Address to the EIDOS Institute
Wednesday 14 April 2010
Ladies and gentlemen
62 years ago a 21 year old man of Palestinian and Armenian heritage landed in Sydney for the first time. He and his mother and brother had fled Jerusalem to escape the conflict that was then part of life in the Holy Land.
Their entire worldly possessions were crammed into their suitcases. They arrived with little more than the belief that Australia could provide them with a new life.
That man went on to marry an Australian and to set up a delicatessen and subsequently a real estate agency. Through their efforts they provided for their family and gave opportunities to their four children that they themselves had never had. They were driven by the values of enterprise which included hard work, and a determination to contribute to the nation that had given them such opportunity.
It’s a very special story for me because it is the story of my family. It is the story of enterprise.
This is not unique – it is very Australian. Much of our post-War prosperity was built on the backs of those that came from Europe and the Mediterranean with great ambitions for their future and an enormous debt of gratitude to our country. Subsequent migrants from Asia and other parts of the world joined that narrative in the years that followed.
Today, I want to speak in defence of that spirit of enterprise and, in particular, of the free enterprise system that has been the cornerstone of successful modern society.
Enterprise is challenged by those who seek to apportion blame during economic downturn. It is challenged by those who believe big government should play a more central role in our everyday lives.
In my defence of enterprise I recognise that it is an adventurous, energetic and creative spirit that is the essence of our humanity and that moves us forward and upward.
In common parlance, it is the drive to “have a go” – to take risks and to be the master of one’s own destiny.
It is the force within us that is born out of both self-interest and also the desire to improve the lot of our families, our communities and our nations. Enterprise is an innate element in human DNA. We have been endowed with limitless imagination and the capacity to dream of better things. Our enterprising spirit gives us the drive and the means to fulfil those dreams.
Enterprise separates the human species from the rest of the Earth’s living creatures. Without it, human beings would have achieved nothing beyond our most basic animal needs.
Enterprise has been the force behind every advance in human history. It is the drive that tells us that we are not satisfied with how things are at any point in time. Through enterprise we can transform our society and ourselves – generally for the better.
This is the psychology of enterprise. But in order to understand its true meaning we must remind ourselves of the history of enterprise.
Innovative developments such as the stone-tipped spear and other pre-historic hunting tools demonstrate that, long ago, smart and enterprising cave-dwellers understood that sourcing food could be more productively handled with these simple inventions.
The enterprising spirit of humans can be seen in ancient times with developments in architecture, religious ritual, written language, ordered government, artistic expression, animal husbandry and cultivation through irrigation.
In fact, much of this initial progress was made possible by the development of agricultural practices that allowed farmers to produce not just enough for their own needs but also a surplus that could be sold or bartered. It was the free enterprise market at work in its very earliest form. For the first time, people were able to see the benefits of working to produce more than they could eat so that they could acquire other things to satisfy their wants and desires.
The development of markets thousands of years ago was a key step in the advancement of human wealth creation. The ability to exchange one set of goods for another and later, the development of non-commodity money as a means of exchange and a store of wealth – that has boosted the productivity of humanity.
Basic markets in commodities, and money as a means of exchange, have been with us for thousands of years. However, we have only recently developed free markets based on a system of private ownership to trade the means of production, such as land, labour and capital.
Indeed, modern capitalism has only prevailed in western society for the last two hundred years. Prior to this, key elements of production were not freely available for trade in market systems. Land was tightly held by a minority of aristocrats who rarely sold and agricultural labour was permanently tied to those landowners. Money or capital was also tightly held by the religious and hereditary elites.
The Renaissance marked the beginning of fundamental change within European societies and it enabled a dramatic acceleration of human enterprise. The effect on economic and social development was profound.
Interestingly, it was the Italian 14th Century invention of double-entry bookkeeping and the eventual development of the balance sheet summary of the late 17th Century that provided the first major tools for business enterprises to expand. These innovations provided an accounting system that could provide a reasonably objective overview of a business’s income, expenses, assets, liabilities and net worth.
This seemingly innocuous development was of fundamental importance to the growth of business as enterprises. These advances allowed for the extension of credit to private business ventures on a much larger scale as the new accounting system gave creditors “trust” that the business owners had sufficient income to service the debt repayments and assets to meet their liabilities.
Credit became an important element in the development of enterprise. The Medici Bank was one of Europe’s largest during the 1400s, although bad lending practices, mainly to monarchs, clergy and aristocrats who failed to pay, meant that the bank was wound up by 1494. Nonetheless, in its heyday, it was the largest of the international banking syndicates and became a model for international financial operations.
It was not the first international financial institution and the Medici’s should have learned some lessons from the experience of the “Knights Templar”.
In the early 1100s bandits roamed the Holy Lands and Christian pilgrims were often robbed or killed for their possessions as they trekked to see the Holy sites. The enterprising Knights Templar arranged for pilgrims to deposit their money in their European strongholds.
Pilgrims could then travel with “letters of credit” that could be exchanged for equivalent money at the Knights’ headquarters on the site of the ruined Temple of Solomon in Jerusalem, which is now the Al Aqsa Mosque. With simple pieces of paper, similar to a modern cheque, the pilgrims were no longer of interest to local criminals.
Their dedication to banking was unfortunately also the Knights’ downfall, as the heavily indebted French King Philip IV decided on an early form of “debt restructuring” – he had the Templars arrested, seized their property and burned them alive at the stake.
The age of discovery which the Renaissance ignited opened new lands and new cultures to European experience. International trade boomed and with it a multitude of new goods and services were created and marketed.
Scientific advances also accelerated. Science had been dormant for much of the Middle Ages. In the Renaissance, enterprising geniuses began to question the status quo and scientists adopted an empirical approach to research.
While these epochal events were gaining pace, some thinkers were also questioning the economic orthodoxy of the times.
By the late 1700s and early 1800s seminal economic thinkers such as Adam Smith, Thomas Malthus and David Ricardo had emerged. Adam Smith’s major economic work, “An Inquiry into the Nature and Causes of the Wealth of Nations”, published in 1776, was a significant departure from existing economic theory.
Smith revolutionised economic theory. He was the first to detail how wealth was created by the combined application of land, labour and capital. He was a strong believer in the free market and promoted international trade as a method of improving a nation’s wellbeing.
Smith’s ideal economy is one where there are competitive, open and transparent markets of buyers and sellers, who, driven by self-interest, will most efficiently produce and allocate goods, services and tradable resources.
Smith passionately believed that the pursuit of individual enterprise to create private wealth has the effect of raising general prosperity. In short rational self interest by many would raise the tide for all.
Even though markets may gyrate wildly in the short run, Smith believed that in the long run, price equilibrium will provide a fair and reasonable return for land, labour and capital.
Despite what some may think Adam Smith was not a supporter of what we might call pure laissez-faire economics.
Anecdote has it that the phrase “laissez-faire” comes from a meeting of prominent French businessmen and King Louis XIV’s finance minister Jean-Baptiste Colbert. Apparently when Colbert asked how the state could be of assistance to the merchants, he received the response: “Laissez-nous faire” or “leave us be”. Clearly, not much has changed in the attitude of business in the 300 years since, except perhaps nowadays the hand-out mentality has supplanted the “leave us be” approach.
Adam Smith, on the other hand, believed that government does have a number of important roles in managing the market economy. Smith felt that government must provide a legal framework to enforce contracts, protect intellectual and real property rights and importantly, to dispense justice.
Smith railed against monopolies and cartels whose operations were anti-competitive or as he famously put it: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Smith believed that government should prevent monopolies and trusts from strangling free market operation.
As a liberal and a supporter of the free market, I find a great deal of common sense in Adam Smith’s writings. For me, Adam Smith’s legacy is the encouragement of individual enterprise as the driving force behind wealth creation in the modern society.
Despite the weight of historical evidence that open economies prosper while closed economies fail, our free market system has its critics – both contemporaneously and in centuries past.
Perhaps the best known critics of the free market were Karl Marx and Friedrich Engels.
Marx and Engel’s solutions to the perceived failings of capitalism were extreme. They sought to eliminate private ownership of the means of production and to install a dictatorship of the proletariat in place of representative democracy.
Their theories were tried by those nations that embraced communism in the 20th Century. They failed because centralised and nationalised systems of economic organisation do not encourage and reward human enterprise. Fundamentally their views were based on the flawed objective of equality of outcome rather than equality of opportunity.
This is a fundamental point. Every time you see an analysis of the division between individual cohorts of income, remember this – it has to be about equality of opportunity and not necessarily solely focused on equality of outcome.
As a consequence of this theory about equality of outcome socialist economies stagnate and eventually collapse. This fatal design flaw – seeking to quash individual enterprise and risk-taking – has committed communism to the dustbin of history.
Other critics have argued that externalities such as pollution from the production process, resource depletion and “quality of life” issues are all excluded from classical economic models, including I might add, centrally planned economic systems. The argument goes that if the true costs of production were included, the economic edifice would collapse because it is currently based on significant inputs of ‘free’ or undervalued goods, such as air, water, soil and mineral resources – all of which are finite and have a high long-run substitution cost when depleted.
It was certainly true that these externalities were ignored by both the private sector and governments for much of the time that has elapsed since the industrial revolution.
However, I would argue that this does not reflect a flaw in our free enterprise system. Rather it was ignorance and a lack of knowledge that allowed us to take much of our environment for granted. Sustainability is an ancient concept but it is now rediscovered in our modern pressured world. Who, 50 years ago, seriously understood the impact of carbon emissions on our atmospheric system? Our oceans were considered infinitely large and capable of withstanding the impacts of human activities. And water was a free and unlimited resource in the minds of most.
Companies and governments now increasingly recognise that these externalities must be considered in the cost of doing business. Sustainability comes with a price tag. Triple Bottom Line Reporting is a phenomenon that has given expression to a broader range of cost inputs. We can see greater environmental regulation by government and these costs are borne by business and ultimately consumers.
Some have also argued that markets are inherently unstable and require the temporary interference of governments on a large scale to smooth the business cycle and to alleviate economic downturns.
The thoughts of John Maynard Keynes are important in this respect.
Keynes argued that wages were demand inelastic in a downward direction and would not fall low enough in recessions to restore full employment. He said that governments could borrow and spend more to restore full employment when private demand was deficient and then governments could run fiscal surpluses (budget surpluses) in the good times to keep aggregate demand in balance over the cycle. That’s effectively what people mean when they say they are going to run a surplus budget over the cycle.
The success of Keynes’ policy prescriptions in the post World War II environment led many to believe that the wild swings of the business cycle had been resolved permanently. Unfortunately they were dead wrong.
Keynes had his intellectual critics. Foremost were the monetarists, led by Milton Friedman and the Chicago School. Friedman correctly predicted that unemployment and inflation could concurrently exist contrary to the Keynesian model that asserted there was a trade-off between the two. The stagflation of the 1970s proved to be a decisive historical event for the monetarists who quickly gained ascendancy and had political supporters like Margaret Thatcher and Ronald Reagan. The monetarists believed that managing the money supply was the most significant single weapon in the fight against inflation.
Managing the money supply wasn’t quite the success that they hoped for because policy-maker’s tools to control the supply of money were inadequate for the task. One problem was that innovative financiers found ways to create money outside the regulated system, for example, through the establishment of credit providers other than the banks and the development of innovative financial products. However, the rise of the monetarists did spur central banks around the world to adapt their thinking about the role of money in taming inflation. They did this by balancing supply and demand for money and credit through the price mechanism of official interest rates. This allowed growth to be maintained over the cycle at its non-inflationary potential.
It is essential to remind ourselves of this history, and the underlying psychology of enterprise, so that we can better understand the proper role of markets today.
In my recent speech, In Defence of Liberty, I outlined why liberty is so important to the welfare of all individuals and the progress of human kind.
Free enterprise is an important manifestation of liberty. I strongly believe that an individual does best when allowed to reach his or her own potential, to form their own beliefs and live their own life free from State interference so long as they are doing no harm to others.
Support for liberty and the free enterprise system go hand in glove. It is, to my way of thinking, impossible to argue for individual freedom and not to argue for free enterprise.
It therefore always intrigues me that there are so many on the left of politics who argue for civil and political rights while, at the same time, seeking to diminish individual economic rights and the role of the free enterprise system. Similarly, there are people on the right who argue forcefully for capitalism but yet would happily see the State intervene in matters of personal morality and values.
Both approaches contain fundamental contradictions. The hypocrisy is palpable.
The simple fact is that Australia’s great strength has been both our open society and our open economy – concepts that are born from the same stock and neither of which can be sustained without the other.
I also outlined in my speech on Liberty why we must be eternally vigilant in protecting the freedoms that have taken centuries to achieve.
Just as the actions of government can restrict those freedoms, so too can government dampen the enterprising spirit of its citizenry.
This brings me to our most recent economic crisis which, as Reserve Bank of Australia Governor, Glenn Stevens pointed out, was really a North Atlantic financial crisis rather than the global economic catastrophe that was first feared.
A number of national leaders postulated that the financial crisis exposed fundamental failures in the free market system. I vehemently disagree with that view.
I would argue that the key to the crisis was the market-interfering role that the United States government played in actively encouraging lenders to extend loans to people who were fundamentally unable to service their debts. The United States social policy agenda was to extend homeownership to as many Americans of lower socio-economic status as possible. Creditors willing to implement the government’s policy prescription lent vast sums to those groups. The default risk was spread across the global financial network through the distribution of mortgage backed securities and more complex derivative products.
Most governments implemented monetary and fiscal stimulus measures in order to prevent a re-run of the Great Depression. Government policy caused the problem and governments have had to resolve the problem. The result has been record levels of sovereign debt in nearly all major industrialised nations. In fact by 2014 – in four short years – six of the G7 nations will have sovereign debt of more than 90% of GDP. That would be the equivalent in Australia of a national government debt of well over $1.1 trillion.
Ironically, this problem will only be able to be fully resolved by growing these economies more quickly than their debt over a long period. This will require more, not less, enterprise.
I fear however, that governments will want to take the “easy” option of running higher inflation. Some governments will print more money to reduce their debt burdens. Other governments may also increase taxation which will dampen the spirit of enterprise at just the time we most need innovation and entrepreneurship.
What we need so desperately is a positive agenda for Australia that will allow our free enterprise system to grow and flourish. Government must support those men and women who work so hard to improve their own circumstances and that of our economy. Government must help those people with dreams, vision and passion and that are the real foundation of our nation’s prosperity.
I think particularly of the millions of Australians in the small business sector. These are Australians who work hard, who take risks, who occasionally will fail but dust themselves off and try again. Australians who are the engine room of our economy, the generators of wealth and employment and so often the backbone of our communities.
The enterprising spirit of small business is often stifled by governments that fail to understand the pressures they face. They are pressures that I understand from my experience as the son of small business operators.
For me, the positive agenda must be based on six priorities. These are the foundations of modern enterprise.
First we need reward for risk. Whether you are a scientist developing a new life saving vaccine or an artist lodging a painting for the Archibald prize, reward for effort coupled with risk is essential. The reward could be monetary, it could be improved status or a place in history and it often depends on the field of endeavour. Opportunity for reward is what drives enterprise.
At a policy level this means that higher taxation acts as a major disincentive for individuals and private enterprise alike. People want to be rewarded for risk-taking and their hard work, and they are understandably demoralised when the fruits of their personal endeavours are appropriated through taxation. This is particularly so when governments show no restraint in government spending or allow taxpayer funds to be inefficiently allocated or wasted. As a taxpayer, that is what angers me most about the scandalous management of funds associated with the pink batts scheme and the BER programs.
Second, innovation is an essential component of enterprise. Often innovation is enhanced by education. Innovators are naturally more successful the better informed they are about the field of endeavour. I mean, think about your own lives – you can be more innovative if you understand the sectors you’re operating in. Of course a curious mind, together with a determination to seek a better way of life, is essential for a successful innovation program.
Many argue that Government should have a greater role in innovation. History proves that this must be a very selective investment. Much industrial innovation for example over a long period of time has come out of the defence industries. From jet engines to radar and from satellites to the internet Government investment in defence has delivered substantial consumer benefits as a by-product of the original lamentable intent.
However we should remind ourselves that the Wright Brothers never got a government grant to pioneer flight and Alexander Graham Bell never received a Washington grant for his “telephone”. Government can waste money in innovation as easily as it can be an essential investor and facilitator of innovation in areas such as medical research.
A free and fair market is the third foundation stone of enterprise. I believe that markets must be transparent and free. They will only be liquid and effective if the relationship between parties is based on fair access to information and equality of opportunity for trade. I do not and never have subscribed to the view that markets can go unfettered in a way that allows monopolies or oligopolies to prevail. An economy dominated by a few is as harmful as an economy controlled by government.
Similarly, effective competition policy means ensuring a level playing field. Government should not give preferment to one player over another. In many areas, and I think of telecommunications and the television sectors, consumers have and arguably remain disadvantaged by regulation that favours incumbents over the new.
Fourth, enterprise fails if parties fail to deliver on their promises. This is accountability. The worst of the recent financial crisis involved the failure of banks to honour their legal obligations to each other. Trust collapsed and so too did liquidity and enterprise. I rail against the diminution of personal responsibility in modern society. Whilst many choose to hide behind the corporate veil ultimately individuals must bear responsibility for their actions.
Fifth, stability is hugely important to enterprise. A community that is socially and economically stable is a more generous facilitator of enterprise than a community wracked by uncertainty and volatility. Human beings are more likely to take measured risks where they can reduce the number of unpredictable elements to a manageable level. For example investment in telecommunications broadband has ground to a halt whilst the biggest commercial player deals with sovereign risk in Australia. Uncertainty over taxation policy, carbon pricing, labour laws and land use each reduce stability and distort market activity. Excessive regulation coupled with burdensome red tape is as harmful to enterprise as the heavy hand of tax.
Six, enterprise cannot function without capital. I define capital broadly to include assets and credit. For a corner store owner his or her fridges are essential just as a blast furnace is a huge investment that is essential for a steel maker. I have never met a builder who is not precious about his tools and rightly so. The cost and availability of capital is hugely important for enterprise.
This is where we must ensure that government demands on the capital markets do not impede the flow of affordable capital to private enterprise. We must ensure that fiscal policy does not result in the government crowding out private sector access to affordable credit in a growing economy.
It’s why I have been so resolute in my opposition to the reckless accumulation of debt by government. That debt is placing upward pressure on interest rates domestically and has an effect internationally, making it more difficult for enterprise. In short I believe that sovereign debt will be the most significant inhibitor of enterprise over coming decades around the world. Servicing sovereign debt obligations globally will cause the price of credit to rise. As a massive importer of capital Australia is facing huge future challenges in raising enough capital to service our growth.
Ladies and gentlemen
As I have shown today, enterprise has been the engine of our advancement from the dawn of human history. It has taken us from the caves, to New Worlds and even to the Moon.
It is no accident that Gene Roddenberry called his star ship the Enterprise. It’s not often that I have had cause to quote from Star Trek but in many ways the spirit of enterprise was so succinctly captured by the show’s opening phrase – “to boldly go where no man has gone before”.
In fact, the new series says “where no one has gone before”.
Australia’s greatest days lie ahead of us and not behind.
For a nation that has been burdened by its distance from markets and its relative isolation from the world, we relied more on enterprise in the past than we truly know.
But that burden is no longer an issue. New technologies are smashing the barriers to growth and Australia is set to take advantage of its geo-political good fortune.
Our enterprising qualities must never be extinguished despite the best endeavours of some governments and some political philosophies to reshape our destiny.
We must not seek to strangle human enterprise; we must seek to liberate it if we wish to live in a freer, more prosperous and more sophisticated society.
I want to conclude with the words of one of the greatest American Presidents – and if I have a political hero it is him – Theodore Roosevelt. It is a quote that encapsulates all that is important about enterprise and one that I try to live by in both my private and public life:
“The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly; who errs and comes short again and again; because there is not effort without error and shortcomings; but who does actually strive to do the deed; who knows the great enthusiasm, the great devotion, who spends himself in a worthy cause, who at the best knows in the end the triumph of high achievement and who at the worst, if he fails, at least he fails while daring greatly. So that his place shall never be with those cold and timid souls who know neither victory nor defeat.”
For the son of a migrant and a small business family, that is what enterprise is all about to me.