No Ticket, No Start---No More!

A Basic Wage for Wheatgrowers: Sauce for the Gander

John Hyde


Introduction

I suspect this paper has its origins in the wrath I once expressed in print concerning the damage done by people who demand a free market for those who are rewarded by the hour, day or week, but who, at the same time, will not support a free market for those who are paid by the bushel, kilo or tonne. I will, therefore, try to show that the principles offended by the regulation of both labour and wheat production are, as nearly as is relevant, identical. I will go on to espouse that inconsistency would undermine the principle purpose of this worthy society---which I understand to be the restoration of freedom in the labour market.

The Wheat Board and the Arbitration Commission have common roots. Those of you who know the history of the Australian wheat industry will know that the various wheat market regulations were once seen as providing a 'basic wage for wheatgrowers'. The concept of a farmer's basic wage was particularly popular among the farmers of the Eastern wheatbelt of Western Australia---where both our President and I spent our youth.

First I will reiterate some text-book stuff about the nature of monopolies and price fixing and the objections to both. That should let most of you switch off for a while. Nevertheless, since these practices are central to my argument, I think I should explain my objections to them.

Next, my paper will look very briefly, at the human rights implications of confiscating the fruits of a person's labour.

Then I will endeavour to describe the regulated wheat industry and some of the consequences of the regulations.

Finally, I will explain why I believe The H R Nicholls Society will fail if it is seen to be asking people who believe they have no market power, the unskilled and unqualified, to accept the discipline of the market when it does not demand the same of farmers, doctors, inventors and others who are in general more wealthy. The H R Nicholls Society has never been an employers' club or carried a brief for the strong against the weak. Were it to do so, most of its members would resign ---and so they should!

Before I begin, I should, depending on how you look at it, declare an interest or establish my credentials. I am a third generation wheat farmer---my son, who is both a better farmer and a more thorough going deregulator than his father, is the fourth. Until dismissed by the democratic process in 1983, I was also a Liberal Party politician in the Federal Parliament. I have campaigned, in and out of politics, for deregulation of my industry for most of my adult life, but before the advent of the Hawke Government I was always frustrated by socialists---that is, by the Country Party and its successors. I do not intend to pursue the point today, but I state for the record that, with Fredrich Hayek, I believe that history has shown socialism to be a dangerous philosophy which, if unchecked, leads to loss of liberty and ultimately life.


Monopolies

There should be no objection to people combining in voluntary associations to further their own ends. Unions and firms are potentially efficient---that is, they potentially advance community well-being while looking after the interests of their members. They, no less than individuals, may be guided by Adam Smith's Invisible Hand.

The condition which insures that benefits from combination flow to people outside the union or firm is, of course, good old competition. Under conditions of open competition, the union or firm must offer a good or service that somebody values more highly than all the alternatives provided by other associations and individuals.

In competition the firm or union is driven, though it is no part of its design to be so, to serve outsiders.


Barriers to Entry

Monopoly power is not, as the name suggests, characterised by oneness, but by a barrier that prevents new firms, unions or whatever offering a similar service. The key to competition is entry into the relevant market. When market entry is inhibited---as it is by the law in the cases of Australian telecommunications, bulk handling, railways, and much else---the customers' interests tend to get shorter shrift than when they have a choice of shrivers.

Consider the Two Airline Agreement: it encourages Ansett and Australian Airlines to provide identical, expensive services. Also, consider our five motorcar manufacturers which are protected by quotas and tariffs from international competition. Now compare these firms with Lloyds, the airline which alone flies to Kangaroo Island. Lloyds lives (or dies) with the knowledge that tomorrow there may be another airline offering topless in-flight champagne or, worst of all, a cheaper fare. Two or five can co-operate to fleece their customers, but no one can co-operate with the unknown predator who has decided to make a raid on a badly-serviced market. Even if such co-operation to raise prices or reduce services were possible, it would be pointless, because successful co-operation would open an opportunity for another predator.

Where newcomers are excluded, there is the opportunity to give too little and ask too much. These extra rewards may take many forms---common among them are higher wages and profits than in other industries, shorter hours and overmanning, sloppy service and poor workmanship and the quiet life. Together they are known as 'monopoly rents', and they are nice when you can get them.


Getting Most out of the Monopoly

No monopoly is perfect, however. In the cases of the examples I have already used, the motor bus and the ferry offer a way of avoiding both the airlines and the motor manufacturers. At current prices and levels of service, many people in fact prefer buses. Some custom is lost when prices are raised or service reduced---but a smart monopolist does not lose income.

The intelligent and diligent monopolist tries to maximise revenues by raising prices until the revenue forgone from lost volume is matched by the revenue gained from higher unit prices. That is, he will sell fewer widgets at a higher price until he reaches a more profitable equilibrium. The widgets not produced, however, are a real loss to the whole community. And there has been a net transfer from widget users to widget makers. This is the sort of activity which explains why Australian living standards, once the highest in the world, are slipping behind those of other countries.

A trade union such as, say the AWU, which in States other than Western Australia has an effective monopoly of the supply of shearers, raises the price of sheep shearing. But it also reduces the supply of sheep--- I have long regarded the cattle grazing on good sheep country as a tribute to the AWU. A capitalist's monopoly would raise prices and reduce service only to the point where revenue is maximised. However, there are special factors which encourage trade unions to go further---unemployed workers drop out of unions and unions are controlled by the senior workers who are least likely to become redundant. Some unions, such as the Seamen's Union, have reduced their industry to a small fraction of what it might be, but the remaining union members do very nicely.


Symbiosis

Monopolies, such as the Wheat Board, the Bulk Handling Authorities, the Australian Workers Union and the Transport Workers Union, are symbiotic. One monopoly makes successful rent-seeking by another monopoly easy. Someone who does not face competition, and can therefore pass costs on, is easy meat for another monopoly---perhaps a labour union or a raw materials supplier. Why not give in when the skin comes off another's nose? This point will be important when we come to consider the Australian Wheat Board shortly.


Monopolies---Natural and Unnatural

In theory, monopolies can be natural economic phenomena. Natural monopolies, which are quite rare, occur when economies of scale are such that the cheapest service is provided by one supplier. Sewerage disposal is probably a natural monopoly---the capacity of sewerage mains increases as the square of the cross-section of the pipes, and much of the cost of sewering is the disturbance associated with burying the pipes---sunk costs in two senses. Unnatural monopolies, on the other hand, are made by laws or other acts of intimidation. Selling grain and representing workers are unnatural monopolies which derive their power from statutory authority and illegal coercion.

There might be a sufficient reason to regulate prices charged by natural monopolies---I don't want to debate that now---but there can no reason to prevent competition---to create a monopoly. A little thought shows that nearly all of the important monopolies in Australia could not exist without their legislation and are therefore natural. They are a government-given licence to extract economic rents from other Australians. To the extent that trade unions derive their monopoly power from private---as opposed to government---coercion, they are an exception.


Price Fixing or Pooling

The Wheat Board is not just a monopoly, it is a statutory price fixer. It thus combines the economic sins of the Arbitration Commission with those of monopoly unions.

The basic problem with price fixing is that, even with the greatest will in the world, the price fixer can never get the price right. If it is right for this loaf, it is not for that; if it is right in O'Connor, it is not in Belconnen; if it was right an hour ago, it is not now. The impossible is made worse by the fact that most price fixers don't even try to 'get it right' in an economic sense. They try to serve vested interests in a concept that is as alien to economics as it is to ethics, the 'just price'. In practice, just prices, unless based on voluntary contract, are entirely subjective. They are less than you are asking from me and more than you want to give to me. The key word being 'me'. If a bureaucrat tries to keep prices above those at which everything is sold, he produces mountains of rotting cabbages, capped oil wells, legions of unemployed workers or a surplus of something else. On the other hand, if he tries to keep prices below market-clearing levels, he is responsible for a housing crisis, a capital deficiency, a skills shortage or something equally.

Even if he tries to get the price just right, he still gets it wrong for nearly everybody. He can't administer hundreds of millions of different prices. Yet this is what he needs to do because a carpenter who works hard is not like one who loafs, a highly skilled tradesman is not like one who has just got his ticket, a bricklayer in O'connor or O'Malley is not the same as one in Oodnadatta or Oenpelli. Averages, even the best averages, just won't do---there is a right and different price for every job and every worker. Similarly there is a right and different price for every tonne of grain. The Arbitration Commission and the Wheat Board set common prices for workmen and for grains that are very different. Agricultural economists call the practice pooling and labour economists could adapt the term. Pooling disguises the price signals that should show which things are worth doing and the least costly ways of doing them.

Pooling of labour and wheat prices is just another reason why our living standards are slipping relative to those nations who are not quite so silly, quite so often.


A Property in Your Own Labour

A slave is a person who is forced to devote his life to the service of another. Slaves are no less slaves if they are rewarded with lives of gilded luxury which they could not hope to obtain for themselves---a not uncommon circumstance in the days when slavery was widespread. A slave is one who does not own his own labour. The right to dispose of his labour as he chooses affects even those people who have nothing else to exchange but their own labour.

However, this right is never complete---even the things one can do with it are restricted. In this it is like all property rights. You may say you own your home, but in fact you own a bundle of rights---the right to sell, to extend, to lease, to occupy, to destroy, etc. You probably do not own the right to put a factory, a church or a shop in it. Similarly, the property you have in your own effort can be conserved, sold to Bloggs or Smith, used to make a different widget, etc---if you're not a slave. The more rights you have in your effort the further removed you are from being a slave. Conversely, slavery, like monopoly, is never complete. Even in a Gulag, people do things for themselves and for their friends. Even in Gulags, people exchange the meagre things they produce for the meagre things other people produce. So long as we still retain the right to quit our industries altogether, I would not describe Australian tradesmen and wheatgrowers as slaves, but the practices of Arbitration Commission and the Wheat Board clearly touch upon a basic human right---the property one ought to have in one's own effort.

A Human Rights Commission worthy of the name would interest itself in this form of regulation because it is a matter of principle and because organisations like the Human Rights Commission ought, at least by exposure, to protect the weak from organised bullying.


Oh Why?

Many students of political behaviour marvel that Governments do things that are so obviously not in the national interest, such as the creation of monopolies, and so blatantly trammel basic rights. The reason is however quite simple, and it has been the same reason for long before the Bourbons to the modern National Party. Throughout time the recipients of acts of grace and favour have paid for them with votes, willingness to bear arms, flattery, party funds and even cash in Swiss bank accounts. Concentrated vested interests can afford to pay; dispersed interests cannot.


The Wheat Industry

The grain industry is an excellent example of what has gone wrong with the Australian economy. This industry, like others, is plagued by a myth. Our myth is that the hard times of the 1930s were caused by the international grain traders. The Wheat Board is expected to prevent a recurrence of the 1930s prices---to ensure a basic wage for farmers.


Stabilisation

Wheat stabilisation has been a costly pipe-dream. In the 1950s, in the name of 'stabilisation', Australian growers' prices were below world prices. Despite Mr Menzies urging us to grow more wheat to feed the starving postwar world and help the balance of payments, history records that we grow more wool. When world prices slumped at the end of the 1960s, stabilisation kept Australian growers' prices above the market. Mr Anthony, then the Minister for Primary Industry, urged us to grow less. Of course we didn't, and soon the Government was building temporary storage to hold all the wheat.

Minimum wheat prices had had the same sort of untoward consequences as minimum wages---silos full of unsold wheat were the equivalent of unemployment. Even the Government could see the foolishness of this, so it compelled us to grow less. It introduced a worksharing scheme---the infamous wheat quotas which favoured so-called traditional growers over newcomers. Then, although it did not say so in so many words, the Government stopped trying to fix the average price of wheat. Henceforth, the growers' price was to be related to world prices. That was less stupid---export industries which are too big for the taxpayer to subsidise must accept export prices. Wheatgrowers, who were, still, by most calculations, net losers from two decades of 'stabilisation', again became subject to world markets. The price is better now, but last year, adjusted for inflation, the price paid to the Wheat Board was as low as it had been in 1931. It seems the Wheat Board's basic wage is very basic.

What then do wheatgrowers get out of their monopoly? They do get some economic rent from the 10 per cent of harvest sold on the domestic market in the form of a higher than free market price paid by Australian consumers. Farmers are not notably consistent: they scream when trade unionists do the same to them.

Moreover, the grower politicians, like the union executives, get status and even a little power.


Handling

The Wheat Board is not the only monopoly in the industry but it is the one which underwrites all the other monopolies. Beyond the farmers' gates, grain falls into the clumsy hands of monopoly bulk handling companies, monopoly railways, monopoly sea ports, and monopoly unions as well as the monopoly Wheat Board. Each monopoly is maintained by law. The uncompetitive part of the grain industry absorbs nearly 40 per cent of the value that the wheat has when on board a ship in an Australian port. And its charges are about three times the sea freight.

Politicians love inquiries: this century the grains industry has been subjected to at least 20 major royal commissions, inquiries and reports. The most recent, the McColl Commission, reported that the statutory monopolies are charging the farmers about 30 per cent more than would be possible in a competitive environment. In short, the monopolies impose a pointless and wasteful tax which subsidises obvious things like poor work-practices and overmanning and it also subsidises less obvious things like wheat bins of the wrong size in the wrong places.

One reason the monopolies get away with it is that they use growers' money to publicise themselves. Immediately after McColl reported, the railways, Bulk Handling Authorities and the Wheat Board bombarded farmers with bumf, while the case in favour of the Royal Commission findings was to be found in one down-market publication, financed by a few growers.

Deregulation of wheat ownership, i.e. deregulation of the Wheat Board, is the key to handling deregulation because, unless competitive grain owners are demanding competitive prices from grain handlers, the handlers have no reason to improve. A monopoly Wheat Board will always be a soft touch for unions and handlers, because, when it accepts a price that is too high or a service that is too low, nobody knows. Growers have nothing to measure anybody's performance against. Until grain ownership is deregulated, excess handling costs will continue to be passed back to farmers.


Pooling

Do not underestimate the price that growers pay for their meagre privileges on the domestic market. The only way that the Wheat Board can maintain its monopoly is by pooling, and pooling is so inefficient that the average grower is no better off and the potential producer of high quality or speciality wheat is far worse off than he would be in a free market. I cite my own case.

I grow my wheat at Dalwillinu---for those familiar with what it implies I add: on fertile red land in a 13 inch rainfall area. I grow some wool there too. In spite of my efforts to gain yield at the expense of quality, my wheat is of unusually high quality. My wool, on the other hand, is unusually full of burrs and dust. I often ask the wool producers in districts such as Yass or Katanning to pool their wool with mine---strangely they always decline. Were our wool pooled at a common price, might not they fill their bales with burrs and dust too? Dust weighs well. Would not wool pooling result in a lower average quality and price?

The principle affects wheat also, I have delivered every weed seed I could get away with and, at one stage I grew a variety, Insignia, which reduced the quality of the Australian harvest.

The Wheat Board is thus like an Australian regulated trade union---a monopoly seller---and like the Arbitration Commission---a price fixer.


The foreign Market

There has been a great deal of discussion about a free domestic market but the possibility of allowing competitive selling on the foreign market has barely been mooted. If the Wheat Board is as good as it claims to be, it will still have my custom. If not, then I want a higher price for each of the particular range of qualities I have produced this year. I want many people trying hard to find those market niches for me.

The usual reason cited for not allowing Australians to compete with each other for foreign markets is that by doing so they would force each other's prices down, benefiting foreign users. That argument only makes sense if, by combining, Australians can form a cartel that exercises appreciable monopoly power in world markets. As Australian wheat is only 16.2 per cent of the world wheat trade, that seems unlikely, but it may be possible to do with some of the specialty wheats we now don't produce because of the centralised system. It is far more likely that Australian wheatgrowers are price takers---this is what they claim to be whenever they are talking about the evils of tariffs. The Wheat Board may not be a typical monopoly, but the hypothesis is unlikely. Surely the onus is on the Board to show that Australian growers would not benefit from competitive intermediaries between themselves and a world market which they cannot influence.


Consistency

The H R Nicholls Society is often wrongly accused of being anti-union. Of course the Society's methods admit a wide variety of views, but I cannot recall a single paper that has attacked unionism, combination, organisation, call it what you like, per se. We understand well that trade unionism is not inherently wrong while deploring the monopolies and centralised price fixing that characterise the Australian labour market. We may legitimately concentrate on the labour market--- we cannot accept an unlimited brief---but we will convince no-one if, when the opportunity arises, we do not apply the same general principles to other markets as we apply to the labour market.

Trade unions as presently structured are mostly cartels in the market for employees. Most cartels are a conspiracy of the strong against the weak---the weak in this case being the unemployed and those consumers who cannot pass costs along to someone else. Further, even the majority of unionists who would be better off if no-one formed cartels, gain great benefits in terms of higher wages and better working conditions from their own cartel. Nobody can afford to abandon his own cartel unless everybody else does the same.

On top of a well-understood self-interest based in monopoly bargaining, a significant number of unionists believe, erroneously, that the rising living standards they have experienced in their lifetime have been brought by unions. They see their interests in terms of class struggle. Unlike most other Australians, a small percentage of unionists are prepared to shed blood---especially fellow workers' blood---to preserve the privileges of their cartel. Trade unionists will not give up their privileges unless they can see that the new rules apply to everybody.

Those who believe that democratic governments can force the obedience of any substantial defiant minority delude themselves and some unionists will fight with weapons a government dare not match. If governments are to take away union privileges, governments need the overwhelming support of the public and of most union members for each step they take---this has been Thatcher's way. The role of The H R Nicholls Society is not trivial.

If we are seen to single out unionists for special treatment, exempting our little mates in the wheat industry and elsewhere, we will suffer the contempt we deserve.

Organisations which have no power and therefore depend entirely upon suasion for influence cannot afford to be inconsistent. We are such an organisation.

Why HR Nicholls?

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