Wrong Way---Go Back

The death of command and control and the rise of creative wealth creation:
How the demise of the IRC will spur economic growth

Ken Phillips

Ladies and Gentlemen

Last weekend I watched a video I had been given some time ago. It was the story of Robe River. I thought it was supposed to be a video explaining both sides of the argument but instead it turned out to be a union produced justification for their stand.

What surprised me but I suppose shouldn't, was that the union obsession with Robe was that it was an ideological battle of class warfare. The bitter workers and union leaders interviewed throughout, were obviously the ones who felt they had lost the working class struggle. Our society, H R Nicholls, was portrayed as the master mind behind the "New Right" strategy for class dominance.

What a comparison that union perception was to the thesis on the Pilbara Iron Ore mines written by Pam Swain. Pam writes the story of Robe as a management struggle to overcome internal incompetence and lack of management resolve to achieve the best in human behaviour. The internal story of Robe River was and I assume still is, one of a company striving to achieve its best.

This week we saw the continuing vindication of the Robe experience in the profit result of North Limited the current owners of Robe, where Robe operational profit for the year was up from $109 million to $134 million.

Not that financial profit is the maker or breaker of a good society. But to quote the film star Burt Reynolds, "I've been poor and happy and rich and happy, believe me rich and happy is better".

So what is the point. It's simple. Ideology is dead. Practical profit has won over class consciousness because profit produces investment, work, income for the citizenry and the elimination of human hunger and misery. I would rather be happy with a full stomach than happy with an empty stomach.

Lack of profit is lack of security. The only job security any of us can achieve is a job with a business making money. Before Robe River focused on performance, the mine was in danger of losing sales contracts. Consideration of mine closure was an agenda item. If the ideology of class struggle at Robe had prevailed over the company determination to perform, the prize for the workers could have been the closing of the mine.

How does this historical perspective of Robe relate to my topic and claim that the death of the IRC will spur economic growth?

My thesis is straight forward.

There is one factor only which causes the creation of wealth in a community and that is the releasing of the creative potential of the human spirit. Suppress human creativity and you suppress wealth creation and happiness.

How a community organises itself to either encourage or kill the flowering of the human spirit directly impacts on human wealth and happiness. Capitalism within a free and democratic framework has consistently proven itself to be the structure which best releases the human spirit of creative wealth creation. Socialism with its imposed command and control structures suppresses, frustrates and kills the capacity of humans to discover and exploit their inner potential.

In Australia, we have not learnt this simple lesson. Wealth creation is not achieved by those on high pulling the leavers and strings so that the mere mortals below will dance to the puppeteer's desires.

The Industrial Relations Commission is the last great puppet theatre left in this country. The stage show the IRC produces has become stale, boring and has sent its audience to sleep.

Australia is not a free, democratic, capitalist society. Australia has elements of democracy, elements of freedom and elements of capitalism. In the work place Australia is heavily socialist. The chief instrument of socialism is the IRC. The chief instrument of the suppression of workplace creativity and wealth creation is the IRC.
Let me expand.

As a non economist I have been surprised to discover that economists rarely investigate the direct co-relation between the performance of an economy and the internal workings of firms. This criticism of his profession was delivered by the Nobel prize winning economist R H Coase in 1937. In my experience his criticism largely stands true today.

Coase's seminal work "The Firm The Markets and the Law" was perhaps the first and one of the most important investigations of how firms operate and how they impact on economic performance. Coase said two key things:

...the operation of a market costs something, and that by forming an organisation and allowing some authority (an entrepreneur) to direct resources, certain marketing costs (transactions costs) are saved. (11)

and further

We can best approach the question of what constitutes a firm in practice... by considering the legal relationship normally called that of master and servant or employer and employee....The master must have the right to control the servants work..... We can thus see that it is the fact of direction which is the essence of the legal concept of employer and employee just as it was in the economic concept (of the firm) which was developed above." (12)

Coase said that firms are created by entrepreneurs who are reliant on the control of humans through the legal master servant relationship of employment, to contain transaction costs and cause the firm to exist and perform.

This concept of firms, being top driven, legal employer controlled organisations, prevailed post industrial revolution and produced spectacular economic growth during the 20th Century. Generally known as the "scientific" approach to organisational management this master servant model was glorified by Henry Ford, Alfred Sloan of General Motors, and it appears the likes of BHP and other industrial giants.

This legal "employment" based, command and control model of firms is at its essence a socialist model. It holds the idea that an employee is a physical and psychological appendage of the employer entrepreneur unable, unwilling or not allowed to act in an independent manner.

This model of firms is socialist because it relies on the entities within the firm, the people, suppressing and containing their own individuality and freedom to think and act, to the collective will of the organisation directed by the superior one at the top.

This model of the firm is not a capitalist model because it prevents and prohibits the market place from operating inside the organisation. Regimes of loyalty and conformity to the greater will of the company vision and ethos, are mechanisms to protect the internal operations and operators of the firm from internal competition.

This socialist model of the firm is the basis of most 20th Century management thinking, writing and practice.

Capitalism during the 20th Century has been happy to allow competition via the market place to operate between firms but has not allowed the market place to operate inside the firm. Perhaps this explains why economists tend to think that the internal operations of the firm have minimal relevance to economic studies.

In Australia, the IRC has been the chief mechanism for the legal enforcement of socialism inside the firm. The IRC has primarily acted to protect the internal functions of firms from internal competition. The establishment of set wage rates for defined and specified jobs has kept workers and managers in their boxes, under control and safe from competition from each other. High performing individuals cannot be rewarded as individuals. Reward and higher incomes have had to be distributed collectively.

In this regulated, internally protected environment of the firm, the creative urges of humans are contained, suppressed and directed to the will of higher beings. It is a system which has functioned more to the benefit of monopolistic, orientated, Australian corporate heads, than it has to the benefit of workers, firms the economy or the nation. It directly aligns the interests of certain parts of monopolistic, corporate, Australia with those of the higher levels of the monopolistic, union movement.

Under this command and control model, the productive behaviour of firms is capped and limited to that capable of being achieved by the collective mentality. The collective mentality has and will always be less productive and creative than the individual mentality.

Let me give a common example. A nation wide Australian food manufacturing company whose internal operations I know well, is a darling of the stock market because it is one of the few profitable, publicly listed food manufacturers in Australia. The company is a good corporate citizen from the perspective of the ACTU who hold regular joint ACTU, company manager co-operation training sessions. A glossy picture of daisy field dancing is presented to the IRC and the investment market.

Internally there are un-addressed problems. One of the manufacturing plants, being my area of knowledge, regularly dumps one fifth to one third of its production because the dough mix has been wrong resulting in underweight or badly cooked product. The man working on the baking line says he knows what is wrong. So does the junior dough mixer. They both say it is not their job to indicate the problems but to do as they are told. Both have tried to make suggestions in the past but been put in their place.

Supervisors regularly receive gifts of groceries from people they allocate to overtime. This company has a large and professional human resources department who spend most of their time talking to and negotiating with the unions.

No one talks about the endemic production problem. Under-performance is the unspoken company creed.

This lack of focus on performance and the achievement of security through company profits, is a direct result of the command and control regime of legally defined "employment." The company obsession with the imposition of the collective will ensures that internal competition is not allowed to function. It is propped, supported and enhanced because of the requirement to focus on sanctioning by the IRC of collective enterprise master plans.

There is however world wide change in the wind. Some argue the change impacting on work is as significant as that of the industrial revolution itself. As world trade barriers collapse and the Australian economy and firms are exposed to direct external competition ,incompetence's inherent in internal, socialist styled firms are exposed.

Nestlé's Kit Kat manufacturing plant in Broadmeadows is a case demonstrating the point. Broadmeadows was a classic Australian under-performing plant. Kit Kat biscuit snacks could be landed in Australia from the Nestlé plant in Britain cheaper than they were being produced in Australia. Nestlé made a decision to fix the Broadmeadows plant or close it down. They defied corporate orthodoxy, battled the IRC processes, suffered an eight week strike in 1996 but changed the culture, work practices and performance of the plant. The plant remains open but still is not however immune from closure. British production has improved even more.

The real international revolution in creative and productive performance has not yet launched itself fully on the island continent of Australia. It is merely lapping our shoreline with occasional incursions.

The Australian revolution yet to come, is the wholesale defeat of the socialist command and control model of internal firm operations. Australia is yet to witness the large scale penetration of the competitive market to the internal workings of the firm.

Evidence is that the death of command and control firms is most advanced in the USA. Business management gurus such as William Bridges, Tom Peters and others provide story after story of anecdotal evidence of businesses breaking free from "scientific" approaches to management. Not that I am a guru freak, I think gurus need to be kept cross legged. But the overwhelming evidence from the USA of something happening cannot be ignored. We cannot ignore a USA unemployment rate of 4.8% and dropping. Something is causing the sustained, low inflation, work producing, growth of the USA economy.

The head of the USA Federal Reserve believes part of the reason is the loss of security in work. For the loss of security, use the words "market place penetration to the internal operations of USA firms" and pictures of booming individual business performance begin to materialise.

The Australian Prime Minister returned from his USA trip this year apparently convinced that Australia had to aggressively grow the Information Technology industry if it was to repeat the USA emerging economic miracle. I hope the Prime Minister has not missed the point of the IT industry.

The IT industry is not just a revolution in products and technology. It is an industry at the cutting edge of the workplace revolution. The IT industry is built on the destruction of the command and control, master servant, employer employee regimes of scientific management described by Coase and dominant in the economy to date. Multiple varieties of independent contracting are the norm in the IT industry. The IT industry is a creative human explosion.

Most look at Microsoft and see a computer company. In reality Microsoft is a creative amorphousing energy mass.

You won't last at Microsoft if your job is just a job. No regular hours, buildings open to workers 24 hours a day. No tracking of hours but everyone watching output. Work is on project results. No standardised career routes. People move onto a new project taking with them the reputation they earned at their last project.

Microsoft perpetuates creativity by eliminating traditional command and control systems associated with employment regimes.

I doubt the ability of the IT industry to explode in Australia if it is required to do so under the auspices of IRC imposed business socialism. Rather, the hope must be that IT industry workplace approaches will be taken up by traditional command and control Australian corporations. Let the explosion of creativity in the IT industry replicate itself in the Australian manufacturing industry.

In support of this thesis I can report that I no longer feel alone in explaining this phenomena the penetration of markets to the internal operations of the firm. An excellent publication produced by the prestigious Institute of Economic Affairs of London in July of this year is titled "Markets in the Firm". The authors make many of the points I have just made although they don't draw the link to the legalities of employment.

If individual human creativity is to be unleashed in firms, three essential elements need to be in place.

1. The legal environment must remove the oppressive, class conscious, power relationship inherent in the "right to control" of legally defined employment.

2. Firms, that is, senior managers, must want to expose themselves and the internal operations of their firm to the principals of internal market competition.

    3. Strategic application of the market to inside the firm must occur.

These three elements, legalities, desire and application must all be present to fully realise the benefit.

In the USA the legalities of employment are "right to control." However the low level of employment regulation and the high penetration of independent contracting tends to neutralise the legal factor as a barrier. The fiercely individual and entrepreneurial nature of USA culture sets the conditions for desire. My cross legged gurus describe the strategic application struggle.

The delivery of the market place inside firms in Australia is occurring in limited instances but is constrained.

The Mars Corporation for example, a USA business, operates in Australia with the desire and the application. They recognise the creative and performance stifling implications of command and control employment. Mars has a company policy of not referring to any of its people as employees. Mars people are called associates as one method to change mentalities away from master and servant. Mars as successful as it is, is constrained in Australia by the political necessity to operate under IRC constraints which insists on master servant, command and control.

My direct experiences in this new wave of markets inside firms is through the Odco arrangements. I have spoken at a prior HRN conference on Odco, have been published extensively on Odco, now have a video available and have recently established an Odco web site so I won't give you a long explanation but will reinforce the major lesson learnt from applying Odco.

Odco is one legal model available for the elimination of command and control systems and for the penetration of the market place inside the firm. On many occasions we have been able to dovetail the Odco legalities with user business desire and strategic application. When this has happened results have been spectacular in terms of performance, company profitability and worker remuneration.

But one message is clear. Legal frameworks of themselves do not good business make. Desire and strategic application must follow.

When we look at our quaint, Australian employment regime, we can see that The IRC is the legal centre piece for the prevention of the operation of the market place inside the firm. The IRC is the legal pillar of a system which entrenches command and control socialist principles inside firms, creates inequality and suppresses individual creativity and wealth creation.

The IRC must be abolished as the first step to allowing ourselves, our firms and our economy to discover creative wealth creation. The second and third steps, desire and application, are not creatures of government policy and can only come from within the national psyche. Government however must recognise the damage it's continued support for IRC employment regimes causes and set its desire and application, for IRC abolition.

References and further reading;

Bridges W (1995.) "Jobshift; How to prosper in a Workplace Without Jobs" Pub by Allen Unwin NSW

Coase RH (1988) "The Firm, the Market and the Law" Pub by The University of Chicago Press

Cowan T and Parker D. (1997) Markets in the Firm A Market-Process Approach to Management. Institute of Economic Affairs London

Greenspan Alan (23/1/97) Testimony to the US Senate Budget Committee; Reported in Australian Financial Review.

Peters Tom (1987) Thriving on Chaos, London Macmillian

Peters T and Waterman RH (1982) In Search of Excellence. New York Harper and Row.

Swain Pam (1995) Strategic Choices. A study in the interaction of Industrial Relations and Corporate Strategy in the Pilbara Iron Ore Industry. Curtin University Perth WA