In Search of the Magic Pudding
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
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
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
'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
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
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
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
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
'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,'
'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
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
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
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
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
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?