Appendix: The roots of economic crisis
If there was one key belief uniting the three governments -- Whitlam from 1974 onwards, Fraser and Hawke -- it was the conviction that excessive wage levels were responsible for the economic crisis, because they undermined profits and pushed up unemployment. Trade unionists' inability to refute these claims was important in undermining working class militancy and opening the way for the Accord. The argument can only be refuted by challenging the economic logic of capitalism itself.
It is undeniable that, all other things being equal, high labour costs will generally cause employers to shed labour. It is foolish for the left to deny the fact, both because the empirical evidence is against us and because it is reformist to imagine that the system can accommodate limitless rises in real wages, particularly in times of slump.
The union wage offensives of 1974 and 1981 pushed up labour's share of the national product, which in turn reduced profitability. Falling rates of profit, by discouraging investment, were a factor in the recessions which followed. Seizing on these facts, the Financial Review’s Michael Stutchbury wrote recently that “the 1982-83 recession can be labelled a trade union or wage blow-out recession.” But this assessment ignores other important factors. By the time Stutchbury wrote his column the recession of the early nineties was well underway, proving that economic crisis could happen even after years of “wage restraint”. And even in 1982 there were obvious objections to blaming the unions for the economic problems of the Whitlam and Fraser years.
Australia's recessions followed trends in the world economy, which was hit by three major blows in the early seventies: the end of currency stability, severe pressures on productive capacity and on food and commodity prices, and the 1973 “oil shock”. None had much to do with unions or wage rises. The recession of the early eighties was precipitated by a second “oil shock” and tight monetary policies -- hardly a consequence of union claims. The resulting international slumps flowed through to Australia.
To be sure, there were also specifically Australian factors, but workers weren't the villains here either. Conventional wisdom has it that the unions went over the top on the wages front during Whitlam's years in power, but this is something of a myth. Under Whitlam the unions had initially held back, and 1973 saw wages fall slightly behind CPI. Unions only launched their dramatic wage push of 1974 in response to the emergence of runaway inflation, caused by such factors as US war spending in Vietnam and a big hike in food prices due to bad weather and international shortages.
It is no more sensible to blame the unions for the 1982 recession. The union “wage push” during 1979-82 was partly a response to exaggerated expectations aroused by Fraser about the wonders of the resources boom. The government had portrayed wage restraint as a temporary expedient until prosperity returned, so if it was now boom time, why not claim pay rises? In any case the proximate domestic cause of the recession was high interest rates. Partly this reflected international pressures, but to the degree that it was locally driven, we must recall that Fraser had also played an important role in establishing the ideological basis for a tight monetary policy. If this was an opportunist exercise in which he did not entirely believe, that hardly lessens his culpability.
Taking a longer term view, there is another sense in which the government must assume responsibility for the economic malaise afflicting Australia since the seventies. The Australian economy has lost ground in world trade for most of the postwar era, as its primary products have receded in importance. At the same time high tariffs ensured that manufacturing remained backward, fragmented and inward looking. A paper circulated by the Jackson committee warned in 1976 that many Australian workers “work their guts out to keep producing from clapped-out machinery driven from lines of belts similar to those pictured in schoolbooks on the Industrial Revolution.”
Fraser's fascination with resource development at the end of the seventies stopped him addressing these problems; he stuck to high interest rates and tight credit partly because he didn't mind if manufacturing declined somewhat. The idea was that booming exports of minerals would pay for manufactured imports. Instead the “resources boom” petered out and recession ensued.
But surely, lower wages would still have made the economy more competitive? Workers saw little point in boosting international competitiveness if this occurred at their expense, but in any case we now know the whole argument was false. The wage cuts which Fraser ultimately failed to deliver were achieved under Labor. This improved competitiveness in the short run, but in doing so only demonstrated that in the long run productivity was far more important. Low wages meant employers had no incentive to invest in machinery, so productivity growth lagged.
So much for conventional economics. Marxists could and did raise more penetrating questions. Why should workers make sacrifices? Having brutally attacked the labour movement, Fraser had a hide asking for restraint -- the crisis was his problem, not ours. More fundamentally, Marxists wanted to abolish capitalism rather than make it work better, and consequently argued for workers to pursue their own interests without regard to the health of an exploitative system. If the system could not accommodate better wages for workers, that was just one more reason for getting rid of it.
The Marxist political arguments were grounded in an economic analysis which centred on capitalist profits. Ian Macphee complained in early 1983 that “the relative share of GDP for wages and profits is now at the same unhealthy proportion which prevailed in the notorious years of 1974-75.” Actually the profit share was even lower, a devastating result for the government. This was part of a longer-term trend which had seen the profit share fall by nearly 21 percent between 1967 and 1983, partly reflecting the relative strength of the working class over two and a half decades.
Taken on their own, these figures might suggest that excessive wages were the cause of the economic crisis, but there is more to the story. Whilst conventional economics emphasises the profit share, Marxist theory focuses on the rate of profit: the rate of return capitalists receive on their investments in labour and means of production. If this is too low, investment stagnates. The rate of profit in Australia fell by thirty percent during the same period. Whereas the profit share could be portrayed as directly linked to the wages share, the rate of profit could not. Other factors must have been at work in the onset of economic crisis in the seventies.
The tendency for profit rates to fall is the core of Marx's theory of capitalist crisis. This theory argues that as capitalism grows, it piles up means of production more rapidly than the labour force expands. But according to the labour theory of value, only the latter is the source of new values -- and thus of profits. Therefore capitalist growth tends to undermine profitability, which in turn discourages investment and breeds economic crisis. The argument is complex, but the implications are simple: there is little point in workers concerning themselves with the health of the capitalist system. For even if this health is restored, the next growth phase simply paves the way for new crises. As double digit unemployment returned in 1991 after years of wage cutting under Labor, Marxists could claim their theory had been strikingly vindicated.
Thus it is nonsense to blame wage rises for the Whitlam or Fraser recessions, or those of more recent times The labour movement was and is right to defend wages and conditions. Its failure lies in not challenging a system that makes crisis inevitable.