The end of liberalism?

Nothing in the language of the 2017 Commonwealth budget was exceptional by Australian standards. Treasurer Scott Morrison stood in parliament and announced what he described as a ‘fair and responsible path back to a balanced budget’, followed by an optimistic account of global macroeconomic conditions, a happy assurance that surpluses would be achieved in years to come, a brief panegyric of the virtues of small business, followed by a list of infrastructure projects to be built near marginal electorates.

Nonetheless, the 2017 budget is likely to be seen as one of the most significant in Australian history. In a very real way, the budget bills that Morrison announced can be said to cap not the era of economic reform (Australian governments have long given up serious market driven reform and privatisation), but an era where at least one side of politics was offering any ideological or intellectual support for free market policies.

There have been disappointing budgets before, of course, and disappointing budgets from Liberal governments. But there are two features of the 2017 budget that make it significantly different from the disappointments that have gone before: the bank tax and the increase in the Medicare levy to fund the National Disability Insurance Scheme. The first is a punitive, distortionary, arbitrary, and incoherent fiscal attack on an unpopular but absolutely vital economic sector. The second is a broad based tax increase to finance a new social service that seems more like Whitlam-era public policy.

The bank tax is most striking because it is almost entirely disconnected from any explicit policy rationale. The complete argument for the bank tax Morrison presented on budget night was this: it ‘represents an additional and fair contribution from our major banks, is similar to measures imposed in other advanced countries, and will even up the playing field for smaller banks.’ In other words, it is ‘fair’, other countries have done it, and it will cut the big banks down to size.

Since budget night advocates of the tax have been trying to retrofit justifications to the proposal: arguing that it is a payment for deposit insurance or the government’s implicit too-big-to-fail protection. But the new bank tax does not even pretend to be pegged to the value of any implicit government guarantee. The government just wants money, and banks are where money is.

Of course, governments have always looked to the banks for money. Arbitrary, punitive taxation is hardly unprecedented. But we are not living in just any historical moment, in any country. Australia is one of the richest, freest and most open countries in the world, the beneficiary of three decades of economic reform — reform that sought to reduce the number of arbitrary, punitive and counterproductive taxes and regulations on the industries central to our wealth.

The budget in the sweep of Australian history

The era of economic reform is typically said to have begun in 1983 and ended in 1993 or 2000. It kicked off with Paul Keating’s floating of the dollar, from which so many other reforms had to flow. It ended either with the Fightback! election loss, or the introduction of the GST by the Howard government.

But of course no policy reform movement comes from nothing and disappears immediately without leaving a shadow. Political interest in market reform survived the reforms themselves. The Abbott government’s 2014 Commission of Audit remains an impressively radical and ambitious document.

Likewise, the ideas of market reform significantly predate the Hawke government. The floating of the dollar and the subsequent liberalisation of banking would not have been possible had the Fraser government not commissioned the Campbell inquiry into the Australian financial system in 1978, and directed it to develop recommendations consistent with ‘the Government’s free enterprise objectives’. And those objectives did not come from nowhere. Malcolm Fraser himself might have been a reluctant free marketeer but the Fraser government was starting to feel the ideological heat from the Dries within its ranks. The sense of a sharp division between the reform period and the 2017 budget is in part because Morrison and Malcolm Turnbull have chosen totarget, of all sectors, banks — the high ground of market reform for half a century.

Yet by the time of the Campbell committee, economic liberalisation had been a pitched battle in Australian politics for more than a decade. The truly pivotal ideological moment was the appointment of Alf Rattigan as chair of the Tariff Board in 1963. Rattigan, who had been assumed at that time to be a quiet, unassuming and pragmatic bureaucrat, waged a long running war against Australia’s high tariff regime from his Tariff Board post. Working with sympathetic and economic literate journalists like Maxwell Newton, Max Walsh, Alan Wood, P. P. McGuiness, Tony Thomas and Ken Davidson, as well as parliamentarians like the legendary maverick Bert Kelly, Rattigan made tariffs and trade a central political issue, redefining the terms of Australian policy debate, and, over time, creating the divide between those who wanted to reduce the government’s reach over the economy and those who wanted to maintain the status quo.

It is often forgotten how this division shaped the bitterly personal contests between John McEwen, John Gorton and William McMahon. This convoluted battle was focused as much on Australia’s tariff regime as anything else. In the 1966 election, a group of woolgrowers and graziers created the free trade lobby, the Basic Industries Group. Although it wished not to harm the Coalition and campaigned only in a few safe seats, it nearly tore the Coalition apart, creating a divide between Liberal free traders like McMahon and the protectionist McEwen. Maxwell Newton, who had been editor of The Australian Financial Review and founding editor of The Australian, used the small trade newsletters he ran in the late 1960s to conduct what the journalist Alan Reid described as a ‘free wheeling political vendetta’ against McEwen on the issue of the tariff.

The tariff contest burbled away in the background of the Liberal Party and the conservative movement more generally during the Whitlam years. Milton Friedman came to Australia in 1975, and Friedrich Hayek visited the year after that. By the time the Society of Modest Members — the group of current and former state and federal MPs dedicated to market reform — had its first meeting in 1981, the free market insurgency had been long established. The ideas on which the Modest Members pinned their hopes had been the source of bitter division in the Coalition for a decade and a half.

The origin of the victory of market economics over technocratic social democracy dates further than even the most senior of our press gallery journalists. Yet with Morrison’s budget, that victory seems to have expired.

Is market liberalism exhausted?

Market liberalism has gone through cycles of decline and resurgence before. Historical perspective helps because it is easy in the current political environment to personalise what is happening: to blame Tony Abbott or Malcolm Turnbull, or any other constellation of political leadership. It is certainly the case that Australia has been poorly served for the last decade. But the leadership comes from the political class itself; they provide the pool from which the leader is chosen and they have the votes. Every prime minister, even the most disappointing, had, at one stage, the endorsement of majority in their party room.

The Liberal Party has been severed from its base — the core voters which support it, raise money for it, man booths for it, and generally give it social force — and has not been rewarded with national popularity.

The Liberal government has tried to echo the Labor Party on notions of ‘fairness’, but why would you buy Liberal fairness when you can buy Labor’s real thing? If trying to reduce inequality by taxing the rich is desirable, why vote Coalition? If the banks need to be punished, why not support the parties that really believe it?

Opponents of reform to section 18C of the Racial Discrimination Act have repeatedly argued that the fight for freedom of speech is a ‘distraction’, and that the Coalition government should be allowed to concentrate on economic reform. But now it seems that the government has given up on both free speech and lower taxes — civil liberties and market economics go hand in hand, and the government seems uninterested in both.

The decline of the Liberal Party, and to a lesser extent the Liberal-National Coalition, into a shadow of its opponents is a sign of exhaustion in the centre-right political class. It also reflects a failure to revitalise free market ideas — and liberalism more generally — decades after the age of Margaret Thatcher and Ronald Reagan.

The window for ‘reasonable’ policy ideas in Australia is remarkably narrow and parochial. No government wants to be caught stepping even slightly outside the thin band of mainstream policy ideas. Canadian income tax rates are indexed to inflation, eliminating the problem of inflation-induced bracket creep. Yet it would be seen as radical and unrealistic in Australia to propose anything of the sort, even though tax rate indexation has successfully worked overseas and was trialled in Australia under the Fraser government.

The unwillingness to puncture some of these sureties, to develop, legitimate and push through policy in the face of opposition, and to seriously challenge the status quo has left Australia’s policy regime stagnant and fragile. Market liberalism arose in just this sort of historical moment, when the Keynesian policies of the mid-century exhausted themselves, unable to provide answers to the economic decline throughout the developed world. Is market liberalism now exhausted too? Certainly parties that profess market liberalism seem to be tired of pursuing free market policies.

The Coalition’s push to the left on economics has been paralleled in other developed countries. Theresa May’s 2017 manifesto declared that conservativism ‘is not and never has been the philosophy described by caricaturists’:

We do not believe in untrammelled free markets. We reject the cult of selfish individualism. We abhor social division, injustice, unfairness and inequality. We see rigid dogma and ideology not just as needless but dangerous.

But far from rejecting the caricature, this seems to reinforce it. Who, after all, believes in ‘untrammelled free markets’? Even the most vigorous anarcho-capitalist believes that markets are ‘trammelled’ by the constraints of norms, values and human-made institutions. If there is a cult of selfish individualism, does it have any members? May claims to be distancing the Conservatives from some sort of spartan Thatcherism but the frivolous nature of this attempt only underpins the impression that ‘May-ism’ is just unmoored from any philosophical foundation.

Against this, the appeal of a Jeremy Corbyn — whose public persona is inseparable from his deeply held political views — is obvious.

Market liberalism looks slightly better across the Atlantic but even in the United States it is in a bad way. The Trump administration’s red tape reduction program, ambitious tax reform, and budget proposals look exciting — if they can be accomplished. Withdrawing from the Paris Agreement is deeply symbolic, but needs to be married with specific policies that roll back the renewable energy labyrinth put in place by the Obama administration.

Otherwise, Donald Trump’s explicitly anti-trade position undercuts one of the founding principles of market liberalism.

Seen in this context, the exhaustion of liberalism in Australia is hardly surprising — it’s exhausted everywhere.

Rebuilding liberalism

Yet we should not look to high politics for a guide to the vibrancy and potential of a set of ideas as rich as the philosophy of liberty. In 1929 a group of Australian economists wrote that in Australia:

practically all shades of thought are committed to some form of Government activity in the economic sphere, whether it be wage regulation or assistance to immigration, criticism of the policy of laissez faire is unnecessary.

The Institute of Public Affairs was founded fourteen years later, and half a century later the idea that we needed to introduce competition and markets into our stagnant economy was a bipartisan view. Long before this year’s budget it has been obvious that our politicians had declared free market ideas as empty platitudes; a period of time in the wilderness will allow for the intellectual rebuilding of centre-right politics.

In fact, the times suit the ideas of free markets and individual liberty more than our political parties realise or acknowledge. The IPA has spelt out at length the tax and red tape challenges holding back the Australian economy — nothing the Labor Party or the newly centrist Coalition are currently proposing have a hope of tackling those two fundamental economic problems.

If the retreat of market liberalism globally has the effect it had in earlier times — greater macroeconomic instability and uncertainty — Australia will need a resilient and adaptable economy to suit.

Other trends demand a revitalised liberalism: the spread of automation from the industrial sector to the high-end service sector, the increasing demand for personal control over healthcare, the move of global economic power from the West to Asia.

Malcolm Turnbull failed to turn his 2016 innovation agenda into anything more than slogans, but like it or not, this is where the big changes are going to come. Doubling down on the twentieth century welfare and planning economic model is not going to help the losers from those changes, nor will it ensure the benefits are distributed widely.

The task now is an intellectual one — to build a new liberalism, a neo-neoliberalism, out of the failures of centre-right politics.

Submission to the Senate Select Committee on the Future of Public Interest Journalism

Introduction: It is widely agreed that a free and independent press is an essential part of a democratic order. This submission addresses itself to the implications of the words free and independent. Government intervention in the market for journalism risks undermining the reason we value publicly interested journalism in the first place – its role in providing a check on government and as a third-party watchdog on possible abuses of political, regulatory and fiscal power. When it comes to the profession of journalism and the industrial structure of the media, government is not a disinterested player. Even granting this parliament’s best intentions, government intervention in the media opens up the risk of government interference with the media from future parliaments.

Available in PDF here.

Adam Smith and Jeremy Bentham in the Australian Colonies

Abstract: How did early colonial Australians think about liberalism, economics and political economy more generally? Colonial Australia has been described variously as having a neoclassical, enlightenment, or Benthamite political culture. This paper provides an empirical approach to the question of early Australian ideas. Exploiting the records of 1,891 book sales and auctions in colonial Australia between 1800 and 1849, the paper examines the relative prevalence of key economic, political, and liberal texts available to colonial Australians. The works of neoclassical authors such as Adam Smith and John Locke were far more prevalent, and more likely in colonial demand, than those of Jeremy Bentham. To the extent utilitarian ideas were prevalent they were in the form of William Paley’s conservatism than Bentham’s radicalism.

Working paper available at SSRN.

The Economics of Crypto-Democracy

With Darcy WE Allen, Aaron M Lane and Jason Potts

Abstract: Democracy is an economic problem of choice constrained by transaction costs and information costs. Society must choose between competing institutional frameworks for the conduct of voting and elections. These decisions are constrained by the technologies and institutions available. Blockchains are a governance technology that reduces the costs of consensus, coordinating information, and monitoring and enforcing contracts. Blockchain could be applied to the voting and electoral process to form a crypto-democracy. Analysed through the Institutional Possibility Frontier framework, we propose that blockchain lowers disorder and dictatorship costs of the voting and electoral process. In addition to efficiency gains, this technological progress has implications for decentralised institutions of voting. One application of crypto-democracy, quadratic voting, is discussed.

Working paper available at SSRN.

Regulation and Red Tape in a Small Open Economy: An Australian Overview

Abstract: It is widely acknowledged in political circles that Australia has a high red tape and regulatory burden. However little scholarly attention has been directed towards understanding the extent and significance of that burden. This paper describes why red tape and regulatory reform should be treated as a particularly significant priority for a small, open economy such as Australia’s. Australia faces a number of economic and fiscal challenges and is likely to become more exposed to macroeconomic fluctuations in coming decades. Red tape and regulation slow adjustment to changes in that environment among individuals and firms. The red tape and regulation reform program should be seen as a central element in making Australia more resilient to local and global economic shifts.

Working paper available at SSRN.

Opening statement to Senate Standing Committee on Economics Inquiry into the Treasury Laws Amendment (GST Low Value Goods) Bill 2017

With Sinclair Davidson

We recommend that the Treasury Laws Amendment (GST Low Value Goods) Bill be rejected by the parliament. It is our view that this is not an integrity measure, that this is not the government closing a loophole in the GST legislation as they claim, but rather that this is a new tax. This new tax does not promote fairness for Australian retailers or consumers. It deviates quite substantially from the current GST design and is only superficially similar to the GST in that it has a 10 per cent rate. The GST itself is a tax which purports to tax Australian consumption, but it is actually a sales tax, and the legal incidence of this tax is on the seller of the goods, and the economic incidence is the assumption that the tax is then passed on to final consumers.

This particular tax, however, does not vest legal incidence in the seller of the goods; it vests legal incidence in the electronic distribution platform and/or the people offering transportation services. It is those companies and entities which facilitate a transaction between foreigners and Australians who will bear the tax, not the seller and not the consumer. This is not a tax on Australian consumption at all, but rather it is a tax on trading with Australians.

As an aside, I noticed before that you were concerned about double taxation. If this tax is collected by the foreign seller or the electronic distribution platform, they may have a problem convincing their own tax authorities that this is not revenue to them, and they may in fact then be taxed on that in their home country. So they need to be able to tell a story that remitting money to the Australian government is actually a legitimate business expense, and I suspect we will find that it is not. So double taxation will come in, in that these foreigners in fact will be taxed in their home countries on a 10 per cent increase in revenue. I was also astonished to discover that the authorities—certainly the tax office—seem to be recklessly indifferent to consumer fraud. That is certainly a massive problem.

The unintended consequences of this tax are such that I think the government has not much thought about these consequences at all. It is very likely to reduce competition in the domestic market as foreign sellers withdraw their services and stop selling. It is likely to expose Australians to darker elements of the internet, reducing antifraud protections and consumer protections that they currently enjoy. It draws foreign entities into the Australian tax net, which currently are exempt from the Australian tax net. No thought has been given at all to the consequences of Australian businesses then being drawn into foreign governments’ tax nets. So not only will there be a greater compliance on foreigners imposed by the Australian government; foreign governments will in turn put a compliance burden on Australian businesses hoping to trade with their citizens. That has not been discussed at all. So the net compliance effect of this is unknown, certainly much more than the budgeted amount of $13 million, which I think is just the salaries of the people who will be working on this. The increased compliance cost on small business is likely to create a barrier to growth. Obviously, large Australian businesses are in a position to wear those fixed costs of foreign compliance. This will create a barrier to small business growth in Australia and again will be a barrier to entry.

This fails as a protection mechanism. Australian consumers pay well above 10 per cent price differentials when buying from domestic retailers than with foreign goods anyway. It fails to produce substantial revenue for the Australian government. We estimate it is less than 0.2 per cent of additional revenue on the existing GST. It is not clear to us that these inherent flaws can ever be repaired. If the government were to simply abolish the $1,000 threshold at the moment, they would find themselves in the position of having to borrow money to collect revenue at a loss, which of course is a completely nonsensical position.

We think the government should leave well enough alone, not introduce a new tax, not expose Australians to the dangers of the dark internet and substandard or unsafe goods, and not encourage Australians to move away from reputable online sellers. So this has no redeeming features whatsoever and it should not be legislated into existence. Thank you.

GST change is a plain and simple tariff, Scott Morrison

With Sinclair Davidson

The Turnbull government’s proposal to eliminate the $1000 threshold before the GST is levied on imported goods is not a tax integrity measure. It is a tariff, and one that will have serious repercussions that the government does not seem to have considered seriously.

The end of the low-value threshold was first flagged by the government in December 2014. It formed part of last year’s budget. Now there is actual separate legislation before parliament, and a Senate committee inquiry that will give its verdict on the legislation the same day Scott Morrison releases his 2017 budget.

By July, if everything goes to the government’s plan, the commonwealth will be receiving a stream of GST revenue from every global internet retailer that supplies Australian customers with a total of more than $75,000 worth of goods.

That’s the plan, anyway. This proposal is no more convincing now than it was two years ago when it was first announced.

In 2011 the Productivity Commission concluded that inspecting low-value imports at the border to assess their GST liability would cost more money than it would raise. So rather than getting Customs to collect the GST, the government wants to convince foreign online retailers to do it for them.

Let’s imagine this ploy works. Some of the consequences are easily predictable. First, many Australians will substitute away from well-known online sellers — such as eBay and Amazon — that have built excellent reputations for facilitating and protecting trade, to those less well-known sellers that are likely not to charge the GST.

Doing so will expose more Australians to online fraud and lead to them purchasing less reliable products from unreliable suppliers that may not meet our high quality and safety standards. It also will expose more Australians to the more unsavoury sellers on the internet, possibly leading to an increase in unlawful imports into the country.

At the very least, a 10 per cent increase in the cost of digital goods will make intellectual property ­piracy just that little bit more ­attractive. This is a real cost of the policy that must be fully accounted for.

Second, the way the government proposes to implement this measure constitutes an exercise in extraterritorial power. The commonwealth Treasury does not have jurisdiction over eBay (headquartered in San Jose, California) or Amazon (headquartered in Seattle). Attempting to rope them into our tax system will place the Australian government in conflict with our major trading partners. At the very least this should generate trade disputes at the World Trade Organisation.

Doubly so if our trading partners read the Treasurer’s second reading speech introducing the legislation, which makes it clear that this is a protectionist measure to benefit the Australian small businesses that have been “unfairly disadvantaged” by the fact they pay taxes that firms in other countries do not.

This is the nub of the issue. Transactions that occur in foreign countries should not be liable to the Australian GST.

The GST is usually described as being a “consumption tax” but in fact, for practical reasons, it is a tax on sales.

When Australian consumers purchase goods online from, say, a company based in Britain, the sale does not occur in Australia — it occurs in Britain.

The money is exchanged in Britain, the order is produced in Britain, the sale is processed in the Britain and the dispatch order is made from Britain.

The fact the goods are subsequently imported into Australia does not mean those goods should be liable to an Australian sales tax. A tax levied on imports is a tariff. This legislation is an embarrassing reversal of Australia’s longstanding free trade agenda.

Morrison pointed out in his second reading speech that his legislation is a “significant world first”. That is not something of which he should be proud.

In the realm of tax administration, at least, Australia is showing itself to be a bad international player.

Rather than introducing a new tariff to protect Australian business from international competi­tion, the government should focus its efforts on those features of the Australian business environment that impose such high prices on local consumers.

Working to lower company tax, high wage structures and reducing red tape would benefit Australians far more than protectionist measures for their small-business constituency.

Submission to the Senate Standing Committee on Economics Inquiry into the Treasury Laws Amendment (GST Low Value Goods) Bill 2017

With Sinclair Davidson

Executive Summary: The elimination of the low-value threshold for the Goods and Services Tax constitutes a new tax on inbound internet trade – that is, it will function as a tariff imposed on Australian consumers.

  • The tax will raise very little revenue and will be expensive and complex to administer.
  • The tax deviates substantially from the existing GST design.
  • The tax is less a tax on consumption but on the reputation of foreign internet businesses.
  • The tax is inconsistent with the government’s commitment to deregulation, the promotion of international trade, and its innovation agenda.
  • The tax rejects principles that the Howard government established in terms of deregulation and the promotion of international trade.
  • The tax will do nothing to address the issue of high retail prices in Australia.
  • While masqueraded as a tax integrity measure, this tax is clearly intended to operate as a form of protectionism.
  • The tax will reduce competitive pressure within the domestic Australian economy, and (as a consequence) expose Australian consumers to government sanctioned higher retail prices.
  • The tax will lead to Australian consumers substituting away from large reputable electronic distribution platforms to more disreputable platforms leading to higher rates of internet fraud and possibility criminality. Product safety and consumer protection rights are likely to be compromised.
  • The tax has few safeguards to ensure compliance and remittance of revenue to the Australian government.
  • The tax contributes to increased levels of regime uncertainty within the Australian policy environment.

Parliament should reject the Treasury Laws Amendment (GST Low Value Goods) Bill 2017.

Available in PDF here.

Diverted Profits Tax Will Go Nowhere

With Sinclair Davidson

The Turnbull government’s diverted profit tax has passed the Parliament. Introduced in response to the moral panic that, somewhere, somehow multinational corporations don’t pay a fair share of taxation, this new tax is at odds with the government’s professed belief in lowering the corporate tax burdens, is at odds with our international competitors, and (as we learnt just this month), is even at odds with the Australian Taxation Office’s tax enforcement priorities.

The 40 per cent tax on diverted profits is expected to raise $100 million. That implies that the federal government estimates a mere $250 million of diverted profits. To put that figure into perspective, the federal government recently announced a tightening of the rules on the grandparent child care benefit. That policy change would result in welfare savings of $250 million.

Grandparents allegedly rorting the welfare system are a much bigger budget problem than multinational corporations allegedly rorting the tax system.

Indeed, Tax Commissioner Chris Jordan gave the game away on March 16 when he told a Tax Institute conference that the gap between what large corporates and multinationals pay and what they should pay in tax was “relatively modest” and that “the biggest gap we’ve got in the system is us” – that is, individual taxpayers.

After five years of hyperventilating about corporate tax avoidance, this is a striking confession. The previous treasurer Joe Hockey made much of the fact that the ATO had identified 30 multinational corporations likely to offend and had embedded agents in those firms and would carefully investigating their practices.

True, Scott Morrison did say that this diverted profits tax is a tax integrity measure. Ensuring the integrity of the tax base is a legitimate policy goal. But a diverted profits tax is a counterproductive and illiberal way to go about it.

It allows the ATO to impose upfront liability and collect tax on allegedly diverted profits. It reverses the onus of proof and removes the right to silence – thus multinational corporations the right to natural justice under the Australian legal system. That is not a reasonable integrity measure but rather a punitive regime that targets foreign investors and successful Australian companies.

This is a policy that substantially increases the powers of the ATO without any governance measures to ensure that abuses do not occur. No doubt these powers will be exercised by the ATO to collect revenue beyond the amount intended by Parliament. That is simply the nature of regulatory bureaucracies and it will be small comfort for those multinationals who successfully challenge the ATO that their money is eventually returned to them.

Even more fundamentally, the diverted profits tax doesn’t sit well with current policy settings, nor with economic reality. There is currently a lot of effort and anti-business rhetoric to collect $100 million. Is it a coincidence that business investment is low? Or is that government is passing tax laws that violate societal norms of fairness and are creating an uncertain and arbitrary tax environment?

Business doesn’t know what tax rate they will face in Australia in years to come. It could be 30 per cent. It could go down to 25 per cent over 10 years if the Turnbull government’s corporate tax cut goes through. Or it could be as high as 40 per cent if some Canberra bureaucrat, empowered by the diverted profits tax, gets a bee in their bonnet about multinational structures they do not understand.

There’s been a lot of talk about policy uncertainty in the Australian energy market. With a lot less fanfare the corporate tax confusion is doing the same to the entire corporate sector. This is not how to ensure jobs and growth

In the meantime, Australia is facing an international environment where the British Prime Minister is openly discussing turning the UKinto a tax haven, and the Trump administration wants to reduce America’s corporate tax rate to between 15 and 20 per cent. The Turnbull government has chosen the wrong time to put multinational engagement with Australia at risk.

Question on Notice response to the Select Committee on Red Tape

Red Tape Committee
Department of the Senate
PO Box 6100
Canberra ACT 2600

Dear Committee,

At the Sydney public hearings on the Select Committee on Red Tape on 24 February 2017, Senator Dastyari asked me to take on notice a “large ideological question”:

Do we want socialism in one country or perpetual revolution?

I am glad to supply an answer to this question.

Senator Dastyari’s question recalls a debate between Leon Trotsky and Joseph Stalin regarding the future direction of the socialist movement. I doubt a debate between two totalitarian mass murderers remains a major bone of contention within the Australian Labor Party in 2017. As the Senator would know, Lenin dismissed Labor as a “liberal-bourgeois party”.

But as Karl Marx and Friedrich Engels so compellingly pointed out in their Communist Manifesto, the bourgeois “has played a most revolutionary
role in history”. They observed that “by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, [the bourgeoisie] draws all nations, even the most
barbarian, into civilization”.

Marx and Engels are spot on. The competitive marketplace, with the innovation and change brought about by free entrepreneurial activity, is itself a permanent revolution. The Labor Party, having presided over much of the economic reform of the last few decades, can rightly take credit for allowing the permanent revolution to be unleashed in Australia.

Contrast this revolution of the free market with socialism in one country. Countries that have experimented with the socialist model of economic control have stagnated. They have been forced to copy and counterfeit living standard-enhancing technologies rather than contribute towards that technological development. Central planning has historically been deeply inefficient and corrupt. The economic problems of planning do not seem likely to be resolved any time soon. The necessity of centralised power in order for planning to function also creates serious problems of political authoritarianism. It could be said that socialism in one country is also a “permanent revolution”, but unlike the market revolution (which grows wealth, living standards, and the ability for individuals to live
the lives they choose) the socialist revolution is a revolution against its own citizens.

It should be clear that I favour the permanent revolution of the market to a permanent revolution of socialist control. However, as recent political events have emphasised, the market revolution also entails disruption, as industries shift across borders and technological change undermines established business models. Furthermore, in our actually existing political-economic system, the heavy burden of regulation, red tape and taxation can make it hard to establish new firms to replaced obsolete ones, prevent successful firms from expanding, and encourage rent-seeking and other prosperity-reducing behaviour.

I advise that the growth of the administrative state, with its network of unaccountable and antidemocratic independent regulatory agencies, and quasi-independent watchdogs and standards bodies, has failed to suppress the market’s permanent revolution, but has placed many obstacles for citizens and workers who have to try to adjust to those changes. If parliament wants to help workers adjust to the permanent revolution, it should be looking to repeal regulatory and red tape burdens that make it harder to find a job and grow a business.

Please do not hesitate to contact me further for more details

Kind regards,
Chris Berg
Postdoctoral Fellow, RMIT University
Senior Fellow, Institute of Public Affairs