Efficiency but not equality?

The Kenneth Myer Lecture presented by Jillian Broadbent on Thursday 7 October 1999 at the National Library.

I am most honored to have been invited by the Friends of the National Library to give the Kenneth Myer lecture this year.

I feel humbled, but inspired, by the distinction of Kenneth Myer himself and that of the previous speakers, which makes it a special privilege to be here.

Ken Myer preceded me as a Trustee of the Art Gallery of NSW. His contributions, in gifts of art and vision, are often referred to, at the Gallery, with both affection and regard.

Ken and Yasuko Myer felt deeply that something must be done about developing a greater awareness and appreciation of the art and the cultural values of Japan in Australia. They believed that art was a great communicator. The Art Gallery of New South Wales has a Japan Gallery. It holds the finest collection of Japanese art in Australia, and all that, is largely due to Ken Myer’s financial support.

Edmund Capon, the director of the Art Gallery of NSW, in describing Ken and Yasuko Myer said that both were Confucian in their fundamental belief that humankind is essentially good. From that stemmed their eternal optimism, their eternal smiles and their eternal wish to do good.

Many would share Ken Myer’s view that art is a great communicator and the arts integral to civil life.

Ken Myer’s community involvement and philanthropy, both directly and through the Myer Foundation, were widespread, not only in the arts. As I contemplated this, I thought of the circumstances and inspiration from which his generous contributions arose.

Throughout history, many of the aesthetic things of our civilization, art, music and writing blossomed with the creation or existence of wealth.

Consider the legacy of the Greeks, the works of art from the Medicis in Florence, or the Guggenheim and the Getty museums in New York and Los Angeles. Closer to home the Felton bequest in Victoria and the James Fairfax and Ken Myer bequests, and our own Archibald Prize in the Art Gallery of New South Wales.

With the creation of wealth, there is a sharing and transferring of that wealth into other areas of creativity which sustains, fosters and enhances the community. It was the thought of these “good vibrations” through the community, from economic activity and a buoyant business sector, that led me to the area of my talk tonight.

There has been a tradition for the Kenneth Myer lecture to be a social commentary. I will try to make this commentary in a framework of economics.

The title of this lecture was not my own. Mine was far less esoteric. Efficiency and equality are however both values of a good society. I will touch on the trade off and complementarity between them. “Efficiency but not equality “ is the claim of the anti economic rationalists. It is too often made as a statement without the question mark at the end. A long run sacrifice in efficiency can actually harm the least equal group, we most want to assist.

By historic standards, Australia’s economic performance this decade has been very good. We have experienced sound economic growth, low inflation, and unemployment is falling.

These developments owe much to the long-term structural economic reforms undertaken by successive governments.

Prosperity carries most people, with it but usually some further than others. Despite an economy which is more productive, flexible and resilient, there is a concern among many over the uneven results of this prosperity . Australia has a sensitivity about the social cost and decline in sense of well being experienced by those who have not been direct beneficiaries of this prosperity.

In the Bulletin some weeks ago, an article by Max Walsh, describing Australia’s miracle economy was titled, “Pacemaker without a Heart”.

In this lecture, I will:

  • examine the source of our disagreement on Australia’s current path;
  • try to identify some common ground and areas of agreement; and
  • finally, recommend an approach for going forward.

This decade is the first in a long time that Australia has achieved a growth performance above most other OECD countries. We are participating in Australia's longest post-war expansion.

Our real growth rate, since 1991, has averaged 4.0% compared with an OECD average of 2.3%. Through this consistent growth period, Australia’s average inflation rate was just over 2%, a significant reduction from the 9% average for the preceding 20 years.

We have reduced our level of government debt as a percentage of GDP. At 37% in Australia, it compares with 120% in Italy, 100% in Japan, and 57% in the United States.

Over the last 2 years, economic difficulties experienced, in emerging Asia, and with our major trading partner, Japan, contributed to a 20% fall in the price of our commodity exports. Australia withstood these woes and was able to grow at an annual rate of 4.3% through that period.

As a result of increased competition, in both domestic and international markets, the recent 20% fall in the A$ has not fed into a higher rate of inflation.

We have been described by some international observers as a “miracle economy”.

This economic performance is the result of specific policy measures taken, by Government (and the Reserve Bank), to equip us better in a global competitive market.

The removal of barriers to internal and external trade has had a notable impact on productivity growth. Tougher competition policy and one of the world’s most extensive privatization programs have contributed to a more efficient allocation of resources.

A substantial program of tariff reduction has been under way since the 1970s. The Australian dollar was floated in 1983, and with it a more independent monetary policy was established. Enterprise agreements are being encouraged over centralised wage fixing, as a wage determination mechanism. De-regulation of financial markets, electricity, transportation and telecommunications have each contributed to a lower cost structure for Australian industry.

Such trade liberalization measures typically have a very long-run pay-off. That harvest is now being reaped.

While aimed at securing in the long run, a better standard of living for all Australians, these policy measures have often been resisted.

The resistance, I believe, comes from the fact that each of these policies has increased the role of the marketplace and the private sector relative to the government sector.

Economic theory and my own experience have made me a believer in the efficiency of the market mechanism. I see community benefits in a healthy, competitive, business sector and the wealth creation which it produces.

There is little debate over the key role the business sector plays in creating competition, productivity growth and the ongoing improvements in living standards in Australia. Through investment, job creation, training, and the generation of taxation revenues, the business sector keeps the economic wheels turning.

It is however the merit on the inside of business which is a song less sung.

I found in business a source of inspiration and challenge in the competitive nature of it, and a satisfaction in the measurability of its success. Business is essentially a collective pursuit with identified common goals. Success requires:

  • motivation of team activity;
  • being able to release the individual and collective capacity of your employees;
  • having short term awareness and long term vision;
  • capacity to adapt to changing customers, competitors, technologies, government policies and the economic environment; and
  • it requires maintaining a local and global perspective.

While performance is readily measurable in financial terms, value is created on multiple fronts.

Through my involvement in the arts, (with music, theatre and the Art Gallery), I am conscious of the sense of discomfort, and at times even distaste, for the hard-edged practicalities with which business is associated.

The mantel of practicality and finance however can cover a high level of vision, courage, commitment and humanity and certainly a capacity to survive.

From my background in banking, on a micro economic level I have worked with a range of businesses in financing their challenges and successes, at times realising their dreams. On the macro level, in observing the business sector’s response to monetary and fiscal policy measures I have seen effective economic outcomes evolve.

When I joined Bankers Trust Australia in 1976, the company employed 60 people and made no profit on $5 million of shareholder funds. Stimulated by the deregulation of the Australian financial markets, and the increased competition it allowed, we set about to challenge the large banks by providing cheaper access to funds for government and company clients. Similarly, in competition with the fund management mutuals, BT grew to become Australia’s second largest fund manager by providing an improved investment performance on superannuation funds. After 20 years, employee numbers were approaching 3000 (all Australians), shareholders funds were $2 billion and the combination of company tax and, income tax from BT employees, was contributing over $300 million a year to Australia’s tax revenues.

Over my 22 years at Bankers Trust, I felt a strong sense of value was created: in the people I recruited and trained; the profit and taxes generated; and the lower cost and better quality services to a wide range of supportive customers.

Despite Bankers Trust Australia being a subsidiary of an American bank, I feel proud of its contribution to Australia.

The market place and competition is not all about dog-eat-dog, it is more often about alliances and cooperation to achieve efficiency.

The best customer, like a good friend is the one who tells you how you can improve your product or service.

In the oil and gas sector, improvements: in data creation and analysis of the sub-sea geology; in the engineering of oil rigs and platforms and in the system of managing the extraction process; have, over the last decade, contributed to halve the average cost of discovering and extracting oil.

This reflects a significant increase in efficiency. It has come about by pooling the knowledge from oil company joint venturers, construction and manufacturing companies and academic research institutions. Technology has played a key role in this advance.

Emerging with this process, under government initiatives, have been improved methods of re-injecting gas and of refining the hydro-carbons so as to minimise adverse environmental effects.

These productivity gains in the oil and gas sector have reduced the cost of power generation. Lower power costs are a key component to increases in the standard of living. While we might take the supply and low price of electricity for granted, in emerging economies and remote areas it is a basic requirement to improving health and education. It powers pumps for clean water, and lights in households for reading and literacy improvements.

The private energy and creativity injected through privatisation into Australia’s electricity and telecommunications sector, is flowing and will continue to flow, through to new job opportunities. In addition, the proceeds from privatisation have reduced our government debt.

For Newcrest Mining, the new competition in power supply enabled that company, on one project, to obtain a 40% reduction in their power costs. As power was a major input cost in their gold production, this fed through to a healthy reduction in their cost per ounce. As the gold price fell from above US$400 to a low of US$252 in August this year, with their lower cost base, they were better equipped to keep the mine operating and their people employed.

Such blatant support of commerce may seem unnecessary and puerile. In the US where Calvin Cooledge, US President at the start of this century, observed “The business of America is business”, I would more likely be arguing a case for business constraints.

In Australia, however, there is a wariness of business becoming too big, powerful and pervasive. In discussion with young graduates about their careers, they often express a feeling that “work in business is selling your soul”. I always advise them to feed and develop your own soul and that in the interdependence and mutuality of the business sector, you do find many others with soul.

As you can gather, I have been and remain broadly supportive of the government policy initiatives in financial market deregulation, in selective privatization, in tariff reduction, in competition policy and in the labour market, and more recently in taxation.

It has been concerning, however, how often my views are in conflict with those of friends, family and colleagues with whom I share common values.

Why do we disagree?

We disagree because we have competing dreams each emanating from a particular view of a good society.

As my mind roamed far and wide in considering this issue, I found a helpful framework in the mapping device used in a book titled “The Executive Compass”. The book is by James O’Toole, an American academic and author. O’Toole considers four themes/values of a good society: liberty, equality, efficiency and community. He sets these values out as the 4 poles on a compass card to illustrate how these polar positions are in constant conflict with each other:

    Equality    
   

line

   
Community line vs line Efficiency
   

line

   
    Liberty    

Most of us share an appreciation of each of these values. Individually, and as a nation, however we would differ in how we rank these values in importance.

Our positioning would vary from one issue to another and change over time as the starting point is shifted by history and circumstances.

These 4 “dreams” tug like polar forces at government and society as a whole.

O’Toole makes some observations as to where particular nations are positioned on the compass given the different emphasis each places on these values:

liberty and efficiency being the strongest values in the U.S.; equality being dominant in Russia and China.

In respect of the title of this lecture, and the time available, I will follow an accepted practice of economists and assume away some of the elements of complexity. I will concentrate on just the 2 values of equality and efficiency.

{graph equality versus efficiency}

 

Complete efficiency is full employment and a constantly improving standard of living. There is some inverse relationship between equality and efficiency which can be represented by a diagonal line across the axes or value poles.

This line or relationship is probably not static in shape or position.

Historically, the introduction of new technologies, eg. electricity, the railroad, or computers would shift the line upwards to a new plane.

Policies on improving the environment and human safety can appropriately shift the line down. Such policies yield community benefits not captured in this 2-dimensional approach. Anti-discrimination legislation, shifts the line up.

Each country, usually through a democratic process, positions itself in this quadrant according to the differing strength of its citizens’ pull from these 2 value poles. It is worth considering where Australia and other countries may be currently positioned.

Before doing this, I will digress briefly to consider the history of economic thought in order to establish a premise on efficiency, about which we might agree.

Historically, the economies of Ancient Greece, Egypt, Rome and early Europe functioned on a system of custom and command. People accepted their position and followed the work of their fathers. Their societies operated under the command of a king, feudal lord or centralised power.

The path to national power and economic progress was seen to be through the search for treasure and probably theft. This inspired the government-sponsored adventures of the likes of Christopher Columbus, Sir Francis Drake and Cortez.

By the 18th century, as land, capital and labour began to be freed up, commerce and trade, rather than treasure, were seen as the great source of national vitality and economic progress.

In 1776, a Scot named Adam Smith published the “Wealth of Nations”. In it he made a number of fundamental observations about the workings of commerce.

His observations about the nature of “economic man”, of the efficiency of the “invisible hand”, of the market place and the role of competition (covered in the 900 pages of the “Wealth of Nations”) became, and remain, the fundamental principles of economics.

Smith believed in a system of “perfect liberty” where the driver was “economic man’s” desire for self betterment.

Competition was the regulator, preventing hungry individuals from holding society up to exorbitant ransom. With competition, the "invisible hand" of the market then worked to allow the prices of land, labour and capital to find their natural level and determine the efficient allocation of these resources.

Competition, Smith suggested, will result in the goods and services that society wants, in the quantities it desires and at the prices society is prepared to pay.

There was no such profession of “economist” at that time. Adam Smith was a moral philosopher. He had a philosopher’s disdain for the vanity of riches.

Smith saw the process he described as “perfect liberty” creating wealth for the nation and all the members of it.

Smith placed the interest of the consuming public over that of the producer. He saw monopoly, or lack of competition, as more of an enemy than government intervention in the market place. Free trade between nations was seen as an important source of competition.

Adam Smith remains a towering figure in the history of economic thought. He was the man who made the world recognise how the market kept society together.

While governments and vested interest groups have historically been selective about which of Adam Smith’s key relationships they accepted, the results have not necessarily captured the well-being Smith saw should evolve.

Self-betterment, competition, an increase in trade, and the market mechanism have however been key contributors to the innovation and world economic growth of the last 200 years.

The acceptance by economists of the economic efficiency of the market does not, as with Smith himself, require a denial of the value of the other elements of a good society.

Adam Smith shared a mutual admiration and friendship with Benjamin Franklin. The “Wealth of Nations” became almost an economic blueprint for America. With such an early belief in, and adoption of, this “perfect liberty”, it has played a significant role in the approach to policy in the United States.

In contrast to this, in communist countries, the desire to command and control the economy and avoid the mercy of the free market, has necessitated an absence of liberty, not just in economics, but in religion and politics.

Over the last decade, the opening up of Eastern Europe has exposed an appalling absence of economic progress, personal freedom and abuse of the environment. In denying the desire for self-betterment and avoiding the market mechanism they associated with capitalism, efficiency has certainly been sacrificed (as well as liberty and community) for equality.

In visiting Russia earlier this year, I became more appreciative of the “good vibrations” of a vibrant business sector and the invisible hand of the market compared with the centralised planning of government. Without these vibrations, there is very little to share around – with or without equality.

In the St. Petersburg area where we were:

  • the unemployment rate was approaching 20%;
  • factories decayed abandoned – some since the Russian revolution in 1917;
  • one-in-three families live in one-room apartments sharing kitchen and bathroom facilities with several other families;
  • postage rarely arrives, without being pilfered of any valuable content;
  • people expressed risk of default in the banking system (justified given the high default rate in Russian banks last year), so savings are often carried around or hidden in homes – and there is a high frequency of theft;
  • with no effective mechanism or process of collecting taxes the Russian Treasury is depleted. They have insufficient funds to provide basic food and shelter for the aged and growing numbers of unemployed;
  • public servants (police and academics), may go unpaid for months.

The true quest for nations is the release of human economic creativity. Russia seems to have failed so dismally in this quest. From a highly educated workforce, there have been few opportunities for human economic creativity. 80 years without a private business sector, and without the use of a market place to determine prices, consumer demand and the allocation of resources has meant a massive under-performance in the improvement of living standards. The wonderful creative and intellectual energy of its people has been systematically attacked and destroyed.

Despite an educated population of 150 million, and a good endowment of treasures and natural resources, Russia comprises just over 1% of the world’s production, about the same as Australia with our much shorter history and smaller population.

Returning to our equality/efficiency line and where Australia is positioned. We can certainly agree that in the balance of values, few of us would choose the Russian sacrifice of efficiency for equality at such a low standard of living. We would also resist the U.S. tendency towards “perfect liberty”.

Western Europe on the other hand has a more controlled market and greater emphasis on equality than the U.S.. Australia is positioned somewhere between the free market of the United States and the higher government involvement of the major Western European countries.

We can represent this by the following diagram:

{graph2 equality versus efficiency}

We may consider our current position as just fine. In a world of increasing trade and globalisation, however, events outside our control can influence this position.

The dynamics of globalisation (where capital, technology and information move readily across national borders) are not fully understood. Depending on the policies we adopt, globalisation could shift Australia to a higher or lower efficiency/equality line.

We hear a lot about the impact of the internet on the transfer of goods into a global market. The son of our guide in St Petersburg had found a job off the internet translating expired patents in Japan from English into German, for a German industrialist. This skilled 17 year old was cheap labour for a German business – maybe, but he was at that point the only income earner of that family. His father, a university teacher, had not been paid for 12 months; his mother, our guide, was recently unemployed, having lost her position when a French bank closed its St Petersburg branch after large loan write-offs.

In a world where markets for labour and capital are becoming more globalised, Western Europe is less well positioned to be a beneficiary of this trend. They have, however, some protection in the formation of their own community in the European Union. No such protection is available to Australia.

It is here our disagreement may re-emerge. As policy makers in Australia have moved to equip us for globalisation to capture the increased efficiency of competition, the market place and the private sector, we question whether we need to change.

Some of the anti-deregulation, anti-privatisation, at times anti-business views expressed in Australia arise from a fear that the greater role of market forces and the private sector over government, will mean a loss of equality – a sacrifice of our egalitarian ideal.

Are we heading on a path to chasing an American dream, not our own? Are we in danger of ending up with many of the American ways we find distasteful: American language, food, junk culture, division between rich and poor, commercialisation of politics, propensity to litigate……?

Australians often express a view that we lack a national identity. This may contribute to a fear of vulnerability to acquiring features of an American identity. Patrick White asserted that Australia will never acquire a national identity until enough individual Australians acquire an identity of their own.

He was right in that individual contribution to our national identity is critical. Individual contribution to, and confidence in, our democratic process is also essential. We need understanding on how each of us fits into, and contributes to, the nation, and on where Australia positions itself in the globe.

A vote for an Australian head of state and yes/yes in the November referendum is an important step forward in confirming our own national identity.

With our endorsement of multiculturalism, what are our identifying characteristics? I believe both individually and as a nation there is considerable agreement on the values we hold dear. Internationally people refer to: the arrogance of the French; the rigidity of the Dutch; the brashness of the Americans; it would probably be the earthiness of the Australians.

The Australian identity is reflected in:

  • our belief in equality
  • our sense of humour (we laugh at ourselves)
  • our “mateship”
  • even our sense of supportive optimism: “she’ll be right mate!”

It is these characteristics which will determine our own balance between efficiency and equality.

Despite a common objective to increase national wealth, we are and will remain different from the U.S. Australians see merit in the concept of a classless society – this would be an anathema to the American way – the ‘rags to riches’ dream.

To take a few examples which distinguish us from the U.S. in particular:

Following the Port Arthur massacre, with our view of community, Australia was quick to adopt legislation to control gun ownership. In the US such legislation is still considered a sacrifice of liberty.

Over my 22 years working in the Australian subsidiary of an American bank, I was so often reminded of the different emphases we would place on common values.

Bonuses or incentive payments were the source of considerable debate, both internally in BTAL and with our then parent company. New York suggested only the top 20% should receive a bonus. Australian management, consistent with a more egalitarian ethos, elected to pay a bonus to all staff.

In the Davis Cup match in Brisbane last month, Wayne Arthurs described playing and winning for Australia as the highlight of his career.

In the U.S., top American players such as Pete Sampras and Andre Agassi until recently chose not to play for their country in the Davis Cup. When Mark Philopousus declined to play in the Australian team one year, there was a national outcry against him - for what we all considered non-Australian behaviour.

I believe our particular Australian balance of values can be preserved while we move forward on efficiency. We are working towards an upward shift in the equality/efficiency line, not just a move along it.

The government’s response to the Ralph Report on business taxation is a bold move to try to capture and encourage more energy in the business sector of the Australian economy. ACOSS have complained that the proposed package will do nothing to reduce equality. Not every policy can move forward on every value.

In our thinking about these issues we should try to avoid the pitfalls of becoming barbarians of specialisation and comprehending only single dimension outcomes, rather than the dynamics of the whole.

To support efficiency and wealth creation does not mean support for conspicuous consumption and arrogance. As Hugh Mackay says: “Australians are irritated by tall poppies who act tall. The egalitarian ideal has made us uncomfortable with the idea that success implies superiority. The Australian ethos is to be modest about our success and humble about our achievements.”

We can only gain from policies which release efficiency. Through the creation of wealth we will improve the living standard of all Australians. These policies may, however, contribute to a wider gap between the rich and the poor. If we create globally competitive industries in Australia, and through them jobs and a growth dividend to government revenue, we can then afford the safety net we want.

To conclude, I will return to the Arts and where I started, that is, the source and inspiration of Ken Myer’s philanthropy.

David Malouf wrote a foreword to the recent Nugent Major Performing Arts Inquiry. He says: “Societies like the one we live in are complex phenomena, their parts deeply intricated, affecting one another in ways that are sometimes hard to assess. To isolate any one of them may be to misread the dynamics of the whole. This is certainly true of the arts. To see them as something ‘added’ that might also be taken away is to miss the extent to which they may be the source, as well as the product, of what we are.”

We do not want to isolate and defend just one value in the complex phenomena of our society.

Incentive and creation of wealth, with the arts, are key elements in “the dynamics of the whole”. They each play an essential role in the “good vibrations” we are after and the release of human creativity and productivity.

Earthiness, humour, supportive optimism and readiness to lend a hand, make our Australian identity. We should nurture this as we pursue our preferred position on the compass of values.

Individuals play a vital role in the democratic process. It is the collective basket of each of our dreams and values, which will determine the balance Australia has between efficiency and equality. Individually we must ensure we are not “barbarians of specialisation”, stuck on the polar extremes of the compass of any one social value. Rather, we should be prepared to test policy initiatives which may reduce equality but can move us forward in efficiency towards full employment and rising standards of living.

Through individual involvement, understanding and effort, but not complacency, Australia can remain an economic miracle which benefits, over time, all its citizens. It may require a bit of give on equality but I urge you to give it a go.

Jillian Broadbent

Addendum

The Kenneth Myer Lecture

Kenneth Baillieu Myer was a good friend of the Library and Chairman of the National Library of Australia Council for eight years. As most of you know Ken and his wife Yasuko died tragically in an aircraft crash in 1992.

He was born in 1921 in the United States, the eldest son of the Australian based family of Sidney Myer, which had established the Myer department store in Melbourne.

Ken Myer’s philanthropic interests ranged across the performing arts, libraries and museums, visual arts, scientific and medical research, international relations and the environment. He served on many boards and committees in pursuit of these interests.

Ken Myer’s association with the National Library commenced in 1960 when he accepted membership of the Library’s Interim Council. Following passage of the National Library Act 1960 he became a member of the full Council and was Chairman from 1974 until 1982. His association with the Library was marked by his strong encouragement of the Library to adopt for the future, new technology and the opportunities that this offered.

His other great contributions to this Library, as to many other institutions and causes were his infectious enthusiasm and unstinting generosity.

In 1976 Kenneth Myer was created a companion of the order of Australia and, in 1989, the Australian Library and Information Association gave him its Redmond Barry Award, which goes to a lay person not employed in a Library who had rendered outstanding service to the promotion of a Library and to the practice of Librarianship.

In April 1990 the National Library launched a library support group called Friends of the National Library. Friends now have more than a thousand members from all over Australia and even some from overseas.

One of the most important activities established by the friends is this lecture series, named to honour Kenneth Myer. It was conceived as an opportunity for invited lecturers to make a significant statement on a broad subject of particular interest to them which may also relate to their background and career interests.

The Hon Gough Whitlam delivered the inaugural Kenneth Myer lecture in April 1990. Nugget Coombs, Elizabeth Reid, David McCaughey and John Mulvaney have presented other lectures.

Jillian Broadbent

Jillian Broadbent is a member of the board of the Reserve Bank of Australia and a director of a number of Australian public companies, including Woodside Petroleum limited and Coca-Cola Amatil Limited.

Following a period of working in economics research at the Reserve Bank of Australia and the University of British Columbia, Jillian was a senior executive with Bankers Trust Australia, with responsibility for the bank’s risk management business and its banking services to the resources sector.

She was named QANTAS / Bulletin Businesswoman of the Year in 1987.

Jillian has always maintained a strong involvement in the arts. She is a trustee and Vice-President of the Art Gallery of New South Wales, a director of Sydney Theatre Company and on the board, since its inception, of the Australian Brandenberg Orchestra.