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A History of Australasian Economic Thought

Author(s):Millmow, Alex
Reviewer(s):Nevile, J.W.

Published by EH.Net (March 2018)

Alex Millmow, A History of Australasian Economic Thought. New York: Routledge, 2017. vii + 250 pp. $200 (hardback), ISBN: 978-1-138-86100-8.

Reviewed for EH.Net by J.W. Nevile, School of Economics, University of New South Wales.

This survey of Australasian economic thought from the mid-1920s to the end of the twentieth century focuses on the interaction between economic events and economic thought, with particular attention to the extent this relationship could, and did, influence economic policy. Chapters 2 to 4, which cover the period between the First and Second World Wars, are the most valuable in the book and will be the main focus of this review. In this period, the work of Australasian economists was widely admired in other English speaking countries. As Keynes commented: “Australia has given the rest of the world a lesson in accepting and positively carrying into effect advice which was experimental and unorthodox . . . yet not violent or revolutionary. . . . [E]conomists in the rest of the world are envious and proud of Australia’s economists who have not only been successful in getting their advice accepted but have shown, in the event, to have been lacking neither in practical wisdom nor in scientific insight” (quoted p. 81).

Chapter 2 describes the coming of age of the economics profession in Australasia. It starts with the establishment of faculties of commerce or, in some places, majors in economics in faculties of arts. These courses were popular with students. In Melbourne, the Faculty of Commerce started life with one department, one professor, one full-time lecturer and 323 students.

The chapter finishes with an account of the founding of the Economics Society of Australia and New Zealand in 1925. Douglas Copland, whose BA and MA were from New Zealand, was both the first President and the editor of the Society’s journal, the Economic Record, which had a bias towards applied economic research and was read by many businessmen.

When the University of Melbourne established a Faculty of Commerce in 1924 Copland was given a Chair and made Dean of the Faculty. Even more important was the appointment of L.F. Giblin to the newly established research chair in economics. Giblin, born in Tasmania in 1872, was a graduate of King’s College, Cambridge. In 1919, Giblin was appointed Tasmanian Government Statistician and was also an informal advisor to the State Premier on economics and statistics. Copland was delighted with Giblin’s appointment. He and Giblin made a formidable contribution to Australasian economics and economic policy for the rest of the interwar period and beyond.

Chapter 3 discusses the stream of developments in economic theory in the years 1926-1930. They include a controversial committee report and a number of path-breaking ideas by Giblin. In 1927, the Australian Prime Minister appointed a committee to quantify the benefits of Australian tariffs. Its academic members were Giblin, Copland and James Brigden, a New Zealander who had learned his economics from Edwin Cannan. The three professional economists all had divergent views on tariff theory and but were able to agree on a compromise document which was close to what Brigden had previously espoused but was sufficiently radical to cause a controversy which has lasted to this day.

The committee argued that tariffs were an effective way of maintaining a given standard of living for a larger population than otherwise would have been possible. This was because tariffs maintained real wages by redistributing rents from landowners to labor. Although he had reservations about the central thesis, Keynes praised the report as brilliant and original.

Giblin also developed theory about taxation in a federation, which covered both vertical and horizontal equity with most attention on the latter. Hence Giblin recommended the establishment of a body similar to the Tariff Board. As a result, in 1933 the Commonwealth Grants Commission was formed with Giblin as a member.
Giblin’s inaugural lecture after his appointment to the research chair at Melbourne University contained a theoretical bombshell. While in Tasmania Giblin had been researching the impact on employment of building a new railway, a project that was being considered by a federal agency. In analyzing flow-on effects, Giblin calculated an export multiplier and gave a draft to Brigden for comment. Brigden thought the analysis had important potential and pointed out that the lower the propensity to import, the greater the multiplier.

Chapter 4 outlines Australia’s response to the depression. In 1929 there was a substantial fall in the price of both wheat and wool exports to England which constrained Australia’s capacity to repay debt owed to England. In response, London closed its markets to Australian investors. This action caused an immediate retrenchment of thousands of workers with significant multiplier effects. The Australian response — to devalue the exchange rate, cut money wages and use Treasury Bill finance to cover budget deficits — was based on advice from a wide range of academic economists. The first official step was taken in January 1931 when the Commonwealth Arbitration Court reduced the basic wage by 10 percent. This followed action by the Chief Executive of the Bank of New South Wales who, on advice from his long-time advisor E. D. G. Shan, depreciated his bank’s exchange rate against the pound sterling by 25 percent. Other banks followed his lead, including the Commonwealth Bank, one part of which acted as Australia’s central bank.

While the response described in the previous paragraphs proceeded as planned, a political problem remained. Both federal and state parliaments had to be persuaded to continue to fund budget deficits. This problem came to a head in May 1931 when the Senate refused to pass the Commonwealth government’s budget. A working group chaired by Copland was established and given the task of finding a solution within a few weeks. The result was the Premiers’ Plan. Its main features were a 20 percent cut in government expenditure, including public service salaries, a 22.5 percent reduction in the interest paid on government bonds held by Australians, increases in federal and state taxes and a reduction in bank interest rates.

After chapters on how Keynes’1936 book came to Australasia and the role of economic theory in war and reconstruction, the remaining chapters cover the period from 1950 to 2000.

Chapter 7 covers the 1950s. The section on growth theory is somewhat disappointing. Trevor Swan’s preeminence is acknowledged, but little space is given to saying why this is so. Swan’s 1956 model is discussed as a version of what Solow sets out in his growth model, reflecting the way many Australian economists use the term Solow/Swan model. However, the main thrust of Swan’s model is explicitly about growth, or rather lack of it, in a Ricardian world, though it is true that the production function used throughout has a neoclassical form. As Swan remarks wryly, his paper contains the neoclassical as well as the Ricardian vice.

In conclusion, just as in the 1920s and 1930s, in the years 1950 to 2000 academic economists in Australia had many formal and informal advisory relationships with economic policy makers. Moreover, as in the earlier period, they thought this more important, and enjoyed it more, than refining theoretical analysis.

John Nevile’s numerous publications include “Dynamic Keynesian Economics: Cycling Forward with Harrod and Kalecki,” Cambridge Journal of Economics (with P. Kriesler).

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Subject(s):History of Economic Thought; Methodology
Geographic Area(s):Australia/New Zealand, incl. Pacific Islands
Time Period(s):20th Century: Pre WWII
20th Century: WWII and post-WWII