The Third Way: Welcome to the Third World

Surveying the Thirdwayers' Ambitions

Ray Evans

The starting point for this paper is ACIRRT's book "australia at work-just managing", and what it means for the debate which has engaged the HR Nicholls Society for nearly 15 years.

The major factor behind the writing of this book, and its promotion as a political agenda, is the end of communism and the reaction of the Left to that event. (We celebrate the tenth anniversary of the demolition of the Berlin Wall in two months' time.)

The collapse of the Soviet Empire and the concomitant end of communism was the greatest triumph of the Thatcher and Reagan partnership. The Left's response to the end of Communism, has been to grudgingly admit, sometimes, the failure of socialism, but then to move forward by attacking freedom, which is the alternative ideal to socialism, as harsh, uncaring, and above all, inegalitarian. I have deliberately used "freedom" rather than "capitalism" as the alternative to socialism, because I want to drive home the point that this debate goes back at least to Plato and Aristotle, and the early days of Christianity, and it is a debate about the reality of human nature and its potential. This is a debate which I presume will keep going until Western Civilisation collapses.

Socialism has failed but the Left has not given up. There have been some notable converts from the Left-Bill Hayden is one such-although even he has not yet worked out fully the implications of his conversion.

Edmund Burke tells us that all government is based on opinion, and the Left is still obsessed with political power and the perquisites with go with it. So the Left has to have a rationale for existing and for political activity and this has led, inevitably, to the rhetoric of the "Third Way".

The Left in Australia, for 80 years and more, had established a very powerful position in the administration of the law and regulation of the labour market. The trade union movement with its many apparatchiks, the constellation of arbitral tribunals with the AIRC at the summit, the labour lawyers, and their opposite numbers on the employers' side of the table, all combined to form a huge bureaucratic apparatus which sat on top of the working people of Australia. The image which comes to mind is that of a large majestic gum tree, perhaps a red river gum, which is covered in mistletoe, a parasitic growth, and which is slowly being strangled by this parasite. What was once a vigorously growing, healthy magnificent tree, is slowly dying.

The doctrine which enabled the trade unions and the Left to plant this parasite into the Australian economy at the time of Federation was, essentially, the Marxist doctrine of class war. However, what gave the infant Labor Party its electoral appeal, and its early parliamentary success, was not class warfare, but its militant advocacy of White Australia.

One of the developments which obscured our understanding that the whole structure of labour market regulation and control was predicated on Marxist nonsense, was the split within the trade union movement, and within the Left generally, into pro-communist and anti-communist factions, a split which took place at different times in different countries.

The most important document in this story is Rerum Novarum, issued by Pope Leo XIII in 1891. It was both a famous defence of private property, and a defence of trade unions, and of government interference in labour market contracts, which sought to provide a secure foundation for church-based anti-communist activity within trade union movements and the working class generally. It succeeded in those objectives, particularly in the United States.

In Australia, in the first decade after federation, the protectionists joined with the trade unions to form a coalition which overwhelmed the free-traders, and those who believed in freedom of contract. This tragic defeat took place when George Reid finally capitulated to Alfred Deakin, and it set the stage for the steady impoverishment of Australia as we descended from the top position of per capita incomes before WWI to 16th or 18th, when the Hawke Government took office in 1983.

Our impoverishment would have come much faster if the oil and mineral discoveries of the 1960s had not created new export industries which replaced agriculture as the primary source of export income, and thus maintained our balance of payments position. Australia's position would have been similar to that of New Zealand (which went bankrupt in 1984), if it had not been for those discoveries.

After WWII, global politics were dominated by the Cold War. Winston Churchill made his famous "Iron Curtain" speech at Fulton, Missouri, on March 5, 1946, less than 12 months after the end of the war in Europe.

From Stettin in the Baltic to Trieste in the Adriatic, an iron curtain has descended across the Continent. Behind that line lie all the capitals of the ancient states of Central and Eastern Europe. Warsaw, Berlin, Prague, Vienna, Budapest, Belgrade, Bucharest and Sofia, all these famous cities and the populations around them lie in what I must call the Soviet sphere. . .and all are subject to . . control from Moscow.

Churchill was much criticised at the time for making what was regarded as an intemperate and sabre-rattling speech.

As Stalin increased his iron grip on Eastern and Central Europe, and nearly got Greece into the bargain, the prospect of a Europe completely under the control of Moscow began to loom as a very real possibility. This fearful prospect divided the Left into pro and anti-communist factions and Rerum Novarum was a critical document in holding the line against the communists, but at the same time in legitimising trade union privilege and power. In Australia this was played out in the ALP and the split of 1954, which guaranteed the Coalition electoral victory until 1972. (Although 1961 was a very close thing indeed for Menzies, and Whitlam's win in 1972 was likewise much closer than is now recalled.)

In the US the AFL-CIO under George Meany was a critical force in the anti-communist alliance and large sums of money were injected into the anti-communist trade union movement in Europe through the AFL-CIO.

What has all this got to do with our present debate about the Third Way? The answer is that the necessity of keeping the anti-communist trade unions in the anti-Soviet coalition, meant that the ACTU under Albert Monk CMG, and the whole apparatus of labour market regulation, was part of the Menzies Government. When Albert Monk went anywhere, particularly to Geneva for ILO meetings, the government provided cars, transport, everything. If Albert Monk wanted to see the Minister, the Minister was always available. Indeed the Minister for Labour was chosen on the grounds of perceived compatibility with Albert Monk.

Under these arrangements, presided over by Bob Menzies, it was impossible to think outside the system. If you talked about freedom of contract in the labour market, people really didn't know what you were talking about. Senator Brian Harradine is the living personification of this historic arrangement, and indeed he has read out to the Senate, and one can only imagine what the senators were thinking of during his recitation, great slabs of Rerum Novarum.

And so the "Third Way" men, the "Third Wayers", are museum relics if you like. They are striving desperately to keep in place institutions and ideas that are based on Marxist nonsense, but were kept alive for strategic reasons during the Cold War.

The gravamen of their current complaint is the changes in labour market law which have reduced, in some measure, the legally privileged place of trade unions. Sections 45 D&E of the Trade Practices Act were the most important of these changes. They were substantially cut back in the Brereton Act, and reinstated, in different form, in the Reith Act.

The other major change in the Reith Act was the end of "roping in". It was this change which enabled Corrigan to move on the waterfront.

I now quote from the book where the seekers after the Third Way, let us call them the Third Wayers, have let it all hang out. The book is entitled "australia at work-just managing?", published by ACIRRT (australian centre for industrial relations and training), an organisation with an irritating distaste for upper case letters.

"The main force behind workplace change has been neo-liberalism, a term we use throughout the book to refer to the advocates of market-driven solutions to economic and social problems.
When it comes to the workplace we are told by the neo-liberals, (that) an Industrial Relations Club has captured industrial relations and 'workplace reform' is hampered by constant third party interventions, mainly trade unions and industrial tribunals. Unemployment remains a problem, the neo-liberals argue, because wages are too high; too high to allow the labour market to 'clear'.
Faced with all these problems, ... the neo-liberal response is to call for more of the same. Workplace 'reform' has not gone far enough. managers have still not enough power to allow them to govern. Unions still have too much power. Individualism in the workplace is hampered by outmoded collective institutions, things like awards and collective agreements. So runs the list of neo-liberal complaints.
The perspective which ACIRRT brings to these issues is a very different one. We don't see increased individualism, stronger market forces, increased competition or the dismantling of the state as solutions to problems. We see them as creating new kinds of problems, things like greater inequality, a divided nation, and greed and futility running unchecked."(1)

Two things stand out when one reads through this book looking for clues to explain what it is that drives the contributors to this volume forward.(2) Where, we should ask ourselves, does their energy and zeal come from?

The first outstanding feature of the book is the extraordinary absence of curiosity. The second is the overwhelming ambition for equality, particularly of incomes, across the entire Australian population.

The absence of curiosity is most striking with respect to unemployment. The second paragraph in Chapter One begins with the sentence: "The biggest losers without doubt have been unemployed people" a sentence with which every member of this Society would heartily concur. This is on page one. On page 18 is the historical unemployment record, reproduced here. The curve shows that from 1946 until 1974, nearly 30 years, unemployment moved up and down between 1% and 3%. In 1974 unemployment took off reaching 6% in 1978, whence it plateaued until 1982, when it leapt to 10%. Under the influence of the Accord and the pump-priming that went with it, it drifted down to 6% in 1990, only to take off again, like a rocket, reaching 11% in 1993, the year John Hewson lost the unlosable election.

This is a very striking curve and one would have thought that even the least curious student of industrial relations, would spend some time looking for specific reasons which would explain the sudden rises in unemployment that dominate this historical record. In this book "australia at work", there is a complete absence of any curiosity or interest in the causes of unemployment. On the one hand, such an absence of curiosity, in a book written by people working for an institution affiliated with Australia's oldest university, is an extraordinary thing. On the other hand, once we think about the consequences of the driving force of egalitarianism which permeates the book, this lack of curiosity is easily explained.

It is hard to adequately describe the obsession with inequality which is found on most pages of this book. Looking at pages randomly selected, we find on page 93:

"Certainly the more deregulated the labour market, the worse is the fate of low-paid workers. Looking at a selection of OECD countries we find that the labour markets in the US and NZ treat low-paid workers very harshly."

On page 76:

"This transition from a centralised to a more decentralised wages system has had important consequences to women, particularly for those who are low-paid... Where the old system of centralised wage fixing tended to limit the dispersion between industries, the new system of enterprise bargaining tends to accentuate that increase. .

On page 70:

"But from the point of view of industrial relations policy, the changes flowing from government welfare interventions did have the effect of significantly diminishing the levels of income inequality which were being generated in the labour market. This raises an important policy issue around the relationship between labour-market generated inequality and government intervention. McGuire, for example, has argued:
If earnings dispersion continues to increase, it may be necessary to continually increase the progressivity of the tax/transfer system just to offset the changes in the pre-tax distribution of earnings.(3)

There is an academic industry devoted to the pursuit of equality, and ACIRRT is just one of the cottages which houses the industry. It lives off the ABS household income and expenditure surveys in which a random selection of households are asked to fill in forms about their income and expenditure. I was once asked to fill in some ABS questionaries and I got out of it by pretending I couldn't read English. Nonetheless the ABS has extraordinary powers to force you to comply.

On the back of this ABS data, this academic cottage industry, funded in large measure by the taxpayer, produces curves such as the following:

One line-ss-represents an income distribution line prior to transfers through the tax and welfare system, (market based incomes). The other line -èè- represents income after tax and welfare transfers.

It doesn't matter for our purpose whether these results are accurate or not. The general shape of the curve must have some connection to reality. There are pensioners who are totally reliant on their pensions. And there are people, barristers, pop musicians, talk-back radio personalities, opera stars, who earn lots and lots of money. And in between there are those in between. Whether or not the ABS data is accurate to 10% or 20% is immaterial. The point of looking at these curves is to unravel the ambitions of the ACIRRT third wayers. Their ideal society, at least as inferred from their book, is to end up with a horizontal line at say about $400 per week. Some of them even want to do so on the basis of market based incomes, not even after taxes and transfers. These people are serious levellers, with a real zeal for equality. It is further obvious that if this society were to be brought into being, it could only be done through the application of totalitarian methods. A police state would be required to enforce a regime which governed in complete detail, every aspect of economic life. This is of course, the communist ideal, responsible for more human misery and death than any other ideal in human history.

It is worthwhile outlining the argument which they would advance to defend their levelling zeal. It goes like this.

1. Society's welfare is maximised when the marginal utility of everyone's extra dollar is the same. That means creating a society in which each one of us would feel equally delighted, if our incomes were suddenly increased by one dollar.

2. On the assumption that everyone has the same preference curve for consuming things that are purchasable, this leads to the proposition that social welfare is maximised when everyone has the same income. If however, people have different preference curves, then infinitely large and fast computers will have to make interpersonal comparisons, in order to ensure that those who are indifferent to the things that money can buy, receive less income than those who value such things more highly. And of course we need to be confident that the differentials will be accurately calculated.

This argument about marginal utility goes back to Jeremy Bentham but it has been given a new shot in the arm by Jonathan Rawls, a Harvard philosopher.

I regard these people, from Bentham to Rawls, and their Australian disciples, notably John Buchanan, as being a bit mad. But it cannot be denied that their ideas have been influential.

It seems to me that the pursuit of equality, whilst it may be rationalised by the kind of arguments I have outlined above, is in reality driven by envy. Envy is a highly corrosive emotion and destroys those people whom it captures. A society which is largely free of envy is a very fortunate one, and the US is to a remarkable degree, unaffected by envy.

Whether the emotion which drives the egalitarians is envy or not we have to be prepared to debate the issue on its merits. When the complaint about increasing inequality, and the allegedly unpleasant society which follows this increasing inequality, is made, the appropriate response is to demand from the plaintiffs a response to the question what is the particular income distribution they require. Is it horizontal?, and if not horizontal, what particular curve will satisfy them, a straight line and if so at what slope; if not a straight line then will a quadratic do?

Then they should be asked how much coercion should be applied to bring this ideal income distribution about?

A recurring theme in "australia at work" is "comparative wage justice". Debates about CWJ have occupied many minds for many hours and it is in the same class of arguments as the argument about equality.

We can escape from the age-old but nonetheless sterile debates about the pecuniary value which should be ascribed to different occupations, as soon as we understand that one of the most important aspects of the rewards we receive from our work is what economists, rather pretentiously, call psychic income. Psychic income is the satisfaction we get from doing something well, and earning the respect of our colleagues and friends, and most precious of all, sometimes our enemies. That satisfaction may, for some people, be the most important part of the rewards they receive.

Politicians often complain about the salaries they receive in comparison with what they might earn at the Bar or in private enterprise. The answer is obvious. They went into politics in order to receive the psychic income which that calling alone affords. Churchmen are another group of people who perform an indispensable role in our society, but whose stipends are, at the same time, extremely low. The greater part of their reward must be in the form of psychic income. Successful opera singers seem to have the best of both worlds. Singing the leading operatic roles in the great opera houses of the world, and being paid huge fees as well, does stretch our ideas of fairness to the limit. To get to that happy position certainly requires both inherited talent together with dedication, commitment and hard work. But it is only because they give so much pleasure to so many people, that the onlooker can shake off the envy which might otherwise consume him when he contemplates a Joan Sutherland or a Placido Domingo. The same considerations, I suggest, apply to our sporting heroes.

Another aspect of the debate concerning the connection between work and rewards is revealed when we look at the contribution which a few extraordinary people have made to our well-being, and the material benefits they received during their lifetime. Think of the importance of Shakespeare, or of Mozart, for example. Shakespeare died in Stratford as a gentleman of comfortable means. But he was not seriously rich. Mozart died tragically at 36 and was buried in a shroud, not because he was a pauper, but because coffins had been outlawed by the Emperor Joseph II. Mozart had made a lot of money, but he had spent most of it and after his tragic death his widow, Constanza, had a very difficult time.

Looking at somewhat less exalted figures in our history we find many who have made great contributions to human welfare, particularly in Australia. Think of John and Elizabeth Macarthur who established the wool industry. Think of Howard Florey, who was instrumental in giving us penicillin. Remember Charles Rasp who discovered the fabulous orebody at Broken Hill in 1883, from which so much Australian industry developed. Dame Jean McNamara who did so much to promote myxomatosis as an antidote to the rabbit plagues which were devastating the Australian countryside up until the 1960s. There are very many Australians whose contributions to Australian civilisation have been at least a thousand times greater than the pecuniary rewards which they received in their lifetime.

All of these people were totally absorbed in their work. They earned the admiration of their colleagues, but some of them were also envied and subjected to attack. But they made very great contributions and we have all benefited greatly from the inheritance which they helped to create.

We look upon these men and women with gratitude for what they achieved. But I suspect that they themselves were grateful for the opportunities which the Australian society of their day afforded them. Australia, a century ago, was a very wealthy country. Economic historians tell us that in terms of per capita income we were at that time the wealthiest country in the world, and the sense of opportunity which pervaded life here is evident from the letters which were written from the new arrivals here, back to Britain.

One of the immigrants who came to Australia nearly 130 years ago, and who hoped to exploit the opportunities which life in colonial Victoria then afforded, was the 18 year old Henry Bournes Higgins. The young Higgins, with his mother, Anne, and four other children, arrived at Port Melbourne in February 1870. Their journey was tragic in that the youngest child, Charlie, six years old, died of diphtheria just before reaching Port Phillip. Their father, a Methodist minister had stayed behind in Ireland to complete the term of his circuit appointment.

HB Higgins was to achieve fortune and fame, first as a barrister at the Melbourne Bar, and then as the father of our conciliation and arbitration system of industrial relations, which has done so much to impoverish Australia since the Commonwealth Conciliation and Arbitration Act was passed in 1904. But that was in the future. Back in 1870, soon after their arrival, Anne Higgins was writing to her husband in these words:

"I could wish all our loved friends were in Australia. Everything is superior here, save religion. People here who come from Ireland all ask lovingly after "the old country" but could not bear to live there. Everyone says the same."

And later on she wrote:

"This is a splendid country: all agree in this. They say they would not return for anything. You feel independent here. Even when looking out for openings for the boys you feel as you don't at home."

and in another letter many weeks later:

"I saw but two beggars since I came: people flourish here."

So wealth and opportunity go hand in hand. And opportunity allows people to exploit their talents to the full, and in turn they contribute to the growth of civilisation by creating knowledge and wealth, and new industries, and new ways of doing things.

Henry Bournes Higgins benefited greatly from the opportunities which Australia offered to him But he did a great deal to deny those who came after him the same opportunities which he had enjoyed. He was primarily responsible for the 1904 Commonwealth Conciliation and Arbitration Act. He was then appointed to the Presidency of the C&A Court in 1906, and to the High Court as well, and he brought down his notorious Harvester judgment in 1907, a judgment subsequently overturned by the High Court. But the damage was done as State tribunals adopted Higgins' approach, and increasingly workers at the bottom of the labour market, unskilled labourers, found themselves unable to obtain work. The price which they could command for their labour, in the market, had been declared an illegal price, made so by HB Higgins and his disciples, and so unemployment began to rise, with tragic consequences for the unemployed. It was not until 1914, the advent of war, and the inflation which followed the war, that unemployment finally came back in 1921 to the levels of 1907.

What Higgins did in 1907 was repeated by his successors in 1974-5 and again in 1981-2. The unemployment upsurge during 1990, the recession we had to have, was caused by the savage credit squeeze, when bankruptcies, particularly within small business, multiplied remorselessly

The problem of illegal employment continues to this day and explains why, even after several years of sustained, substantial economic growth, we still have, particularly in rural and provincial Australia, serious problems of unemployment. Recent evidence has come forward suggesting that Gippsland, particularly the Latrobe Valley, has a very serious unemployment problem. But so has Tasmania, and to a lesser extent South Australia.

The only way in which these depressed regions can recover is if they are allowed to compete with the major cities, and the only way they can do that is through being able to offer their labour at advantageous rates, compared with the cities.

This is how the American Deep South, once a region of widespread poverty, has been able to bootstrap itself back into prosperity. Atlanta, for example, is now a very prosperous city.

In the US today, unemployment rates are typically below 4%. In Minnesota it is 2.1%. The Economist recently remarked of the US that

"In this workers' market, anyone with a measurable pulse and two fingers to peck at a keyboard is employable."

In Australia we have made it illegal to achieve this level of employment and opportunity by pricing the young, and the unskilled, out of the labour market.

At some point we are going to have throw out the whole Higgins legacy, and embrace real freedom in the labour market as the only antidote to unemployment and much else besides.

When reading through "australia at work" it is encouraging to note just how nonsensical the argument and analysis is. On the other hand it is depressing to realise that the people who believe in this nonsense and play with it, work at university institutions, get paid pretty well, and are feted on the ABC as intellectual giants.

But the world they are defending, the Australia of the forties and fifties, cannot come back. The world they yearn for, the world of imposed equality, is a totalitarian nightmare, and if they win political power and seek to move down that path, every step they take will raise up enemies against them. In the meantime, of course, they have to be exposed and ridiculed.


1. australia at work just managing? 1999, Prentice Hall, Sydney, ACIRRT, Foreword by Ron Callus, Director, ACIRRT. page 8.

2 . The foreword to this book begins thus. "It is unusual to have an institution as an author of a book but our decision to do so is based on our commitment at ACIRRT to collaborative work.." Despite this commitment to group authorship, Ron Callus, the Director of ACIRRT, singles out Ian Watson, for providing "intellectual input and vision". Other contributors cited are Betty Arsovska, John Buchanan, Merilyn Bryce, Ron Callus, Shannon O'Keefe, Kristin van Barneveld, and Murray Woodman. It is regrettable nevertheless that the more nonsensical comments in the book cannot be attributed to particular authors.

3 . McGuire, P. (1993) Changes in Earnings Dispersion in Australia, 1975-1992, A paper presented at the 1993 Conference of Economists, Perth, September, unpublished.

Why HR Nicholls?