In Search of the Magic Pudding

Keynote Address

Padraic P McGuinness

One of the great pleasures of reading is the reading of children's books, which are usually better written (I do not refer to the new variety intended for semi-literates) and more profound than most of the literature of our contemporaries; having a daughter who is still quite young I have spent quite a bit of time in the last ten years reading these books aloud, and have found that there is a good deal of common sense and basic wisdom to be found in them not only in general but specifically on economic matters.

One of the things you discover in folk literature and children's literature (and of course they were originally the same) is that something for nothing always has traps. Norman Lindsay's, The Magic Pudding, was written in the middle of the First World War, though actually published in 1918; when I went back to read it again for the first time since my own childhood it came back to me in an extremely fresh and interesting way.

Rod Cavalier who is a former Labor minister for education in the NSW government knows a lot about Lindsay, and was in fact married at one time to a member of the Lindsay family. The book certainly turned out a magic pudding for them, since they are still enjoying apparently inexhaustible royalties from it. I asked him whether there was reference in the book to a contemporary political controversy, since one of the interesting things about nursery rhymes and similar apparently innocent folk-stories is that often they originate in political or social conflict.

But although he cannot recall any such context for Lindsay's book, I see it as a political commentary on many Australian attitudes and institutions. The Magic Pudding, you will remember, was a pudding which could be steak and kidney pudding, or it could be a plum duff, or an apple dumpling---you just had to turn the dish around and whistle twice and it changed to whatever you wanted. It was absolutely unlimited in supply, and the pudding enjoyed being eaten and in fact pleaded to be eaten.

The interesting thing about this is that it repeats in Australian terms a universal theme. One of the earliest references to this is in the Second Book of Kings. This is the widow's cruse, an oil jug which always had milk in it and never needed refilling. John Maynard Keynes uses the story of the widow's cruse in his Treatise on Money to illustrate the notion that profits are endlessly replenished by increases in money demand. The theme of inexhaustible abundance (which I suppose goes back to Paradise) is one which also runs through popular thinking about economics in all societies. You will be familiar with the purse which always has a shilling in it, the table cloth which is magically set with a feast, and so on. In Britain there is the folk-legend of the Land of Cockaigne, where roast fowls grow on trees, and in the USA there is the legend embodied in the song about the 'big rock-candy mountain.' An interesting extension of this is in the 'L'il Abner' comic strip by AI Capp, where little creatures called Schmoos are to be found in the hidden 'Valley of the Schmoon', where they multiply even faster than rabbits, delight in being eaten, and will obliging jump on to the spit to be roasted.

These stories are all part of a very deep folk tradition, related also to the story of the three wishes. They all have a common element, in their original (as distinct from sentimentalised) versions. There is always a catch, a hidden trap, or a built in punishment for being too greedy-. The magical gift is not to be abused. The purse which always had a shilling was empty when it was used as more than a help. Killing the goose in order to discover the source of the golden eggs simply ends the miracle. Pots of gold at the end of the rainbow always turn out to have traps. Using the three wishes usually means that by the third you are in worse trouble than when you started out. And so on. The point of all this is that magic puddings have nasty habits, as has Lindsay's. He of course realised that children love hearing or reading about eating delicious things and lots of them.

    A peculiar thing about the Puddin' was that, though they had all had a great many slices off him, there was no sign of the place whence the slices had been cut.

    'That's where the Magic comes in,' explained Bill. 'The more you eats the more you gets.

    Cut-an'-come-again is his name, an' cut an' come again is his nature. Me an' Sam has been eatin' away at this Puddin' for years, and there's not a mark on him.

This was after the Pudding had tried to escape in search of other owners:

    'My word', said Bill when the Puddin' was brought back. 'You have to be as smart as paint to keep this Puddin' in order. He's that artful, lawyers couldn't manage him.'

    Puddings are treacherous. 'The trouble is,' said Bill 'that this is a very secret crafty Puddin', an' if you wasn't up to his games he'd be askin you to look at a spider an' ben run away while your back is turned.' 'That's right,' said the Puddin' gloomily. 'Take a Puddin's character away. Don't mind his feelings,'

    'We don't mind your feelin's Albert,' said Bill. 'What we minds is your treacherous 'abits.

The book is a fascinating little political parable. There is a struggle for control of the Pudding between the noble society of Puddin' owners and a gang of Puddin' thieves which well describes the struggle between government and opposition for control of the public purse. Take the following graphic description of the present Opposition.

    ...Round a bend in the road [the noble society of Puddin' owners] came on two low-looking persons hiding behind a tree. One was a Possum, with one of those sharp, snooting, snouting sort of faces, and the other was a bulbous, boozy-looking Wombat in an old long-tailed coat, and a hat that marked him down as a man you couldn't trust tn the fowl yard. They were busy sharpening up a carving knife on a portable grindstone, but the moment they caught site of the travellers the Possum whipped the knife behind him and the Wombat put his hat over the grindstone.

    Bill Barnacle flew into a passion at these signs of treachery.

    I see you there,' he shouted.

    'You can't see all of us,' shouted the Possum, and the Wombat added, 'Cause why, some of us is behind the tree.'

Anyway, the thieves get temporary control of the Pudding, and the noble society of Puddin' owners rescue it but not before they have become involved in an institution which reminds me strongly of the Arbitration Commission. The Pudding is arrested by the Lord Mayor and taken before the Court, where the Judge is sitting on the bench playing cards and drinking port with the Usher. They immediately take the Pudding into custody and tuck in.

    'All very well for you to talk,' said Bill, scornfully,'sittin' up there eatin' our Puddin'. I'm a respectable Puddin'-owner an' I calls on you to hand over that Puddin' under threat of an action-at-law for wrongful imprisonment, trespass and illegally using the same.'

    'Personal remarks to the judge are not allowed,' shouted the Usher...

    He sat down and tossed off a bumper of port to prove his words. 'Your deal, I think,' said the Judge, and they went on sipping and munching and dealing out cards. At this Bill gave way to despair. 'What on earth's to be done?' he asked, 'Here's these legal ferrets has got our Puddin' in their clutches, and here's us, spellbound with anguish, watchin' them wolfin' it, Here's a situation as would wring groans from the breast of a boiled onion.'

    Why it's worse than droppin' soverins down a drain,' said Sam.

    'It's worse than catchin' your whiskers in the mangle,' said Bill.

When the court gets control of the Pudding it's tough luck for the Pudding owners.

After a lengthy legal discussion, Albert complains:

    'How much longer do you expect me to stay up here, bein' guzzled by these legal land-crabs?' demanded the Puddin. 'You shall stay there, Albert, till the case is well and truly tried by these here noble Peers of the Realm assembled,' said Bill, impressively.

    'Too much style about you,': said the Puddin', rudely, and he threw the Judge's glass of port into Bill's face, remarking; 'Take that, for a being a pumpkin-headed old shellback.'

    There was a great uproar over this very illegal act. The Judge was enraged at losing his port, and the Mayor was filled with horror because Bill wiped his face on the mayoral bat, Sam had to feign amazement at being called a liar, and the puddin' thieves kept shouting; 'Time, time; we can't stand here all day.'

It does sound like our courts and arbitration tribunals, doesn't it? The story of the Magic Pudding is one of the great stories of the hazards of having something for nothing. In this case, it has a happy ending, for the noble society of Puddin' owners, at least. But this tradition of magic abundance needs to be contrasted with another tradition in economics one of the many reasons it is known as the dismal science (although at Cambridge University not so many years ago it was known, for equally good reasons, as the Gay Science). It is summed up in one phrase There Ain't No Such Thing As a Free Lunch (TANSTAAFL). Nobody really likes the idea that this might be so, which is why the idea of perpetual motion or running cars on water instead of petrol (remember how keen the former Queensland Premier was on that?). Surprisingly the notion of a free lunch is basic to economics---it might be called the science of free lunches. I am not talking about merchant bankers, but about the fact that many notions in economics are about yielding surplus. Exchange which is beneficial to both parties; economic rents; consumer's surplus; and of course the fact that a more efficient allocation of resources makes everybody better off. In a sense that is a Magic Pudding. I repeat, however, that all magic puddings have nasty habits. What does that magic pudding of the economists involve? It involves two concepts---the concept of allocative efficiency, which means efficient trade and exchanges, and also one of those foolish misnomers which are all too common in economics, where a fancy name is invented where an easy one would do.

The concept of X-inefficiency became popular amongst economists because it sounded terribly impressive and scientific. But it is just another term for not getting things right, for general managerial inefficiency. Allocative efficiency technically involves a competitive situation where all trades are conducted with full knowledge and everybody maximises his position; allocative inefficiency occurs when you don't have flexible prices, free competition or when there is a monopolistic situation. People are forced away from, or cannot move towards, the Pareto optimum. By contrast, X-inefficiency is simply a fancy term for the fact that people have non-economic motives---they want a quiet life, or they want to swindle someone else for the pleasure of it, or they want to keep wages down for ideological reasons even though it would be more sensible to pay higher wages, or they want to keep wages higher than they ought to be for similar reasons, or they eschew certain forms of behaviour for conventional reasons, or because they simply do not want to work very hard.

It is an interesting concept, X-efficiency or X-inefficiency. In the New Palgrave's Dictionary of Economics its inventor, or rather the man who sold it to economists as something special, since there's nothing new about the idea, Harvey Leibenstein gives a classical example from the New York Times of 13 October, 1981, which 'compared two identically-designed Ford plants, one in the UK and one in Germany, both designed to produce the identical automobile utilising the same manpower and equipment. Nevertheless, the German plant produced 50% more automobiles than its UK counterpart with 22% less labour. Despite the identical plant design, the different effort conventions help to explain the X-inefficient result in the UK plant.'

In a word, X-inefficiency is only a polite way of saying that the Poms are useless bludgers and lousy managers, and the Krauts aren't. Even if true, it is hardly a profound theory. I must confess here to being married to a German. They are lazy, too, but rationally so. I have often come across the comment in various forms, which is true enough, that the Germans can even make socialism work. When you compare the performance of the East German and the West German economies, the difference is quite remarkable. But when you compare the performance of the West German and the Polish economies, the difference is even more remarkable. The Poles cannot make socialism work---or perhaps can't be bothered trying to make the best of a bad job. There is incidentally a famous three wishes joke about Poland. This one is about the farmer in Poland who knocks over a stone and finds a fairy under it. The fairy says, 0K, you've got me, you get your three wishes, what are they? And the farmer says, well, my first wish is that the Chinese People's Army should invade Poland, stay for a week, and then go home again. That's a bloody funny wish says the fairy, but all right, that's the deal, you've got it. What's your second wish. The farmer says, my second wish is that the Chinese People's Army should invade Poland again, stay for a month, and then go home again. The fairy says, this is the silliest position I've ever been in, but all right, that's the rules you've got one more wish, make it sensible this time. My third wish says the farmer is that the Chinese People's Army should invade Poland again, stay for six months, and then go home again. The fairy says I think you're out of your mind, but the wish is granted and would you kindly tell me what it's all about. Well, says the farmer, it means that the Chinese Army will cross Russia six times. So you see why the concept of X-inefficiency is trivial.

The point about the concept of the magic pudding is that it is a dangerous one, a classic populist economic fantasy. But it also spills over into economics, in the belief that it is a simple matter to reorganise things so there is a free increase in productivity, there is a free lunch waiting to be eaten by a rational human being. But many economists tend to overlook the rewards to non-rational economic behaviour, which in pretentious terminology is sometimes called rent-seeking, that is getting hold of something you can benefit from, extract surplus from, as a result of government regulation or some other form of monopoly. Quite often the purpose of rent-seeking is simply a quiet and easy life. It used to be much easier to go to Malcolm Fraser at the Lodge and ask him to keep tariffs or quotas on than to start reorganising a business and exporting, which is hard work. There is a real return to that kind of behaviour, but of course there is also the possibility of a relatively free increase in total output and an increase of living standards, which however will involve someone losing rents and here we come to the labour market issues.

Quite a lot of people who talk about labour markets seem to think there is a magic pudding lurking in the background. On the one hand there is the Arbitration Commission kind of magic pudding where it is assumed there is an unlimited potential product which will not be affected by the behaviour of the noble society of puddin' owners, or by puddin' thieves, or by judges who arbitrate the ownership of the puddin'. Although Norman Lindsay has a happy ending in his book with the pudding owners settling down in a tree house with their pudding firmly corralled with the prospect of an indefinite future of feasting, it has to be remembered that this is clearly an inequitable distribution of a natural resource, and there still are puddin' thieves roaming about, while it is made quite clear early in the book that puddings are treacherous beasts and have a habit of escaping. So if you get to feeling secure and confident about your magic pudding it's likely to end up running off down the road, and being adopted by pudding thieves.

Labour markets are a little bit like this, particularly where you have an institutional situation where people begin by assuming that the product, the pudding, is limitless and unaffected by effort or requiring any particular attention. There is another kind of magic pudding too---there are people who assume that if you do nothing but remove all obstacles to people doing what they want your magic pudding will not escape, that all that is required is deregulation, non-interference and so on. It is very tempting to go to that extreme when you look at the shemozzle that we have in the labour market at the moment. It isn't necessarily a result which is either possible or desirable because in fact pudding ownership and pudding production has to be a cooperative effort, and cooperation is not always best served by markets, especially when they are inefficient markets. Markets in terms of general freedom are much to be preferred to the absence of markets; nevertheless they are not perfect institutions but accidental human products.

Here I want to refer to what has been called the 'OECD Dichotomy'. It has been remarked, especially by the economists of the OECD, in the study of labour markets in the industrialised economies that the best results and performance in terms of inflation and growth tend to occur in two distinct types of labour markets. On the one hand, highly organised and centralised labour markets, and on the other, totally decentralised and competitive labour markets. Anything in between tends to give inferior results. What we have seen in Australia in recent times is an attempt to produce a very centralised situation with the Accord, with some success, a reduction in real wages of 7% or 8% and a corresponding improvement in employment. Countries like Sweden, with very centralised labour market arrangements have had fairly good inflation/growth/employment outcomes (though with occasional problems). Countries like the United States, on the other hand, which has a totally decentralised labour market and a very low rate of unionisation have a very strong employment performance and relatively low inflation.

The OECD view is that the implication of their analysis is that either extreme is desirable, or at least reasonably beneficial, but a mixture, positions in the middle, produces adverse outcomes. A compromise, a halfway house, is worse than the extremes. This is what we have had in Australia, with a central wage fixing authority of no real power but which is good at interfering in negotiations between the government and the ACTU, and in fact encourages unions like the metalworkers by refusing to exercise any practical discipline when they try to undermine the ACTU. Clearly here the judges have control of the magic pudding. The point that emerges from the OECD dichotomy is that deregulation is not the only solution, though of course it is attractive to those who dislike central authority. Of course, over time, the centralised solution is successful only to the extent mat it 'tracks' a market solution.

This is interesting in terms of approaches like the application of common law rules to bargaining situations, and alternative centralised concepts like pendulum or last-offer arbitration. This has been experimented with in a number of countries, including New Zealand, and starts from an authority which has real arbitral authority, as well as enforcement powers (which may be given to it by contractual agreement between the parties). The bargaining process culminates in each party stating a final position, a last offer. Then the arbitrator has the duty of selecting whichever is the more reasonable of these offers, but nothing in between. Clearly, there are incentives for the parties to move towards a central reasonable outcome---the most unreasonable party is likely to lose.

The interesting aspect of this kind of arbitration is that there is a built-in incentive to be reasonable for both sides. That is a kind of arbitration which could work in a totally decentralised system; but national wage principles could enter into it. The strange phenomenon we have at present, of course, is arbitration with a government-union position on one side, and employers on the other.

In all these possibilities there is the prospect of a system which would produce benefits simply from the more rational behaviour of the parties. But the ideal decentralised system, without institutions other than the common law, while attractive, has the features of the 'magic pudding'. That is, it is not a simple and magical solution without its own problems.

The idea that there is a magic pudding of labour market deregulation is similar to all the other kinds of folk fantasy I have referred to. The trap, according to the mythology, always emerges from the misuse of the magic solution, the widow's cruse or the three wishes. In Keynesian economics, the magic pudding is the notion that there is a kind of cost-free process of economic expansion. So government deficits became the magic pudding. In Reagan-style supply side economics there is a similar magic pudding notion, that tax cuts could magically generate more than the output and revenue increase needed to finance them. Like the widow's cruse, there is always a trap in the attempt to utilise these notions.

Essentially, the problem is one of magical thinking. But magic puddings are treacherous beasts, and the old principle in approaching confidence tricksters should be applied. If someone offers you something which is too good to be true, then it is not true. Distrust governments bearing neat and easy solutions, and distrust simple and comprehensive solutions to complex problems, whether they be labour market deregulation or easily reaped increases in product which appear to be cost-free.

Why HR Nicholls?