AN INAUGURAL LECTURE
BY L F GIBLIN
Ritchie Professor of Economics in the University of Melbourne
Delivered in the Public Lecture Theatre University of Melbourne,
28th April, 1930, The Chancellor of the University,
Sir John MacFarland, presiding.
Mr. Chancellor, Ladies and Gentlemen,
The Chair which I have the honour to hold is, perhaps, unique in Australia. The University professor in general carries a very heavy weight of teaching and administrative duties, and the time necessary for the study and development of his subject can be won imperfectly even by laborious effort. This Chair was founded by Mr. R. B. Ritchie, of Penshurst, on such terms that the occupant would be free to devote most of his time to the study of his subject, purely in the interests of knowledge. If we put aside for the moment the doubts we may legitimately have as to the present occupant, and view the foundation in the abstract, I am sure we can agree without reserve that it is a very welcome innovation and a noble effort for the advancement of learning in Australia.
I owe the University some apology for my delay in offering it this formal inaugural lecture. You may guess my diffidence as a pure amateur in economic studies in attempting to fill an academic chair. I hoped that with the passing months the Professorial robe might come to hang less loosely about me, but I am afraid I am irrevocably an amateur and my surprise at finding myself in this Chair is undimmed. My feeling remains that the action of you, Sir, and of the Council in making the appointment was a tribute to the great Australian genius for gambling on a very speculative event, not, of course, in any vulgar sense, but rather in that suggested by the classical story of George Fox and tobacco. You may remember how in his early journeyings through England, denouncing the wickedness of the times, he came one night to a north country inn.
A bold young fellow came up to him, sitting quietly in the parlor, and offered him a filled pipe of tobacco. He was minded to refuse according to his habit, but bethought him that the young fellow would go away and say that he had not unity with the creation. So he took the pipe, he tells us, and smoked awhile that it might not be said that he had not unity with the creation. So in respect to gambling I conceive the Council as proving their unity with the creation in making this appointment.
To-day I wish to discuss so far as time will permit three of the major problems, not entirely unrelated, which confront us in Australia in this year 1930. I will begin with the most immediately urgent, the present financial and economic position - the difficulty in meeting our obligations abroad, the loss of income at home and-the menace of catastrophic unemployment. The gravity of the position is generally accepted - with signs of panic in some quarters. Let us first recognize it as a severe attack of a malady incident to young countries in process of development, and dependent on a large export trade in raw materials. Such countries, with a rapid increase in population, are very dependent on external capital for both intensive and extensive development. These capital imports, whether public loan or private investment, for the greater part must take the form of consumable goods and add to the national dividend. Such a country is, therefore, of necessity spending more than it earns, and its national income is inflated above the value of production. If the new capital is followed by a sufficient increase in production, all is well so long as the supply of external capital is not excessive, and remains steady from year to year during the quick-growing stage. Thereafter the reduction should be gradual until the time comes when the country can stand on its own feet, and begin to reduce its accumulated external obligations, public and private.
Unfortunately, these conditions are frequently not fulfilled. The fictitious prosperity coming from large capital imports and an easy optimism as to the undeveloped potentialities of the country combine to push people and Governments into excessive public loans - that is, loans for development which will not be followed by an adequate increase in production. On the other side, the supply of external capital will fluctuate with economic conditions in the investing country. The overseas investor himself is capricious, at one time pouring capital into a country quite out of proportion to its economic needs, and at another time withholding it for motives which are at least very largely psychological. My colleague, Dr. Gordon Wood, has made this subject his own, and his forthcoming book on "Borrowing and Business" is an illuminating study of the connection between the recurrent crises in Australia and the flow of capital imports. Our last great crisis in Australia, that of 1892, had its origin not in public loans, but in excessive private imports of capital almost pushed in against all reason by the British investor. It is of interest to note that at the same time he was so severely rationing New Zealand, suddenly, after years of prodigality, as to force a crisis there and a long period of severe depression. A year or two later, British investment in Australia dried up, and the inflation collapsed with a crash, the echoes of which even now have scarcely died away. When the supply of capital is thus interrupted, it requires only a bad season or a fall in export prices to turn depression into disaster. This has been the experience of Canada and New Zealand and the Argentine equally with Australia.
Our present trouble is not, then, different in kind from what has been experienced before both by Australia and other new countries. The cool historical view, however, still allows us to recognize our present position as exceptionally grave, both because our loss of income is very great and because there is no certainty that it will not continue.
Let us look a moment at the two major factors in the situation, the cutting off of capital from abroad, and the fall in export values. After borrowing an average of nearly £30m. a year since the War, we find ourselves unable to borrow at all in the present financial year, which moreover, we appear to have begun with heavy debits overseas, due to relatively small borrowing in the year 1928-29. Time will not permit a discussion of the capital imports which are desirable at the present state of Australian development. Most people are now agreed that for a number of converging reasons we must reduce our dependence on foreign capital in future, even if it is available; and it is not at all certain when it will again be available and on what terms. Four factors have contributed to the present loan in London:--
(a) A real scarcity in the latter part of 1929. This was temporary.
(b) An increasing demand on the capital available for British investment. This may be permanent.
(c) A well-justified suspicion on the part of British financial opinion that we had been wasting the money on uneconomic schemes. This may very properly take some time to allay.
(d) The psychology of the British investor which is incalculable and generally irrational, grouping him at one end of the great family, at the other end of which is the Flemington punter.
We have, then, an immediate shortage of income on this account in the neighbourhood of £30m., and a large part of this shortage must be expected to continue on grounds of policy if not of necessity.
The fall in export values is even more serious. Wool and wheat are outstanding, but metals and butter and most other exports contribute. Wool is likely to remain in the neighbourhood of present levels. Wheat is more uncertain, but may continue low for some years. Our deficiency in the present year will be from £30m. to £40m., and much of this deficiency is likely to continue.
We have, then, a gross deficiency of income of perhaps £70m. in the present year, and a reasonable possibility of £50m.per annum for some time to come, - on our present volume of exports. Much of the loss falling in this year is being postponed by various devices. We will live on existing stocks to some extent, and in particular have nearly used up our spare stocks of gold both to give us income and make our interest payments in London. We have also made a temporary loan of £10m. in London to carry us on for a few months. Further, the overseas exporter is allowing payment for his goods to stand over, and so we are getting private and temporary loans in place of long-dated public ones. The extent to which this is being done is not at present calculable. The export of gold has nearly reached its limit, and the other devices merely postpone the evil day. The useful and, in fact, necessary end attained is to give us time to adjust ourselves to the new conditions, if we may allow ourselves the flattering unction of this reticent verb. But the net result is that in the year now ahead of us, we will probably have a direct shortage of income of the order of £50m., and a large proportion of this may continue indefinitely - on our present volume of production.
Assuming, then, a direct loss of income from the fall in exports and the cessation of external loans of the order of £50m., what will be the effect on other income?
Consider the following argument. A woolgrower receives £900 less income than his average. He has, therefore, £900 less to spend. He will reduce his expenditure in those goods and services he can best spare. One-third of total consumption is on imports or exportable goods, and we may assume that one-third of his reduction of expenditure, £300, will be for such goods, so that the balance of trade will be improved to that extent. The remainder will be for non-exportable goods and services. Let us suppose he puts off a fencer engaged in improving his property at a cost of £200 per annum; saves £200 on clothing, putting a tailor out of work; and saves another £200 in pleasure-travelling, putting a motor-mechanic or driver out of work who was previously earning that sum. There is no other income available for employing the fencer, tailor and motor-mechanic, and there is, therefore, a further loss of income of £600, two-thirds of the original £900. This £600 of income was also being spent by the fencer, tailor and motor-mechanic, one-third, or £200, in imports and exportable goods and two-thirds, or £400, on the landlord and butcher and boot-maker and other Australian workmen. So that there will be an improvement of the balance of trade by £200, and a further loss of Australian income of £400. And so on, until, in the end, there has been a reduction in the consumption of imports and exportable goods of £900 in all, and a reduction of Australian income of £2,700, or three times the direct shortage of income of the wool-grower.
Applying this argument to the total assumed shortage of £50m., we have an improvement of the balance of trade of £50m., and a shortage of Australian incomes of £150m., which would imply an addition to unemployment of at least one-sixth of our population. This is, of course, a very simple and crude statement of the argument, but the refinements, for example, in respect to the saving in taxation or the effect of adverse exchange on the price of imports do not greatly modify the conclusion. Is, then, this appalling result likely to happen, or is the whole argument affected by a fundamental error?
The matter is obscure. I confess I do not see my way clearly through the tangle of price reactions that must follow the loss of income. I will only say that my somewhat muddled belief is that the tendency will be broadly to this result, to the extent that the Australian standard of living fails to adjust itself to the diminished income; but that if the loss is evenly spread through the community, it may be very nearly confined to the first direct loss of £50m., and there need be no serious addition to unemployment.
This is, very roughly, the way I see it. If nominal wages and salaries were reduced by 15%, the general price level in Australia would drop about 10%, and the drop in real wages would not be more than 5%, or about 4/6 a week on the basic wage. The fall in prices would give about £20m. more real income to export industry. This would make up a good deal of the export loss, but it would not be enough to bring any expansion of export industry as a whole. But it would probably be enough to preserve its present dimensions. There would be a further gain of real income to manufacturing industry competing with imports of about £10m. on its old production, and, in addition, a large increase of this production and consequent income by the displacement of imports with lower production costs. The amounts of this new production can only be guessed at, but I think it should be nearly enough to make up what is left of our original deficiency of £50m., and there would be no serious additional unemployment. That I believe to be the possibility with prompt surgical treatment. It would mean in effect spreading two-thirds of the shortage over the whole community and leaving export industry to carry the balance.
My very rough guess at the shortage of income in the year before us, therefore, ranges from £50m. to £150m. according to the effectiveness of our internal adjustments, with a probability of being somewhat below the middle position, or, say, £90m., with a further probability of a deficiency of not less than £50m. in the ensuing years. This may be compared with two recent estimates which must command great respect. One, by Mr. E. C. Dyason, given to the Economic Society last week reckons that there is a deficiency of income now taking place at the rate of £100m. per annum, and this estimate allows for reductions which are now taking place in anticipation of the crisis, e.g., in short time and restricted production. Mr. J. B. Brigden, confessing that it is an optimist view, hopes that the total shortage with all secondary effects will not exceed £65m.
We are accustomed to speak of a shortage of income of so many millions, compared with the average income of the last few years. It would, no doubt, have been wiser to regard that as an inflated income due to exceptional prices for our exports and a rate of borrowing abroad far higher than at any time in the past. It is too late now. We have, as human nature always will, regarded these conditions as normal, a quite proper recognition of our outstanding personal qualities, which should naturally be permanent. We have lived right up to the inflated income, based our wages and profits and general habits of consumption on that income. Now that we are returning to a state of things which must be regarded as approaching normal for the future, the adjustment will have to go much deeper than that plausible word suggests.
Just a word more on that subject of inflated consumption. Three years ago I had the honour of addressing the A.A.A.S. at Perth on the subject of "The Road to Ruin," which I conceived as paved by the extravagances of post-war consumption. The case is even stronger to-day. Demand seems no longer bridled by the capacity to pay for the desired commodity. Very striking is the new consumption - in motor cars, movies and talkies, wireless, gramophones, tobacco for women, and the increased expenditure in confectionery, and dress, dancing and travelling. And the tendency seems to be, not to substitute for former consumption, but to super-add it, with the help, amongst other things, of instalment credit. This might be justified by increasing production, but the volume of production has increased little since the war. The rate of consumption has been carried so far only by an income temporarily swollen by large oversee loans and high export prices.
I do not wish to discuss here in any detail the measures taken by the Federal Government to deal with the general situation. But a brief reference is necessary. These measures are dominated by the Government responsibility for finding funds in London to pay oversea interest, and by the desire to reduce the existing burden of unemployment. I have mentioned the shipment of gold and the temporary borrowing in London, but the chief measures are a considerable addition to the tariff, both by new schedules and tariff by-law, designed primarily to increase Australian production and lessen imports; and a further raising of the tariff, with limitation of quantity or prohibition for specified goods - designed primarily to reduce both imports and consumption.
So far as these measures are directed to the building up of funds in London, they are open to criticism, but not of the most serious kind. It is probable that the same end could have been attained by allowing a free market in exchange, instead of keeping it "pegged" as has long been our Australian custom. The consequent rise in rates would have automatically decreased imports, protected local manufactures and given substantial help to the hard-hit export industries. It is true that the Governments would then have had to pay very heavily for the funds necessary to meet interest in London. That is not perhaps a valid objection. In any case, it could have been met by pooling all exchange, taking what was necessary for interest purposes at a fixed premium, 5 or perhaps 10 per cent., and allowing the rest to go to the highest bidder. This method would have been equally effective in providing funds in London, though possibly slower in action. It would have been more equitable between traders, and as a means of building up Australian manufactures would have automatically given the protection to those industries in which it could most economically be used.
In respect to unemployment, it seems to me that the Government measures are more justified by the circumstances. The Tariff amendments will undoubtedly increase employment in factories, but at a cost, even if the prices of the protected goods are not raised - and with all respect to the promises of the manufacturers, one can only hope that the rise will not be great; but even if there is no rise, there will be a loss of government revenue to be made up, and that must impose additional costs, much of which will fall in the last resort on export industry and on production - mostly itself protected production - which is actively competing with imports. There will then be some fall in production and employment in such industry to set off against the increase in the industries receiving more protection. It is impossible now to estimate the net effect. All one can say is that scope is given for higher industrial efficiency and it is possible to hope that the effort made in response to the emergency may be such that the balance will be substantially on the right side. The effect of a net increase in employment on the national income is very great, because, as with the wool-grower considered above, there is not only the new income of the re-employed, but the secondary effects, tending, if there is no consequent inflation to an increase of income up to three times the original increase.
One reason why it is possible to hope for better results from the tariff than the ordinary economic argument would allow is on account of the psychological reactions to the present emergency. Australian products are handicapped a good deal by custom and prejudice. The purchaser has seldom an independent judgement of the value of the commodity purchased. The price asked often determines our judgement of the value of clothes and hats and boots. We seldom trust our own taste even in food; but are a prey to labels or advertisements or the simple eloquence of the salesman. Imports are frequently declared superior to Australian products on the strength of a judgement that was traditional twenty years ago - and perhaps then justified. There seems no doubt that Australian products are handicapped by high selling charges and that the margin between the factory cost and the retail price is abnormally high. One is disposed to be impatient of sentiment in business, but it seems that the strong growing feeling of the necessity for dispensing with imports temporarily may here have substantial and permanent results.
However, whether we approve or disapprove, it must be recognized that these measures cannot touch the heart of the position. They are designed to rectify the exchange position in London and absorb to some extent existing unemployment. They attempt to deal with the legacy of the past, but hardly touch the problem of the future of carrying on with a seriously reduced income. The solution of that problem is hardly the function of the Government. It can refrain from hindering, and perhaps usefully give a lead such as the Government of New South Wales is attempting. The onus is on the whole people as individuals and particularly on the human agents of industry and production.
I have said or implied that wages must fall along with salaries, profits of all kinds, rents and all income from land, and in fact nearly all income; and further, that if they do not fall quickly, unemployment will reach appalling figures and the final fall in income be much greater; and I mean, real wages, wages measured in purchasing power, and not only nominal wages.
I do not say that it need be a great fall. I think 5 per cent. would be sufficient, if it took effect promptly. I do not suggest that prompt action will bring prompt remedy, but that prompt action is necessary to avoid the worst consequences.
This is a hard saying - that real wages should fall, after having maintained them apparently intact for 24 years at any rate. Of course, it would be possible to restore them by greater productive efficiency; but that cannot be counted upon, though it is to be hoped for. Wages could be restored even by greater labour efficiency - but that is paying the same money for more work, and is in effect a fall in wages.
I have said, "Wages must fall," and I have not given you any very precise reason for the necessity. Everybody is saying it. The more cautious say, "The costs of production must go down," but they mean wages in their hearts. But are we quite sure of the necessity? Everybody says it - but a considerable number of people always have said it, all through recorded history. Probably Adam in his later centuries was very apt to say of his descendants of the nth degree, "These boys eat too many figs, and they don't work the way poor Abel used to. I shall have to cut down their rations." And the same lament has come from each generation in turn all down the ages. "Men don't work as they did when I was young."
There is another reason for caution before swelling the bleating of the flock. There is no doubt that the community outside the wage-earner - roughly the income tax-payer - has been hard hit, and this is the part of the community which is efficiently vocal. Naturally it is out to find the villain of the piece. This is primitive man again, who was wont to construct a god and a devil to take the praise and the blame for his varying fortunes, and by process of what the economist now calls horizontal integration frequently combined them in the same person. His more civilized descendants refine a little, and having found someone thumpable who is a small-part cause of his troubles, takes it out of him for the whole account. So in Tasmania, suffering from a complex of economic disabilities, very difficult to disentangle, they put the whole blame on the Navigation Act and the Arbitration Court, which are possibly responsible for 10 per cent. of the trouble. I remember the sheep-breeders of Tasmania when they were losing perhaps £20 a year on account of the first chaff-cutting award, and perhaps £500 on account of the going out of fashion of the wrinkly merino. The distaste for wrinkles did not offer a suitable vent for righteous indignation, so the wicked unions and agitators bore the whole brunt.
There is need for caution then. This belief that wages must fall comes too easily to many of us. Easy beliefs are dangerous. Leslie Stephen was fond of quoting a dictum of John Locke, "Do not entertain any proposition with greater assurance than the proofs it is built on will warrant." It sounds like a truism. But make it a personal test at the end of any argument or discussion and you will realize how far human nature has yet to go on the path of honest thought. On a subject like the present one, it will not be amiss to keep it very present in our thought -"Do not believe anything more strongly than the evidence warrants."
The first thing then is to be clear in our reasons why wages must fall. Do our reasons agree with other peoples'? If not, there is room for scepticism. If there is no possibility of bias, it may only illustrate the paradox that popular opinions are generally right and the reasons for them generally wrong. But if there is possibility of bias - particularly of class bias - the conclusion wants very careful scrutiny.
On what grounds can the necessity of lower wages be put? We may go impartially through the facts of lower export values and stoppage of loans and come with some conviction to the conclusion that our income will be short by at least £50m. per annum, and probably a good deal more, out of a national income which totalled about £650m. at the outside. We may note, too, that even before the drop in export values and loans, the sky was threatening. Faced with a necessity for large exports to provide oversea interest and to pay for such necessary imports as tea and oil and rubber, the exporting industries have carried on with increasing difficulty. One by one sugar, butter, wine, dried fruits they have given up the struggle to compete in external markets, and subsist only by a levy on the consumer; which increases the difficulties not only of all the other export industries, but equally of the protected industries which are competing with imports. The great wheat industry was feeling the strain, even before the fall in wheat prices, and the eastern wheat-grower at least was calling for the help given to sugar and butter. It appeared as if only wool and some metals would be left to stand up to world competition. Any attempt to speed up the process of superseding imports by home production was attended by such costs that any decrease in imports was likely to be accompanied by a similar or even greater decline in exports. And under these circumstances even with plentiful loans and high export values, unemployment was increasing and becoming not seasonal or cyclical but persistent - at higher figures than had been known since the 'nineties.
Now unemployment, when persistent at such levels - now 14 per cent. for all organized labour - means in the first place over-population - over-population for the resources of the country at the basic standard in force. In a free working economic system the remedy is either emigration or a fall in wages, which would come about automatically. Emigration we may rule out of court as a remedy for Australia, and wages have been "pegged" by Trade Union combination and industrial legislation, so that they will not respond to the situation. The pegging has been mainly useful in the past, a moderating and stabilizing influence; if rigidly adhered to it may bring us into dangerous waters now.
So far we are on safe ground. The total income has come down, and there is no fall in numbers from emigration. So the average income must fall. Still there is a gap before we reach the position "wages must fall."
The argument must be very right and clear. We have to convince not only the income tax payer - whose easy conviction on this point is rather a handicap - but the wage-earner himself. If the argument is right and he is not convinced, there is likely to be trouble. The logic of facts may come home with hunger and misery and perhaps blood-shed, and certainly passionate class-hatred - a poor foundation on which to build a new economic structure.
Consider then John Smith, basic wage-earner, and his reactions to this argument. He is fair-minded and ready to do his bit for any good cause; but he will have difficulties over this argument. It is not an easy argument. He has not the training to be sure of the reasoning, nor the experience to verify the cited facts. And indeed, anyone who sups with statisticians needs a long spoon. John may be impressed by the argument, but he is not likely to be convinced. You may simplify it into a parable; but the simple parable from its omissions is very open to destructive criticism and John is bound to be critical. He has the personal experience of having heard again and again that it was impossible to pay such-and-such wages; and he has seen them paid and industry go on apparently none the worse. His father and grandfather have had the same experience and passed it on. He is very naturally sceptical.
Remember that he believes, not unplausible, that he has won his present standard of living by generations of persistent struggle, and sticking by his mates. The economist tells him that his real wages are six times what his father had in England a hundred years ago. The economist may further tell him that this has been made possible, not by his combined bargaining power, but by the increased productivity of industry through advances of knowledge and technique, and that he is getting only the same proportionate share of production as a hundred years ago. This may be true enough. But another economist will tell him that he could not naturally have expected to get the same share in a highly capitalized state of industry as at a simpler stage; any more than the worker on a hydro-electric plant to-day can expect to get the same proportion of the value produced as the worker in a bush saw-mill. And he will himself be quite sure that his real wages would not have increased six-fold along with productivity unless he had been ready to fight for them at every turn.
With this outlook - which cannot easily be shown to be mistaken - any acceptance of a lower wage will seem to let down his mates, first in his own trade and next in every other trade. His giving-way may be the leak in the dyke which floods the whole field of the wage earner's welfare.
The suggestion of working harder for the same wages is equally open to well-justified suspicion. One in seven of his mates is out of work and he both sees most of the distress and bears most of the cost of seeing them through. If he works harder - whether by piece-work or otherwise the obvious first effect will be to put more of his mates out of work. He has been confronted before with schemes for doing more work and increasing productivity with the promise of more wages for himself immediately and more work for everyone in the long run. But this cool economic long-run means for his mates immediate months, possibly running into years, of unemployment; and no measures were ever taken beforehand to prevent it. When you put before him a plan by which the immediate unemployment may be avoided, then he may be willing to talk business.
All this is surely loyalty. We reckon loyalty in general a good thing, even a fine thing - loyalty to country or faith, to school or University, even to your business firm or cricket club. Is it not even more clearly a fine thing, this loyalty to something less obvious, more ideal - the conception of the welfare of the great majority that earn their living under wage conditions? It is the better side of John Smith which makes him hold out, even when for once at any rate, the facts are against him. In this contention,
"His very virtues now assail
A tempter to mislead."
Even if he persists to the end to deny what at the back of his mind he half suspects to be the economic truth, may we not allow him at least the verdict of splendide mendax?
This is at the best when John Smith is a fair-minded man. Fair-mindedness is not very common. We should be loth to ascribe it without reserve to the majority of our friends and acquaintances. In fact, a good many of us, if we were perfectly honest, would be tempted to paraphrase the answer of the old Scotch lady, when asked how many in the parish were innocent of heresy; "Well, there's just me and the Commonwealth Statistician; and whiles I'm no sure of the Commonwealth Statistician." So by the majority of wage-earners, with only an average share of fair-mindedness, we may expect our argument to be received with derision and rejected with scorn, and have no effect beyond confirming their belief in the wily selfishness of the abstract "capitalist."
If John Smith has a hobby for politics and argument, his answer may be put into words. He will say that even if our facts are right, which he does not know, and there is this large shortage of income for the country, that is still no reason why wages should suffer. There are plenty of big incomes in the country to stand the strain, which on our own admission may only last for a couple of years. He can see plenty of signs of big incomes; expensive motor cars, two or three to a family; clothes marked up in the shops at extravagant prices; great hotels crowded with visitors who spend more on food for one day than he spends in a week; expensive looking houses with carefully tended gardens and grounds; thousands of people going off every week to spend hundreds of pounds each sight-seeing in Europe. He sees in the papers the deaths of men leaving millions. He reads of stations and city blocks being bought for fabulous prices. Let these people stand the shortage of income and not put it on the wage-earner, whom he knows by experience to be hard put to make ends meet with a wife and four children. There must be plenty of big incomes in the country. His Union Secretary has told him that there is over £100m. of income over £500 a year according to the Income Tax returns; and everyone knows that a great deal of income is kept quiet - he reads cases in the paper every week. If the big incomes dropped £50m., there would still be a great deal left besides the first £500 a year.
There is an answer to this, but it is not quite a simple one and depends on figures which are not as well established and generally accepted as one could wish. The Union Secretary is not quite right about income, because he has included the income of companies and made no allowance of £500 a year for the shareholders. With taxation of companies at the source, the calculation cannot be made from published material, but there is probably about £100m. of income above £300 per annum. But there are two large necessary deductions to be made from income before we find what is really surplus. One is of the direct taxation both by States and Commonwealth, which is required to pay interest on debt and carry on the Government of the country. This amounts to £44m. annually. The other is of the savings from income, which are required for public loans and for capital goods of all kinds, houses and shops and factories, additions to plant and improvements to land. Savings have been estimated by Mr. J. T. Sutcliffe at £80 in 1923-24, and his method would give a still larger figure for 1927-28. I think these figures are too big, but if savings are even £50m., it is clear that with direct taxation they would use up all income over £300 per annum, and nothing at all will be left to meet the drop in income. There remains the possibility of income escaping income tax, of which nothing certain can be said. With our long-standing income taxes, both State and Commonwealth, it is not likely that the concealed income, though it may be serious in itself, is any considerable proportion of the whole. For Great Britain, Bowley and Stamp allow only 1 per cent. for net evasion.
But this may not satisfy John Smith. A check may be applied in another way. The total National Income has been estimated by Mr. Sutcliffe and Dr. Benham, and their estimates though differing in details, agree fairly well for the totals. Other critics have tried their hand on these estimates, and find again that the corrections they propose cancel out to a large extent, leaving the total not much altered. Mr. Sutcliffe's figure for 1927-28 would be £650m., and I think this may be safely accepted as the outside figure. If now we take the number of adult male " breadwinners" in Australia and give them all the bare basic wage of (say) 14/- per day; and give the other breadwinners-women and girls and males up to 21 - half the basic wage; we shall have used up £500m. of income, and have only £150m. left at the outside, out of 1927-28 income. But income is short by at least £50m., so that we shall have less than £100m. left. Direct taxes and savings will require all of this or more, and there will be less than nothing left to pay any income over 14/- per day, margins for skill of all kinds, and salaries of engineers, doctors, accountants, and even Members of Parliament. Such a position is clearly impossible.
This argument would be convincing enough, if the figures for national income and savings were well established and generally accepted. I think we badly need more economic investigation and discussion that will lead to estimates for these important matters which are generally accepted and can be used for practical purposes. I will only say here that I think a little consideration will make it clear that savings must be at least of the order of £50m. Without any migration, we have to place in industry and find homes for 30,000 additional men. The average capital required for home, factory buildings and plant or farm improvements cannot be less than £1000 per head and is probably a good deal more. We have, therefore, over £30m. on this account without any provision for immigrants. Commonwealth and State loans take £9m. per annum, and local Government loans must add considerably to this. It is fairly clear that total savings must exceed £50m., even when immigration is slow.
This is the best I can make of an answer to John Smith, and you see I have made but a poor job of it. All this will not be very convincing to him. It is all too uncertain, too much a matter of good judgment based on experience and knowledge. There is no straight-forward rule-of-three answer to his difficulties. What he will make of my argument will depend altogether on the confidence he has in my honesty and my ability to see straight, and that can only come from personal experience. And so I think it must be generally. This question must be settled by personal contact between the different ranks of industry. It must be thrashed out man to man, in work-shop and office, on farm and road, all over Australia.
The obligation is very heavy on the higher ranks of industry to bring to the settlement a clear head and good understanding of the points at issue, and all they know of honesty, patience and generosity. Honesty in its widest sense most of all, for it is only on honesty that the bridge of mutual understanding can be built. On those of us who are looking on a like obligation lies; our response to it will help quite appreciably to a good ending.
I think we shall come out on the right side. I have great faith in John Smith. I have pulled knee to knee with him under many different conditions, ashore and afloat. He is a good mate, rather touchy on some points of etiquette, but very reasonable when he has cooled down. And always when there was real occasion for it, you found courage helpfulness, self-forgetfulness, to send you on your journey a little humble and a good deal proud. Most of all you found this in the ranks of the A.I.F., in the days when patriotic fervour had become a very dim memory and it was a simple question of manhood with a dirty job before you that had to be done. And you found these flowers of high endeavour often in what, to your shame, you had thought the most unlikely quarters.
A great lover of music has told us that in bad moods when doubt assails him whether all music is anything more than an ingenious and complicated game in the arrangement of notes, he listens to the Cavatina from the B Flat Quartet Op. 130 of Beethoven, and all doubt vanishes and music fills his life again. Well, when faith in John Smith is in question, Cavatinas sing to me from a dozen places up and down the Western Front; and I have not the slightest doubt that we shall pull through gloriously.
I must pass on to a rather hurried consideration of another awkward problem - that of over-production in the primary industries. We are feeling the low prices in wool and wheat, butter and all metals except copper. Most other primary products are in the same case. Cotton, rubber, sugar, tea, coffee are all being produced in greater quantities than can be sold at a profitable price. It is a curious position in which the world finds itself. Early in last century there seemed good reason to think that the population of the world, unless its growth was severely checked, would soon outrun its capacity to produce food and raw materials. Now after a century in which numbers have grown at a rate unparalleled in history, we find food and raw material a drug in the market. It is an awful warning to prophets.
Two factors have contributed. The increase of productivity in primary production by growth of knowledge and mechanical invention and the rapid exploitation of the waste lands by revolutionary improvements in transport. Combined, these have overwhelmed the tendency to diminishing returns. The second of these factors must be nearing the end of its tether; the first will no doubt continue, but its varying strength at different times in the future cannot even be guessed at. The tendency to diminishing returns will in the end dominate, but for a considerable period in the immediate future we may expect a position like the present with the supply of food and ran materials tending to exceed the demand.
There is depression and unemployment in the manufacturing countries also-England, Germany, the United States-which may be regarded as a secondary effect of the decreased purchasing power of the primary producer at world prices. The justification of this view is that the demand for food is strictly limited by population, and that for other raw material very largely so, while the demand for secondary products is limited only by purchasing power. There is hardly any high grade finished or nearly finished product of primary industry except fruit and flowers and precious stones. In a simple society a high proportion - perhaps even 80 per cent. - of its needs are satisfied by primary industry. To-day in Australia, only just over one-quarter of our income is spent on primary produce, food, raw material, metals, fuel, either imported or home produced. I have no exact figures to offer you, but there can be no doubt that the proportion is decreasing year by year.
In these circumstances it is to be expected that our future development must be chiefly by secondary industry. If we cannot succeed in efficient secondary industry, then our growth will be very slow and fitful. To attempt at the present any great extension of primary industry will be to knock our heads against a brick wall; and it will be a brick wall moving towards our heads, for prices will fall still lower with increased production.
This does not mean that primary production does not want the closest attention. Every possible effort to produce with lower costs will be required to maintain our present volume of production. From time to time the position of world supply and demand will allow us to extend these industries. But in general, steady growth can only be expected in proportion to the growth of Australian population which will come with the substitution of Australian products for imports. But the rate at which this substitution can be effectively made will depend not on the height of the tariff but on the efficiency of Australian production. The tariff only gives opportunity.
Australia will then become gradually more and more self-contained, and external trade become of relatively less importance. The rate of growth, preserving or improving our standard of living, will depend on increased productivity in all industry, but the actual increase of population will be in secondary industry. We must learn to view the growing urbanization of Australian population not with sentimental whimpers but as a necessary condition of growth; and try to make of towns reasonable places for human beings to get the best profit out of living.
A similar move in industry is likely to take place in all the newer countries. It has nearly completed its course in the United States and gone some way in Canada. A similar movement under rather different conditions is taking place in China and India. We may expect international trade to decrease in relative importance. Countries like England and Germany which import food and raw material and export manufactures must have nearly reached their zenith, and must suffer a relative decline. Pre-eminence in any country which is built on trade has never been very long-lived. Their material civilization is precarious compared with the stable prosperity of so self-contained a country as France.
This question of over-production leads on to my final subject of over-population, which I can but glance at very cursorily. We have a high standard of living in Australia. We have first to earn it, which we are not doing at present, and then justify it by the use we make of it. But supposing it earned and justified, what power will preserve it to us against external aggression?
The population of any country is limited by the ratio of productive efficiency to standard of living. In Australia this may continue as at present to grow at a high rate for a long period, because of the great store of unused natural resources - unusable at present productivity but coming steadily into use with increase of knowledge and capacity. But the older countries, both of Europe and of Asia, have not these reserves, and their capacity to grow is severely limited. This would not matter if all countries approximated to a common basic standard of living. But variations are extraordinarily wide. What right has a country to keep its resources unused which another country with a lower basic standard could profitably use for its overflowing population? And if it has the right, who is to police it?
It is an old question in respect to the hordes of Asia, and racial differences dominate the solution. I am speaking rather now of European countries, whose civilization can challenge our own. Consider these differences of basic standard as measured by real wages in the different countries,-
England and Northern Europe, 7
South, East and Central Europe, 2 to 3
Australia at present could carry an additional three millions of people at the British standard, and assuming British efficiency equal to Australian, could absorb the British unemployed and her own in profitable production.
Assuming Australian efficiency to be 50 per cent. greater than Italian-an obvious exaggeration-then Australia is restricting her population to 61 millions on resources which would support 15 millions of Italians at their standard, and many millions more on the unused resources.
I do not suggest for a moment that resources should be spread to maintain a larger population at a lower standard. Such a principle would lead to the general degradation of the world to the lowest subsistence standard. On the contrary, it is desirable that every country should maintain and raise its standards and limit its population to that end. But consider the practical difficulty with two countries like Australia and Italy of general racial similarity, each justifiably proud of its own culture, but with this gaping division in the standard of material comfort. Italy is a progressive country, increasing rapidly in material civilization. It has 340 people to the square mile of not very rich territory. Population is increasing faster than in any other country of Europe, and it is the only country in Europe in which the rate of growth is increasing. Distance shelters us for a while, but if Australia was across the Mediterranean from Sicily, I think the hungry generations of Italy might soon become a question for practical politics.
Italy would have a plausible case. No country has so long a record of civilization and achievement. We may plead our high standard, but a mechanically high standard does not justify a categorical imperative. If it is expressed in talkies and motor-cars, in unbridled use of alcohol or confectionery, or in vagaries of expensive apparel, a higher standard of living may be a gross pretender beside that of your country of plain living and high thinking. The classical Scotch folk of George Macdonald have a much better claim to inherit the earth than the bargain-hunters of Bourke Street or the movie-fans of the Block.
But even if the claim is good, how is it to be sheltered from the envy of less happier lands? Can you imagine a League of Nations strong enough and altruistic enough to intervene to safeguard the towering heights of prosperity of some small favoured population?
I have no solution to offer you. I think it can come only from the development of international agreement. We want to see nations accepting the responsibility of limiting their population. To the capacity of their territories, and not letting them grow to bursting point. At present, indefinite increase of population is often claimed as natural right, and is buttressed by the churches. I think Great Britain should shoulder some responsibility for checking the over-population of India - the result of British rule - not perhaps by restoring infanticide and suttee, but by other less provocative devices. But if the nations are to be persuaded to accept this responsibility, the first essential is that they should start as fairly as possible on an equal footing. In respect to the waste lands still remaining, they are not on an equal footing. Germany and to a lesser degree Italy, might fairly ask for a fairer division. It might pay France for the sake of future security to make some contribution to this end. Our interests are so much at stake that I think we could profitably give up Papua and the Mandated Territories - in the last resort even the Northern Territory - if that price could secure a lasting settlement.
I have discussed with you very imperfectly some of the major problems which confront us. I have confessed to a good many doubts and uncertainties, and such conclusions as were reached have not been very comforting. I do not want to suggest that Hell yawns before us, but I do think that out track lies
"Whence the grieved and obscure waters slope
Into a darkness quieted by hope,"
and that it is only after some measure of Purgatory that we shall pluck again the amaranths of our desire.