A few of my Rants

The End of the Dream.

What has happened to the lucky country? We have ample food, abundant natural resources, and a healthy and resourceful people, yet we are burying sheep while people go hungry, we are importing goods while our manufacturing industry collapses about our ears, and we are exhorting people to work harder while more and more become unemployed. Clearly the social system has broken down, and equally clearly the politicians and their expert advisers have not the faintest idea either of what has gone wrong, or of what to do about it.

Why has this disastrous situation arisen? And why do we seem inexorably committed to an endless cycle of boom and bust? In this paper I will attempt to show that there are four fundamental defects in the foundations of our economic structure, and demonstrate how they have led to the present mess. These are:

1. The Myth of The Safe Investment.

For many years scientists strove to produce perpetual motion, in the form of a machine which would go on doing useful work without any work being put into it, but at last they came to realize that such a machine was fundamentally impossible, and that you can never get more out of anything than you are prepared to put into it. However the concept of investment, at the heart of our financial system, is the economic equivalent of perpetual motion, and it is this fundamental error which is the root cause of the apparently inevitable cycle of boom and bust plaguing us again today.

2. The "Bigger Fool" Theory.

Nominally the stock exchanges exist to enable people to invest in the nations leading industries. Unfortunately, as the painful lessons of the last depression have been forgotten, investment has been more and more regarded as an opportunity to gamble, and all too often the guiding principle has been the "Bigger Fool" theory

3. The Two Edged Sword of Technology.

Just as technology offers the promise of abundant nuclear power, and the reality of the hydrogen bomb, it offers the potential for making life easier for everyone, and the reality that within a few years, a few automated factories in South East Asia will be able to make all the manufactured goods the world needs.

4. The Trojan Horse of Free Trade.

Endlessly we are told that economic efficiency is the sole criterion for judging the worth of an industry, that free trade is the answer to the worlds ills, and that therein lies the sole hope for the third world. But more and more, with the advance of technology, the truth is that as long the international rip off merchants can find one corruptible government somewhere around the world, the effect of free trade will not be to raise the standards of living of the poor nations, but to force the wages of all but a privileged few individuals down towards the level prevailing in that country.

Let us now consider these points in more detail.

5. The Myth of The Safe Investment.

It is clear from the antics of our leaders, and the nonsense which fills the financial pages of our papers, that our economists and politicians are totally ignorant of the fundamental relationship between interest and inflation rates. This is not too surprising, as our monetary system is an artificial one, and operates in a largely irrational way. However we can get some idea of its operation if we think of money as an entitlement to have a certain amount of work done for us. Thus, perhaps, we could think of $100 as entitling us to have a basic man work for us for one day.

Two things went wrong in the development of the financial system. The first was the tying of the system to materials having no intrinsic value, such as gold and silver, so that the amount of money available was determined not by the thriftiness of the community, but by accidents of nature. A moments thought will show that while the discovery of gold in Australia has been of incalculable benefit to the European settlers and equally disastrous to the aboriginal inhabitants the adding of some tons of gold to the worlds coffers produced no significant direct benefit to mankind.

The second great error in the development of the monetary system was the emergence of the concept of the payment of interest. As long as money was strictly a medium for the exchange of labour it was possible, in principle, to have a stable monetary system. This was still possible when communities got together to undertake ventures for the general good, whether voluntarily through co operative schemes, or involuntarily through taxes, so long as it was realized that the reward for participation came from the benefits of the project. However once the idea arose, of lending money to someone else, and getting it back with interest, the system inevitably became unstable.

Suppose for example that 20 years ago I had lent the S.E.C. $100 at 5% interest, and that with my money they had erected a pole outside my house. I would have received interest of $100, and would now receive - apparently unblemished - my $100 back again. However the pole which it had paid for would by now have rotted away, and the S.E.C. would have to borrow another $100 to replace it. Thus by lending my money I would have been able to double it, but the S.E.C. would have nothing to show for their expenditure.

Had I started with a larger sum: if, say, I had managed to bewitch an heiress with a dowry of $200,000, I would have been able to live in a manner befitting my station without doing anything whatever to benefit mankind, and, unless I were wildly improvident, would have been able to watch my wealth rise steadily.

This happy state of affairs, in which if one can amass a sufficient capital one can exist for ever just by lending it to others, represents a fundamental breakdown of the system. This is easily demonstrated by calculating the extraordinary rewards of investment if we reinvest the interest and wait a reasonable period. For example $1000, invested at 5% compound interest would be worth $131,000 in 100 years. In the real world this sort of return is simply not possible, and the practice of lending for interest can lead to one, or both, of two results.

If the supply of money is tightly controlled all the wealth will accumulate in a few hands, with most people effectively enslaved by astronomical debts, as was the case in Europe until recently, and is still the case in many feudal societies. On the other hand, if the lenders are not able to restrict the money supply, the currency will simply depreciate at such a rate that the useful life of an investment is about the same as the average useful life of the items purchased with the borrowed money.

Thus we see two things:

i. In a society in which the workforce cannot be enslaved the inflation rate will be firmly tied to the average interest rate. (In an expanding economy in which investments are used prudently the inflation rate may be discounted somewhat by the growth rate, but I do not believe this effect is worth more than 1 or 2% in our society.)

ii. The more frivolously borrowers use their money, the shorter the average life of the investment, and therefore greater the inflation rate.

2. The "Bigger Fool" Theory.

The economic health of the nation - and indeed the world - is determined, more than anywhere else, in the worlds stock exchanges. Unfortunately these have long ceased to pay anything but lip service to the notion that they exist to facilitate the development of the nation, and the gambling instinct has been given full reign. As quick profits can only be made by predicting future movements, and as these result from the actions of the people trying to predict them, the markets have become more and more unstable. Yesterdays Posiedon is todays dirty word, and fortunes are made and lost on rumours spread by self appointed experts and unscrupulous manipulators. Today this instability is compounded by worry about the ever rising inflation rate, and fears of an imminent collapse. Such fears, tragically, are all too likely to be self fulfilling, as widespread action to dodge a perceived collapse will inevitably precipitate it.

3. The Two Edged Sword of Technology.

Most people spend most of their lives doing things they would rather not, because it is the only way they know to earn a living. Technology, which promises to relieve us of the drudgery and tedium of boring, dirty and hazardous jobs, must surely be a good thing, then. Unfortunately it hasn't worked out that way. Certainly some dirty jobs have been eliminated, but more often satisfying jobs for craftsmen have been replaced by boring jobs for unskilled workers. Today, increasingly, the tedium of the production line is being replaced by the tedium of the dole queue. Yet, still, we must work harder, and ever harder, we cannot afford a 35 hour week and this while jobs are disappearing wholesale!

This failure of technology to live up to its promise is not the fault of the technology, but of society, which has failed to ensure that it has been used for the benefit of everyone, rather than the individual. Today the challenge is more serious than ever, as technology is developing so rapidly that in the next few years a handful of automated factories in underdeveloped countries will be able to produce sufficient manufactured goods to satisfy the worlds requirements. Unless very drastic action is taken very quickly these factories will become a reality. They will be manned by slave labour, and the profits will be reaped by a handful of individuals living in fortified ghettos to escape the massive discontent resulting from their activities.

4. The Trojan Horse of Free Trade.

In the last 50 years we have seen, in Australia and in England, the death of the village or small country town as an economic entity. Not long ago each village had its own economic and social life, its own butcher, baker, and candlestick maker. Now all have gone. If the village was near a city, it has degenerated into a dormitory suburb, its occupants fleeing daily to the city. If it was not it has simply died. Australia is, and will remain, a small market, and just as the country bakery was not able to compete with the city bakers mass produced plastic foam, there is no way in which Australian industry will be able to compete on an equal footing with the giant automated factories now being built. Unless we take immediate strong and determined measures to protect Australian industry it seems inevitable that Australia, as an industrial nation, will go the way of the country town, and will become simply a collection of farms and mines controlled and exploited by the multinationals.

Once we lose our industrial base we lose our credibility as an independant nation, as there will no longer be any possibility of defending ourselves for more than a few days, no matter how many expensive toys we buy from overseas. Such a change, from a proud self reliant nation to a financial colony, managed, as of old, by people who have blotted their copybooks at home, will have the most disastrous effects on the prosperity and wellbeing of the nation.

The Present Mess.

If there is one word which sums up this country today it is conflict. Any farmer will tell you, at length, how the city folk don't understand the farmers, how the farmers are being exploited by the town-dwellers, and how they are having to work harder and harder to make a living. The manufacturer will tell you that if only those lazy bludgers would get off their backsides and do an honest days work occasionally he could afford to pay the outrageous wages they demand, while the workers complain that they're not going to slave their guts out for someone who treats them as a commodity, to be hired when things are good, and fired at the first whiff of trouble. The one thing all agree on is that the government should do something about it. But what, is another matter.

This atmosphere is in marked contrast to the optimism of the late 50s, and at first glance it seems that things have taken a new and ugly turn, but when we look further back we see that we are merely repeating the old cycle of boom and bust.

Why should we be locked into this apparently unbreakable cycle? Inflation is the inevitable consequence of lending for profit, and equally inevitably once the inflationary cycle has started it will continue at an ever increasing rate. For a time the inflationary pressure can be masked by expansion of the market, but this requires an exponential growth rate, which can never be sustained for more than a few years. As interest rates rise it becomes increasingly difficult to maintain the accelerating growth rate required to keep up with inflation, and so the inflation rate spirals faster until, at least to date, the inevitable collapse wipes out the paper profits, and most of the nations wealth.

Looking back, I was brought up in the aftermath of the 1930's depression and a disastrous war, and the conventional wisdom was that we should work hard to buy our own homes, and save for our old age, through life insurance or safe investments in government bonds and the like. Inflation, if I recall correctly, was not a subject of conversation until about 1950, when the Korean war pushed the price of wool to astronomical heights, and dumped a vast amount of money in the hands of the delighted graziers. Quickly this spread through the community, pushing prices and wages higher and higher, and giving the inflationary spiral a momentum which seems to have been building up ever since. While there have been many contributing factors, notably the activities of the U.S. government in financing the Vietnam war, three local factors would have assured this result, regardless of outside effects. These were:

1. The growing power of the trade unions, and their determination to get what they considered to be a fair slice of the cake, in competition with the determination of the holders of financial privelege to preserve what they believed were their due rights.

2. The realization of the small investor that they had been ripped off, and that the life insurance policies and investments which had cost them so dear would on maturity afford them but a moments respite from their financial struggle. The result was an increasing reluctance to invest in the traditional sources of low cost finance. Coupled with this was a decay of the traditional financial morality

3. The vested interest of the politicians in inflation, since it enabled them to syphon off an ever increasing proportion of the national wealth through the progressive tax scale, without overtly raising taxes. Since every turn of the spiral meant that a larger portion of the cake went in taxes the main contenders fought ever more desperately to maintain their share, causing the spiral to spin ever faster. Furthermore, as the tax rates rose the taxes became increasingly resented, and public morality took another catastrophic dive as tax dodging became more prevalent and more widely condoned.

As the economy has become more unstable governments have come under ever greater pressure to do something about the perceived evil of inflation, and have turned again to the traditional remedy of restricting the money supply. As usual this has pushed up the interest rates as people compete desperately for the funds essential to run their businesses, and, as usual, the inflation rate has gone up to match. But it is becoming ever harder for individuals and businesses to make ends meet, and the probability of a catastrophic collapse rises daily. It is all too likely that todays financial gurus will soon be echoing the quack doctors of old: "The cure has worked, but unfortunately the patient has died."

The Way Out.

Let us look first at the remedies currently being proposed. The farmers are agitating strongly for the removal of all restrictions on imports, without realizing that it is precisely because they are dependant on overseas markets that they are suffering their present squeeze. If, as in Europe, the farmers primary source of income was the local market, and if this local market were healthy, there would be a real chance for them to maintain a decent standard of living. But there is no hope of our farmers selling to the people really in need of food, and as long as they continue to rely on supplying peripheral markets, in competition with the peasants of Argentina, and the subsidised farmers of Europe or U.S.A., they have no chance of making a decent living. Worse, by advocating the import of cheaper machinery, etc., they are driving down the standard of living of the only people who could provide the profitable market they need. Similarly our manufacturers have no hope of selling in open competition on the world market, but by trying to contain wages in a vain attempt to do so, are increasing the pressure on their natural customers to buy cheap imported goods instead.

Finally, in a situation where perhaps 10% of the population can produce all the goods that are needed it is absurd to be arguing that the answer to our problems lies in harder work, or higher productivity. All these can do is to put even more people out of work.

What, then, can we do to get out of the present mess? It is clear that the policies currently being pursued in Canberra, in London, and in Washington, will inevitably lead to a disaster of the first magnitude, and that the effect on Australia will be far worse than it will be on the U.S.A. It is also clear that while it will be exceedingly difficult to introduce sensible counter-measures in Australia, we can safely assume that there is no hope of effective action being taken on a worldwide basis. We must therefore consider what Australia can do on its own. Contrary to the general belief, Australia does have significant scope for independant action, but any effective action will be unpopular overseas, and will require a united government with strong public backing.

As I see it, the first, and most urgent, objective must be to halt the collapse of our industry. This requires immediate strong action to halt the flow of imports, and could well include a substantial devaluation. We cannot afford to import steel while our own industry collapses, or to permit the death of industries such as the vehicle transmission industry which are vital to our defence. We must also adopt, at all levels of society, an effective policy of buying Australian. The money you save on cheaper imported items could well be at the expense of your own job!

It should be noted that a very significant part of the import bill is generated by the military establishments penchant for playing with expensive toys. For example the $2000 million which we are committed to spending on a few planes of dubious value would provide 200,000 jobs. This money would make a far greater contribution to our security if it were used to improve communications and encourage the growth of towns in Northern Australia. In the forseeable future massive unemployment, coupled with the collapse of our industry, poses a far greater threat to our security than any outside agressor.

The next question is how to revive the economy. Paradoxically, as inflation can only be reduced by reducing the interest rate, and as the main problem facing our manufacturers is that their customers have no money, the answer is not to reduce the money supply, but to increase it! This will reduce the inflationary pressure, as interest rates are forced down, and will give the consumers the money to buy from our manufacturers.

It is not yet socially acceptable to be paid for not working - though this must inevitably come - but we do not want to produce more goods, as we have too many already, so the increased money should be devoted to projects which increase the quality of life, without wasting valuable natural resources. Projects that come to mind are such things as providing more help for the elderly, improving cycleways in the cities, paths and amenities in the National Parks, and encouraging the growth of, and improving the standard of living in, country towns. Far more emphasis should be placed on research in industry and universities, and much greater encouragement given to industries such as computer software development where Australian inventiveness can pay on the world market.

Provided that we ensure that the money so injected into the economy is not promptly squandered on imports, or gobbled up by vultures from overseas, such measures, contrary to official gospel, will neither lead to skyrocketing inflation, nor to oppressive rates of taxation, since we will have a prosperous community to support them. However we must discourage the current emphasis on speculation, and encourage long term investment in industries which will contribute to the nations well being.

As part of our strategy we must decide on a policy towards inflation. Our economic system is now geared to an inflation rate of over 10%, with many people committed to long term loans at 15% or more. This is only feasible if the inflation rate remains at its current level, and if it were suddenly markedly reduced these people would be in great financial difficulty. Accordingly, we must either accept that inflation cannot and must not be suddenly reduced, and aim for a gradual reduction, or we must make funds available, at an acceptably low interest rate, to pay off all existing local loans (it is not necessary to pay off loans in other currencies as if we can control our inflation rate our currency will appreciate rapidly with respect to them.) Whichever strategy we adopt will be challenged by overseas interests, who will seek both to destroy measures they consider harmful to themselves, and to reap the profits of our efforts. Any effective strategy must impose firm controls on the flow of funds in and out of Australia.

Whatever we do in the short term, we must remember that the root cause of our problems is lending for interest, and in the long term we must devise an alternative concept of investment which is not inherently destabilizing.

R.H.Riordan 16.11.82

This paper was written in 1982, at the height of a depression. We have since gone through several more boom and bust cycle, and our competitive position has been immeasurably worsened by a profligate squandering of resources on private excess, with government backing and encouragement, all in the sacred name of free enterprise. Many of our formerly most successful companies have been slaughtered, and their assets looted, and our overseas debts have been massively increased.

A rigid application of right wing dogma has indeed reduced the inflation rate, but the patient is at the last gasp, and will soon be dead, if the present policies are not reversed forthwith.

 © Roger Riordan 2004-2019

End of Dream