by R. H. Carnegie, Chairman Conzinc Riotinto of Australia Limited
Speech at a Luncheon Meeting of The Institute of Directors in Australia held at Hotel Southern Cross, Melbourne, March 15, 1976.
For some weeks Peter Derham has been pushing me for a title and a topic.
My first thought was “Confidence in Australia”. A good title and an easy speech because in the long-run I am very optimistic about Australia, particularly in contrast with everywhere else.
The theme might have been — “For most of 1970-72 the Liberals were in disarray, and for most of 1972-75 Australia was in disarray. But this period was only a temporary lapse. Now we have a new Government and we can leave it to them. The US economy is picking up strongly, and this improvement will flow to Australia in the end of 1976 or early 1977. Let’s all then go back to our businesses.”
You would have all felt better and gone away saying: “These Institute lunches always make me feel important, prosperous, and happy.”
That’s not my theme nor my speech today. Australia’s basic problems did not cease on December 13. Political decisions are largely related to, and influenced by, what the community at large thinks it wants. Politicians are sensitive to their electors in the same way businessmen are sensitive to their customers (or they are if they want to stay in business long).
My title today is the same as a speech last year — “Wake-up Private Enterprise”.
I have to paint with a broad brush because of the time limits. Obviously we have to all get back to work; so do all Australians.
I want to make six fundamental points:
- The surge forward and transformation of Australia from 1945 to 1965 came from shared aims in the whole community.
- The success achieved, with other changes in society, created a period of high expectation and demands in the 1966-1976 period.
- Australia has destroyed its competitive position in the world economy over this period.
- Most Australians are even yet not aware of the depth of our malaise, nor the time and effort needed to get out of it.
- Directors bear a heavy responsibility for the lack of community awareness.
- Australia’s economic future depends on re-establishing a vision of our country for the 1980-2000 period which the whole community can support.
My talk is designed to stimulate and aggravate, not to comfort you.
THE SURGE 1945-1965
Australia was transformed in the twenty years from 1945 to 1965. The basic reason was the willingness of the whole community to work together to achieve aims at a realistic pace.
Between 1930-1945 all Australians shared a period of common experiences. The Depression, with its insult to human dignity; the War, with its recognition of a need for greater national strength and self sufficiency.
By 1945 we had common aims: Economic growth, full employment; a desire for more people all able to get useful work; a desire for more Australian industry to reduce imports; a search for a broader base of exports than simply farming.
Between 1945-1965 all political parties shared these aims, because the electors wanted these results.
People everywhere in the world became confident in Australia — they invested here — they came here, mainly to the cities. Australians worked and prospered.
Despite setbacks as happened in 1961, private enterprise in this period was well regarded as helping the community to achieve its desired aims.
TEN YEARS OF CHANGE 1966-75
In 1975, most Australians born since 1940 had experienced only continuous and comparatively effortless prosperity. By contrast, people born about 1920 still were deeply influenced by patterns of thought and action developed in the Depression and the War.
The old goals of economic growth, full employment, exports, import replacement all seemed unworthy to the young. They were unfavourably compared with new ideals: better “quality of life”, more open communication, more equality, better education, more participation.
Economic progress seemed automatic. Politicians, academics and the public took it for granted. So if it were automatic, why bother to feed the cow — just take the milk and enjoy life.
In the USA, and Australia, surveys of public attitudes now show widespread and hostile attitudes to business. The size of business profits is thought to be ten times bigger than they are. Business is thought to aim solely at profits and be reducing the quality of goods and services sold.
The community, not only the Labor Government, became anti Private Enterprise.
The growing distrust of business was not only an Australian experience, but it took place world wide. It still exists.
Australia, however, in this ten-year period, gave up one thing — its competitive position in the world.
The world is a competitive place. It doesn’t owe us a living.
Results have looked good, but the results of 1970-75 were due to plans made in 1960-65, and investments made in 1965-70. Investments have declined in real terms in the 1970-75 period because of growing scepticism about Australia’s position.
In the mid-1960s Australia started to export processed goods, mineral exports were growing, and dependence on foreign capital to balance payments on international account was dropping. The willingness of Australians to make long-term investments was increasing. Wages were still advancing broadly in line with productivity.
In the last ten years the whole position has changed — a few illustrations:
- Australian wage rates are as high as American. Australian productivity remains low, so our wage costs are among the highest in the world.
- Capital costs in Australia are 30% or more above that of comparable plant in America.
- Marginal tax rates on key supervisory and managerial and skilled tradesmen are higher than in the UK. They are discouraging initiative by negating reward for skill and effort.
- New projects like those of the 1960s — e.g. Hamersley, Kambalda — are not financeable in Australia today.
- The general attitude to the industrial situation is discouraging all investment. Examples are provided by experience in Queensland project construction, and in coal deliveries to Japan.
- Because there has been no industrial stability, there has been too little rise in productivity.
- Issues of industry structure have been bedevilled by ad hoc ideas and changes so uncertainty prevails.
- Depreciation rates allowed for tax have dropped behind those allowed competitors around the world.
It is true many of the symptoms are world wide: the new “stagflation” phenomenon; the uncertainties of more widely fluctuating patterns of world trade and world currencies; the escalation of wages.
But Australian inflation of costs are far ahead of most OECD countries. Our productivity levels are low and growing slowly. Our investment in new export industries is low (farmers are losing money and fertiliser sales are down). And the outlook for 1980 is poor.
And all this despite the inherent advantages of our resource base and skilled workforce. Why?
THE COMMUNITY IS NOT AWARE
The loss of competitive position was not simply caused by an inexperienced Labor Government in Canberra. The truth lies deeper in a set of community expectations, which are unrealistic in the sense that they cannot be achieved with sustained work over time. Life is not like the TV — it cannot be switched on to give instant satisfaction.
The problem can be termed “The Revolution of Rising Entitlements”.
Australia, like America, has always believed that society should provide a basic equality — an equality of opportunity for anyone who wishes to work to improve his or her circumstances. We believed that our expanding economy could provide a rising standard of living for all — a promise of plenty.
The “Promise of Plenty” has been transformed into a revolution of rising expectations. This need not have been a problem. Rising expectations for themselves might, in principle, lead people to be more responsible for their society.
But the expectations have been changed in character, from a result which can be achieved by work, to a result which should happen automatically. The promise of equality has transformed expectations into “entitlements”. Claims are now made that the Government take positive steps to make everyone better off. Now all grievances get dumped into Government’s lap.
Many of the ends desired by the request for Government action are good in themselves, but they are unachievable unless the community is prepared to pay. All indications are that when governments in total take more than 25% of the GNP, the community will no longer voluntarily pay. Governments then turn to inflation and printing of money to achieve their ends.
A FAILURE OF DIRECTORS
The unpleasant part of this speech is to say: it is we Directors who must take a large part of the blame.
If the community does not understand the problem, then we have failed in our defence of private enterprise. If Government demands overload the capacity of the economy, then we have a responsibility to educate the average Australian on how the economy works, and to explain how it meets the need of the Australian community better than any alternative.
I would like the specify three principal failures:
- The muddle-up of the role of profits — Many businessmen say our aim to make a profit. I dispute this. I believe all great businesses have been built on the aim of bringing a better value product or service to a market: Henry Ford, the automobile; Myer, value and friendly service; Heinz, 57 varieties; Kiwi, boot polish; even Neil Diamond and his music. It doesn’t mean that they didn’t want to make profits. Of course they did, because only through profits could business expand, investment be financed and people be paid good wages. But the aim was not profit — profit was a necessary result. When we take our eye off the basic purpose of building a business by supplying something of better value to a willing free market, we start to downgrade business as a profession. We start to lose the moral basis of our enterprise — if for example profit is the aim, what constraints will be provided to maintain product-quality?
- The unwillingness to defend on a basis of principle in public debate — The “left”, to use a general term, do not suffer the same hesitation. They know the debate on public issues has to take place on public forums. And they have experienced performers on their side. We hang back and leave it to the politicians. But they can only react if they get our public help; we have to stand up and be counted.
- The natural tendency to look at the short-term, and to hope the long-term will look after itself — Everyone in this room is busy with his own business. This month and this year results are paramount. But we ignore at our peril the environment within which we operate. A Japanese said, in comparing business in Japan with ours, that he believed his country could take a longer view, and would thus in due course outcompete us because we were excessively influenced by short-term pressures such as those exerted by financial journalists. We have to learn from the Japanese to focus on the long-term as well as simply the short-term.
My title, Wake Up Private Enterprise, is designed to emphasise our failure as a group to provide an adequate philosophic base for private enterprise in public debate. There is a moral basis for private enterprise but we must:
— defend it
— live up to it
A VISION NEEDED 1980-2000
We have a new Government in Canberra. But though this helps we cannot leave it to them. Business leaders have to play their part in the necessary public debate. They have to help create a realistic Australian vision of the future.
What elements must be encompassed by a vision? I select only four, though there are others:
- A Realistic View of Australia in World Terms — What can we do given our size, our wealth, our geographic isolation, and our assets? What are our responsibilities as part of a divided world in which three-quarters of the population is at or near to starvation levels?
- An Idealistic View of What Each Human Being can achieve for himself given a liberal free society — which means a systematic attack on those impediments created by society against individual improvement.
- A new perspective on the relations between an individual and the enterprise in which he works. The old perspective is that the employee is lucky to have a job. The new perspective will require the restructuring of enterprises to permit more individual participation.
- A more social-conscious and socially-responsible outlook for enterprises in their relationships with the community. This means more disclosures about decisions; greater commitment to value to customers.
Above all, this vision cannot be based upon a defence of the status quo or of the past. We cannot simply defend unearned privileges, position, or property. We have to find a way of relating rewards to contribution. We must unify the entire productive sector of farmers, manufacturers, miners, and the service sector.
WHAT CAN WE DO
My plea is for every Director to commit himself to two hours a week additional effort in public debate and defence of private enterprise.
Each of you set aside some time each day or week for exercise to maintain your long-term health.
What I ask is a comparable treatment of your time to the long-term health of the private enterprise system.
Obviously worrying about Australia-wide issues can be unproductive. I suggest we concentrate on issues which are of more immediate concern to the business community.
I am going to mention six issues on which there ought to be some public debate and the business community must take an active part.
SIX ISSUES FOR BUSINESS
- Inflation Accounts — Everyone in this room knows that traditional accounting is inadequate. Everyone knows that unions, government and the community gets the wrong picture of business profits. If we adopt CVA the true picture emerges — a gradually declining profitability in real terms of industry over the last five years or so. Of course I want the new accounts accepted for tax as recommended by the Mathews Report. But, more fundamentally, I want the community to understand the weak position private enterprise is now in. The media doesn’t help in emphasising profit in total dollars unrelated to investment. But we must do more ourselves. We must recognise there is, and will be, great opposition in Canberra to the adoption of new accounting standards.
- Incentives for Effort — The Jackson Committee pointed out that management in Australia is comparatively lowly paid in relation to average wages. The Aspley Report points out that the Australian tax system places a heavy charge on income and is light on consumers. The net result is driving people away from work. My own view is that the marginal tax rates above $200 a week should be sharply reduced and our top rate should be cut by 50% as in many other countries and personal income tax must be indexed. In case people say “What about the cost involved?” I have taken out figures for the year 1973/74. If the marginal tax rate between $200-$500 had been reduced from its average of something over 55% to 35% and if the marginal rate above $500 had been reduced to 50% from its present 65% the loss of revenue would have been of the order of $130 million out of a total personal income tax payment of $5.355 million. Obviously rate reduction would flow into the $150 to $200 a week category with a further loss of revenue but this is hard to quantify. I believe cutting marginal rates to encourage the most productive members of our community to work harder would be a very good community investment and in the long-term it would be good politics. We have to recognise our system won’t work without carrots for those who produce.
- Participation of People — For better or worse the education system is changing. Expectations are changing and thus we in business have already a changing workforce. The disciplines once taught in schools and at home are now relaxed. We will have to do more to involve people in their work, so that they are keen to contribute and not basically “anti” their jobs or unconcerned about company results. Somehow we have to gain their active participation if we are to raise productivity and maintain reasonable product quality and output performance. I don’t think overseas solutions — workers on boards, and so on are very helpful. We in Australia have to find our own way to meet this new challenge.
- Exchange Rate and Capital Export Policy — At existing exchange rates, the opportunity for Australian producers to compete against imports or to sell into overseas markets is greatly restricted. In the past we needed foreign capital and sought it to balance our accounts. Now we need a more competitive exchange rate like the US, and the opportunity to create job on a basis of world markets. If we do well on exports then we have a change to become a capital exporter; investing around the world so we do not pile up large unused foreign balanced. Such a new, outwork looking, strategy is basic to Australia’s continued industrial growth.
- Industry Structure and Trade Practices Legislation — A new debate is starting on what kind of industry structure we want. The US legislation assumes that the more competitors you have the better. We in Australia have uncritically adopted too many of their ideas. They may suit a large market, but they don’t suit ours. We need vigorous small firms, and elimination of the retained profits penalty on small firms. But we need also some larger firms to spearhead our entry into world markets. If we don’t encourage our large companies to move out geographically and to develop technology, will we be able to hold our heads up in an increasingly scientific and technological world twenty years ahead?
- Confrontation or Consultation — Above all we have to consider our traditions from Britain and their emphasis on confrontation in front of a judge, such as in the Arbitration Court, and before the IAC. Do these, and our very political system, encourage the type of consultation and compromise between power groups in the community that are necessary to make things better? I think the producers need to make more effort to develop a common cause in defence of production — whether it is mining or farming or manufacturing or banking and insurance. This demands more consultation and more education of the community to the basic fact that, without production, there is nothing to consume.
What are we doing about these? Have you made a submission to Senator Cotton for his White Paper on manufacturing industry or are you leaving it to someone else?
We have a great country, but we are letting it down. The opponents of private enterprise, who have never met a payroll, are working on public opinion. We are not giving support for our democratic private enterprise system. We are too busy with our day-to-day concerns.
But we can’t be too busy or we won’t have the system survive for our children. That is why I say — Wake-up Private Enterprise!
- Sir Roderick Carnegie's foreword to Bert Kelly's Economics Made Easy
- Bert Kelly on Free Enterprise
- Hurrah for the Gang of Five
- Our kids will get homework, so let's first give them schoolwork
- WAKE-UP PRIVATE ENTERPRISE
- Political No Man's Land