by Craig Milne
PODCAST Listen here to Craig Milne in conversation with the NCC’s Chris McCormack about what will need to be done to revive Australia’s economy in the post-covid19 world, where failed globalist assumptions will no long obtain.
Amid the difficulties caused by the covid19 pandemic, many Australians are calling for the revival of manufacturing to lessen the nation’s dependence on China. For that to happen, Australia’s governing class will need to ditch some of the ideas that it has cherished for the last half century. Australia will need to get back to implementing national development policies that might actually work.
Australia used to be a significant manufacturing nation. In the middle of the 20th century, manufacturing accounted for almost 30 per cent of its GDP; at the time the corresponding share for the United States was 27 per cent and for Britain 32 per cent.
The tariff-reduction and trade-deregulation policies aggressively adopted by successive Australian governments over nearly 50 years have steadily reduced manufacturing to less than 6 per cent of GDP today; a level similar to that of a some African states. According to Harvard University’s Atlas of Economic Complexity, Australia is ranked in 93rd place out of 124 nations listed.
This appalling result suggests that after decades of “economic reform”, Australians have become, industrially speaking, a nation of ignoramuses: a shameful outcome for such a once capable people.
Australia established a competent manufacturing sector during the 19th century because it was settled by people from what was then the world’s pre-eminent scientific, technological and industrial nation.
Although the imperial division of labour favoured the home country for manufactures and delegated the production of fibres, cereals and ores to the colonial periphery, Britain was a long and expensive sea journey away. Distance and high transport costs presented many opportunities for local manufacturing through a colonial connection that provided easy access to the world’s best skills and to abundant capital resources.
Protective tariffs were first applied in Victoria in 1866 to foster industrial development, a policy that eventually made Victoria the premier manufacturing state in Australia. Colonial legislators in New South Wales did not follow suit, piqued perhaps by their southern upstart’s rapid growth.
Disagreements between advocates of free trade over protectionism shaped inter-colonial political divisions leading up to Federation. These divisions, despite the adoption of protectionism as Commonwealth policy, at Victoria’s insistence, never really faded away.
In fairness it should be said that the NSW position made some sense in colonial times; the Australian colonies were just extensions of British territory, with limited self-government granted in the interests of administrative efficiency. For the same reason that there were few factories in Devon or Somerset, the business of the Australian colonies was best served by concentrating on pastoral, mining and agricultural activities in accordance with Ricardian principles.
With Federation, the situation changed fundamentally: Australia was now becoming a fully independent nation and it needed an economic policy to suit. Just as Alexander Hamilton had made the case for American manufactures a century earlier, Australian protectionists made a similar case for industrial development. After 1901, with economic sovereignty becoming an issue of overriding importance, the protectionists were absolutely right and the free traders were wrong.
Free trade (unregulated or deregulated markets) has been a central and fervently held tenet of mainstream political economy for a very long time. It belongs with the set of ideas embedded in Enlightenment utopianism; the belief that a just and perfect organisation of the human world could emerge from the enacting of secular liberal reforms.
In the 18th century, when the labour theory of value still made sense, international transportation was precarious and capital was at risk in foreign lands, the case for free trade was strong. Free trade would be a way to lift prosperity through international specialisation. It could build peaceful, cooperative relations between nations in place of mercantilist rivalries.
At the time, labour everywhere was paid at a subsistence level and there were no social reformers or trade unions seeking to improve the condition of the labouring classes. A subsistence income was better in some places than others, but the differences were not substantial. Unlike today, labour cost differences between nations were small.
Trade volumes, even when unimpeded by customs duties, were not particularly large. Most nations produced nearly everything that they needed within their borders. Trade was largely in essential commodities unavailable locally and in luxury goods.
The Industrial Revolution changed all of that. The application of chemical energy to shaft work, first made economically viable in the coalmines of Britain, exponentially increased the “effective labour power” of the British economy and, with the proceeds redistributed, made possible an extensive and historically unprecedented improvement in living standards.
The free-trade ideology is often cited as the pre-eminent cause of British economic success, but this isn’t true. Britain operated a thoroughly mercantilist policy like everybody else in Europe. The coal-fired heat engine was the driving force of Britain’s rise to a great industrial power, not the ideas of Adam Smith or David Ricardo.
Free trade was only adopted in Britain after the repeal of the Corn Laws in 1846, a policy change driven, apart from Whig malice towards landed interests, by the realisation that the century-long effective British monopoly on steam-powered production was coming to an end. Free trade was a British attempt to preserve the status quo; to hold onto its industrial hegemony by convincing other nations to forgo a similar path of development.
Britain was signalling that it was prepared to sacrifice its farmers and open its markets to food imports if other nations would abandon their industrial aspirations.
The German-American economist, Friedrich List, saw through the subterfuge easily. Britain, he thought, having attained a mezzanine of industrial development for itself, was trying to pull up the ladder behind it to prevent others from copying its success.
Nations that followed the British line languished, while those that adopted protectionist ideas flourished. The United States, Germany and Japan all built up their industries behind tariff walls and all became great industrial nations. All of these repudiated the free-trade ideology, at least at first; their academic economists might have complained, but their publicists and politicians ignored them.
And then, at the end of World War II, a century after the repeal of the Corn Laws, the United States, its infrastructure undamaged, humming with industry, the biggest and most efficient manufacturing nation on earth, with all of its rivals either bankrupted or in smoking ruins, suddenly decided that it now believed in free trade after all.
What Australian policy needs to learn from economic history is that free trade is a policy for hegemons. It is the path to follow for the biggest, best and least-cost producers looking for global market expansion and economic dominance. For everyone else it’s a mug’s game.
Australia is a high-income country with limited scale opportunities and mediocre technical skills. It is an expensive place to do business. Without trade regulation, Australia can only be globally competitive in a handful of commodities and extraction activities dependent on favourable national endowments and a limited human factor contribution.
Australia needs a complex, capable and technically proficient economy, able to conceive, design and produce the things needed to secure its strategic interests. It therefore requires a manufacturing sector much larger and more capable than it has now; achieving this within the current free-trade ideology will be effectively impossible.
Craig Milne is executive director of the Australian Productivity Council, an industry assistance agency providing productivity improvement services to business organisations through engineering, human resource and management systems work.