The inter-war period
L.F. Giblin once declared, in hindsight, that 1924 ‘might perhaps be called A.E.1 — the first year of economists in Australia' (1947). Certainly, it was in the inter-war period that Australian economics progressed from the cogitations of solitaries to being a complex of intellectual and social capital that would assume a role as counsel to the nation in the economic tribulations of the period.
The occasion of this transformation was world war, and its twin offspring of economic turbulence and an effectively sovereign Australian state. At the same time the war's social dislocation, by revitalising the universities, fostered the brains to manage the state's problems. And so it was that the most prominent manifestation of the advent of economics was the rapid creation of specific Chairs and Departments and degrees in Economics and Commerce throughout Australia and New Zealand, where there had been almost nothing before (Anderson and O'Neil, 2009; Groenewegen, 2009; Kenwood and Lougheed, 1997; Williams, 2009). There followed, with a lag of 10 years, the first appointment of economists by the Treasury and the Commonwealth Bank.
But perhaps the key sign of the arrival of the economist was the foundation in 1924 in ‘almost evangelical fervour' of the Economic Society of Australia and New Zealand (see Scott, 1988), with D.B. Copland assuming a vigorous leadership role. The Society quickly established the Economic Record (Giblin, 1947), with its first issue selling a very respectable 1,150 copies (compared to the 3,000 of the Economic Journal at the time).
The new profession was very small, perhaps 20 in all; of which the most senior twelve were Horace Belshaw (b. 1898), J.B. Brigden (b. 1887), Colin Clark (b. 1905), John Bell Condliffe (b. 1891), D.B. Copland (b. 1894), L.F. Giblin (b. 1871), K. Isles (b. 1902), R.C. Mills (b. 1886), Leslie Melville (b.
1901), E.O.G. Shann (b. 1884), Ronald Walker (b. 1907) and Roland Wilson (b. 1904). This ‘intimate' circle was almost entirely native born; of these twelve there are only two partial exceptions (Belshaw arrived in New Zealand aged eight; Clark was British born, but his father had made his fortune in Queensland). All but one had formal education in economics, and most had post-graduate study, including three doctoral degrees (Belshaw, Walker, Wilson). Its intellectual orientation (with the solitary exception of Wilson) was strongly towards England rather than the United States.Underlining this is that ten of the dozen had significant personal, professional or pedagogical association with J.M. Keynes. Keynes was, in fact, examiner for the University of New Zealand in economics 1919 (Blyth, 2007). Like Keynes, none of these were unalloyed academics; all had significant careers as public servants or advisors. Like Keynes, all of them pursued a method of ‘realistic theory'. And, like Keynes, all of them — with the gaping exception of Shann and Melville — were sympathetic to the ‘end of laissez-faire’ New Liberalism that Deakinism was so clearly correlated with.
That doctrinal technicalities fell lightly upon them, but policy heavily, made them sensitive to the palpable facts of the Australian situation: it was a ‘small open economy', whose exports were overwhelming produced by sector-specific natural resources with a price inelastic supply, and whose income (in consequence) included a large rent component, driven by fluctuating world demand. Having a high standard of living, the bulk of its income was spent on services. The now familiar classification of economic activity into the primary, secondary and tertiary sectors appears to be an antipodean neologism (Fisher, 1939). Australia was also a capital-hungry economy, with investment regularly exceeding saving, the size excess being determined by volatile net capital inflow driven by overseas sentiments, with the concomitant implication that any deficiency in aggregate demand would be a matter of its trade account.
These circumstances produced a novel economics of the open economy that can be summarised in three themes. First, the dependence of factor incomes on relative prices. In the opening issue of the Economic Record Brigden (1925) advanced the heterodoxical thesis that a tariff may enhance real wages. In Brigden's argument, labour is assumed to operate with diminishing marginal productivity in food (the exportable), but with constant marginal returns in manufactures (the importable). Given this, increasing tariffs will leave the marginal productivity of labour in manufactures unchanged (by assumption), but will induce a reallocation of labour from food towards manufactures, that thereby increased the marginal product of labour in food. The upshot is that the manufactures wage is unchanged, and the food wage is increased, and so the ‘living standard' is raised.
This argument of Brigden became the key idea in the moderately protectionist semi-official The Australian Tariff: an Economic Enquiry of 1929. In Paul Samuelson's judgment the Enquiry helped ‘set off an analytical controversy that has helped shape' the 1941 proof of Samuelson- Stolper that higher tariffs would unambiguously increase real wages if the country's importcompeting sector is relatively labour intensive. In Samuelson's own words: ‘I at least had very much in mind at the time of the Stolper-Samuelson investigations... the correctness of the “Australian case for the tariff”' (quoted in Coleman, Cornish and Hagger, 2006, 71).
Second, the dependence of the price of non-tradeables on net capital inflow. Wilson (1931) argued that, contrary to the contention of Mill and the presumption of the ‘transfer problem' debate, net capital inflow need not be favourable to the recipient country's terms of trade. This was because there could be no presumption that mere reallocation of purchasing power from the donor to the recipient country (which capital inflow amounted to) would increase the world demand of the recipient country's exportable.
However, argued Wilson, the reallocation of purchasing to the recipient country would certainly increase the demand for those outputs of the recipient country that only the recipient country could demand: it is non-tradeable.Thus Wilson's contention was that the size of capital inflows governed ‘the second terms of trade' — the price of non-tradeables in terms of tradeables, and this was to become a recurrent theme in Australian theorising throughout the twentieth century. The first fruit of Swan's digestion of Wilson's thesis was the ‘Swan Diagram' (Swan, 1968), which demonstrated how, in a neo-Keynesian context, capital inflows would necessitate an increase in home costs (that is, non-tradeables). Wilfred Salter recast the same ideas in neoclassical form in the ‘Salter Diagram' (Salter, 1959). The key equilibrating role of the relative price of non-tradeables was assimilated into international economics: James Meade was ‘converted' during a ‘DC flight from Canberra to Sydney' in 1956 (Arndt, 1985). But the most resonant application of the notions awaited the ‘Gregory Thesis' of the 1970s that pressed a simple but socially significant implication of Wilson's thesis: that an increase in the value of non-tradeables would cause a depression in the production and incomes in the import-competing manufacturing sector.
Third, the export multiplier. In an economy composed mostly of services, a fall in the value of services amounts to a fall in national income, and so in pressing the link between the trade account and the value of services we are led to a vision of macroeconomy in which exports are significantly out of all apparent proportion to their size. This vision was captured by Giblin in 1930 through his articulation of a multiplier concept, in which (to use his example) a reduction of 700 pounds in export incomes would ultimately reduce national income by a total of 2,100 pounds, assuming a propensity to import of 1/3.
In Australia, 1930 Giblin applied his multiplier logic to the onset of the Great Depression, 15 months before the Cambridge multiplier was in print.
The logic of Giblin's multiplier differed from that of Cambridge; his was purely an export multiplier, and its roots appear to be correspondingly different and local (e.g. De Lissa). For all its distinctive logic and provenance, it is legitimate to be tantalised by the fact that King's College library does contain a copy of Australia, 1930. Giblin — a former student of King's College and friend of Keynes — had sent it, and it had arrived in June 1930. But there is no evidence that either Keynes or any ‘Circus' members were aware of Giblin's multiplier. Neither was Giblin any more successful in April 1932 in securing Keynes' assent to his proposition that ‘any increase of purchasing power directly by government expenditure or otherwise would result in a total purchasing power of three to four times the original amount' (Coleman, Cornish and Hagger, 2006, 97). Keynes' interest was caught, not by the work of Australia's professionals, but by a certain Australian partisan of Social Credit who, Keynes told Copland, had authored ‘a most brilliant little book... with a touch of genius', and about whom Keynes asked Copland to dig about for details (see Millmow, 1997).Nevertheless, Giblin did succeed in leaving one footprint on the General Theory. In 1935 he pressed on Keynes one peculiar condition of Australia; that industrial tribunals undertook to peg the aggregate real wage level. Presumably, this prompted Keynes to ask in the General Theory, what would be the implications for his model ‘if, as in Australia, an attempt was made to fix by law the real wage'? (Keynes, 1936, 298).