australia) Pty. Ltd., and Mr. George Lloyd inspected a number of plants in Adelaide, as well as several
sites in Melbourne, without success. Certain locations
in Brisbane were also examined, all with the same result.
It was decided after this preliminary search that
an intensive search of all available sites in the Sydney
Metropolitan area should be made. Among those inspected was the De Haviland propellor factory in Alexandria. The
conclusion was reached, however, that it would be better
to find a site on which to build the factories that
were required for the project, rather than attempt to
adapt already existing factories around it.
Meanwhile newspaper stories continued to report
on the progress of the search, and government officials
continued to suggest possible alternatives, most of
which were concerned with the utilization of war plants
or the possible establishment in a country centre. The
Queensland Government approached the newly-created 114. company to interest it in its existing war-plant at
Rocklea.
It should be remembered that the plan was for a gradual development and growth from purely body-building activities to full production of a complete car. This development, it was expected, would span a decade or more.
Consequently, a suitable location would be one near a sea-port in order that imported chassis components, motors, assemblies and sub-assemblies could be readily and cheaply trans-shipped from dock to factory.
In 1945, few Australian cities had shipping facilities. In 1945, few places other than the major cities had a labour force from which could be drawn adequate staff and competent employees. It is not difficult, then, to see why Messrs. Lloyd and Kirby were so keen on a location in the Sydney metropolis.
Towards the end of 1945 an article was published in one of the weeklies on the Victoria Park Racecourse as real estate.17 The article was suggested by the spectacular rise in the price of shares in the Victoria
Park Racing and Recreation Company Ltd. on the Sydney
17 Smifh's Weekly, October 17, 1945. 115.
Stock Exchange. In May, 1940, the shares were sold for
4/-. In March, 1943, they brought 5/-. September
1945 1 s price was 9/-, and at the date of the article
transactions were taking place at 12/- per share. The balance sheet filed at the office of the Registrar
General in 1945 showed tangible assets of only 8/J per
£1 share. This figure was based upon property with a book-value of £103,710. Rumours of an offer of £200,000 for the land enclosed byihe racecourse boundary fence were circulating. Using this figure instead of the book-value of the property gave a net tangible asset figure of 16/2 per share.
In the middle of 1945 Mr. Lloyd and Mr. Kirby
'found' the Victoria Park Racecourse. They regarded
it as an ideal site for the company's factory.
The site of Victoria Park Racecourse in the early
days of the century was nothing more than a swamp. Sir
James Joynton Smith, however, had a vision of it as one
day being near the heart of a great city. Swamp and
all, it was bought by Sir Joynton for £125 per acre -
£15,000 in all. He financed the deal on £1,000 cash,
and shortly after raised a £30,000 mortgage on the
property. With that money he had the area drained,
and eventually converted into Sydney's show racecourse. 116.
In 1908 he formed a £50,000 company, giving a lease with option to purchase the freehold for £30,000. The
option was never exercised, but nine months after it had elapsed, Sir Joynton handed to the company the deeds - worth £100,000o
In the early days Victoria Park was a money
spinner. It made big profits. But instead of paying them out as dividends, he ploughed the major portion back into the company and into prize-money.
He also placed a limit of ten per cent on the dividend rate.
Came 1913 and a decision to reconstruct the
then existing company. Its assets and liabilities were transferred to a new company, and shareholders
were given seven shares for every five held. This
increased capital from £170,000 to £242,739. The
articles of association of the new company contained
a provision that James Joynton Smith, who had been
managing director of the old company, should hold
the same position in the new until he resigned, died,
or ceased to hold 5,000 shares. While holding
office, he had the authority 117 0
"to exercise all the powers, authorities and discretions ••• expressed to be vested in the directors generally ooo and all other directors, if any••• shall be under his control and shall be bound to conform to his directions ooon18
Another clause read:
"The said James Joynton Smith may o•• delegate to any person o•• powers vested in him, and may by his will ••o appoint some other person to be Managing Director of the Company, and after his death ooo the name of the person so appointed shall be deemed to be substituted ooo for the name of the said James Joynton Smitho" 19
After the boom of the 'twenties the Victoria Park
Racecourse suffered a declineo It was little more
than a training track in 1945, having been leased to
the Sydney Turf Club from January 15, 1945. It had
not paid a dividend since the 'thirties, though there
was the possibility of it's again basking in something
like its old glory with the proposed re-introduction
of mid-week racing.
0n,,January 23, 1945, shortly after 99,360 shares
from the estate of the late Sir James Joynton Smith
18 Articles of Association of the Victoria Park Racing and Recreation Company Ltd.
19 Ibid. 118. had been transferred into the names of three trustees, 20 the directors were W.P. Donohoe, Lucien Cunningham, M~L.A., and F.D. Donohoe. In the last codicil to his will,
Sir Joynton Smith exercised his power to appoint a successor as managing director of the Victoria Park
Racing and Recreation Company Ltd. under the articles of association of the company. He chose William
Patrick Donohoe, to whom he bequeathed 5,000 shares.
Through Richard Stanton and Sons, George Lloyd approached the executors of the estate in an attempt to purchase the racecourse. Mr. W.P. Donohoe and his brother, the lawyer F.P. Donohoe, expressed interest in the proposition. After discussions, they offered Mr. Lloyd an option on the site. The option was to terminate on September 20, 1945. Their one condition was that in no circumstance was the proposal to be mentioned either by cable or letter. Censorship was still in existence, and the executors were adamant that no one outside the two parties to the proposal should know of it.
Australia, at this time, was still at war with
20 The trustees of the estate were William Patrick Donohoe, Francis Patrick Donohoe and Gladys M. Joynton Smith. Japan, and Mr. Lloyd and Mr. Kirby had to obtain special permission from the Ministry of Air to fly to England to submit the plan to Lord Nuffield and the board of the Nuffield Organisation. On September 1, the two men left by Lancastrian for London.
The Board of Morris Motors Ltd. was called together and the proposal for the purchase of the site considered.
A thorough investigation of the company's Australian plans for development was undertaken. After lengthy and sometimes heated debate, the Vice-Chairman, Sir Miles
Thomas, supported by other directors, expressed himself against the purchase. He regarded the investment as too large. The purchase price was £205,000, while the fixed price of the land was £170,000. Also, the size of the site - 115 acres - was far in excess of the 21 amount of land required for the factory. Mr. Lloyd on the other hand argued that not only was the real estate in a position in relation to the city proper that would be impossible to equal, but the area could be developed in such a way that the Nuffield factory
21 It was estimated that 50 acres would be ample for the project. 120. could be surrounded by the supporting industries which automobile manufacture requires.
"After the discussion Lord Nuffield asked the Board: 'Does the Company wish to purchase this site or not?' "The reply was: 'No 1' "The Chairman, Lord Nuffield then stated: 'Well, be it 5 acres or 115 acres ••• we should not argue the point about the area in question if a suitable location for our project is to be found, and as the Board has determined that it does not wish the Company to purchase the property, I am prepared to purchase it myself." 22
At Lord Nuffield's request, Mr. Lloyd cabled the company's lawyer, Morton Brewster, to complete the purchase of the land. In due course Lord Nuffield became the owner of one of the most attractive pieces of real estate for industrial development in this country. The average price of the land was approximately £1,800 per acre. Purchases of land by industrial concerns in the same area had been at prices exceeding £4,000 per acre.
On November 7, 1945, the Federal Treasurer approved the purchase price.
Mr. George Lloyd returned to Australia early in
22 Lloyd, George: Brief History of the Purchase of Victoria Park Racecourse. This document was prepared for the use of members of the Nuffield Organization. 121.
December, 1945. On January 10, 1946, he met the
Chairman of the Sydney Turf Club with a request that
the company occupy the areas known as the paddock and
leger in order to permit the introduction of the
company's operations. In discussing this matter,
Mr. W.W. (Billy) Hill, the Club's Chairman, gave the
first indication that the S.T.C. was entertaining the
idea of resuming the course for racing. However, it
was pointed out that the Australian Jockey Club were
also interested, and that they had taken over the
responsibilities of the base from the Sydney Turf Club.
At his own suggestion, George Lloyd informally
lunched with W.W. Hill and the Chairman of the
Australian Jockey Club, Mr. Alan Potter. When the
request was renewed, Alan Potter gave assurance that
the A.J.C. was only directly concerned with training
facilities for as long as possible, and as the request
involved no interference with these activities, he
would be inclined to concede to it. At the same
time he pointed out that if the S.T.C. considered a
question of interest to racing generally was involved,
he would not oppose the S.T.C. 1 s wishes.
On January 18 'Billy' Hill informed Mr. Lloyd
that the committee of the S.T.C. had refused to meet 122. the request. He added as a reason the very strong inclination on the club's part to acquire the course by resumption to remodel and reopen it as a racecourse.
Immediately after receiving this decision, George
Lloyd sought an interview with the Premier, Mr. William
McKell. He showed Mr. McKell a confidential and comprehensive outline of what had been planned. He impressed that, because of the uncertainty now involved, the company was not prepared to assume the costs involved in allowing these preparations to continue. Accordingly, planning and preliminary work was suspended pending a decision by the New South Wales Government.
(d) Government's Attitude.
Mr. Ben Chifley and Mr. William McKell, then
Premier of New South Wales, were more than a little suspicious of the proposals put forward by Lord Nuffield.
The proposals, in many way, were directly opposed to the plans developed by the Ministry for Post-War
Reconstruction and the Secondary Industries Commission.
1. The Government had expressed its desire to
establish the motor vehicle manufacturing
industry in this country, including the
manufacture of the chassis and engine. The
Nuffield proposal, on the other hand, was 1.23.
one in which the undertaking of chassis and
engine manufacture would be the final stage
in a lengthy programme of development. The
State and Commonwealth Governments did not
want to wait the ten or more years proposed
by Lord Nuffield.
2. The Commonwealth Government had also made it
clear that it was concerned that the motor
industry, when developed, should utilize
war-time plants as far as possible. This was,
to some extent, determined on the basis of the
industry's ability to contribute to a war
effort, and the ease to which it could swing
from peace to war-time production. The
Nuffield proposal was one in which the only
addition to the industry was a body-building
plant and assembly, stages of production that
were already well catered for in Australia.
J. The intention to purchase the Victoria Park
Racecourse had all the ear-marks of a speculative
real estate deal. The property was three times
larger than that needed to set up the project,
and the purchase was in the name of Lord Nuffield,
rather than in the name of the Australian company 124.
or the English owning-company.
4. According to Lord Nuffield, the project, in the
short run, had little hope of being profitable.
To Chifley and McKell, this was in direct
opposition to their intention that new capital
investment should be made on an economically
sound basis. While adding to Australia's
ability to provide employment, it was interpreted
as a misuse of resources, and a drawing away from
productive and profitable ventures man-power
and materials to an improductive and unprofitable
venture.
5. The State Government had proposed that, in line
with the policy of decentralization, financial
assistance would be given to industries and
plants located in country areas to enable
equalization to be effected. The arguments
of Lloyd and Nuffield against establishment
in Orange or Bathurst was that the costs of
transportation would be too great, and that
location in either of these centres would be
therefore impossible.
There was a sixth reason. The New South
Wales Government was a Labor government. 125.
Horse-racing, far from being the sport of
kings, was seen as working-man's sport and
entertainment. With the proposal to
reintroduce mid-week racing, Victoria Park,
located as it is, close to the city and
a major part of the city's factories, was
in an ideal situation to re-establish racing
as a major sport. Rosebery and Moorefield
racecourses were still being used as army
barracks, and there were no plans to reopen
them for racing.
(e) A~ment.
Because of his reservations regarding the proposal,
William McKell was rather evasive in his reply when
Mr. George Lloyd called on him in December, 1945. He stated that no decision could be given at that stage.
A similar answer was given by Mr. Mandle, a member of the Secondary Industries Commission a few days later.
In both cases it was advised that 11 the matter was receiving attention, but that no decision could be reached at the present time. 1123
2J Lloyd, George: op. cit. 126.
Lord Nuffield arrived in Australia in January
1946, and in an effort to promote the project, enlisted the aid of the press in New South Wales.
The consequence was that the proposal received a great deal of publicity. In a further effort to force the State Government to agree to the proposal,
Richard Industries Ltd {later Chrysler Dodge De Soto
Distributors Ltd., and now Chrysler {Australia) Pty.
Ltd.) were offered the continuance of an existing contract for the supply of coachwork requirements.
The result of this agreement was a series of newspaper headlines.
11 How We Lost a New £1,000,000 Company to Adelaide1124
"Motor Factory Hitch1125
11 Nuffield Says He's Bewildered1126
"Sydney Loses Car Plant to S.A. 112 7
"Shocking Blow to State's Prosperity1128
It had never, in fact, been the intention of
Nuffield {Australia) to build bodies in the short run.
24 Daily Telegraph; March 28, 1946. 25 Sydney Morning Herald, March 28, 1946. 26 Ibid. 27 Daily Telegraph, March 28, 1946. 28 Sun, March 28, 1946 {editorial). 127.
Such a procedure would have required at least eighteen months to tool up, and at March, 1946, a shipload of chassis was already on the way to
Australia. Car distributors wanted immediate delivery of cars, and nine months previously an order for
£500,000 worth of car bodies had been placed with the
South Australian firm. The agreement was that
Richards Industries Ltd. should build the coachwork requirements of Nuffield (Australia) Pty. Ltd. until the end of 1947.
Meanwhile, Lord Nuffield was still the owner of the Victoria Park Racecourse. The A.J.C. still leased the racecourse as a training track. And the State Government still had not approved the establishment of a motor vehicle plant at Victoria
Park.
On February 6, 1948~ it was announced that the Nuffield Body Plant was to be built at Victoria
Park.29
The agreement to the proposal by the State
Government resulted in the purchase by the Australian
29 Sydney Morning Herald, February 6, 1948. 128. company of 15 acres from Lord Nu££ield. A contract was let to Concrete Constructions Pty. Ltd. £or the construction of a factory of approximately 110,000 feet.
This factory was to be built from two Royal Navy hangars acquired by the Technical Director, James N.
Kirby. These two hangars are still standing, and are used to house production of the Company's present line of vehicles.
The factory was officially opened on March l,
1950, by the State Premier, Mr. James McGirr, and commenced production on July l, 1950. BIBLIOGRAPHY 129.
BIBLIOGRAPHY.
Books.
Burnham, James: The Managerial Revolution (Pelican, 1962).
Galbraith, JoK.: American Capitalism (Pelican, 1963).
Eells, Richard: The Meaning of Modern Business (Columbia, U.P., 1960)
Schumpeter, Joseph A.: Capitalism{ Socialism & Democracy Allen & Unwin 1943)
Berle, Adolph H. & The Modern Cor oration and Means, Gardner, C.: Private Property Macmillan,1940)
Greenwood, William T. Issues in Business & Society (ed.): (Houghton Mufflin, 1964)
Hart, Donald J.: Business in a Dynamic Society (Macmillan, 1963).
Smith, Adam: An Inquiry into the Nature & Causes of the Wealth of Nations (Irwin, 1963)
Marx, Karl: Capital (Dent & Sons, 1962)
Keynes, John Maynard: The General Theory of Em loyment, Interest and Money Macmillan, 1957). Marshall, Alfred: Principles of Economics (Macmillan, 1930}
Spengler, Joseph J. & Essays in Economic Thought Allen, William R.: (Rand McNally & Co., 1962)
Robbins, Lionel: The Theory of Economic Policy (Macmillan, 1953)
Marx, K. & Engels, F.: Manifesto of the Communist Party (Foreign Languages Publishing House, Moscow, 1959) 130.
Drohan, N.T. & Day, J.H.: Readings in Australian Economics (Cassell, 1965)
Drucker, Peter F.: The Concept of the Corporation (Mentor, 1964)
Heimann, Edward: History of Economic Doctrines (Oxford U.P., 1959)
Kurihara, Kenneth K. Post Keynesian Economics {ed.): (Allen & Unwin, 1955)
Arnold, Thurman W.: The Folklore of Capitalism (Yale, U.P., 1938)
Smith, Neil Skene: Economic Control (King & Son, 1929) Myrdal, Gunnar: The Political Element in the Develo ment of Economic Theory Routlege & Kegan Paul, 1953
Blang, M.: Economic Theory in Retrospect (Heinemann, 1964)
Meier, Gerald M. & Economic Develo ment Theory, Baldwin, Robert E.: History, Policy Wiley, 1963)
Roll, Eric: A History of Economic Thought (Faber & Faber, 1954) Hunter, Alex (ed.): The Economics of Australian Industry (M.U.P., 1963)
Arndt, H.W. & The Australian Economy Corden, W.M. {ecs.): (Cheshire, 1963) Condliffe, J.B.: The Development of Australia (Ure Smith, 1964) Articles.
Merry, D.H. & Full Employment: The British, Brums, G.R.: Canadian & Australian White Papers, Economic Record, December, 1945. lJlo
Wilson, J.S.G.: Prospects of Full Employment in Australia, Economic Report June, 19460
Coombs, H.C.: Problems of a High Employment Economy, The Joseph Fisher Lecture; Adelaide, 19440
Clark, Colin: The Budget and the Basic Wage, Economic Record, December, 19500
Government Publications.
Third Interim Report from the Joint Committee on Social Security: Consolidation of Social Legislation and Post War Unemployment: March 25, 1942.
White Paper on Some Problems of Economic Policy, by Douglas Copland, Economic Consultant to the Prime Minister, April 20, 1945.
White Paper on Full Employment in Australia; May JO, 1945.
Reply by the Commonwealth of Australia to United Nations Questionnaire on Full Employment; October 8, 1948.
Sir Robert Menzies: The Interdependence of Political and Industrial Leadershi in the Modern State; First Baillieu Lecture, B.I.M., July , 19 •
Other.
Records of the British Motor Corporation {Australia) Pty. Ltd.
Records of J.B. Were & Sons.
Newspaper Articles as follows:
Smiths Weekly
Victoria Park as Rich Real Estate; October 17, 1945.
Lord Nuffield to Build Cars Here; October 27, 1945. 132.
Sydney Morning Herald
Racecourse as Factory Site; Nuffield's Bid; November, JOth, 1945.
A.J.C. Holds Lease for Victoria Park; November, JOth, 1945. Cars off their Courses; January 5, 1946. Motor Factory Hitch; March 28, 1946. Nuffield Says He's Bewildered; March 28, 1946.
Apotheosis of Shilly-Shally (Editorial); March 29, 1946. Car Factory for S.A.; April 4, 1946. Mr. McKell Attacks Lord Nuffield; April 17, 1946. Victoria Park Debacle; April 18, 1946.
Nuffield Body Plant to be Built at V.P.; February 6, 1948. Daily Telegraph
£205,000 Offer for Racecourse; November JO, 1945. How We Lost a New £1,000,000 Company to Adelaide (Editorial); March 28, 1946.
Sydney Loses Car Plant to S.A.; March 28, 1946.
Nuffield 1 s Statement to Aust. Public; March 28, 1946.
McKell Hopes for 'Amicable Adjustment'; March 28, 1946.
Car Plant Switch 'Final'; March 29, 1946. McKell Admits Mistake - So What Now Lord Nuffield (Editorial); March 29, 1946. lJJ.
Govt. Favours Morris Move; April 17~ 1946.
The Sun
Nuffield 1 s VP Cars Next Year; February 21, 1946.
Shocking Blow to State's Prosperity (Editorial); March 28, 1946.
Car Plant Project 'Ended' - Nuffield Goes on Holiday; March 29, 1946.
Mirror
Nuffield Will Make All-Australian Car; February 21, 1946. Nuffield May Buy Victoria Park; November 29, 1945. Action Expected on Nuffield Factory; March 28~ 1945. Opposition Move to Censure Govt.; March 28, 1945. Resumption of V.P. will be Prohibited; March 28, 1945. No Chance of Nuffield Contract; March 29, 1945. Censure Rejected; April 17, 1946. The Australian Manufacturer
Why the Fuss?; April 6, 1946.