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VOL. XXXI NOVEMBER, 1955 No. 61 




tbe Economic Societg of fluetral 
ant> mew Zealand 



STABILITY ................ H. C. COOMBS ITS 


GROWTH ................. H. W. ARNDT 192 



ANALYSIS .............. . . . . BURGESS CAMERON 232 


INCREASE .. . ............. W. M. CORDEN 242 



INVESTMENT .............. ROBERT A. PEARSE 261 


1867-75 .................. A. BARNARD 275 



ECONOMIC ADVISERS ........ ......... EDWIN G. NOURSE 291 


TO 1929-30 . . . . .................... W. A. SINCLAIR 299 




A REPLY .... A. HAGGER 323 


News and Notes ........................ 330 

Reviews (see inside cover) .................... 332 

Price Ten Shillings net 

Registered at the G.P.O., Melbourne, for transmission by post as a Periodical. 


BENNETT, M. K. : The World s Food D. W. FRYER 341 


to Economic Development I. SHANNON 343 

BUTLIN, N. G., and DE MEEL, H. : Public Capital Formation in 

Australia: Estimates 1860-1900 R. S. G. RUTHERFX>RD 337 

BUTLIN, S. J. : War Economy 1939-1942 F. R. E. MAULDON 332 

WILLIAMS, D. B., and ROSS, A. A. : Wartime Agriculture in 
Australia and New Zealand 1939-50 W. S. KELLY 334 

DALTON, HUGH : Principles of Public Finance . . . . W. ROSENBERG 349 

FRENZEL, KONRAD (ed.) : Atlas of Australian Resources 

M. M. BAYNE 338 

GLOVER, P. D. : The Attack on Big Business . . . . J. McB. GRANT 354 

HAAVELMO, T. : A Study in the Theory of Economic Evolution 

C. G. F. SIMKIN 353 

HUTT, W. H. : The Theory of Collective Bargaining . . . . A. COOK 355 

JEFFREYS, JAMES B. : Retail Trading in Britain 1850-1950 


LEIBENSTEIN, HARVEY : A Theory of Economic-Demographic 

Development H. BELSHAW 353 

MORGENSTERN, 0. (ed.) : Economic Activity Analysis, B. CAMERON 350 

PATEL, G. D. : The Indian Land Problem and Legislation 


REYNAUD, P. L. : La Psychologic Economique . . . . C. WESTSTRATE 356 

SRAFFA, PIERO (ed.) : The Works and Correspondence of David 

Ricardo G. S. L. TUCKER 353 

THOMAS, BR1NLEY : Migration and Economic Growth A Study of 

Great Britain and the Atlantic Economy A. BIRCH 347 

UNITED NATIONS : The Determinants and Consequences of Popu 
lation Trends P. H. KARMEL 342 


Economic Survey of Europe in 1954 E. A. BOEHM 355 




1. Introduction 

A glance over the topics to be dealt with in this section during 
the coming week reveals a concentration on the economic processes 
associated with growth and development and on the problems con 
nected with them. As I see the function of this address, therefore, it 
is to survey in broad outline the relationships between economic de 
velopment and financial stability as they appear to the general prac 
titioner in the economic field. By so doing I hope to provide a general 
background which will throw into bolder relief the more immediate 
problems of our economy. 


Let me first make clear the sense in which I propose to use the 
terms. By economic development I mean the use of resources both 
human and material to increase our capacity to produce goods and 
services in other words, action by which we can increase and improve 
our equipment, technique and skills. Economic development is one 
way of using our resources and to use them for this purpose means, 
of course, that they cannot be used for others. Thus resources can be 
used to produce 

(a) goods and services for current consumption, e.g. food, cloth 
ing, medical attention, maintenance of law and order, etc.; 

(b) consumers equipment such as refrigerators, motor cars, 
radios, houses; 

(c) social equipment such as schools, hospitals, administrative 
buildings ; 

(d) producers equipment which includes collective property 
such as railways, roads and power plants and corporate pro 
perty such as factories, shops and offices as well as indi 
vidually owned equipment such as farm improvements, tools 
of trade and the like. 

Narrowly defined, economic development should perhaps mean 
the use of resources to produce goods in the last category but, in 
Australia, economic development is associated with and to some extent 

* Presidential address to Section G of A.N.Z.A.A.S., Melbourne, August 




identified with increasing population. It is therefore appropriate to 
include those forms of equipment, particularly social equipment and 
houses, which are necessary to equip an increasing population. 

Financial stability must be looked at in two ways. Internally I 
take it to mean the absence of substantial change in the value of 
money. If the Australian pound continues over the years to buy 
approximately the same quantities of goods and services of the kind 
people normally spend their money on, it can be regarded as stable. 
Absolute stability in this sense is impossible if only because the com 
plex of goods in which people are interested changes, but the concept 
is clear enough for practical purposes. 

From the external point of view the concept of financial stability 
is different. In a world of freely moving exchange rates it could 
perhaps be identified with reasonable stability in such rates, but in 
a world where variation in exchange rates occurs rarely and then 
only in response to a fundamental change in international economic 
relations, another criterion must be sought. When a country is facing 
difficulty in its international payments, it is now almost normal prac 
tice for its government to take action through exchange control and 
import restrictions to limit the effects of these difficulties and in a 
practical sense the existence, the severity and persistence of such 
controls can be regarded as evidence of some departure from external 
stability. In extreme cases of instability these measures may prove 
inadequate and a variation of exchange rates themselves occur. This 
concept is even less precise than that of internal financial stability 
and is different in kind since it is affected directly by what is happen 
ing in other countries. 

It should be noted that the two types of stability need not run 
together. A country could be experiencing internal financial stability 
at the same time as it experienced instability in its external financial 
relations, and vice versa. 

Briefly, a country can be regarded as enjoying financial stability 
if, over the period concerned, its domestic currency purchases an 
approximately uniform quantity of goods and services of the kind 
desired and if its nationals can spend or make payments abroad 
without significant restraint. 


It is clear that most people would regard economic development 
and financial stability in the senses we have used the terms as desirable 
and certainly they are nowadays very much in the minds of most Aus 
tralians. It is the purpose of this paper to explore the broad relation 
ships between them to see, for instance, how the pursuit of economic 
development may influence financial stability and to draw such con- 


elusions as may be practicable about how we can best achieve them 

It is important in an examination of this kind to be clear about 
the presumptions which underlie our approach. For instance, the issues 
would appear differently to a person who thought economic develop 
ment a waste of effort or one who enjoyed fishing in the troubled 
waters of financial instability. For the purpose of this paper I have, 
therefore, accepted the following broad presumptions believing them 
to express a kind of common denominator of Australian contemporary 
attitudes : 

(1) that economic development is desirable both as a means to 
full employment and higher standards of living and as an 
end in itself ; 

(2) that it is desirable that the value of money within the eco 
nomy should be stable through time although minor varia 
tions are not of great significance; 

(3) that it is desirable that Australians should be free to buy, 
to travel, and to make payments abroad within the limits of 
their own resources, but that this end should not be pursued 
to the extent that it seriously endangers reasonable economic 
development, full employment or reasonable internal stability 
in the value of money ; 

(4) that, within some limits, it is legitimate for governments to 
take action designed to increase the proportion of the eco 
nomy s resources devoted to economic development beyond 
what it would be if left to individual decisions ; 

(5) that if financial stability is endangered, it is legitimate for 
a government to take action directly or indirectly to preserve 

(6) that action by government necessary for these purposes 
should operate as far as possible on the factors determining 
the general economic and financial climate so that the de 
cisions of individuals and enterprises are freely made in the 
light of apparently objective considerations. 

It should, of course, be observed that these desiderata may be partially 
in conflict and that practical decisions will require a balancing of one 
against the other. 

2. Resources for Development 

Since economic development is a form of production, it follows 
that the resources available for it are the resources available for pro 
duction of all kinds the labour, natural resources, equipment and 
skills of the country and its people. These resources can be used either 
to produce the goods and services finally required by the community 
or to produce exports which are exchanged abroad for imports of 


goods and services finally needed. The possible total volume of goods 
and services available within the economy depends partly on our own 
productive capacity, but partly also on the terms of trade. This is a 
very important factor to Australia. Since the war wool has exchanged 
on the average for one and a half times as many imports as it did in 
the five years before the war. This has added substantially both to our 
standards of consumption and to our rate of development. 

First claim on these resources is made by expenditure on goods 
and services for immediate consumption purchased individually and 
those provided and paid for by public authorities. To these must be 
added expenditure on consumers equipment which in the contem 
porary scene is making increasing claims on the resources of the eco 
nomy. It is only to the extent that resources are freed for other pur 
poses by saving by abstaining from making claims on resources for 
consumption, that expenditure on development is possible without 
excessive pressure on available resources. What is the position in 
Australia ? 

We used to think that if there was one thing we really knew 
about the working of the economy it was the stability of the relation 
between consumption and income. The events of the last ten years, 
both in Australia and in other countries, have rather shaken our 

The percentage of income spent on consumer goods and services 
has fallen as incomes have increased, although there appears to have 
been a reversal of this tendency in the last few years. During the 
1930 s personal consumption absorbed about 75 per cent of the sup 
plies available after deducting movements in stocks; in the last five 
years the percentage has been between 60 and 65. This fall has been 
partly attributable to an increase in the proportion of income absorbed 
by taxation and has been accompanied by an increase in government 
expenditure of a current nature, particularly on defence. Current 
government expenditure now absorbs about 10 per cent of available 
supplies compared with less than 6 per cent pre-war. However, even 
allowing for this increase in government expenditure, the proportion 
of resources available for development has increased significantly, 
from about 20 per cent in the late 1930 s to over 26 per cent in the 
last five years. 

What is the likely trend of consumption expenditure in the near 
future ? Consumption standards will presumably continue to rise with 
incomes, but it is not clear how the proportion of consumption to 
income will change. Although there might be some reason to expect 
that the proportion of income saved will increase as incomes rise, new 
products and new tastes, the wider use of hire purchase credit and 
continued economic security might well encourage consumers to spend 
a constant or even increasing proportion of their incomes. 




The resources left for development in the Australian economy, 
after consumption needs have been met, have been maintained within 
recent years at relatively high levels. Indeed, Australia ranks among 
the group of countries with the highest rates of development. 

Estimates of Supplies and Their Use 

Gross National Product 
Exports, etc 

"Retained" G.N.P. 
Imports, etc 

Available Supplies 
Less Increase in Stocks 

Available for Final Use 

Percentages of Supplies Used 




Investment (Gross) 
Private^ . . 
Government . 


Averaees for 

Four Years 








































































* Including financial enterprises. 

f All expenditure on goods and services other than public works. 

j Including all motor vehicles. 

From what has been said it can be seen 

(a) that development is a form of production and is an alterna 
tive to production for other purposes; 

(b) that the various forms of production are initiated by expen 
diture and that the allocation of resources between them is 
determined by the allocation of expenditure by individuals, 
by business, by public authorities and by governments. 

The significance of expenditure in this process suggests a nexus be 
tween economic development and financial stability at least in its 
internal aspect. Let us follow it through step by step. 

3. Relationship between Expenditure, Production, Employment 

and Prices 

1. The resources available from the total for development are 
limited to those not used to produce consumption goods and services, 


and this quantity is determined (unless there are labour and other 
resources being left idle) by what people, firms, and governments 
save from their incomes. 

2. Decisions to spend on development are generally made inde 
pendently of decisions to save; consequently, there is no reason why 
the resources required to give effect to the decisions to spend on de 
velopment should prove to be equal to those which are made available 
by decisions to save. 

3. It can happen, therefore, that the decisions to spend on con 
sumption on the one hand and on development on the other can in the 
aggregate be more than or less than the amount which could be satisfied 
from current production at current prices. 

4. If there is a tendency for spending to run beyond the value 
of current production, the effect is felt first on the stocks of goods held 
which are reduced by the extra spending. This in itself encourages 
attempts to increase production, and firms seek to increase the labour 
and other resources they employ. If the economy is already fully 
employed, their attempts to do so bid up the prices of labour and 
materials with consequent rises in the costs of production. These rises 
in costs can generally be passed on readily in increased prices when 
demand is at a high level. Furthermore, shortages tend to appear 
because demand exceeds supplies and competition tends to force up 
prices generally. Thus in a situation where decisions to spend on con 
sumption and on development would involve the use of more labour 
and materials than are available at current prices, there appear short 
ages, rising costs and rising prices. 

5. On the other hand, if there is a tendency for spending to be 
less than the value of potential current production at current prices, 
the impact is felt first by stocks of goods which accumulate unsold in 
the hands of merchants and producers. This in itself leads to decisions 
to reduce production, leading to unemployment and waste of resources. 
Surplus stocks lead to cutting of prices, and unemployment to wage 
cutting and reductions in incomes, which lead in turn to lower costs 
and prices. 

6. These two processes tend to be cumulative so that both over 
spending and underspending are intensified by the results they pro 
duce. Thus overspending produces rising costs and prices, with re 
sultant increases in profits and other incomes which make expansion 
appear attractive and so intensify the tendency for spending to be 
increased. On the other hand, underspending produces unemployment, 
with loss of income, which means that spending will be cut further 
and the incentive to spend on development correspondingly reduced. 


7. In the depression period of 1930-5 we had a classic illustration 
of a period of underspending. The drive for development had appar 
ently spent itself during the 1920 s and there seemed a dearth of op 
portunities. Unemployment on a widespread and intensive scale was 
normal and there was downward pressure on wages and other incomes. 

The period from 1945-51 presents the opposite picture. The war 
time accumulation of arrears of capital replacement, stimulated by 
increasing population and the emergence of new opportunities for 
industrial growth, produced a flood of plans for expenditure on de 
velopment by governments, firms and individuals. This expenditure 
quickly outran possible production and we experienced the familiar 
cycle of shortages, rising costs, rising prices, following one another 
in increasing tempo. During this period the internal value of the 
Australian pound was seriously unstable so much so that in the 
later stages confidence in its future was gravely impaired, to the 
extent that many people were unwilling to hold assets in fixed money 
form, e.g. government securities, and sought forms of assets such as 
land and equity shares whose prices might be expected to move with 
changing money values. This unwillingness to hold wealth in the form 
of money, by increasing the demand for property and shares, inten 
sified the rise in prices and the urge to expansion. Furthermore, in 
this period we had a taste of the social inequities caused by a rapid 
deterioration in the value of money which created hardship for pen 
sioners and others on fixed incomes and wiped out much of the value 
of past savings. 

This period of inflation was ended in 1951-2 by a sharp fall in 
our export income and a flood of imported goods. These produced an 
acute financial stringency and a buyers market for goods as a result 
of which there was a widespread revision of developmental plans, 
public and private, to a scale more nearly within our physical capacity. 

8. Thus it can be seen that expenditure on development as a 
major and variable component of total expenditure can affect pro 
foundly internal financial stability. Unless this expenditure is suffi 
cient, together with expenditure on consumption, to employ fully our 
labour and resources, we are likely to experience falling prices and 
incomes with a cumulative tendency to unemployment and depression 
in the economy. On the other hand, once expenditure on development 
passes the point at which, together with expenditure on consumption, 
it is adequate to employ our resources fully, we are likely to experience 
rising prices, shortages and waste characteristic of periods of inflation. 

4. Relationship between Development and External Stability 

The relationship between spending on development and external 
financial stability is less immediately apparent but is just as important. 


It is easy to see that in any significant amount of expenditure in 
Australia there will be involved some expenditure overseas if not 
on the goods or services themselves, then on raw materials, capital 
equipment, interest or profits, royalties, and so on. Therefore, the 
higher the level of expenditure in Australia the greater the amount 
of overseas expenditure involved. Expenditure on consumers goods 
and services of imported origin has a direct and corresponding effect on 
overseas expenditure : expenditure on consumer goods locally produced 
usually requires expenditure on imported materials and equipment to 
an extent which varies according to the nature of the goods. Expen 
diture on development involves frequently imports of equipment, 
materials, etc., as well as payments of royalties and other similar 

It is important to note that once full employment has been 
reached, further increases in expenditure on whatever types of goods 
tend to result in almost corresponding increases in expenditure abroad. 
Since production here cannot be increased suppliers turn to imports 
for additional supplies. Thus, at times of high expenditure, it is normal 
to see in our import statistics substantial sums on account of com 
modities in which Australia might reasonably be expected to be self- 

We see then that there is a direct relationship between the levels 
of expenditure in Australia and the demand for imported goods and 
services. What are the resources from which this demand can be sat 
isfied ? Each year we sell abroad a substantial volume of exports which 
gives us an international income which enables us to spend abroad. 
The amount of this income depends on the volume of our export 
production and the prices the exports command, while the amount of 
imports we can buy from this income depends upon the cost of im 
ported goods. Our capacity to buy imports depends, therefore, basically 
upon the scale and efficiency of our export industries and the terms 
of trade on which we exchange their products for imports, i.e. the 
relationship between export and import prices. 

This basic income can be supplemented by the proceeds of over 
seas borrowing and the investment by non- Australians of funds in 
Australia and also by the extent to which we draw on our international 
reserves. Money lent to or invested in Australia, for whatever purpose 
the money is initially spent in Australia, adds to the flow of foreign 
currency available, and thus enables Australia as a whole to purchase 
correspondingly more imports. Similarly, if we have reserves of gold 
and other international currencies and are prepared to draw upon 
them, we can buy more imports than our current export income will 
purchase. But it is important to remember that international reserves 
must be accumulated by refraining from spending export income or 
the proceeds of borrowing and that they can be spent only once. 


Consequently, we see that there are definite limits to our capacity 
to pay for imports limits set by our production of exports, by the 
terms on which we exchange exports for imports, by the amount 
we are able to borrow abroad and by the size of our international 
reserves and our willingness to run them down. But our propensity to 
spend on imports is dependent primarily upon general levels of spend 
ing in Australia levels which at least in the short run are to a large 
extent independent of our capacity to pay for imports. 

It is, therefore, possible that spending in Australia on consump 
tion and on development can rise to levels which exceed our capacity 
to pay for the resulting imports. In such a situation the first effect 
is for reserves to be drawn upon to finance the excess imports. If the 
excess is temporary or is checked naturally or by internal policy 
measures, the drain on reserves may be halted and perhaps reversed, 
but there is no fully effective automatic tendency to bring about this 
reversal. Indeed, a cumulative inflationary process can maintain in 
ternal spending at levels which continue progressively to deplete inter 
national reserves. If such an inflationary process is not halted, it will 
become impossible to provide the foreign currencies necessary for the 
payment of imports at their current price, and import restrictions and 
exchange controls will have to be applied or intensified. 

On the other hand, if internal levels of expenditure are so low 
that the demand for imports is insufficient to use the international 
resources becoming available, international reserves could accumulate 
possibly even to a point where it would appear that the country was 
being deprived of some of the benefit of its current international 

Does this mean that if we can so control our domestic expenditure 
that we just maintain the full employment of our labour and other 
internal resources, our expenditure on imports will neatly balance our 
income from exports and overseas borrowing? Not necessarily. Whe 
ther we can pay for the imports required by the level of expenditure 
associated with full employment depends upon our capacity to produce 
for export and the terms of trade on which we can exchange exports 
for imports. Largely this is a question of the relationship between 
internal and external costs but not entirely. Export industry, par 
ticularly if it is agricultural or pastoral, may have a considerable 
potential for expansion at existing cost ratios, but to make that poten 
tial effective may require considerable capital expenditure, time for 
improvements to become mature and possibly even structural changes 
such as subdivision of land. These may delay the achievement of in 
ternational balance under the pressure of high expenditure even if 
cost ratios are satisfactory. But excessive expenditure associated with 
over-full employment is bound to put pressure on the international 
balance in all but the most exceptionally favourable conditions for 


the relative prices of exports and imports. Furthermore, a sudden 
deterioration in the terms of trade may create conditions in which it is 
impossible to preserve both full employment and an international 
balance except at a lower level of internal costs. 

It is clear, therefore, that if it were necessary to maintain strictly 
at all times conditions of external financial stability, it would be an 
exceedingly complex and difficult task, requiring both 

(a) an appropriate level of internal expenditure; and 

(b) a level of internal costs properly adjusted to a continuously 
changing relationship between export and import prices. 

Fortunately it is possible to build a buffer between the internal eco 
nomy and the frequent changes in the factors affecting our inter 
national balance of payments. "We protect ourselves by the maintenance 
of international monetary reserves which we allow to fluctuate widely. 
By so doing we are able to ignore minor and passing influences and to 
give ourselves time to adjust ourselves to more persistent and funda 
mental changes. But this technique assumes that the pressures on our 
balance of payments will be sometimes one way and sometimes another. 
If we fail to bring under control a lack of balance in internal expen 
diture or to adjust ourselves to fundamental changes in our terms of 
trade, we can reach a position where we can no longer accept the con 
sequential changes in the amount of our reserves, and import restric 
tions and exchange control of increasing severity become inevitable. 

Fluctuations in the Australian balance of payments are very 
large by comparison with those of many other countries. Since the 
thirties, therefore, we have come to regard occasional resort to import 
restrictions and exchange control as almost normal techniques of 
economic management. They can be very effective in bringing under 
control expenditure abroad and without doubt they are a useful 
addition to the techniques available to us. However, they have no effect 
on the causes of the difficulties. The demand for imports arises out of 
expenditure in Australia. To prevent that demand becoming effective 
does not reduce the levels of expenditure but tends merely to concen 
trate it on domestic resources. Furthermore, this concentration will 
encourage those who are planning further development. And, if domes 
tic resources are already being used to capacity, this encouragement 
will intensify the internal pressure and render more probable internal 
financial instability. 

The importance of the international balance of payments in rela 
tion to development is well illustrated by our changing experience since 
the war when we have shown a persistent propensity to spend on de 
velopment. This propensity arose partly from arrears of development 
caused by the war but was greatly stimulated by the relative cost 
advantage enjoyed by Australia as a result of its war-time control of 


prices. Since then the steady and rapid increase in population, creating 
as it does both the need for equipment of great variety and also the 
market opportunities for new classes of industry, together with tech 
nical change in primary and manufacturing industries, has provided 
a positive urge for developmental expenditure. 

After the war our international position was exceptionally strong. 
Our costs were relatively low and our exports were commanding 
scarcity prices. Furthermore, we had built up and were still adding 
to very substantial reserves of international currencies. In these cir 
cumstances we were able to proceed boldly with expenditure on de 
velopment without being conscious of the limits which can be imposed 
by the balance of payments. Gradually, however, the special advan 
tages of our immediate post-war situation have been reduced as inter 
national trade conditions became progressively more normal. Our cost 
structure gradually rose as price controls were relaxed and continued 
to rise under the pressure of domestic inflation; prices for primary 
products fell towards a more normal relationship with prices of im 
ports; and, finally, a major part of our accumulated reserves were 
used in 1951-2 when a sudden fall in wool prices and a flood of imports 
struck us simultaneously. They have been again depleted in the last 
year. We have, therefore, returned to a position where we must take 
into account the limitations imposed on development by movements in 
the balance of payments. 

5. General Summary 

It will be seen, therefore, that development is closely interwoven 
with the factors which affect financial stability. Briefly, the essence of 
this relationship can be summarized thus : 

1. Expenditure on development is a major and variable element 
in total expenditure and adequate development plans, public 
and private, are essential to maintain full employment and to 
avoid the instability associated with deflation. 

2. If, however, expenditure on development tends to exceed the 
resources made available by savings, there will be a corre 
sponding tendency towards rising prices and other aspects of 
instability associated with inflation. 

3. Expenditure on development adds to the demand for imports 
and can in some circumstances lead to a demand which exceeds 
our capacity to pay. 

4. Capacity to pay for imports is dependent primarily on the 
output of our export industries and on the terms of trade. In 
these the relationship of internal to overseas costs may be 
significant particularly if there is a substantial adverse move 
ment in the terms of trade. A healthy relationship of internal 


to external costs cannot be maintained if total expenditure 
is excessive. 

There is, of course, a great variety of possible situations in this 
complex of relationships and a glance through Australian economic 
history of the last generation will provide interesting case studies. But 
for the purposes of this paper it is probably desirable to concentrate 
consideration on the type of situation which is most relevant to our 
current conditions and to their probable evolution. 

The dominant feature of the present Australian economy is the 
strength of the urge to development. This is shown not merely in the 
physical evidences of achievement nor in the statistics which show 
how formidable a proportion of our resources we devote to this pur 
pose. It is also shown in the mood, the climate of opinion and expecta 
tion among those who have decisions to make about development. There 
is a widespread conviction that Australia is in an active phase of 
growth and that while checks and interruptions are possible, indeed 
likely, they will prove temporary. 

I would attribute this general sense of growth to the following 
features of our situation : 

1. The determination to increase our population by a steady and 
substantial flow of migrants this flow, while imposing its 
strain on us, provides a continuing basis for expanding pro 
duction and establishes a steadily expanding need for equip 
ment of all kinds, i.e. it creates both the need and the oppor 
tunity for development. 

2. Our primary industries are experiencing a technical revolu 
tion which, if applied widely and supported by the necessary 
capital expenditure, offers the opportunity for both greatly 
increased ouput and relatively lower costs. 

3. The steady policy of industrialization has produced the basis 
of an industrial community skilled workers, technicians, 
managers, basic industrial services and a wider range of sup 
porting forms of production on which further expansion can 
be based. 

4. Overseas industrialists have become increasingly conscious of 
the possibilities of Australia both as a growing market and 
as a source of productive capacity. 

5. We are gradually evolving a more adequately equipped and 
skilled market for capital with specialized financial institu 
tions capable of servicing the varied financial needs of the 

These factors are strong and apparently persistent and, at least 
while conditions in the major industrial countries of the world remain 
buoyant, there seems good reason to expect their continuance. While 


judgments of this kind are, of course, dangerous, it seems to me that 
we can expect this expansionist phase to continue. Therefore, we are 
more likely to be concerned in the years ahead with the problem of 
finding the resources to give effect to the plans for development which 
emerge naturally from the homes, the businesses and the governments 
of Australia than we are to be concerned with a deficiency of plans 
with which to keep our people and our resources at work. 

In other words, the questions we may have to answer are : 

1. How can we increase the resources available for development? 
And when we have done our utmost 

2. How can we limit our developmental plans so that we do not 
press against the limits of our internal and external resources 
to the point of financial instability? 

6. Possibilities of Increasing Resources for Development 

What are the possibilities of adding to our resources for develop 

(a) Increased Production 

Often it is suggested that if we can produce more by increasing 
our population and by raising our productivity per head we can add 
correspondingly to our rate of development. It is true that there is 
scope by these means to increase total production although it may be 
less than generally believed. The last decade has been a period of 
remarkable population growth and heavy capital investment, yet it is 
unlikely that the average increase per year in G.N.P. (apart from the 
effect of price increases) over that period has exceeded 4 per cent. 
This of course understates the full effect of population and produc 
tivity changes: part of the increase is taken out in increased leisure 
and also in changes in the nature of goods and services produced. 
Many of the things on which money is spent as income rises are less 
likely to be influenced by factors increasing production per head 
some forms of entertainment, travel, clothing and other personal pos 
sessions, services, etc., are by their nature less subject to economies of 
mass production than many of the more essential items of production, 
but their inclusion in production may be more indicative of rising 
standards of living than mere increases in the value of production 
per head. 

Only a part of the increase resulting from higher production can 
be applied to development. The newcomers and those whose output 
is increased by higher productivity will receive corresponding incomes 
and will spend the major part of them in consumption. Only to the 
extent that their incomes are saved are additional resources made 
available for development. If they save the same proportion of their 


incomes as the existing population, a 4 per cent increase in G.N.P., 
which is perhaps more than we can expect year in year out, can be 
expected to give a potential increase of only about 4 per cent in the 
volume of resources available for development. This at present value 
of production would mean an increase for all investment expenditure 
of about 40 million per year. 

Another qualification associated with increasing population is the 
equipment needs of the new arrivals. The capital equipment required 
to service our population at present standards, taking into account 
housing, domestic equipment, schools, hospitals and other social equip 
ment, and transport, power, factories, shops and offices and other 
production equipment represents a substantial amount per head. 

Unless the economy already has equipment adequate to a popula 
tion greater than the present, it will need to devote a part of its de 
velopment resources to equipping the new population at existing stan 
dards before it can carry its development to the stage of raising the 
amount of equipment per head. In other words, a larger population is 
in a sense an alternative to a better equipped population. If we set 
ourselves too high a target rate of growth of population, we may be 
forced to accept a slower rate of improvement in the standard of our 
equipment per head. 

These qualifications do not suggest that it is not of great impor 
tance to increase our population and to raise our productivity, but 
merely that we should recognize the limitations to what we can hope 
to achieve by these means in the way of more rapid development. 

(b) Increased Savings 

Another hopeful line may be in the possibilities of greater savings. 
Here we start from a position in which Australians performance is 
good. Despite our reputation for extravagance we are among the thrif 
tiest people in the world. Our savings per head can be matched only 
in such countries as Canada, New Zealand, and the United States of 
America. To some extent this reflects our high standards of income 
and partly the relatively modest and stable consumption habits of our 
primary producers, but it reflects also the effectiveness of our institu 
tions for collective savings savings banks, life assurance societies, 
pension funds, etc. as well as the practice of companies of ploughing 
back for expansion a substantial part of their profits. 

The recent rapid growth in the use of hire purchase facilities has 
had the effect of diverting more savings to the provision of consumers 
durable goods which contribute less than other forms of equipment to 
future standards of production. This diversion is at its greatest while 
the use of hire purchase facilities is growing and a continuance of the 
growth at the same rate as the last two years could limit significantly 
the resources available for development. 


Can savings be increased from their already high level! Some 
thing could perhaps be done by changes in the tax structure so as to 
favour the saver as against the spender and the company which ploughs 
back its earnings as against the company which distributes. Colin Clark 
has made an ingenious plea for taxation of expenditure rather than 
of income and recent work in the United Kingdom may help overcome 
the frightening administrative difficulties which such a plan offers. 
The idea is certainly worth examination. The extension of pension 
schemes into industries and occupations employing workers on a weekly 
basis has become a widespread feature of United States industry and, 
if developed here, could tap a field of income with great saving 
potential. So far our trade union leaders have shown much less interest 
in such plans than their American counterparts but, if the means test 
for old-age pensions is sufficiently modified, their interest may be 

Saving can in a sense be imposed on people by taxation and, in 
deed, to the extent that developmental work is financed from revenue 
it may be said that this is already being done. Theoretically it would 
be possible to extend this principle further and development would 
benefit, provided taxpayers responded by reducing their consumption 
rather than their own savings. The precise effect would be difficult to 
assess but the ultimate limitation is the willingness of the community 
to allow itself to be taxed. 

There are clearly possibilities here, but we would be unwise to 
expect that we could so change consumption and saving habits as to 
add greatly to the resources for development even in the long run. 
Even now we may be fighting a losing battle with the wiles of the 

7. Possibilities of Increasing Capacity to Pay for Imports 

Increased production or greater saving could contribute to de 
velopment by giving to it greater domestic resources. We have seen, 
however, that the need to pay for imports associated with expenditure 
increased by expenditure on development may also impose a restraint 
on our plans. We must look, therefore, at what can be done to increase 
our capacity to pay for imports. 

(a) Overseas Borrowing 

One of the quickest methods of adding to our resources for de 
velopment, if it is practicable, is to borrow abroad either by public 
authority loans or by encouraging private investors to bring their 
funds to Australia. These have added substantially to our development 
potential in the last decade. 

I have mentioned earlier that there is a growing interest in Aus 
tralia as a field for investment. This has been reflected in a substantial 


flow of private capital and in the governmental loans from the Inter 
national Bank for Reconstruction arid Development and other overseas 
sources. Most of this has come with little direct persuasion and it may 
be that, if we sought to do so, we could make Australia an even more 
attractive field of opportunity for overseas capital. 

But here there are three problems. First there is a danger that 
in increasing our borrowings from overseas we will so increase the 
claims which non- Australians have on our production that they will 
become embarrassing, either in relation to our total production or in 
relation to our export income. However, this is not a serious problem 
for Australia. The service of our foreign-owned capital does not repre 
sent a major part of our international income and we could increase it 
without great concern particularly if we could see the capital being 
used to increase the international income itself. 

Secondly, there is the problem of the uncertainty in the flow of 
foreign capital. An economy receiving capital from overseas gradually 
gears the structure of its production to that flow. If it is suddenly 
interrupted (as it was for instance in 1929), there may be acute em 
barrassments and possibly the need for substantial changes in the 
pattern of domestic production. Arrangements of the kind which have 
run over the last decade between Australia and the I.B.R.D., by which 
a series of loans was arranged, represents a useful device to offset this 
danger, but it is difficult to see this technique being widely applied in 
the private sector, although the steady ploughing back of profits earned 
has the same sort of effect. 

Thirdly, there is the political problem of how far we wish to extend 
foreign ownership of Australian assets and enterprises. Generally, our 
experience with non-Australian owners of enterprises in this country 
has given little cause for concern, but there is room for wide differences 
of opinion on how far it is wise to go. 

Finally, of course, the possibilities in this field are limited by what 
overseas institutions and investors are prepared to invest in Australia. 
It would be easy to be over-optimistic on this point. 

(b) Increasing Export Production 

There is no doubt that expenditure on improvements and major 
irrigation and other developmental works, together with the applica 
tion of existing and growing technology, is expanding and can greatly 
expand our export production. However, a number of factors limit 
the rate at which this can be done : 

(1) the scope for the opening up of unused lands is not great 
and where it exists requires slow and expensive preliminary 
development ; 


(2) the use of the new technology requires capital expenditure, 
new knowledge and time; 

(3) some of the initial increase in productivity is generally (and 
wisely) taken out in the greater security of better rotations, 
safer stocking, and other aspects of better and safer farming 
rather than in increased output; 

(4) farm development is traditionally financed from internal 
sources ploughing back of profits and bank borrowing 
against equity already built up. It is difficult for farmers, 
however good, to find finance for potential production. 

There is need for thought on how these limiting factors can be 
minimized since our need for exports is great and day by day our 
growing population is eating into our export surpluses. 

(c) Import Replacement 

Since the expansion of our basic export industries must be a slow 
process, it is natural that attention should be concentrated on the 
possibilities of directing development at the replacement of imports 
by local production. To the extent that this can be achieved develop 
ment serves a double purpose. In a sense it provides some part of its 
own requirements of imports by the savings which it makes by meeting 
other people s needs for goods previously imported. Furthermore, by 
diversifying our production, it reduces our dependence on the income 
from a few major export industries and thus adds to the insulating 
value of our international reserves. There is also the additional advan 
tage that most import replacing production is not limited by the sort 
of factors which restrain the growth of our primary industries. Sources 
of capital are more readily available, up-to-the-minute overseas tech 
niques can be acquired and used, and production at full rate of flow 
follows promptly on capital expenditure. 

There is no doubt that the concentration on import replacement 
which has characterized our development since the war has a rational 
justification and can contribute greatly to solving the international 
problems created by the development itself. But there are qualifica 
tions. The production locally of goods previously imported is not a net 
gain since almost invariably the production itself involves imports 
of materials, components and capital goods and frequently requires 
payments of other sorts capital charges, royalties, etc. The net saving 
in import expenditure may be small and, indeed, it is possible in the 
period of expansion, when capital equipment is being imported, for 
the developing industry to make greater payments abroad than it saves. 
Moreover, it is possible that we could build up a pattern of import 
requirements of industry which would be very inflexible in the face 
of a serious deterioration in our terms of trade, so that restriction 


of imports would fall directly on the means to production and employ 

These problems may be the greater if development is unduly 
concentrated on production of final consumers goods running ahead 
of the base on which they stand the production of materials, fuels, 
power, transport and the like. There may be some reason to believe 
that our own development is somewhat top heavy in its superstructure 
in this way. 

8. Means for Limiting Development Expenditure 

There is undoubted scope for extending the practicable rate of 
development by action in the fields I have run through briefly. Yet if 
I am right that we can reasonably hope for a continuance of the factors 
which are stimulating our development, we must expect to find our 
selves pressing against the limits set internally by the resources avail 
able after consumption demands have been met and externally by the 
pressure of expenditure on the international resources available for 
imports. We must expect therefore that our governments and banking 
institutions will from time to time find it necessary to restrain develop 
ment so as to preserve reasonable financial stability. Are effective 
measures practicable? 

Expenditure on development may be undertaken by governments 
and other public authorities, or by private firms and individuals. In 
Australia developmental expenditure by public authorities is brought 
under review in the annual budgets and loan programmes and there 
is some co-ordination at the Loan Council. It has been shown that this 
co-ordination can effectively discipline these programmes the growth 
of their aggregate has in recent years been reasonably held, taking 
into account the growth of the national production. Here there is no 
problem of knowledge or technique, but a problem of judgment and 

Private expenditure on investment presents a much more difficult 
problem. It is diverse in character and widely distributed. Knowledge 
of its prospective changes is imperfect and there are no means whereby 
those conceiving and executing plans can become aware of the effect 
of the plans of others or be forced to reconcile conflicting plans. 

In many countries governments seek to bring about such a recon 
ciliation by control over investment projects or by control of capital 
issues. In Australia, except in war or the threat of war, such measures 
are constitutionally impracticable. We do have at our disposal the 
instruments of budget policy and monetary and banking policy. Bud 
getary policy is the basic instrument of economic policy and it can 
be used to exercise restraint or to provide a stimulus to expenditure. 
To some extent the restraint or stimulus can be directed so as to affect 


particular forms of expenditure such as expenditure on development 
but there are limits. Fundamentally the public sees the budget as the 
means the government uses to finance its activities and of distributing 
the cost equitably among its citizens. Too great a variation in the 
content of the budget for reasons of economic policy impairs the plain 
man s basis of judgment of its reasonableness and its equity. Above 
all the budget cannot be frequently and violently altered. Nevertheless 
Australian history has shown the value of a soundly conceived budget 
policy and the dangers of irresponsibility towards basic economic 
problems in its formulation. 

Monetary and banking policy too have their part to play and 
something is undoubtedly achieved by them. However, our less fully 
developed money market and our conviction that interest rates should 
be kept low render our techniques less complete, and the influence of 
monetary and banking policy probably less effective, in the restraint 
of a tendency to over-spending than in some other countries. 

These are issues which will be explored no doubt by others. I 
must however confess that I feel there is danger to the Australian 
economy if we cannot evolve ways of exercising effective restraint on 
our healthy but exuberant tendency to want to do more than our 
resources will permit. 

9. Conclusions 

Finally, could I bring together the broad conclusions which I 
feel emerge from this survey ? 

1. There seems good reason to believe that the conditions under 
lying Australia s recent rapid development are soundly based and that 
the urge to expansion will continue. 

2. There are, however, real limits both internal and external to 
the rate of development Australia should undertake if it is to maintain 
financial stability. 

3. When all possible has been done to push back these limits, 
we will be able to achieve much but probably less than most of us 
would like. 

4. We are likely therefore to be faced from time to time with 
the need to restrain developmental plans, both public and private. 

5. There are significant weaknesses, partly constitutional, partly 
technical, but partly arising from our own attitudes, in our capacity 
to restrain excessive expenditure on development especially when the 
initiative lies predominantly in the private sector of the economy. 



The concept of external economies ? has had a remarkable career 
on the stage of economic theory. For several decades, the early promise 
of its debut in Marshall s Principles remained unfulfilled. The critics 
were beginning to jeer about li empty boxes" when Allyn Young, in 
1928, launched it in a scintillating new role. This charmed the con 
noisseurs but led to no new engagements until, a few years ago, Eco 
nomic Development became the rage. Overnight, external economies 
emerged as the prima donna, appearing in half a dozen new parts. No 
wonder such late success is threatening to turn its head. The time has 
come to sit back and reflect quietly what time and popular acclaim 
have done to the young star of fifty years ago, and what its future 
may be.* 

1. Historical 
(a) Marshallian Partial Equilibrium Analysis 

Marshall, who invented the concept, defined "external economies" 
as "those dependent on the general development of the industry"; 1 
or, in Viner s more precise phrase, "those which accrue to particular 
concerns as the result of the expansion of output by their industry as 
a whole, and which are independent of their own individual outputs . 2 

Marshall s interest in external economies was twofold: First, to 
gether with internal economies, they deserved study as one of the chief 
sources of economic progress, the material aspects of man s welfare. 
Secondly, and more particularly, they provided a partial answer to 
the problems posed for partial equilibrium analysis by the phenomenon 
of increasing returns. The distinction between l internal and * exter 
nal" economies could not overcome all "the difficulties which beset 
the theory of equilibrium in regard to commodities which obey the 
law of increasing return", 3 especially the indeterminacy of the long- 
period supply price of a commodity. But "external economies" were 
at least immune to the awkward implication of internal economies 

* The author is greatly indebted to several colleagues for reading an 
earlier draft of this article and, for helpful criticism, especially to Pro 
fessors M. Abramovitz, J. Blackman, B. D. Cameron, D. Cochrane, R. Nurkse 
and T. W. Swan. None of these, of course, is responsible for errors and 
deficiencies which remain in this version. Two articles on external economies, 
by T. Scitovsky ("Two Concepts of External Economies", J.P.E., April 
1954) and M. Fleming ("External Economies and the Doctrine of Balanced 
Growth", E.J., June 1955), appeared after this article was written and 
could not be taken into account in revision as fully as they deserve. 

1. A. Marshall, Principles of Economics, 8th ed. (Macmillan 1920), 
p. 266. 

2. J. Viner, "Cost Curves and Supply Curves", reprinted from Zeit- 
schrift fuer Nationaloekonomie (1931) in American Economic Association, 
Readings in Price Theory (Irwin 1952), p. 217. 

3. Marshall, op. cit., App. H, p. 805. 



that " whatever firm first gets a good start will obtain a monopoly of 
the whole business of its trade in its district". 4 It was the fact that 
increasing returns so largely accrued as external economies, as much 
as the limits set to the growth of individual firms by loss of entre 
preneurial " elasticity and progressive force", 5 which seemed to make 
it possible to reconcile increasing returns and competitive equilibrium. 6 

Scattered throughout the Principles, there are broad references 
to external economies as a source of economic progress, but wherever 
Marshall distinguished carefully between internal and external econo 
mies, the context was partial equilibrium analysis of the competitive 
model. The limiting assumptions and objectives of this approach ac 
count for the relatively narrow definition and scope of what we now 
know as " strictly Marshallian" external economies. 7 What mattered, 
in this context, was merely that such economies accrued to the indi 
vidual firm independently of the size of its own output, and that they 
had the effect of reducing the costs of production of the "representa 
tive" firm producing its output from plant of optimum scale for that 
output. The competitive equilibrium model necessarily required the 
assumption of a given demand curve for a given product of an indus 
try; 8 and consequently, since changes in factor incomes would affect 
the demand curves, also the further assumption of perfectly elastic 
supply of factors of production. 9 Marshall recognized, of course, that 
cost reduction through external economies implied an increase in the 
"efficiency of ... capital" 10 and would, therefore, stimulate invest 
ment; but this was not the point which interested him in this con 

Marshall s examples of external economies, in the main, fit into 
this pattern. The external economies which accrue to a firm from the 
growth of the industry are chiefly matters of "improved organiza 
tion": n "improved methods or machinery which are accessible to the 
whole industry"; 12 "advances made by subsidiary industries"; 13 
"developments of mechanical appliances, of division of labour and of 
the means of transport, and improved organization of all kinds"; 14 
especially those which result from the growth of correlated branches 
of industry which mutually assist one another, perhaps being concen 
trated in the same localities", 15 such as the development of "hereditary 

4. Ibid., p. 459, n. 1. 5. Marshall, op. cit., p. 316. 

6. Cf. Allyn Young s reference to "Alfred Marshall s fruitful distinc 
tion" as, among other things, "a safeguard against the common error of 
assuming that wherever increasing returns operate there is necessarily an 
effective tendency towards monopoly" ("Increasing Returns and Economic 
Progress", E.J., Dec. 1928, p. 527). 

7. P. N. Rosenstein-Rodan, "Problems of Industrialisation of Eastern 
and South-Eastern Europe", E.J., June-Sept. 1943, p. 206. 

8. Joan Robinson, The Economics of Imperfect Competition (Macmillan 
1934), Appendix on "Increasing and Diminishing Returns", p. 341, n. 1. 

9. Ibid. 10. Marshall, op. cit., p. 318. 11. Ibid. 

12. Ibid., p. 615. 13. Ibid. 14. Ibid., p. 808. 15. Ibid., p. 317. 


skill , the growth of subsidiary trades . . . supplying it with imple 
ments and materials", and the economic use of expensive mach 
inery"; 16 also "those connected with the growth of knowledge and the 
progress of the arts", 17 e.g. in "matters of Trade-knowledge: news 
papers, and trade and technical publications". 18 

Subsequent writers who dealt with external economies in the same 
context necessarily retained the same narrow assumptions and defi 
nition. 19 Mrs. Robinson, who made the most thorough examination of 
increasing returns in the context of partial equilibrium analysis, and 
in doing so made explicit the assumptions which had largely been 
implicit in Marshall s discussion, defined external economies in strictly 
Marshallian terms : When a new firm enters the industry it may en 
able all the firms to produce more cheaply so that, while each produces 
at its minimum average cost, the cost of the minimum is reduced." 20 
The main illustrations she had in mind were the case where machinery 
can be bought more cheaply when the industry presents a larger market 
to the machine-making industry and where a large labour force is 
accustomed to work at a certain trade" and develops "a traditional 
skill". 21 

(b) Allyn Young: Increasing Returns and Economic Progress 

Some years before Mrs. Robinson elaborated the Marshallian con- 
eept of external economies , Allyn Young, in a famous article, had 
given the concept a considerably wider meaning. Allyn Young started 
out from Adam Smith s dictum that the division of labour is limited 
by the extent of the market". But he pointed out that "in an inclusive 
view, considering the market not as an outlet for the products of a 
particular industry, and therefore external to that industry, but as 
the outlet for goods in general, the size of the market is determined 
by the volume of production". 22 Looking not at one industry but at 
the economy as a whole, supply creates its own demand. Any increase 
in aggregate output anywhere widens the market for goods in general, 
provided there is "some sort of balance, that different productive 
activities [are] proportioned one to another", 23 and thus creates new 
opportunities for further increases in output by further division of 
labour and in other ways. In other words, every increase in aggregate 
output, by widening the market, yields "external economies" to firms 
somewhere in the economy. 

This source of external economies, to which Allyn Young was 
inclined to attribute "the leading role in that continuing economic 

16. Ibid., p. 271. 17. Ibid., p. 266. 18. Ibid., p. 284. 

19. Especially the articles by Clapham and Robertson in the "empty 
boxes" debate, reprinted in Readings in Price Theory, Chs. 5 and 7; Viner, 
op. cit. , and Joan Robinson, op. cit. 

20. Joan Robinson, op. cit., p. 340 f. 21. Ibid., p. 341. 
22. Allyn Young, op. cit., p. 533. 23. Ibid. 


revolution" of the last two or three centuries, 24 was one which, in its 
nature, could find no place in Marshallian partial equilibrium analysis. 
The latter, by confining attention to one industry and assuming a 
given demand curve (for a given product), inevitably precluded con 
sideration of external economies resulting from shifts in demand 
curves. 25 If these external economies were to be brought into account, 
it was necessary to widen the concept to include all cost reductions 
accruing to firms (or industries) from expansion of output of goods 
and services in general. 26 

Allyn Young s concern with external economies was as a source, 
perhaps the most important source, of economic progress. His re- 
interpretation of external economies was an immensely illuminating 
contribution to our understanding of economic progress as a cumula 
tive process which feeds on itself. But it is important also to note the 
limitations of Allyn Young s approach. 

First, as Allyn Young hinted here and there, the process by which 
an expansion of the market makes it economical to carry further the 
division of labour, and particularly the adoption of "capitalistic or 
roundabout methods of production", 27 is not necessarily the only 
mechanism which yields external economies in his wider sense and 
makes for cumulative economic growth. There are references to 
"changes of a qualitative nature", "new products appear, firms 
assume new tasks, new industries come into being". 28 But these other 
mechanisms are not analysed. He merely refers, rather vaguely, to the 
fact that "every important advance in the organization of industry, 
regardless of whether it is based upon anything which, in a narrow or 
technical sense, could be called a new invention , or involves a fresh 
application of the fruits of scientific progress to industry, alters the 
conditions of industrial activity and initiates responses elsewhere in 
the industrial structure which in turn have a further unsettling 
effect". 29 

Secondly, the only possible source of market-widening increases 
in output which give rise to external economies, in Allyn Young s 
argument, is a rise in productivity, i.e. in the efficiency with which 
existing resources are employed. The possibility that the initial increase 
in output might result from the employment of hitherto unemployed 
factors of production does not enter his argument because, thirdly, 

24. Ibid., p. 536. 

25. Much of Allyn Young s concern in his article was to point out the 
deficiencies of Marshallian equilibrium analysis for the study of economic 
growth, because of its "partial" and "static" character. 

26. Marshall did not always interpret external economies in the narrow 
sense of economies due to growth of a single industry; cf. his first reference 
to external economies as those which "depend chiefly on the aggregate volume 
of production in the whole civilised world" (op. cit., p. 266) ; but it was the 
narrow concept which interested him. 

27. Allyn Young, op. cit., p. 539. 28. Ibid., p. 528. 29. Ibid., p. 533. 


and not perhaps unreasonably in his context of long-run development, 
he accepts Say s Law of Markets without the qualifications which 
Keynes added a few years later. 

Finally, Allyn Young s interest is confined to the effect of an 
increase in the market in reducing costs (thus increasing productivity 
and output and widening the market further). Like Marshall, he is 
well aware that cost reduction stimulates investment indeed he lays 
special stress on cost reduction through the adoption of more capital 
istic methods of production but, partly because he is concerned only 
with the product effects, not the process (money income) effects, of 
investment, the stimulus given to investment by a widening of the 
market is not his primary concern. 

(c) Economic Development: Inducements to Invest 

Formally, the concept of "external economies " used in recent 
discussion of problems of economic development of under-developed 
areas conforms to Allyn Young s definition. But there has been yet 
another change of context and emphasis so drastic as virtually to give 
the concept a new meaning. 

To the author s knowledge, the concept was first introduced into 
discussion of economic development by Professor Rosenstein-Rodan, 
in his well-known article of 1943. He concisely explained the context 
in which the concept of "external economies" has been employed in 
relation to economic development ever since : Existing institutions 
of international investment are inappropriate to the task of industrial 
ization of a whole area. They deal with too small units, and do not 
take advantage of external economies." For instance, it is "not profit 
able for a private enterprise to invest in training labour , but " it is a 
good investment for the bulk of industries to be created when taken 
as a whole. ... It constitutes an important instance of the Pigovian 
divergence between private and social marginal net product ". 30 

The emphasis now is on the effect of external economies, not so 
much in reducing costs, as in stimulating investment ; and the signifi 
cance of external (as contrasted with internal) economies is that they 
cause divergence between private and social marginal product. They 
are thus advanced as a major explanation of the paradox that private 
investment does not appear to be attracted by the investment oppor 
tunities offered by capital-poor under-developed countries where the 
marginal productivity of capital might be expected to be high. "The 
technical opportunities may be great ; the physical increase in output 
may be spectacular compared with existing output, but value produc 
tivity is limited by the low purchasing power of the people. . . . The 

30. Op. tit., p. 204 f . 


notion of * external economies seems applicable here, though not quite 
in the sense in which Marshall commonly used it." 31 

While " external economies" here still seem to mean the same as 
to Allyn Young, a new interpretation has really crept in. The difference 
is not merely that Allyn Young used the concept to explain the actual 
process of cumulative progress in the advanced and still growing eco 
nomies, while here it is used to account for the failure of this cumula 
tive process to get under way in the relatively stagnant under-developed 
areas. 32 The more important change lies in the new emphasis on the 
significance of external economies for the inducement to invest. In 
place of increasing returns, in the sense of falling costs with increasing 
output, we are now concerned with mutual support between acts of 
investment in different fields, i.e. all cases where investment stimulates 
rather than discourages further investment, 33 and external economies, 
instead of covering those cases of increasing returns which occur in 
dependently of the output of individual firms (or industries), now 
cover those cases where the favourable repercussions of investment do 
not (fully) accrue to the investor in a given field. 

The prime example of external economies, in this sense remains 
Allyn Young s type: "Each of a wide range of projects, by contri 
buting to an enlargement of the total size of the market, can be said 
to create economies external to the individual firm or industry." 34 
"Most industries catering for mass consumption are complementary 
in the sense that they provide a market for, and thus support, each 
other." 35 

But these are by no means the only cases where investment creates 
new investment opportunities elsewhere. "It might easily happen that 
any one enterprise would not be profitable. . . But the creation of such 
an enterprise, e.g. production of electric power, may create new invest 
ment opportunities and profits elsewhere, e.g. in an electrical equip 
ment industry." 36 Again, "external economies are often invoked as 
an argument in favour of a different programme of industrialization. 
. . . Investment should concentrate at the start on . . . basic industries 
. . . the normal multiplier effect will naturally lead to further indus 
trialization according to the advocates of this programme". 37 Or take 
this illustration of the external economies yielded by investment in an 
irrigation project: "Irrigation brings closer settlement. Denser settle- 

31. R. Nurkse, Problems of Capital Formation in Underdeveloped 
Countries (Blackwell 1953), p. 14. Nurkse, by a slight anachronism, actually 
attributes to Allyn Young the new formulation that "the inducement to 
invest is limited by the size of the market" (ibid., p. 6, n. 1, italics supplied). 

32. Cf. H. W. Singer, "Economic Progress in Underdeveloped Coun 
tries", Social Research, 1949, p. 9 : The situation of underdeveloped countries 
"illustrates, in reverse, . . . the prevalence of cumulative processes. . . . One 
thing leads to another, but nothing leads to nothing." 

33. Cf . L. M. Lachmann, "Investment Repercussions", Q.J.E., Nov. 1948. 

34. Nurkse, op. tit., p. 14. 35. Ibid., p. 11. 
36. Rosenstein-Rodan, op. cit., p. 207. 37. Ibid., p. 208. 


ment may make worth while the construction of a railway. This reduces 
transport costs and enables production to be further expanded. Pro 
cessing industries may be attracted by the increased production, thus 
increasing the regional population and creating a local market for 
food and the services of tertiary industries, etc., etc." 38 Yet another 
example is that attributed by Rosenstein-Rodan to Allyn Young : the 
construction of a suburban tube line which yields external economies 
in the form of capital appreciation of adjacent land and buildings. 89 
The term external economies" has even been transferred from the 
economies to which investment in a new industry or new capital equip 
ment may give rise to the new industry or capital equipment itself: 
The most productive form of development is the systematic creation 
of those indispensable external economies in economic production, 
especially in the fields of transport and power." 40 

There is no need to extend the list of illustrations at this point. 
The list already given, though by no means exhaustive, shows that the 
new meaning which the concept of external economies has acquired 
is very wide, certainly covering a number of quite distinct mechanisms 
by which investment in one field may give rise to new investment 
opportunities elsewhere. In the second half of this article, an attempt 
will be made to examine the new concept of * external economies more 
closely in relation to the earlier ones, and to disentangle the various 
mechanisms which may give rise to "external economies" in any of 
the various meanings of the term. 

2. Analytical: Increasing Returns 

Let us begin with a recent lucid statement on increasing returns : 
According to "orthodox theory, given the structure of demand for 
final goods and the state of the arts , the marginal productivity of 
capital will be high or low depending on the proportions of factors. . . . 
It will, therefore, vary directly with supplies of labor and other natural 
resources and inversely with the stock of existing capital. An increase 
in the supply of a factor, however, brings an increase in aggregate 
output in addition to a change in factor proportions. And with an 
increase in scale of output there are increases in efficiency due to im 
provements in the organisation of industry. That is to say, there are 
increasing returns . . .". 41 

Since, given (a) the structure of final demand, (b) the "state 
of the arts", (c) supplies of labour and other natural resources, and 

38. G. O. Gutman, "Investment in Development Projects", paper read 
at the Canberra Meeting of the Australian & New Zealand Association for 
the Advancement of Science, Jan. 1954 (mimeographed), p. 10. 

39. Rosenstein-Rodan, op. cit., p. 207. 

40. Singer, op. cit., p. 6. This last would seem to be an extension of the 
concept which clarification of the meaning of "external economies" should 
eliminate from the vocabulary of economic development. 

41. M. Abramovitz, "Economics of Growth", in B. F. Haley (ed.), 
Survey of Contemporary Economics, Vol. 2 (Irwin 1952), p. 154. 


(d) the existing organization of industry, the application of additional 
amounts of capital (investment) must yield diminishing returns, it 
follows logically that the occurrence of constant or increasing returns 
must be due to incidental changes in one of these four parameters as 
the scale of output increases. 

At the same time, the old truth that you cannot get a quart out 
of a pint pot suggests that an increase in output must, somehow or 
other, be due to an increase in input, however surreptitious and well- 
hidden. The problem of accounting for increasing returns, therefore, 
resolves itself into tracking down increases in "inputs" underlying 
these changes in one or the other of the four parameters which may 
give rise to increasing returns. 

(a) Organization of Industry 

It will be convenient to start with the fourth, the "organization 
of industry", because this is the only one which was not held constant 
in Marshallian partial equilibrium analysis and because here, there 
fore, most of the work has been done for us, by Marshall and his 
followers, most thoroughly by Mrs. Robinson. 

It remains to inquire how increases in efficiency arise. They arise 
because the factors of production, in the world as we know it, consist 
of indivisible units, each of which is not equally well adapted to per 
forming all the tasks required in production. If all the factors of pro 
duction were finely divisible, like sand, it would be possible to produce 
the smallest output of any commodity with all the advantages of large- 
scale industry. But actually the factors consist of men ; . . . instruments 
of production each of which, for technical reasons, must be of a certain 
size; and land, which is usually divisible, but which sometimes, for 
technical reasons, cannot be divided without limit. It is therefore im 
possible for an industry to equip itself to produce one unit of a com 
modity without immediately providing capacity to produce more than 
one unit." 42 Indivisibility of specific factors accounts for increasing 
returns because, if production on a small scale requires the use of an 
indivisible specific factor, and this factor "has a certain cost which 
must be incurred whether it is fully utilized or not, the average share 
of each unit of output in this fixed cost" will fall as output increases. 48 

Here, therefore, our problem is easily solved: the additional "in 
put" which accounts for increasing returns is represented by fuller 

42. Joan Robinson, op. cit., p. 334. 

43. Ibid. Technical indivisibility, as Chamberlin has been at pains to 
emphasize ("Proportionality, Divisibility and Economies of Scale", Q.J.E., 
February 1948), can of ocurse be partially overcome by such devices as 
hiring factors for fractional periods. It is clear also that technical discon 
tinuities are not always what they seem : the reason why a certain machine 
is never manufactured below a minimum size is usually not that to do so 
would be technically impossible, but that it would be inefficient, i.e. the 
machine would be more costly to run in terms of expenditure on repairs, fuel, 
materials, etc. 


utilization of an indivisible factor. This case clearly accounts for a 
great many instances of increasing returns ; not only for all those cases 
of internal economies where an increase in output spreads the overhead 
costs of single productive units, such as a piece of machinery, or a 
manager, or a skilled worker; and for all such external economies as 
falling costs of transport services provided by an existing railway net 
work as (say) agricultural output in the area expands; but also for 
such benefits of specialization and division of labour as Adam Smith s 
advantage gained by saving the time commonly lost in passing from 
one sort of work to another" 44 and the similar gains in productivity 
from "improvements in the organisation of industry" recommended 
by modern time-motion experts. 

But not all economies of scale traditionally regarded as due to 
"improvements in the organisation of industry" can be thus accounted 
for. As Mrs. Robinson points out, following Adam Smith and Marshall, 
"the possibility of increasing returns is widened by the fact that 
various units of factors are adapted to performing different tasks. 
Men differ in their natural abilities, and can acquire skill when they 
concentrate on a single task". 45 The economies of scale which accrue 
through specialization as workers acquire "dexterity" at a task or the 
external economies which accrue to firms in a growing industry through 
the acquisition of a "traditional skill" by the working population of 
a district can hardly be explained by "fuller utilisation" of existing 
productive unite. They arise from improvement in the quality of the 
available factors of production. 

(b) Supplies of Complementary Factors 

It seems, therefore, that we have already moved on to changes in 
another of our four parameters, supplies of labour and other natural 
resources". But can we treat an improvement in the quality of labour 
as an increase in the supply of labour ? We here confront an awkward 
problem which has bedevilled value theory at any rate since Ricardo : 
the non-homogeneity of the so-called "factors of production". Mrs. 
Robinson, like others before her, tried to deal with this in terms of 
"corrected natural units"; but, as she admitted later, this "was a 
mere aberration, and no genuine solution is possible which treats non- 
homogeneous factors as though they were homogeneous". 46 If we define 
a "factor" in the only way it can be precisely defined, as a group of 
productive resources "such that within each group the elasticity of 
substitution between units is infinite, while between factors it is finite 
or zero , 47 we must face the fact, as one of the basic facts of economic 

44. Wealth of Nations, Book 1, Ch. 1, quoted by Joan Robinson, op. cit., 
p. 336. 

45. Joan Robinson, op. cit., p. 335. 

46. Joan Robinson, "Rising Supply Price", reprinted from Economica, 
1941, in Readings in Price Theory, p. 236, n. 8. 47. Ibid., p. 236. 


life, that there is a multiplicity of "factors", and that production, 
according to the techniques available in each field at any time, re 
quires different combinations of selected groups of some such specific 

It follows that anything which improves the quality of the other 
(traditional) factors with which capital is to be combined in produc 
tion, or which creates additional units of specific factors not previ 
ously available, represents a change in the parameter "supplies of 
labour and other natural resources" and may increase the marginal 
productivity of capital, as compared with what it would be if this 
parameter could be assumed to remain constant. Any such change 
which occurs in consequence of an increase in the scale of output, 
therefore, may be a source of increasing returns. 

Moreover, once the heterogeneity of the traditional factors is 
admitted, the available factor endowment, which must remain constant 
for the orthodox conclusion to remain valid, includes not merely avail 
able supplies of labour and other natural resources, but also available 
supplies of specific capital equipment. When the cost of wheat produc 
tion falls because expansion of wheat output spreads the overheads of 
an existing railway network over a larger volume of traffic, increasing 
returns can be attributed to fuller utilization of existing productive 
units ; but when expansion of wheat farming in an area stimulates the 
construction of a railway, not hitherto economical, the resulting fall in 
transport (and therefore farm) costs cannot be wholly explained in 
this way ; it is clearly due in part to a change in the factor endow 
ment", in the form of additional capital equipment in transport. 48 So 
long as investment is conceived as "simple growth of a stock of homo 
geneous capital , 49 each additional unit of capital, by definition, com 
petes with the existing stock, and the marginal productivity of capital 
necessarily declines as the stock of capital grows given the structure 
of demand for final goods, the "state of the arts", and supplies of 
labour and natural resources. But if the availability of specific forms 
of capital equipment constitutes one aspect of the "factor endowment" 
which partially determines the marginal productivity of capital, the 
difficulty in reconciling this axiom with increasing returns disappears. 50 

48. This part of the fall in transport costs is, of course, no greater than 
that which would result from the investment of an equal amount of additional 
complementary capital in horses and buggies. 

49. Lachmann, op. cit., p. 698. 

50. We can, if we like, express this fact in terms of the concept of 
"complementarity", as in the statement that the effect on the marginal pro 
ductivity of capital of "a given act of investment will depend on the power 
of the newly created capital goods to add to or detract from the income- 
earning capacity of other capital resources, either existing or planned. And 
this effect will in its turn depend on the degree of complementarity or sub- 
stitutability which exists between the new capital goods and other capital 
goods, already existing or about to be created" (Lachmann, op. cit., p. 699). 
But such a statement has no explanatory value : to say that "specific" factors 
are "complementary" is, of course, tautological. 


Clearly, here lies a major part of the explanation of the paradox 
of economic development, the failure of capital to "flow from coun 
tries with high to countries with low ratios of capital to other re 
sources \ 51 The relative factor endowment of different countries, which 
determines the marginal productivity of capital, is not adequately 
described in terms of the ratio of "capital" to "labour" and "natural 
resources". Because of complementarity between different forms of 
specific capital equipment, the marginal productivity of capital is very 
likely to be higher in rich countries endowed with a large and varied 
stock of capital equipment than in poor under-developed countries. As 
has often been pointed out, one reason why under-developed countries 
attract little capital is their lack of complementary capital equipment 
in basic industries, transport and power, and in "social overhead 
capital". 52 

There is some danger in extending the meaning of factor endow 
ment too greatly. 53 But it is hard to see any logical reason for explain 
ing a high marginal productivity of capital in terms of relative abun 
dance of complementary "labour" and "natural resources" and re 
fusing to explain the high marginal productivity of capital in de 
veloped, as compared with under-developed, countries in terms of the 
relative abundance in the former, not only of complementary forms of 
capital equipment, but also of human resources of high quality (health, 

51. Abramovitz, op. cit., p. 155. 

52. Cf., e.g. H. W. Singer, "Obstacles to Economic Development", 
Social Research, Spring 1953. 

53. Cf . Samuelson s comments on the "limitations of factor proportions 
analysis" in international trade theory ("International Trade and the Equal 
isation of Factor Prices", E.J., June 1948, pp. 180 ff.) : "It would be artificial 
in the extreme to explain any such empirical case by saying that knowledge 
is -scarce in the one place relative to the other. At best this is a crypto- 
explanation ; at worst it ignores the play on words involved in the fact that 
the term factor of production is used in two or more quite different senses : 
(a) as a concrete input item . . .; and (b) as a condition which has a bearing 
upon production. . . . Knowledge is not an input such that the more you use 
of it, the less there is left." True, but knowledge may be a "factor" in the 
same sense as a dam which costs something- to produce but does not wear 
out and whose creation increases the electricity-generating capacity of a 
country. A distinction which can validly be drawn, and which is useful in 
the theory of growth, is between those "conditions which have a bearing 
upon production" which can be augmented (or depleted) by man, such as 
technical knowledge (or mineral resources), on the one hand, and those 
which cannot, such as (as yet) climate. The former are potentially depen 
dent variables in a model of economic growth, the latter are not. Whether 
we choose to include the former in our definition of "factors of production" 
is a matter of taste. Cf. also Meade s distinction between "unpaid factors" 
and "creation of atmosphere" ("External Economies and Diseconomies", 
E.J., March 1952). Improvement in the state of education or technical know 
ledge may actually provide a better illustration of the latter than Meade s 
own illustration of rainfall ; his claim that "if in the district in question the 
amount of land, labour and capital devoted to, say, wheat-farming were to 
be increased by 10 per cent, the output of wheat would also be increased by 
10 per cent even if the rainfall were to remain constant" (p. 61) is surely 
valid only if "rainfall" is (question-beggingly) measured in terms of inches 
per acre, not if it is measured in gallons. 


skill, know-how, adaptability, etc.) and other factors which contribute 
to efficiency in the production of particular goods and services, such 
as efficient legal, financial and governmental institutions. 54 Wherever 
an increase in aggregate output increases * supplies of complementary 
factors" in this sense, we can expect to meet increasing returns. 

Granted that the investment of additional capital may yield in 
creasing returns because it may incidentally stimulate an improvement 
in quality or increase in quantity of complementary factors, it is still 
necessary to reconcile this fact with the inescapable truth that you 
cannot make something out of nothing. What is the source, in terms 
of additional input", of the additional output which accrues where 
increasing returns result from improvement in the supply of comple 
mentary factors? 

In quoting, above, the illustration of external economies in trans 
port resulting from an increase in farm output, we made a distinction 
which is not to be found in any of the discussions of increasing returns 
by writers in the Marshallian tradition : the distinction between in 
creasing returns due to fuller utilization of existing equipment, and 
increasing returns due to construction of new equipment, not hitherto 
economical. The source of the much greater economies in the latter 
case is, of course, the capital invested in the new railway. Marshall and 
his followers habitually ignored this distinction and took an adequate 
supply of capital for granted, because, in their context of particular 
equilibrium analysis, all that mattered was the fall in the costs of 
transport to individual farmers. This clearly will not do when the 
phenomenon of increasing returns is related to economic growth of a 
whole economy. In all cases where increasing returns are due to the 
creation of complementary capital equipment, the realization of in 
creasing returns requires not merely that investment in such capital 
equipment shall be economical (profitable) but also that an adequate 
supply of capital both as real saving and as investible funds is in 
fact available. 

This, in turn, has a further implication. It suggests that the con 
cept of increasing returns (and, consequentially, of external econo 
mies) can legitimately be extended to cover those cases where an in 
crease in aggregate production diminishes obstacles to investment on 
the side of finance. The rate of economic progress is limited, as Allyn 
Young pointed out, by the fact that * the accumulation of the necessary 
capital takes time". 55 Growth of per capita income, however, in itself 

54. Cf . the yet more far-reaching list of "conditions which have a bear 
ing upon production" and with respect to which advanced countries, merely 
because they are advanced, have an advantage over underdeveloped countries, 
in S. H. Frankel, The Economic Impact on Under-Developed Societies (Black- 
well 1953), pp. 66 if. 

55. Op. cit., p. 534. 


facilitates the supply of capital, by making saving easier (at least at 
low levels of per capita income). Economic development may also 
stimulate the flow of saving by creating social attitudes conducive to 
thrift and by creating institutional channels for saving ; and it may 
further increase the supply of investible funds by diminishing the 
inducement to hoard. It is arguable that investment in savings banks 
or other institutions of this sort in under-developed countries is likely 
to yield (interest-cost reducing) " external economies" in this peculiar 
sense. 56 

(c) The Structure of Demand 

In the two preceding sections, we investigated how an increase in 
the scale of output can give rise to economies through improvements 
in the " organization of industry" and changes in " supply of comple 
mentary factors". In this discussion, the initial increase in the scale 
of output was taken for granted, and we merely considered its conse 
quences. Yet, it is obvious that an increase in the scale of output will, 
in fact, occur only if the larger output can be sold, in other words, 
in response to an increase in demand. 57 "The division of labour is 
limited by the extent of the market. It was Allyn Young s contribu 
tion to point out that this very fact provides a major part of the 
explanation of the phenomenon of increasing returns. Any increase 
in real income represents a widening of the market for goods and 
services in general which yields increasing returns in the form of 
further increases in productivity and real income, which further 
widens the market, and so on. 

Allyn Young was primarily concerned to draw attention to the 
cumulative character of economic progress and therefore stressed in 
creases in productivity gained through increasing returns as the source 
of the increase in real income and demand which opens up further 
opportunities for increasing returns. But any increase in real income, 
whatever its source, will clearly have the same effect of widening the 
market for goods and services in general. l It goes without saying that, 
with a given labour force and with given techniques and natural re 
sources, it is only through the use of more capital [or, more generally, 
increases in productivity] that such an increase in production can be 
obtained." 58 But, as Young implicitly recognized, an increase in real 
income will widen the market and yield increasing returns whether it 
is due to population growth or new discoveries, as it were exogenous 

56. The "role of finance" in economic growth is admirably analysed by 
Abramovitz, op. cit., pp. 164-8. 

57. If we like, we can express this fact, following Nurkse in the passage 
quoted above, by distinguishing between "physical" and "value" productivity. 

58. Nurkse, op. cit., p. 12. 


to the system, or whether it is due to the endogenous operation of the 
cumulative process of increasing returns and economic progress ", 69 

The point is of some importance when attention is focused on a 
widening of the market, not, as in Allyn Young s case, as a source of 
cost-reducing economies of scale, but as a source of new investment 
opportunities. For a widening of the market creates opportunities for 
new (" widening") investment,- whether or not it also creates oppor 
tunities for cost-reducing ("deepening") investment based on econo 
mies of scale. It may be argued that such mutual support given by in 
vestment in one field to investment elsewhere through a mere widening 
of the market can hardly be treated as an instance of external econo 
mies, since the term "economies" properly connotes cost reduction. 
Rosenstein-Rodan, in the first statement of the argument, ingeniously 
forestalled this objection by reference to risk as an element of cost: 
"The industries producing the bulk of the wage goods can therefore 
be said to be complementary. The planned creation of such a comple 
mentary system reduces the risk of not being able to sell, and, since 
risk can be regarded as cost, it reduces costs. It is in this sense a 
special case of external economies ." 60 Since the phenomenon is im 
portant and clearly closely related to other undoubted instances of 
external economies, it may be reasonable to take advantage of this 
little piece of jugglery to justify the extension of the term "external 
economies" to include it. 

Allyn Young stressed the effect of a widening of the market on 
cost-reducing economies of scale because, given a stationary popula 
tion, absence of new discoveries, and full employment of available pro 
ductive resources (which he took for granted), it is only through 
increases in productivity that real income can rise further and thus 
sustain the cumulative process of growth. In the context of economic 
development, however, the converse conclusion may be just as impor 
tant : Where some of the available productive resources are unemployed 
(e.g. in the form of disguised rural unemployment), a widening of the 
market can increase real income even if it induces mere widening 
investment, without any economies of scale (though, in practice, real 
income will usually increase for both reasons). 61 That "the inducement 
to invest is limited by the size of the market" is, after all, merely an 
other statement of the relationship between the rate of investment and 
demand for final goods familiar in the theory of income determination 

59. Allyn Young-, op. cit., p. 534. 

60. Op. cit., p. 206. Professor Scitovsky, in his illuminating recent 
article, also implicitly defines external economies in this wider sense since 
he is prepared to include any mechanisms by which expansion in one industry 
"givei rise to profits" in another industry (loc. cit., p. 149). 

61. Cf. Nurkse s statement (op. cit., p. 7) that "in a given line of 
production any increase in output, even when it maintains the old degree 
of capital intensity, will be discouraged by the smallness of the market". 


in the form of the "induced" investment function. It is true that, given 
full employment of available resources, additional real investment 
requires an increase in "domestic purchasing power, not in monetary 
but in real terms. . . . Monetary expansion alone does not remove [the 
trouble], but produces merely an inflation of prices. 7 62 But the reason 
is not that investment in any given industry is not stimulated by a 
rise in money demand for that industry s final products, but that, in 
the absence of unemployed resources, output can be increased in this 
industry only at the expense of a contraction of output elsewhere in 
the economy. In an under-employed economy, as the notion of * pump- 
priming" implied, monetary expansion alone may do the trick of ex 
panding real output. 63 

In parenthesis, a further point may be made which, while of little 
significance for problems of long-term economic development, further 
shows how Allyn Young s approach is related to Keynesian theory of 
income determination. Allyn Young s contribution was to show how, 
taking the economy as a whole, an increase in productivity generates 
further increases in productivity, via real income, because supply 
creates its own demand. Writing in 1928, Allyn Young was able to 
take his stand on Say s Law of Markets without any of the inhibitions 
which would naturally afflict an economist writing after 1936. We have 
learned to qualify Allyn Young s proposition : supply creates its own 
demand only if investment offsets saving. At the same time, without 
being conscious of this aspect, Allyn Young, with his insistence on the 
manifold ways in which increases in aggregate income give rise to new 
opportunities, not merely of widening investment, but also of deepen 
ing and especially innovatory investment "new products", "new 
industries", "fresh applications of the fruits of scientific progress 
to industry" 64 stressed the very factors on which optimists about 
economic progress in a private enterprise economy must rely to lay 
the Keynesian spectre of stagnation. 

So far we have taken into account only quantitative changes in 
the "structure of demand" increases in demand for given products. 

62. Nurkse, op. cit., p. 6. 

63. Cf. Nurkse s statement (op. cit., p. 13) : "While the money-income 
effect of investment accounts, at least in part, for the bunching of investment 
activities in the course of the cycle, it is the effect of the investment on the 
general level of productivity that increases the flow of consumable goods and 
services. The real-income effect, although it may have depressive monetary 
repercussions in the short run, is indeed the sum and substance of long-run 
economic progress." I.e. we must distinguish between three effects of invest 
ment: (a) the favourable (multiplier) "money-income" effect (which can 
increase real income only in an under-employed economy) ; (b) the depressive 
"real-income" effect, due to increase in capital equipment which competes 
with the existing stock; and (c) the favourable "real-income" effect which 
operates through increasing productivity and real income ; the first two are 
short-run, the third long-run. 

64. Op. cit., pp. 528, 533. 


What about qualitative changes, shifts in demand from old to new 
products ? That these constitute an important source of new investment 
opportunities has often been emphasized, especially of course by 
Schumpeter, but as a source of new investment opportunities they are 
notoriously difficult to classify because they rouse the sleeping dogs of 
the index-number problem which are better let lie if the notion of an 
increase in real income " is to be conveniently handled. Allyn Young 
dodged the issue by trying to assimilate new products to improvements 
in productivity: new products "have a presumptive claim to be re 
garded as embodying more economical uses of productive resources 
than those which they replace". 65 Part of the additional investment 
opportunities provided by the emergence of new products can be re 
garded as "widening" investment opportunities since, by stimulating 
new wants, it presumably raises the average propensity to consume. 
But the importance of new products as a source of new investment 
opportunities lies precisely in that they not merely add to total demand 
but cause shifts in demand which create demand for new productive 
capacity partly by destroying demand for existing productive capacity. 
What matters for our purpose is that, though economic growth 
may yield external economies by stimulating the development of new 
products, the mechanism at work does not operate, in the first instance, 
through changes in real income and demand, but through changes in 
technology and is, therefore, related to the subject of the next, rather 
than this, part of the argument. 66 

(d) The "State of the Arts" 

We must inquire, finally, whether (and how) increasing returns 
can occur through changes in the fourth parameter, the "state of the 
arts", or technical knowledge. 

D. H. Robertson, following Marshall, thought that, in construct 
ing a long-period falling supply curve, "it would appear proper to 
eliminate the effect of major inventions which were clearly not depen 
dent on the size of the industry". 67 This is, of course, correct if changes 
in technical knowledge must be regarded as entirely exogenous. This 
will usually be the case in the Marshallian context of growth of a 
single industry. It is a much more doubtful assumption in the context 
of economic growth of a whole economy. 

Economic growth unquestionably stimulates technological pro 
gress in numerous ways: rising per capita income makes possible in- 

65. Ibid., pp. 535 f . 

66. Investment in advertising and other selling costs provides an 
example of economies, through induced expansion and qualitative changes of 
demand, which may accrue externally as well as internally. 

67. D. H. Robertson, "Those Empty Boxes", reprinted from E.J., 1924, 
in Readings in Price Theory, p. 143, note (written in 1950) ; also Marshall, 
op. cit., p. 460. 


creased expenditure on education and research ; the economic applica 
tion of one invention, by posing new problems and stimulating the 
imagination of the production engineer, calls forth a series of further 
technological advances; 68 organized research increasingly produces 
discoveries to order, in response to new demands by consumers and 
business. "The Industrial Revolution of the eighteenth century has 
come to be generally regarded, not as a cataclysm brought about by 
certain inspired improvements in industrial technique, but as a series 
of changes related in an orderly way to prior changes in industrial 
organization and to the enlargement of markets." 69 Wherever an in 
crease in the stock of capital (investment) and aggregate output in 
duces technological changes which raise the marginal productivity of 
capital, and thus create new investment opportunities, we can speak 
of increasing returns due to changes in the "state of the arts". 

What is the source (in terms of "input") of the additional out 
put which is obtained by technological progress ? On the face of it, the 
answer is simple. In any given state of technical knowledge, technical 
limitations prevent perfect adaptation of methods of production to the 
existing endowment of specific factors of production, the imperfection 
consisting, in the last analysis, of under-utilization of indivisible 
units. 70 Technological improvements "save labour", i.e. utilize labour 
more fully, by substituting "round-about" for direct methods of pro 
duction, or they "save capital" by substituting smaller for larger 
indivisible units of capital equipment, or in other ways reducing 
"waste" of raw materials, fuel, or other complementary inputs. 71 

This would seem to be an entirely adequate answer with reference 
to technological changes in the narrow sense of improvements in 
methods of production, particularly where these improvements result 
from costless "discovery". But a case can be made for subsuming 
technological changes under our earlier heading of "changes in com 
plementary factors". For one thing, there is a sense in which the 

68. Cf. Keirstead s concept of "linked advances" in B. S. Keirstead, 
Theory of Economic Change (Toronto 1948), Ch. 8. 

69. Allyn Young, op. cit., p. 536. Allyn Young, like Marshall before him, 
wrote as though all "new discoveries" were exogenous, while endogenous 
changes in technique could be written off as "merely adaptations of known 
ways of doing things, made practicable and economical by an enlarged scale 
of operations" (op. cit., p. 534, n. 2) ; this is a very questionable generali 

70. It is not surprising that the economies of technological progress 
turn out to be due, at bottom, to the same cause as those of "improvements 
in the organisation of industry", for the difference between these two forms 
of change in method of production, which seems so marked in traditional 
partial equilibrium analysis, is, after all, nothing more clear-cut than the 
difference between those variations in the combination of different amounts 
and types of specific factors which are assumed to lie within the intellectual 
horizon of the entrepreneur and those which are assumed to lie beyond it. 

71. The economies due to technological progress must, of course, be 
reckoned net of (internal or external) diseconomies of obsolescence. 


" state of the arts" of a country at a particular time can be regarded 
as one aspect of its factor endowment; certainly, there seems little 
reason for drawing a sharp line between an increase in the "skill" of 
a country s working population, on the one hand, and an increase in 
the general level of technical or scientific knowledge, on the other. The 
temptation to treat "technical knowledge" as a specific factor is in 
creased when, as is increasingly the case to-day, technological advances 
represent the yield of investment in scientific or industrial research, 
in just the same way as an increase in the skill of workers may be the 
object of investment in training or a piece of machinery the outcome 
of investment in fixed capital. 

Similar difficulties notoriously beset the analysis of other types of 
"innovation". Does the discovery of hitherto unknown mineral re 
sources represent an increase in a country s factor endowment? The 
fact that discovery may often presuppose investment in the costs of 
exploration makes it seem convenient to treat costless discovery as an 
extreme case where the investment required to bring the additional 
capital resources into being is zero. 72 The problem of new products 
discussed above is another example. 

For our purposes, it does not matter very much how we choose 
to classify technological changes. What matters is that changes in the 
state of the arts constitute one of the mechanisms which may, and 
undoubtedly do, give rise to increasing returns. One reason why in 
vestment may increase rather than depress the marginal productivity 
of capital is that it may, as one of its repercussions, induce techno 
logical advances. 

(e) Summary 

To sum up the discussion so far, we have seen that orthodox theory, 
according to which the marginal productivity of capital must decline 
asi the stock of capital increases, holds good only on the assumptions 
that (a) the structure of final demand, (b) supplies of complementary 
factors, (c) the state of the arts, and (d) the organization of industry, 
remain constant. We have also seen that the occurrence of increasing 
returns can be accounted for by the fact that none of these assumptions 
is necessarily valid : an increase in the stock of capital very often gives 
rise to incidental changes in one or more of these four parameters, 
changes which counteract and frequently outweigh the tendency to- 

72. This would seem to be a more convenient approach than that of the 
Austrian school: "One of the chief functions of the accumulation of capital 
is to create possibilities of economic use for natural resources for which so 
far there had been none, and thus to convert objects without economic value 
into economic resources" (Lachmann, op. cit., p. 709, and references there to 
Menger and Hayek). 


wards diminishing returns. 73 Without having considered all the multi 
farious ways in which increasing returns may arise, we have shown 
that all the most important mechanisms operate through changes in 
one or the other of these parameters ; and indeed that this is necessarily 
true of all possible causes of increasing returns. Finally, we have seen 
that it is possible to trace the additional output, which accrues as * * re 
turns increase , to additional inputs : the additional * input being 
either (a) fuller utilization of existing (indivisible or unemployed) 
complementary factors or (b) additional supplies of complementary 
factors. This, too, is a satisfactory conclusion; for what other source 
of additional "inputs" could there be? 

3. Analytical: External Economies 

In the second part of this article, we have tried to account for 
the occurrence of increasing returns. It remains to investigate why 
increasing returns in many cases accrue as external, rather than in 
ternal, economies ; or, in other words, why, in the Marshallian case, an 
increase in the output of an industry, say through the establishment 
of new firms, may reduce costs to other firms in the industry (as well 
as to the new firms themselves) ; or, in the wider sense of increasing 
returns, why investment in one field may increase the marginal pro 
ductivity of capital (create new investment opportunities) in other 

If we regard all the benefits that result from the initial increase 
in output, including both the profits directly accruing to the investor 
and the benefits accruing indirectly to other firms, as the total yield 
of the investment, the answer can be stated simply : external economies 

73. These incidental changes in the parameters need, of course, not 
necessarily be favourable. So long as attention is concentrated on the economy 
as a whole, and factor supplies are assumed to be elastic, it is hard to imagine 
cases of additional investment having adverse repercussions (though the 
above-mentioned diseconomies of obsolescence partially off-setting economies 
of technological change may be an instance). It is another matter when 
factor supplies are assumed to be limited. In that case, additional investment 
in one field, by raising factor prices, will have adverse effects (external dis 
economies) on investment in other fields, and these could conceivably out 
weigh favourable repercussions of the kind discussed above. This is the main 
objection to the doctrine of balanced growth raised by Fleming (loc. cit.). 
But since (a) a highly elastic labour supply is the central feature of the 
situation in most under-developed countries (cf. W. A. Lewis s brilliant 
article "Economic Development with Unlimited Supplies of Labour", Man 
chester School, May 1954) and since (b) the assumption of an elastic capital 
supply has been implicit in the context in which the doctrine of balanced 
growth has been put forward (i.e. to inquire why capital, assumed to be 
seeking investment outlets, does not go to under-developed countries, and how 
capital assumed to be available should be invested in such countries), the 
objection does not seem to be one which need cause the proponents of the 
doctrine very serious concern. (In Allyn Young s context of loner-run 
cumulative growth in developed economies, it is, of course, not possible to 
assume a highly elastic labour supply in the short-run; but here account 
must clearly be taken of natural growth in the working population.) 


are due to the fact that the investor is, for one reason or another, 
unable to appropriate to himself the whole of the yield of the invest 
ment. The question then becomes one of ascertaining the factors which 
prevent the investor from reaping the total yield of his investment. 
Let us consider the various types of increasing returns from this point 
of view. 

(a) Marshallian External Economies 

If expansion of output enables a large vertically integrated shoe 
manufacturing concern to install a new type of machinery which it 
produces in its own machine shop solely for its own use, the resultant 
economies of scale accrue entirely as internal economies. Contrast with 
this the case where growth of an atomistic shoe industry, by entry of 
new firms, creates external economies to all firms in the industry by 
making it profitable for a specialist firm to produce specialized mach 
inery. To sharpen the picture, we may assume that it is the enlarge 
ment of the market for machines by the entry of one marginal firm 
into the shoe industry which tips the scales in favour of the establish 
ment of the machine-making firm. In that case, the external economies 
accruing to the whole shoe industry might be said to be part of the 
total yield of the investment in the establishment of the marginal shoe- 
producing firm. This part of the total yield could conceivably be appro 
priated if the investor in the shoe-producing firm were able to exact 
adequate payment from the machine-producing firm as a condition of 
establishing his firm, and if the machine-producing firm, in turn, were 
able to compensate itself by charging a price for its machines which 
would deprive the other firms in the shoe industry of any of the benefits 
(external economies) accruing from the superior efficiency of mechan 
ized production. What prevents either firm appropriating the benefits 
of external economies, in the Marshallian analysis, is the assumption 
of perfect competition. The machine-producer cannot appropriate the 
benefits if competition forces him to pass the gains on to his customers 
in the form of competitive prices ; and, without discrimination, the old 
firms must benefit equally with the marginal new firm. 

The force which prevents the appropriation of the economies of 
scale by one firm need not be competition. In the case where an increase 
in farm output yields external economies by spreading the overheads 
of an existing railway system over a larger volume of transport ser 
vices, it is more likely to be public regulation of freight rates than 
competition which will ensure that the external economies accrue to 
the farmers, rather than to the railway company. But in all such cases, 
some of the economies will accrue externally wherever competition or 
public control prevents the initial investor from monopolistically ap 
propriating the total yield of his investment. 


(b) Allyn Young s External Economies 

Quite a different explanation accounts for the external character 
of the economies which accrue when an increase in output anywhere 
in the economy widens the market for goods and services in general 
and thus creates new investment opportunities elsewhere. The explana 
tion, however, is obvious and need not detain us long. 

The reason why the benefits of increasing returns from an enlarge 
ment of the market do not usually accrue to a significant extent to the 
initial investor responsible for the increase in productivity and real 
income which caused the enlargement of the market is, fundamentally, 
as Nurkse has pointed out, the diversity of human wants . 74 Recipi 
ents of an increase in real income will spend the extra income on a 
great variety of goods and services. That is why Say s Law is never 
valid for an individual industry but is valid ("hoarding" apart) for 
the economy as a whole. 

The distribution of the benefits of this type of external economies 
depends, in the main, on the income elasticities of demand for different 
products : * The rate at which any one industry grows is conditioned 
by the rate at which other industries grow, but since the elasticities 
of demand and supply will differ for different products, some indus 
tries will grow faster than others. 75 So long, therefore, as the growth 
of output is dependent on investment in individual firms and industries, 
the economies accruing through enlargement of the market are, in their 
nature, mostly external. 

(c) Other Cases of "Irrecoverable Costs" 

There are, finally, a number of cases where, for a variety of reasons 
inherent in the nature of the product, * the benefits yielded by invest 
ment are difficult to appropriate and sell privately". 76 

One example is education, where consumers are, at best, prepared 
to pay no more than the equivalent of the benefits they expect to accrue 
to themselves (or their children) but not for those benefits which 
accrue to society as a whole. Other examples are those services "in 
which universal or nearly universal use is required if benefit is to be 
obtained (e.g. many public health facilities and controls) " or in which 
the minimum scale for efficiency is such that they can only be provided 
for communal consumption, such as defence, foreign affairs, admini 
stration of justice, etc. 77 Yet another, rather different, example is in 
vestment in training labour which is "not profitable for a private 
entrepreneur" because "there are no mortgages on workers an entre- 

74. Op. dt., p. 4. 

75. Allyn Young, op. cit., p. 534. Allyn Young, in analysing this process, 
employed the rather awkward concept of "elasticity of reciprocal demand" 
for commodity a. in terms of commodity 6, instead of the concept of income 
elasticity of demand. 

76. Abramovitz, op. cit., p. 141. 77. Ibid. 


preneur who invests in training workers may lose capital if these 
workers contract with another firm". 78 

These examples (except the last) constitute the traditional func 
tions of government. They have for long been recognized as responsi 
bilities of government because they cannot be left to private enter 
prise : they represent instances of Pigovian divergence between private 
and social marginal net product. Private and social marginal net 
products diverge in these cases precisely because the benefits of expen 
diture (investment) in these fields cannot easily be privately appro 
priated, because it yields external economies". 

One of the main theoretical contributions of recent writers on the 
problems of under-developed areas, and the reason for their revival 
of interest in the concept of external economies, has been their argu 
ment that the long-standing case for communal action in fields where 
external economies give rise to divergence between private and social 
marginal net product has a much wider application than the traditional 
functions of government. The argument is being applied to two new 
fields : One is the exploitation of Allyn Young & type of external eco 
nomies in the form of balanced growth through a wave of capital 
investments in a number of different industries" : 79 "Complementarity 
of different industries provides the most important set of arguments 
in favour of a large-scale planned industrialization. 80 The other is gov 
ernment initiative in the provision of basic services (transport, power, 
irrigation, etc.) and social overhead capital (education, public health, 
etc.), the benefits of which accrue largely as external economies and 
which, therefore, do not sufficiently attract private investors. In all 
these cases, public investment has one great advantage over private, 
in that what are "external economies" to the individual private in 
vestor are "internal economies" for society as a whole. 81 This is not 
necessarily a conclusive argument for government action in all such 
cases, for government operation may involve "diseconomies" of its 
own; but it constitutes a strong prima facie case. 

Since so many of the obstacles to private exploitation of "poten 
tial" investment opportunities in under-developed countries can be 
accounted for in terms of divergence between private and social mar 
ginal net product, due to external economies, it is worth pointing out 
that not all such obstacles are of that character. 

One of the factors which has frequently been mentioned as a 
deterrent to private investment in under-developed areas is that 
"additions to capital equipment in any case are apt to come in rela 
tively big units, and there is especially a characteristic lumpiness in 
the process of investment in overhead capital facilities such as rail- 

78. Rosenstein-Rodan, op. tit., p. 205. 79. Nurkse, op. tit., p. 13. 

80. Rosenstein-Rodan, op. cit., p. 205. 81. Ibid., p. 207. 


ways, power plants and water works". 82 The trouble is that investment 
in these overhead facilities is not only fruitless in the sense that it is 
merely a precondition, albeit an essential one, of useful production: 
it also implies activities of a peculiarly high capital-intensity. . . . 
Continuous development in small doses is apt to be very disappointing. 
What is needed is a big initial effort to carry through the barren 
period. >83 

The difficulties to which these passages draw attention are clearly 
quite distinct from (though they are often associated with) those dis 
cussed so far, the need for a sufficiently large market and the fact that 
some of the yield of investment accrues * externally . The difficulties 
here are the large initial capital resources required and the length 
of the gestation period, and consequent high risk rate, in these fields 
of investment. These difficulties will not deter the very large private 
investor who commands adequate capital resources and can afford to 
take risks and a long view. Nor are they entirely non-existent for 
governments as public investors, though government usually has the 
relevant advantages of the very large investor in a high degree. They 
are not, therefore, obstacles to private investment which can be re 
garded as due to divergence between private and social marginal net 
product. Nor do they represent an example of difficulties due to exter 
nal economies : the crucial dimension here is not space the yield of 
investment in one field partially accruing in other fields but time. 84 

4. Conclusion 

In this article, an attempt has been made to show how the meaning 
of external economies has changed, with a changing focus of interest, 
as the concept has passed from Marshall, through the hands of Allyn 
Young, to the current discussion of economic development ; and to show 
how the various meanings are related. The classification of external 
economies, and of the factors which give rise to them, has been under 
taken primarily with the object of helping to clarify some of the ideas 
which have assumed prominence in current consideration of problems 
of under-developed areas. But it may also have some relevance to the 
study of economic growth in advanced countries. 

Canberra University College. 

82. Nurkse, op. cit., p. 10. 

83. Singer, "Economic Progress in Underdeveloped Countries", loc. cit., 
p. 6. 

84. A similar problem is represented by the peculiar uncertainties of 
development investment which arise from the fact that it aims at structural 
change: "In terms of the familiar diagram, economic development does not 
move along existing demand and supply curves, but moves the whole complex 
of these curves on to a different level. . . . Investment of this type is not a 
response to the existing market structure, but an attempt to alter that 
structure" (Gutman, op. cit., p. 5) ; cf. also K. E. Boulding s reference to 
the problem of "maximum maximorum" in B. F. Haley (ed.), Survey of 
Contemporary Economics, Vol. 2, p. 27. 


"Economics," says Professor Lionel Robbins, "is the science 
which studies human behaviour as a relationship between ends and 
scarce means which have alternative uses." 1 In this neat formula he 
sums up a view of the scope of economics which was first advanced by 
Menger, and in England by Wicksteed. Its popularity in the English- 
speaking world is a relatively recent development and must be largely 
due to Professor Robbins s persuasive pleading. 

Before asking whether his definition is adequate, it is worth re 
minding ourselves of the standards by which any definition must ulti 
mately be judged. To define a science is to define the special interests 
of the people concerned with it. If economics is defined in a way that 
excludes material with which economists are specially concerned, this 
is a prima facie reason for changing the definition. The same applies 
if a science is defined in a way which includes material with which its 
practitioners are not specially concerned. There may also be circum 
stances where a definition, though neither too wide nor too narrow, is 
none the less misleading. 

Whether the definition involves error or merely threatens to cause 
confusion, there are two ways in which the resultant problem can be 
dealt with. We can say: "The fact that this material is (or seems to 
be) wrongly included in (or excluded from) the definition makes it 
an exception. " Or we can say : * The definition needs to be changed, 
and we can change it accordingly. Which course we decide to take is 
finally a matter of convenience. 

There is no doubt that on minor points Robbins s definition has 
stood up to criticism well. It is open to the objection, however, that 
economics as he defines it overlaps the field of other sciences, a point 
which is important in view of recent suggestions that the method 
of economics be applied to them. Secondly, though supporters have 
thought it one of the virtues of the definition that it separates eco 
nomics from technology, it will be argued below that it fails to do so. 
The definition can also be criticized on the ground that it is impossible 
to give a good companion definition of the word "economic". It will 
therefore be suggested that Robbins s definition of economics should 
be revised and that the word "economic" should be redefined corre 

* I am indebted to Professor Wilfred Prest and Dr. A. C. Jackson for 
criticizing a draft of this article. 

1. Robbins, The Nature and Significance of Economic Science (Mac- 
millan, London, 2nd ed., 1935), p. 16. 



1. Some Criticisms of Robbins s Definition 

There is no need to summarize here the clear exposition which 
Bobbins has given of his view of the scope of economics. 2 The main 
point to bear in mind is that the "alternative uses" which his defini 
tion mentions included, not only the achievement of different purposes 
by different people, but also the achievement of identical purposes by 
different people and of different purposes by the same person. If some 
one can consume a good at either of two times, and it seems important 
to him whether he does so at one time rather than another, then he 
must choose between alternative uses in Bobbins s sense. Sometimes 
the ends with which economics is concerned are the acquisition of 
various consumer goods, and the scarce means is money. Sometimes the 
ends are, or include, the acquisition of wealth by separate individuals, 
and the scarce means are the resources with which they earn wealth. 
Lastly, the ends may be the manufacture of goods, and the scarce means 
the factors of production which are used for that purpose. It can 
readily be conceded that every relationship with which economics is 
concerned is between ends and scarce means which have alternative 
uses and, chiefly for this reason, Bobbins s definition survives after 
over twenty years of sometimes heated discussion. 

Some of the criticism which have been brought against it seem 
either trivial or mistaken. One was perhaps suggested by an admission 
on Bobbins s part that he hesitates to use the word "wealth" "as 
equivalent to a flow of economic goods". To define "wealth" con 
sistently with his definition of economics, he would have to say that 
it comprised all resources that satisfy human wants which is not 
the sense in which we ordinarily use the term or alternatively, that 
wealth consists of all resources that are scarce and have alternative 
uses. It is presumably because of this that he feels the use of the word 
"wealth" would involve a paradox whereby, if goods become free 
goods, wealth diminishes. 3 

There are, however, two reasons why this situation should not 
tell heavily against Bobbins s definition. As Professor Fraser points 
out, we can define wealth "as including all potentially exchangeable 
goods, irrespective of whether they have or have not a value in any 
given case". 4 A good may temporarily cease to be scarce relative to 
wants, but we need not regard it as ceasing to be wealth so long as 
there is any chance of it becoming scarce relative to wants on some 
future occasion. We may throw it away because its carrying costs out 
weigh the benefits, apparently rather hypothetical, from holding on 
to it ; but if so, we are making a deliberate decision to sacrifice wealth 
in one form in order to conserve it in other forms. Consequently, when 

2. Ibid., pp. 12-21. 3. Ibid., 47 n. 

4. L. M. Fraser, Economic Thought and Language (Macmillan, London, 
1937), 24 n. 


a good passes from the scarce category to the free category, it does not 
thereby cease to be wealth. This only happens when we choose to say 
that it is no longer potentially exchangeable. The amount of wealth 
depends on what we regard as wealth, and it is misleading to say that 
wealth "diminishes" when we decide that some item no longer falls 
in the "wealth" category. 

Secondly, it is rare for any good to become a free good unless 
resources which are scarce, relative to wants, are being used to pro 
duce it. It would be quite consistent with ordinary usage to think of 
wealth as consisting not only of scarce means with alternative uses, but 
also of goods which, though not scarce, have been produced with scarce 
means. On this view, there are few goods of which we cannot say de 
finitely that they are either wealth or free. 

It has been said that Robbins s definition "precludes any con 
sideration of the general level of economic activity". 5 The implication 
is that in a depression resources are not scarce. In the relevant sense, 
however, they are. They may be abundant relative to effective demand, 
but they are not abundant relative to desire. The reason why, in a 
depression, all factors of production are not fully employed is that the 
prices asked for their services are too high to be worth paying. This 
is quite consistent with the possibility that still higher prices would 
increase confidence and purchasing power to a point where the demand 
for factor services actually rose. That would merely mean that over a 
certain range, the income effects of the increase in demand were more 
important than the substitution effects. If labour were not scarce rela 
tive to demand and were expected never to be scarce again, wages 
would be nil and no one would be afraid of their dropping any lower. 
Employment of labour would go on increasing so long as the marginal 
product of labour was positive which means that all labour would 
soon be employed. 

A more substantial criticism can be levelled at Robbins s defini 
tion, namely, that it fails to separate economics from technology. 

According to Hans Mayer, whom Robbins quotes, a problem of 
technique exists where there is one end and more than one means of 
achieving it. A problem of economy exists when there is more than 
one end as well as more than one means. 6 It can be admitted that this 
distinction is perfectly sound in logic. What we have reason to question 
is whether it separates the sphere of technology from that of economics. 

It has been argued that it does so in the following way : if we want 
to build the fastest car, regardless of cost, a problem arises which is 
purely technical. But if cars are being made for profit, other considera- 

5. Raymond T. Bye, "The Scope and Definition of Economics", Journal 
of Political Economy, October 1939, p. 645. "Such problems cannot be fitted 
into Robbins s definition without a good deal of literary gymnastics" (p. 646) . 

6. Robbins, op. cit., pp. 32-8. 


tions enter. The problem then is to decide how many cars and what 
types of car should be made, having regard to what they will sell for, 
and how this should be done, having regard to the cost. The problem 
as a whole can only be solved by solving a number of technical problems 
and also an economic one. 

The technical problems arise from the fact that there are various 
possible methods of producing any particular quantity of any one type 
of car. Some of these methods will be inferior to others in the sense 
that they use a greater quantity of some scarce resource, without mak 
ing a smaller use of any other resource and without leading to higher 
output. Such methods of production can be ruled out on technical 
grounds. We then have a list of possible arrangements, all technically 
unimpeachable, and must choose between them. How we choose should 
depend on the relative values that we place on marginal cars of each 
type and on marginal units of each type of resource. Ordinarily this 
will depend to a large extent on market prices. 

If the distinction between technique and economy always arose 
in this form, it would neatly separate the sphere of economics from 
that of technology. In fact, however, we have merely described one of 
the forms which problems of economy can take. For building the fastest 
car is an end that we can pursue only if we set ourselves a number of 
ends which are, in turn, means to the end of building the fastest car. 
These ends, like minimizing air resistance, maximizing horsepower, 
etc., will sometimes conflict; and in deciding which materials to use 
and how the car should be constructed, we must often strike a balance 
between them. 

It may be held that this point is irrelevant since the conflict be 
tween ends is not due to a scarcity of means. Yet the meons in this case 
are every bit as scarce as in any situation dealt with in economics. The 
fact that there can be only one building on the south-east corner of 
an intersection means that such buildings are scarce, and there is no 
actual or apparent borderline between this sort of scarcity and the sort 
more obviously due to the niggardliness of nature. Even if there were, 
economics is undoubtedly concerned with the effects of both types of 
scarcity. It has been interested right from the start in problems arising 
from the shortage of centrally located land as well as of land which is 
highly fertile. If it is conceded, however, that the physical impossibility 
of erecting two buildings on the same site creates scarcity in the realm 
of economics, it must be conceded that similar impossibilities create 
scarcity in the realm of technology. For purely technical reasons, the 
designing of an axle for a certain purpose may call for economy. The 
larger its diameter, the greater the force it can transmit; hence the 
aims of reducing its size and of transmitting as large a force as pos 
sible are in conflict. They would still be in conflict, and the conflict 
could still be technically relevant, even if axles were free goods. 


Inevitably technology contains problems of economy, and Bobbins s 
definition would include them in economics, even though the science 
can throw no light on them. Admittedly all problems of economics are 
problems of economy, but not all problems of economy are illuminated 
by economics. 

The distinction between the concepts of technique and economy 
as defined by Mayer is perfectly valid, but it cannot be used to separate 
the science of economics from the science of technology, pushing some 
relationships into the first field and others into the second. Ultimately 
this is due to the very meaning of the concepts of end and means. We 
can think of a situation or course of action as a means whether or not 
it is used as a means, and whether or not, if it were used, it would 
achieve its end. If, however, it can be thought of as a means, it can be 
thought of equally well as an end. For to use a means is to aim at 
something, i.e. at using the means. This, therefore, becomes an end. 
If one of my ends is to write and I pick up a pencil in order to do so, 
I entertain a further and subordinate end namely, to pick up the 
pencil. As Dr. Zweig says, in regard to another attempt to separate 
economics from technology: 

"the end in one case may constitute the means to some further 
end, and both ends and means are just different links in one and 
the same chain. Coal is the means in the production of iron, which 
in this connection is the end, but iron again is only the means in 
the production of agricultural machines, which are again the 
means in some other association". 7 

To say this is not to say that there is no difference between ends 
and means. A situation can be regarded as an end without being re 
garded as a means to other ends : ends, that is to say, can be ultimate. 8 
In thought, moreover, the means-aspect of a situation or course of 
action can always be separated from the end-aspect. We are perfectly 
capable of thinking of something as a means without thinking of it as 
an end also. But anything that is thought of as a means can also be 
thought of as an end if it could not be, then the "use" of the means 
could not be aimed at. As we have seen, the strength of Bobbins s 
definition lies in the fact that the earning of wealth and various steps 
towards doing so, as well as the final aims of consumers, can all be 
regarded as ends. This fact is fatal to the attempt to separate economics 
and technology on the basis of Bobbins s definition. 

These two fields are, as a rule, easily distinguished because, in 
practice, we only use the term "technology" to describe sciences con- 

7. Ferdynand Zweig, Economics and Technology (P. S. King & Son, 
London, 1936), p. 22. His criticism of Robbins s definition may rest, however, 
on a misconception. Cf. also J. N. Tewari, "What is Economics?", Indian 
Journal of Economics, April 1947, p. 424. 

8. An ultimate end may also be instrumental. One can regard happiness 
as an end in itself and also recognize that the happier workers are, the more 
efficient they are likely to be. 


cerned with physical relationships. There are, however, social sciences 
that bear on economic affairs in the same way that technology does, 
and whether we call them technology or not, the problem of separating 
them from economics is a real one. Administrative science and the 
discipline which has come to be known as "industrial relations 7 9 are 
important sciences of this kind. Both are concerned with the allocation 
of scarce means between competing uses. 

2. Economics and its Neighbours 

This brings us to the central weakness of Bobbins s definition. He 
regards economics as concerned with a relationship between all types 
of ends and all types of scarce means that have alternative uses. But 
he does not specify which relationship. Indeed his definition is often 
paraphrased to read that economists study the relation between ends 
and scarce transferable means. There are, however, many such rela 
tions, and economics is more concerned with some of them than with 

It is a pity that the many writers who quote Bobbins s definition 
do not quote also the sentences in front of it. 

"The economist studies the disposal of scarce means. He is inter 
ested in the way different degrees of scarcity of different goods 
give rise to different ratios of valuation between them, and he is 
interested in the way in which changes in conditions of scarcity, 
whether coming from changes in ends or changes in means from 
the demand side or the supply side affect these ratios. 10 

This is a valuable description of what economists do, but even in con 
junction with the definition that follows, it hardly marks out a distinct 
science. For even within the field where "ratios of valuation " have 
been formulated, economics is not equally concerned with all the forces 
by which the ratios are affected. It is certainly interested in the effect 
that tastes, fiscal policy and the distribution of wealth may have on 
the demand for consumer goods. Equally certainly, it is interested in 
the effect of technique, fiscal policy and the demand for consumer goods 
on the demand for factors of production. It is interested also in the 

9. In a valuable paper, "The Theory of Effort and Welfare Economics", 
Economica, February 1951, Dr. A. E. C. Hare points out that "industrial 
relations in its present stage of development as a separate specialisation 
consists of an assembly of very diverse data related in various ways to labour 
and its problems" (p. 81). He outlines a theory of effort which, he suggests, 
"appears to be capable of relating the empirical observations of industrial 

Esychology to the practices of personnel management and joint consultation 
i such a way that they all fall into place as part of the general theory of 
welfare economics. If this is so, it may perhaps be a starting point for a very 
desirable and much wider unification of the present diverse body of matter 
which constitutes industrial relations" (p. 82). There is no suggestion that 
the subject should be incorporated in economics, or that it ought to use 
similar methods. 

10. Bobbins, op. cit., p. 16. 


effect of the demand for factors of production and of fiscal policy on 
the distribution of wealth. But these relationships apart, the boundary 
between economics and the field we are pleased to describe as economic 
sociology 11 is indefinite. 

The effect of a change in the distribution of wealth on the size 
and composition of the population would probably be included in 
economic sociology by all who distinguish it from economics proper. 
But the same might not be said of the effects of the population change 
on labour supply and consumer demand. The effect on tastes of adver 
tising and of the distribution of wealth are usually turned over to 
economic sociology, and so, until very recently, was the way that the 
demand for consumer goods and for factors of production affects 
technical invention. The effect on tastes of the concentration of labour 
in cities is certainly regarded as outside economics. As for how urbani 
zation reacts on politics and leads to the growth of trades unions, both 
of which developments affect the distribution of wealth and the supply 
of labour the whole of that involved story has been told many times, 
and has never been the exclusive concern of either economics or eco 
nomic sociology. 

Each of these relationships can be regarded as arising between 
ends and scarce means which have alternative uses. Yet economics is 
not concerned with all of them. Those with which it is concerned have 
the common characteristic that they almost always involve exchange 
and the use of money. 12 Hence the question has been raised whether, 
in defining economics, this limitation should be recognized. 

Robbins considers that this is not a matter about which sensible 
people will waste many precious moments". 13 Whether he is right 
would seem to depend on whether the method of economics is different 
from that of the other social sciences. This is a question that can hardly 
be settled in passing. It must suffice to say that many economists feel 
that there is a difference, and that the difference lies in the presence 
in economics of a structure of necessary argument which is used to sug 
gest hypotheses. No such structure exists in the other social sciences 
and to that extent, the method of economics is unique. It is therefore 
desirable that its professed scope should correspond to the area within 
which the method is used. 

11. For reasons of space no attempt to define economic sociology will be 
made here. To try and do so would at once raise the question of the scope of 
sociology generally. 

12. Cf. Benjamin Higgins, What Do Economists Know? (Melbourne 
University Press, 1951), pp. 3-4, 3 n. 

13. "Live and Dead Issues in the Methodology of Economics", Eco- 
nomica, August 1938, p. 344. More recently he has spoken appreciatively of 
"the Pigovian accessibility to the measuring rod of money , which, if not the 
same thing as the definition in terms of scarcity which I favour, differs from 
it only in a certain implied institutional restriction". "Robertson on Utility 
and Scope", Economica, May 1953, pp. 104-5. 


In practice it has been allotted a broader area than this, and two 
unfortunate results have followed. First, those parts of the wrongly 
annexed territory that are not occupied de facto by any other science 
have been somewhat neglected. Since they cannot be studied by the 
method of economics, they tend to be ignored by professional econo 
mists, while other social scientists are largely unaware that problems 
await study for which their own methods are better suited. The neglect 
of many problems in economic sociology has been partly due to this 

Secondly, territory has been claimed for economics which other 
sciences have long been occupying. For virtually every social science is 
concerned in part with the relation between ends and scarce means 
that have alternative uses. This is true, e.g., of political science. A 
diplomat has only a limited amount of bargaining power relative to 
his ends. He can seldom achieve all the aims of his policy. Up to a point 
these aims may be complementary. But beyond that point they almost 
always conflict. The more bargaining power the diplomat expends on 
one aim, the less, as a rule, he will have to spare for achieving others. 
Likewise, administrative science, being interested in how administra 
tors spend their time, is concerned with the relation between scarce 
means and their alternative uses. Chiefly for this reason, it has been 
suggested that political science and administrative science should be 
drastically reorganized with economics as a model. 

We have the high authority of Professor Talcott Parsons for the 
view that the method of economics is applicable elsewhere. 14 Yet the 
history of efforts to apply it to other sciences is not encouraging. Pro 
posals for reconstituting political science on these lines have been 
current for quite a while. When economics was thought to be concerned 
with the effects of the pursuit of a rather narrow range of purposes, 
it was suggested that political science should trace in the same way 
the implications of the desire for power. 15 Now, under the influence 
of Bobbins s definition, it is argued that the theoretical parts of eco 
nomics and of political science belong to a larger theory of political 
and economic choices. 16 Several writers have also proposed that eco- 

14. ". . . economic theory is clearly formally and technically the most 
highly developed of the theoretical sciences of human action. With the appro 
priate adaptations, which in many cases may prove to be far less radical 
than appears at first sight, its methods of analysis and even its substantial 
results can certainly serve as models for other branches of the general theory 
of social systems. The view of the relation of economics to these other 
branches which I have put forward in these lectures greatly enhances my 
own estimation of the promise in this direction." Parsons, The Interpreta 
tion of Economic and Sociological Theory, The Marshall Lectures, Univer 
sity of Cambridge (1953, mimeographed), p. 67. 

15. G. E. G. Catlin, The Science and Method of Politics (Kegan Paul, 
London, 1927), A Study of the Principles of Politics (Allen & Unwin, London, 

16. D. Black, "The Unity of Political and Economic Science", Economic 
Journal, September 1950. 


nomics should incorporate administrative science, at least so far as 
the latter deals with business. 17 

It usually seems to be implied that the sciences concerned should 
copy the method of economics, a proposal the value of which would 
be shown most clearly if the method were used to solve their problems. 
It is not always possible, however, for the value of methodological 
ideas to be demonstrated in this way. The first job is to lay founda 
tions, and even where something has been built on them, as for instance 
by Professor Black, 18 the fact that his contributions to political and 
administrative theory do not appear to have any immediate value 
is certainly not sufficient proof that the lines he is working on are 

It is rather a thankless task to take up a negative attitude towards 
the proposals which he and other writers have put forward. Yet the 
progress which economics has made while using its distinctive method 
seems wholly due to the role of price, so that its method is unlikely to 
be of much use outside the field where price is employed. In other 
departments of life people may act quite as rationally as they do in 
the market-place. Their conduct may be guided mainly by a single 
aim, just as economic conduct is guided mainly by the desire for 
wealth. But nowhere else is there any device fulfilling a range of func 
tions at all comparable to those of price. Its success in summarizing 
information and so enabling it to be communicated between mind and 
mind is quite unique as regards data that are not merely physical. 
Moreover, once the information is communicated, it co-ordinates eco 
nomic behaviour in a way which has no parallel in other spheres. Else 
where there may be data, like voting returns, which are just as precise 
as prices. But they do not exert a comparable influence on the way in 
which people act. 

It is true, as Professor Black reminds us, that votes indicate pre 
ferences just as market transactions do. It is therefore possible to state 
coefficients which, like price, relate the extent to which some prefer- 

17. ". . . the theory of business administration cannot be kept separate 
from the rest of economics. Separation would only be justified if a special 
group of problems existed. The independence of its problems is the only 
basis for the independence of a science. . . . Because of the size of the problem 
it is right and understandable that the student of business administration 
studies more the relations within the firms and households, and the economist 
more the relations between economic units. But the difference in emphasis 
should not lead to a separation into two separate sciences." Walter Eucken, 
The Foundations of Economics (English trans., William Hodge, London, 
1950), pp. 311-12. 

"To students of business administration, it may seem . . . odd that, so 
far, little has been done to integrate into the body of pure economics any 
developed theory of the functioning of the administrative organisation." 
G. F. Thirlby, "Notes on the Maximisation Process in Company Administra 
tion", Economica, August 1950, p. 266. 

18. His Economic Journal article mentions four earlier papers. D. Black 
and R. A. Newing, Committee Decisions with Complementary Valuation 
(William Hodge, London, 1951) was reviewed in this journal for May 1953. 


ences are implemented to the extent to which other preferences must 
therefore be sacrificed. But their coefficients, unlike price, are of little 
use in advance of the event. Knowledge of them, if it were ever dis 
seminated, would not have much influence on political conduct. It 
would tell the voter relatively little about the implications of his vote. 
In consequence it would not tell the political scientist much about the 
factors by which the voter was influenced. As for explaining the 
behaviour of politicians, the votes at previous elections are only some 
of the signals by which even the most cynical shapes his course. 

The purposes of voting are essentially different from those of 
money. Money is not only a means of exchange and a store of value, it 
is also a standard of value and, in a complex economy, an indispensable 
basis for the kind of calculation from which economic decisions spring. 
The ballot box has more modest functions. It helps to create the con 
ditions which allow government by consent its other functions are 
essentially subsidiary. People can be governed in a tolerably competent 
manner though they do not possess the vote, but no large-scale economy 
can function with even moderate efficiency unless it uses a price system. 
These differences are sufficient to rule out the possibility of a political 
science employing the method of economics. For if even the vote fails 
to produce the kind of conditions that have allowed economics to use 
its distinctive method successfully, it is unlikely that other phenomena 
will prove more serviceable. 

The view that administrative science of which "industrial man 
agement" is, of course, a part should be included in economics and 
should use similar methods deserves fuller consideration. In a dis 
tinguished work on the methodology of this discipline, Professor Her 
bert Simon expresses the belief * that concepts and theorems developed 
in economic theory have wide applicability to administrative de 
cisions". 19 To say this is not to say that administrative science should 
use the method of economics, and in the present connection Simon s 
views are only pertinent because he has given us what is, perhaps, the 
ablest treatment so far of the methodological problems of adminis 
trative science. 20 

Simon argues that 

"the criterion of efficiency as applied to administrative decisions 
is strictly analogous to the concept of maximization of utility in 
economic theory. It is not asserted here that the criterion of effi 
ciency always does dominate administrators decisions, but rather 
that if they were rational it would." 21 

19. Simon, Administrative Behavior (Macmillan, New York, 2nd ed., 
1947), p. 182. 

20. I have discussed some of the suggestions in Professor Simon s book 
in a review in Public Administration (Australia), March 1950. 

21. Simon, op. tit., p. 182. 


But the analogy is not a good one. For as Simon later observes : 

"The need for an administrative theory resides in the fact that 
there are practical limits to human rationality, and that these 
limits are not static, but depend upon the organizational environ 
ment in which the individual s decision takes place. . . . Two per 
sons, given the same possible alternatives, the same values, the 
same knowledge, can rationally reach only the same decision. 
Hence, administrative theory must be concerned with the limits 
of rationality, and the manner in which organization affects these 
limits for the person making a decision/ 22 

A theory describing the various factors which affect the extent to 
which administrators act rationally would be welcomed by economists. 
Yet their task is essentially different from that of administrative 
scientists. The economist works out what people would do supposing 
they achieved their ends by the most rational means. He then proceeds 
to investigate whether they do act in this way. If the administrative 
scientist were to use a similar method, his first step would be to work 
out the course of action that would be rational for an administrator 
faced with a given problem and guided by given knowledge. But this 
would be easier talked about than done. Obviously the rational means 
for achieving a certain end cannot always be worked out easily before 
action is taken. It could be, then as long as the end was envisaged 
clearly enough the rational means would almost always be chosen. 
Nor need the situation be any different after the event. Even where a 
decision has been reached and acted upon, it may not be any clearer 
whether it was, in fact, the appropriate one. If the problems involved 
were complex, it is unlikely that an administrative scientist, arriving 
on the scene one year or even ten years later, will be able to see what 
the right decision was. Besides, if he is to relate the degree of 
efficiency achieved to its causes, he must decide how far the decision 
was subjectively rational. He must decide, that is to say, whether the 
administrator made the best possible decision, knowing what he did. 
This means discovering what the administrator knew ; and to discover 
what anyone knew on some previous occasion can be very difficult. 

It may be objected that there is seldom a perfect coincidence be 
tween the assumptions of economists and the facts, but that even so, 
it has been found useful to calculate what the assumptions imply. It 
is only useful, however, because, as a rule, conduct in concrete situa 
tions is something like what it would be if the theorist s assumptions 
applied. No doubt the decisions of any administrator are something 
like what they would be if the administrator were infallible and knew 
a great deal that he does not know. But from the very nature of the 
administrative problem, the behaviour of administrators varies widely 
from this norm. The whole purpose of administrative science is to 

22. Ibid., pp. 240-1. 


explain why it varies. In economics it is helpful to know the exact 
respects in which the facts of any particular case diverge from the 
assumptions of the * nearest theorem, and the theorems can be useful 
even where the divergence is perfectly obvious. In similar cases admini 
strative scientists may get some help by making assumptions like objec 
tive or subjective rationality and drawing deductions from them, yet 
it is most unlikely that they will get as much help as economists do. 
Professor Simon gives an interesting analysis of the conditions 
of efficiency. 23 He says that 

"the mathematically minded will see in this structure a set of 
equations strictly identical with the economist s production 
functions . ... It follows from the considerations which have 
been advanced that that portion of the decision-making process 
which is factual, which is amenable to scientific treatment, resolves 
itself into the determination of the production functions of admini 
strative activities . 24 

Yet this, after all, is only a small part of the economist s task. If it 
were his main task, then the whole method of his science would be 

It seems unlikely, therefore, that political science or administrative 
science will ever use the same method as economics. This strengthens 
the case for defining the latter field in a way that will make its boun 
daries clear. 

3. Robbins s Definition of "Economic" 

There is a final objection to Robbins s definition. That is the diffi 
culty of reconciling it with the everyday meanings of the word "eco 
nomic". To use this adjective after defining economics as Bobbins does 
will sometimes cause serious confusion, as a teacher quickly discovers. 
The problem links up with another, which is what we mean by "goods 
and services . We certainly do not include under this head everything 
that is useful or desirable. By goods and services we mean the things 
that help to achieve our economic ends. Goods and services are, in 
effect, economic means. To get beyond this we must give a precise 
meaning to "economic". 

In The Nature and Significance of Economic Science, Robbins 
feels obliged to suggest that the word "economic" be avoided al 
together in describing ends or satisfactions. 25 Some years later, how- 

23. Ibid., pp. 186-8. 24. Ibid., p. 188. 

25. "It would be going too far to urge that it is impossible to conceive 
of economic satisfactions . For, presumably, we can so describe a satisfaction 
which is contingent on the availability of scarce means as distinct from a 
satisfaction which depends entirely on subjective factors e.g., the satisfac 
tion of having a summer holiday, as compared with the satisfaction of re 
membering it. But since, as we have seen, the scarcity of means is so wide 
as to influence in some degree almost all kinds of conduct, this does not seem 
a useful conception. And since it is manifestly out of harmony with the main 
implications of our definition, it is probably best avoided altogether." Robbins, 
op. cit., p. 25. 


ever, when writing The Economic Causes of War, 26 he found it essen 
tial to define economic ends in a way that would separate them from 
military and political ones. This was bound to be difficult ; for we not 
only regard the obtaining of money or of consumer and producer 
goods and services as an economic end, we may also treat as economic 
an end that is only valued because in turn it assists the winning of 
wars. We regard cutting off an enemy s supplies as an economic 

Bobbins has a definition which he believes corresponds to both the 
senses in which the word is used. 

"If, in everyday speech, we say that a man s motive in doing a 
certain thing is wholly economic, what we really mean is simply 
that he regards it only as a way of securing means for satisfying 
his ends in general. If he does it with only one end in mind, we 
do not regard his motive as economic ; we regard it as having the 
character of the end to which it is specific. But if he does it with 
the desire to increase his power to satisfy ends in general, then 
we do regard it as economic; and we say that his action has an 
economic cause. 

"This way of speaking has its counterpart in the more tech 
nical regions of economic analysis. Rightly conceived, the economic 
man of classical theory is not a man who has no end but the 
making of money. He is not a man who is concerned only with 
providing for his own consumption. He is simply a man who in 
his capacity as producer is concerned with the maximization of 
general purchasing power. His productive activities are not ends 
in themselves. They are not immediately subservient to particular 
kinds of consumption. They are purely instrumental to the aug 
mentation of his power to purchase in general. He may want 
money for purposes of pushpin or poetry, for egotistical or altru 
istic reasons. But as producer he has no mixed motives. His motive 
is purely economic. " 27 The characteristic of the economic motive 
is the lack of specificity of the means with which it is concerned. 28 

It can be admitted that Bobbins s definition corresponds perfectly 
to one of the distinctions between the economic and the non-economic. 

" . . . the distinction within the sphere of general strategy between 
military and economic objectives will be seen to be a distinction 
between objectives having more or less specific utility for the ends 
of particular operations. The destruction of a cargo of iron ore is 
an economic objective ; the destruction of steel guns is military". 29 

But Bobbins must also separate economic objectives, in the sense of 
money or goods and services, from military and political objectives. 
Here his distinction breaks down. In the first place, consumer goods 
and services may be desired only for their own sake, and even pro 
ducers goods and services can be highly specific. In the second place, 

26. Jonathan Cape, London, 1939. 

27. Robbins, The Economic Causes of War, pp. 117-18 (Robbins s 
italics). 28. Ibid., pp. 118-19. 29. Ibid., 119 n. 


military and political objectives can also be desired for more reasons 
than one. A military end, once achieved, can be used as a means to a 
number of ends. Successful interference with an enemy s trade opens 
quite a variety of possibilities. No doubt these ends are also means to 
the single end of victory. But victory in turn can be used to promote 
a number of aims. 

The inadequacy of Robbins s definition becomes clear when he 
tries to separate the economic causes of war from the non-economic. 

"The causes of war are to be regarded as economic if the objective 
is purely instrumental to securing for some person or persons 
a greater command of resources in general a greater power of 
choosing alternative types of real income. They are to be regarded 
as non-economic if the objective is not instrumental to anything 
further if it is definitely an end in itself rather than means for 
a number of ends." 

Immediately after, however, he says that "both types of war may be 
waged by men having a multiplicity of ultimate objectives". 30 If the 
word economic is to be used to describe all ends that are also means 
to other ends, it can be applied to any end at all, except those which 
are not instrumental to other ends and which are only pursued, there 
fore, if they are held to possess ultimate value. 

Eobbins s definition of a very useful adjective is scarcely satis 
factory. Yet it is hard to see how it can be improved upon consistently 
with his definition of economics. If this, however, can be amended, we 
may be able to define economic " in a way which fits in with the new 
definition of the science, as well as corresponding to general usage. 

4. Economics and "Economic" Redefined 

It has been suggested that economics describes those relationships 
between ends and scarce transferable means which involve exchange. 
The science, however, can be interested in such relationships even where 
there is no question of exchange. Recent discussion has shown that it 
throws enormous light on the allocation of producer goods and services 
in a fully socialized economy, provided the economy employs a price 

Professor Parsons gives a strikingly accurate account of economic 
theory when he calls it 

a system composed of the variables which most directly account 
for the degree to which any given social system of action in fact 
involves a rational process of the acquisition and allocation of 
scarce resources by the means designated".. 31 . 

But the definition in the sentence preceding this quotation is open- 
to criticism: 

30. Ibid., p. 118. 

31. Parsons, The Structure of Social Action (2nd ed., Free Press, 
Glencoe, 111., 1949), p. 266. 


"... for the purposes of this study, economics may be defined as 
the science which studies the processes of rational acquisition of 
scarce means to the actor s ends by production and economic ex 
change, and of their rational allocation as between alternative 
uses". 32 

Economics can study choice even where this deviates somewhat from 
the rational norm. In any case the definition fails to exclude technology, 
though Parsons certainly wishes to do so. 33 Nor does it eliminate the 
many relationships which bear on acquisition and allocation but with 
which economics is not concerned. 

The solution would seem to be to make some mention of price 
when defining our science. The meaning of price is only intelligible 
along with the notion of scarcity, yet the fact of pricing need not 
accompany scarcity and is, indeed, a distinguishing feature of those 
scarcity relationships in which economics is interested. The science 
should therefore be defined as follows : 

Economics studies those relations between ends and scarce means 
with alternative uses that are usually mediated ~by price. 

The main reason for amending Bobbins s definition on these lines 
is that economics is thereby separated from neighbouring sciences. 
When an entrepreneur uses price in making his decisions, including 
decisions about productive methods, economics can throw some light 
on the process by which the decisions are reached. In other connections 
where scarce means must be allocated between alternative uses, and 
where the process is not assisted by price, economics contributes no 
thing. It throws no light on the purely physical problems of economy 
with which technology abounds, nor does it illuminate the distinctive 
problems of administrative science. By explicitly recognizing these 
limitations we obtain a watertight definition. If, of course, administra 
tors or builders or engineers ever tackle their distinctive problems 
with the help of coefficients that perform the same functions as price, 
then economics will overlap with other disciplines. It has been sug 
gested that linear programming could be used to set up a system of 
shadow prices which would guide the decisions of managers at the 
lower levels. 34 So far as this proposal is acted on, the borderlines of 

32. Ibid., p. 266. Professor Stigler has given a similar definition: 
"Economics is the study of the principles governing the allocation of scarce 
means among competing ends when the objective of the allocation is to 
maximize the attainment of the ends." George J. Stigler, The Theory of 
Price (Macmillan, New York, 1947), p. 12. 

As between the two, Professor Parsons s definition has the advantage 
that by mentioning "the process of rational acquisition . . . by production 
and economic exchange", it includes relationships that help to determine the 
distribution of wealth and are traditionally included in the corpus of 

33. Parsons, op. cit., pp. 265-6. 

34. See A. Charnes, W. W. Cooper and A. Henderson, An Introduction 
to Linear Programming (Wiley, New York, 1953), pp. 33-4, 39 and the 
references given there. 


both economics and economic sociology will need to be reviewed. This, 
however, is a problem with which we can deal if and as it arises. 

The amended definition covers economies in which some good, 
valuable in itself, does service as money in Mr. Radford s P.o.W. 
camp, it was cigarettes. 35 Such goods are money and the resultant 
evaluations are prices, in every important sense of the words. 86 Since 
the definition refers to relationships usually mediated by price, it 
covers economies where no such standard of reckoning is used. In such 
economies, however, there has been little or no exchange 37 nor much 
rational calculation, hence economics can tell us little concerning them. 
On the other hand, a points system of rationing being a price system 
in all but name, its problems clearly fall within economic science. 

The proposed change in Robbins s definition is something of a 
concession to Professor Pigou. Pigou defines economic welfare as 

"that part of social welfare that can be brought directly or in 
directly into relation with the measuring-rod of money", 88 

and a definition of economics could be worked out on similar lines. It 
would be necessary, however, to delete the words "directly or in 
directly", since problems of technique can certainly be related to the 
measuring-rod of money. It might also be preferable to speak of that 
part of welfare "that can be and usually is" so related. However, the 
definition would still fail to specify the type of relation in which we 
were interested. By introducing the idea of economy, Robbins and 
the writers preceding him have rendered a service. 

Lastly, the proposed amendment lets us define "economic" in 
a way consistent with our definition of economics and also with every 
day speech. "We can say that a problem is economic if it is usually 
solved with the help of price. An end is economic if its cost, in terms 
of alternative ends, is usually measured by price. It follows that ends 
can still be economic even though there are times when this method 
of measuring their cost is not employed. What is decisive in this regard 
is the way in which the cost of the end is usually measured. "Whether 
it is a means to other ends and the nature of these other ends are 
wholly irrelevant. Likewise a means is economic if its contribution is 
usually measured by price. 

There will be borderline cases where an end which is also a means 
cannot be easily classed as either economic or non-economic. Here the 
best procedure is to define the end more precisely. If we want to con 
trast military ends with economic ones, it would be risky to put * guns 
in either category. But we can say that guns at the point where they 

35. R. A. Radford, "The Economic Organisation of a P.o.W. Camp", 
Economica, November 1945. 

36. Cf. Eucken, op. cit., pp. 159-60. 

37. Norman Angell, The Story of Money (Cassell, London, 1930), Ch. 2. 

38. A. C. Pigou, The Economics of Welfare (Macmillan, 4th ed., 1946), 
p. 11. 


leave the arsenal are economic ends, usually pursued with the help of 
price, while guns on the battlefield, whether brought there as a matter 
of tactics or lately captured from the enemy, are not ends usually pur 
sued with the help of price. They are therefore non-economic. 

The definition proposed here can also be used to separate the 
economic aspects of rural life from the non-economic. The economic 
advantages of a rural job can be regarded as including not only the 
associated power to buy goods and services which are priced in both 
country and city, but also benefits which are free in the country and 
can only be made available in cities by using scarce resources. Day-time 
privacy, day-time quiet, opportunity for outdoor social contact and 
access to natural beauty are benefits of this kind. They should be taken 
account of along with wage and price data when rural and urban living 
standards are being compared. For this purpose, however, they must 
be distinguished from other rural advantages, real or alleged, like the 
cohesiveness of small communities. The fact of their being obtained 
usually with the help of price seems the only adequate criterion. 

No doubt both the suggested definitions must still be used with 
judgment. This simply reflects the fact that the bearing of economics 
on concrete problems and the help which price gives in measuring the 
cost of achieving ends are always matters calling for judgment. Each 
can vary greatly, even between situations that in other respects are 
very similar. 

University of Melbourne. 


1. An Empirical Analysis 

Keynes s The General Theory has furnished economists with pro 
bably the most powerful method of analysing the productive activity 
of the entire community. His formulation of that theory in aggregative 
terms was designed for the analysis of problems concerned with the 
economy at large, notably the problem of mass unemployment in the 
thirties. However the characteristic economic problems to-day are as 
much problems of industrial structure as of the economy at large 
e.g. problems of inflationary bottlenecks, import surplus and defence 
planning. Indeed, the unemployment problem itself has basic struc 
tural aspects. It is natural therefore that an effort should be made to 
develop the Keynesian theory to permit analysis of the structure, as 
well as of the amount, of national employment and activity. It was 
pointed out in a previous article 1 that inter-industry analysis consti 
tutes exactly such a development of Keynesian theory. The aim of 
this paper is to assess the degree of success with which inter-industry 
analysis can handle practical problems of industrial structure. 

Inter-industry analysis seeks to handle such practical problems as : 

(i) Industrial mobilization. The problem is to ascertain the level 
of output of each industry required to meet national defence 
needs, as w r ell as to ascertain whether available resources are 
adequate for those levels of output. 

(ii) Market research. The problem is to ascertain the market for 
a commodity (e.g. steel) which is widely used by other in 
dustries in the production of final goods. 

(iii) Inflationary bottlenecks. The problem is, for example, to an 
ticipate the demands upon and by the electric power industry 
in a period of national development. 

(iv) Employment policy. One problem is whether a particular 
recession shall be met by a public works programme, by tax 
cuts, etc. each measure having a different impact upon the 
industrial structure. 

(v) Structural change. One problem is to ascertain the effect of 
a change in technology in one industrial sector upon the 
markets and costs of other industries. 

Before proceeding to set out the basic method employed to analyse 
any of these problems, it should be mentioned that inter-industry 
analysis is also referred to as " input-output analysis * or "Leontief 
analysis", but rarely as "general interdependence theory 3 

1. "Input-Output Analysis", Economic Record, June 1954. 



rasian theory". This preference for a new set of names is not to be 
explained merely by their sales appeal to the comptrollers of funds 
for economic research. The protagonists of inter-industry analysis are, 
as the name suggests, genuine empiricists. For them, no economic 
theory merits discussion unless two questions about it can be answered 
in the affirmative: " First, can we obtain the data needed to set about 
testing and applying the theory? Second, can we overcome computa 
tional and other problems involved in the practical application of the 
theory to structural problems ? " It is unusual indeed to prescribe that 
the answers to these two queries determine the respectability of an 
economic theory. Now the difficulty of testing and applying economic 
theories is proverbial. Perhaps the most important causes of this diffi 
culty are the erudition of some theories and the inadequacy of statis 
tical series. The pioneers of inter-industry analysis reacted to these 
obstacles in a typically hard-headed fashion by making assumptions 
which permit the formulation of simple theories for initial testing, and 
then foraging for data. Having first overcome these obstacles, their 
second step was to devise a method of recording the basic data suited 
to the capabilities of available computing equipment. The final step 
in solving any particular structural problem is the statement and 
manipulation of the set of equations specifying the conditions of equi 
librium. The next three sections of this paper discuss the nature of 
these three stages in handling structural problems. 

2. Fundamental Assumptions 

On purely practical grounds, inter-industry analysts make four 
assumptions as to: the nature of the industry s production function, 
the existence of short-run normal profit rates, the discontinuous nature 
of technical substitution possibilities and the existence of a given final 
bill of goods. The nature of and reasons for these assumptions may be 
explained briefly as follows. 

Because statistical data are usually recorded on an industry basis, 
the theories of the input-output analysts are stated in terms of the 
productive activity of the industry, not the firm. In order to do this it 
has been necessary to assume that, for any given collection of produc 
tive factors employed in an industry, the output they are capable of 
producing is the same irrespective of the number of firms into which 
the industry is organized. This does not, it should be noted, involve 
any assumption as to whether scale returns in the industry are con 
stant or decreasing. 

Having made the industry the basis of the investigation, input- 
output analysts, rather than discuss competitive theory, prefer to pos 
tulate the further assumption that an empirically established normal 
profit rate will prevail in the industry, at least in the short run. If 


entry into the industry is quite free this normal profit rate will be the 
minimum needed to keep firms in the business. If, however, the relation 
ship between member firms is oligopolistic, one possibility is that a 
normal profit rate will be fixed at the level which is expected to maximize 
collective profits for existing member firms the normal profit rate 
being higher, the more effective are the restrictions upon entry of new 
firms. It is clear then that the assumption of a given normal profit 
rate by input-output analysts is not to be equated, as some commenta 
tors have suggested, to an assumption of pure competition. The em 
pirical evidence available for manufacturing industry strongly sug 
gests the prevalence both of oligopolistic relations and of stable short- 
run profit rates. 

The assumption that the output capable of being produced by 
any given group of factors employed in an industry is the same irre 
spective of the number of member firms is an essential part of the 
underpinning of inter-industry analysis. It is worthy of note that the 
general acceptance of this assumption in economic analysis would have 
further ramifications. Thus if inter-industry analysis explains the out 
put of the industry, the task of the theory of the firm is to explain the 
distribution of total industry sales as between member firms of the in 
dustry. Such explanation is rendered difficult since, by assumption, 
the businessman s marginal revenue and marginal cost are constant at 
all levels of the firm s output so long as the industry s output is un 
changed. For example, a businessman who contemplated reducing his 
volume of output would find his market taken over by a competitor, 
and in the new position the marginal revenue and marginal cost of 
both firms would be the same as before. In such a situation the firm s 
" scale condition" viz. equate the price of a factor to its marginal 
revenue product would not suffice to specify the firm s most profitable 
level of output. However, discussion of such problems of the firm finds 
no place in inter-industry analysis. 

Let us turn now to the problem of minimizing the cost of produc 
ing a particular level of industrial output a matter which is of as 
much concern in inter-industry as in other fields of economic analysis. 
Traditional analysis tacitly assumes that inputs are continuously sub- 
stitutable and that the technical marginal rate of substitution between 
them diminishes. Inter-industry analysts, with the help of time series 
data and direct engineering investigation, point out that this situation 
is the exception rather than the rule. Inputs are infrequently continu 
ously substitutable and where they are, the marginal rate of substi 
tution may be constant over the possible range of substitution. The 
characteristic situation is in fact that any method of producing a com 
modity involves considerable capital equipment, the design of which 
usually requires that other factors be used in fixed proportions up to 
plant capacity. A modification of this is the apparent prevalence of 


the practice of maintaining in the industry a basic skilled work force 
which, like the industry s capital equipment, remains constant in size 
up to its capacity output ; the balance, the less skilled section, of the 
industry s work force tends to vary proportionately with the inputs of 
materials. In such a productive system, the significant opportunity for 
choice in productive activity is characteristically not a choice between 
continuously substitutable factors (which can be solved by the equi 
marginal productivity condition), but a choice between a finite num 
ber of methods of production with each of which is associated certain 
capital equipment and fairly closely specified rates of flow of inputs. 
Thus the view is held by inter-industry analysts that the important 
choice in productive activity is usually between a new finite alterna 
tives in fact between two or three or so possible methods of produc 
tion. The existence of continuously substitutable inputs and even 
diminishing technical marginal rates of substitution is not of course 
denied any more than it would be denied for example that, in 
individual cases, the personal deficiencies of a businessman may limit 
the size of his firm. It is merely that these phenomena are not regarded 
as the norm in business activity. 

Inter-industry analysis is now confronted with a further difficulty. 
For any practical attempt to replace aggregative or macroeconomic 
models of our society by models in which individual industries are dis 
tinguished, is immediately confronted with the absence of adequate 
information as to consumers tastes. However daring economists have 
been in specifying aggregate consumption functions, no country has 
yet been furnished with a complete set of commodity consumption 
functions notwithstanding the efforts of Richard Stone and his assis 
tants. The reaction of input-output analysts to this situation is, typi 
cally enough, to concentrate for the present upon "open" models in 
which the consumption functions (characteristic of "closed" models) 
are replaced by a given final bill of goods. The final bill of goods lists 
the actual quantities of specific commodities which collectively com 
prise the final demand of Keynesian analysis. In view of the obviously 
greater explanatory value of * closed models, it is surprising to find 
that "open" models are capable of handling a variety of important 
problems. One such problem discussed in detail below is the industrial 
mobilization problem which is indeed largely responsible for the tre 
mendous fillip which has been given to inter-industry analysis in 
recent years. 

The foregoing assumptions bring the analysis to the stage of prac 
tical feasibility and the next task is the collection of data. Four types 
of information are required as to: resources (including labour and 
industrial plant capacities), the final bill of goods, normal profit rates 
and the state of technology in each industry. Ideally this information 
should be obtained wherever possible at first hand by a research team 


and the data then checked for comprehensiveness and consistency 
against a series of independently collected transactions tables (or 
input-output tables). In practice input-output analysts are prone to 
rather excessive reliance upon the transactions table as a primary 
source of information. 

3. Description of Industrial Technology 

The second stage in handling structural problems is concerned 
with the manner of recording technological data. To appreciate this 
matter it must be realized that computational difficulties are always in 
the background of inter-industry analysis. Inasmuch as the problems 
analysed are usually capable of theoretical solution and the basic data 
are potentially available from engineers, chemists, farmers and others, 
the computational aspect assumes especial significance. To keep it 
within reasonable limits, input-output analysts adopt a basic device. 
This is that an industry s technology, no matter how complex, is re 
corded piecemeal and each of the pieces is a statement of this form : 
the input of the factor i used in producing commodity j bears a 
straight-line relation to the output of j 2 This method of describing an 
industry s technology may be compared with a jig-saw puzzle in which 
all the pieces are of the same simple shape and when all the pieces 
are fitted together, the pattern of technology is revealed. This device 
has its limitations, but a little exploration shows them to be by no 
means as great as may first appear. 

First of all there are many cases where this device is obviously 
immediately applicable. For example, in flour-milling we may find 
the intake of wheat and labour satisfying the straight-line relations : 

Wheat input = 48-6 X Flour output (bus./sh.ton) ; 

Labour input = 1,133 + 0-002222 X Flour output (men/sh.ton). 

The same kind of relation is found to hold true over a very wide range 
of industries from blast furnaces and breweries to cement and soap 
works. However, if scale returns are continuously diminishing, it is 
necessary to approximate to the curve of diminishing returns by a 
series of connecting straight lines (on the same principle that we may 
approximate to a small diameter circle by a hundred-sided polygon). 
The degree of approximation involved is, of course, the critical con 
sideration. On the other hand, if scale returns diminish discontinuously 
with constant marginal increments within the ranges, then no approxi 
mation is involved. For example, suppose labour requirements in the 
coal industry comprise a fixed skilled work-force of 8,000 men plus 
a variable work-force determined by the need for 1,000 men per million 
tons up to an output of 12 million tons, and for 1,300 men per million 

2. i.e. Xij = bu -f dij-Xi, where xu is the input of i, X } is the output of 
/, and a,ij, bu are constants each of which may be positive or zero. 


tons for any further production up to 18 million tons per annum, i.e. 

in range 0-12, Labour input = 8,000 + 1,000 X Coal output 

(men/m.tons) ; 
12-18, = 20,000 + 1,300 X Coal output 


It is then possible to ascertain (either by trial and error or by some 
more refined method) that output will be in one of these ranges. If 
output will be in the higher range, then the second of these two 
straight-line relations is the one to be used. 

Let us turn now to the possibilities of substitution within the 
technical horizon of the industry. It has already been pointed out 
that input-output analysts believe the normal situation to be that the 
businessman has the choice between a few distinct alternative methods 
of production such as producing steel by the open hearth method or 
in a Bessemer converter each of which may be described by a set of 
straight-line relations such as we have been describing. The basic 
routine of inter-industry analysis is to begin by assuming that some 
particular method of production (or activity) will be used and subse 
quently, where necessary, to test this by costing both it and any alter 
native methods to ensure that it is the cheapest. 3 If it is not, then the 
incorrect assumption is replaced and the analysis re-worked. Plainly 
the skilled investigator will develop methods to minimize the number 
of incorrect assumptions. 

In industries where inputs are continuously substitutable over a 
range and the technical marginal rates of substitution are diminishing, 
inter-industry analysis must fall back on the technique of approximat 
ing by choosing between a finite number of alternatives. In such a 
situation (if it really exists) inter-industry analysis is seen at its worst. 
However, the approximation technique can be tested since, once factor 
prices have been calculated, the process of differentiation can be 
employed to test whether the equi-marginal productivity condition is 

In resume then, inter-industry analysts represent the technological 
horizon of the industry by a collection of straight-line relations solely 
for computational convenience. Phenomena of diminishing scale re 
turns and price substitution need not be ignored but can be dealt with 

3. The basic procedure for determining relative prices from the com 
plete set of industry cost accounts is set out by W. Leontief in The Struc 
ture of American Economy (p. 46) for the closed, single resource model. 

As to the open inter-industry model, once the level of outputs and inputs 
in all industries has been calculated, it is then possible to calculate from 
the assembly of cost accounts the system of equilibrium prices consistent 
with this level of outputs, provided the prices of non-labour scarce resources 
are pre-determined, i.e. the interest rate and land rents are parameters. In 
the case of Australia a convenient alternative to pre-determined land rents 
would be for the prices of Australia s major exportables to be parameters 
in which case land rents would be determined as residuals. 


by approximation and trial-and-error methods though these methods 
undoubtedly place a heavy premium on the use of skill and ingenuity 
in eliminating incorrect hypotheses and so reducing the volume of 

4. The Mobilization Problem 

The final stage in the method of inter-industry analysis is the 
handling of the set of equilibrium conditions. 4 Here we may con 
veniently take the industrial mobilization problem to illustrate the 

The problem is to ascertain the level of output of each industry 
necessary to meet the nation s defence needs and to ascertain whether 
available resources are adequate for those levels of output. The infor 
mation needed to solve the problem includes : a catalogue of resources 
(including plant capacities), normal profit rates and the state of 
technology in each industry which is to be recorded in the way already 
described. Secondly, information is needed as to the final bill of goods. 
In the present case the bill of goods will comprise: the materiel re 
quirements of the military departments; the quantities of consumer- 
goods which will be made available for purchase by private individuals ; 
the investment requirements to ensure the productive capacity re 
quired for the programme ; and finally exports imports being netted 
out of the bill of goods. 

Once these two groups of information have been assembled, the 
method of solving the problem is in principle that of ascertaining the 
levels of industry output implied by the given bill of goods. That is, 
the method in essence uses the technical coefficients in the straight-line 
relations to ascertain just what commodities and factors are used up, 
directly and indirectly, in finally turning out each item in the bill 
of goods. In more detail, the method is as follows. For each commodity 
(e.g. coal) the equilibrium condition is: 

Output Sale of Sale of Sale of Bill of 

of coal = coal to + coal to + coal to +"...+ goods entry 
Industry 1 Industry 2 Industry 3 for coal 

So if there are 200 industries each producing one different commodity, 
there are 200 such equilibrium conditions. Now if no industry varies 
the stocks of commodities it purchases, then its purchases equal its 
requirements to produce the equilibrium rate of output. Thus if Indus 
try 1 is Power Generation, the "sale of coal to Industry 1" is in fact 
the current coal needs of power stations which bears a straight-line 
relation to powder output. Exactly what this straight-line relation is 
may be uncertain at first, either because scale returns vary or because 

4. In Section 5 of the article "Input-Output Analysis", loc. cit., a stan 
dard procedure for solving closed general equilibrium systems was set out. 
The present section details the corresponding (simpler) procedure for solv 
ing open models. 


there may be substitution possibilities between coal and oil fuel. 
Ad hoc procedures are used to decide which of the possible straight- 
line relations will prevail and this is used as a working hypothesis to 
be proved or disproved by subsequent testing. For example, the rela 
tion which has recently prevailed may be used. 5 The straight-line rela 
tion thus specified is then inserted in the equilibrium condition for 
coal. By carrying out this operation for each coal-using industry (steel, 
railways, gas, etc.), the equilibrium condition for coal is re-stated in 
the form : the required output of coal equals the sum of the straight- 
line relations for coal of all the coal-using industries together with the 
bill of goods entry for coal. 6 Repeating this for all 200 commodities 
produces a set of 200 equations, each of which specifies a relation be 
tween the levels of output of some or all commodities. It will normally 
be found that there is a particular level of activity for each industry 
which will satisfy this set of relations, and this set of activity levels 
can be calculated with the assistance of punch-card tabulation or high 
speed computers. The validity of the working hypotheses made in 
the course of the problem can be tested : the hypotheses concerning 
the range within which output and scale returns lie can be tested 
immediately; 7 the hypotheses concerning the cheapest of the various 
methods of production known to be technically feasible can be tested 
after the structure of prices consistent with the spread of calculated 
outputs has been computed. 8 If any hypotheses are found to be invalid 
the calculation must be re-worked, so errors are expensive in terms of 
computing time. 

As to the remainder of the mobilization problem : whether avail 
able resources and plant capacities are adequate for these levels of 
output can be found by computing the resource requirements (of 
labour, etc.) implied by the bill of goods and then comparing these 
with actual resources. This comparison can be made in close detail 
and, depending on its outcome, the mobilization programme may be 
expanded or (more probably) trimmed. 

Inter-industry analysis plainly lends itself to use as an instrument 
of government policy whether in defence planning, in forestalling 
bottlenecks in a peace-time development programme, or in endeavour- 

5. Thus in Australia during the five years 1944-9, the ratio of black 
coal ( 000 tons) to electricity generated (mil. kwh.) was 0-43 approximately, 
with a mean deviation of 2 per cent. 

6. i.e. Output of coal = (b c i + a c iXi) + (b c2 + a c2 X 2 ) + (b c3 + a cS X 3 ) + 
... -f y c , where Xi is the output of Industry 1, y c the bill of goods entry for 
coal, and all a and b are non-negative constants. (In terms of the last foot 
note bd = and a c i = 0-43.) 

7. This test simply takes the form of checking whether, in terms of the 
example in Section 3, the calculated output of coal is in fact in the assumed 
range of 12 to 18 mil. tons. 

8. Refer footnote 3 above. Once relative prices have been calculated, 
the test then takes the form of checking whether, at the calculated factor 
prices, the method of production (or activity) assumed is in fact the cheapest 


ing to maintain a state of full employment. 9 Equally, however, it can 
be used as an instrument of private business planning. For example, 
U.S. investigators found that of their country s gross iron and steel 
output in 1947, 16-6 per cent was exported directly or indirectly, while 
a further 32-6 per cent was used to satisfy consumers indirect de 
mands (the demand for cars and canned foods heading the list). 10 This 
kind of result is of major interest to any industry attempting to evalu 
ate its future markets. 

5. Assessment 

Perhaps the most important criticism which can be levelled at 
inter-industry analysts is their past tendency to rely upon single trans 
actions tables as sources of data thereby creating among their fellow 
economists the impression that the analysis breaks down in the absence 
of fixed proportions and constant scale returns. This deficiency will 
presumably be rectified with the growth of funds available for research 

An important limitation to inter-industry investigation is its 
formulation in terms of a state of equilibrium. It should be pointed 
out, however, that Professor Wassily Leontief and his associates are 
working vigorously towards the objective of replacing the open equili 
brium version by a closed dynamic model. The demands made by such 
a model upon statistical sources would of course be considerable. 

A lesser criticism of inter-industry analysts is their failure to 
make due allowance for joint production and for the production of 
a commodity by more than one industry. The fact is that each of these 
involves some complication for the simple "one industry-one com 
modity" type of inter-industry analysis. However, it is perfectly 
feasible for the analysis to take explicit account of the production by 
an industry of a "major" and one or more "subsidiary" commodities. 11 

9. As to this last, cf. Cornfield, Evans and Hoffenberg, "Full Employ 
ment Patterns, 1950", Monthly Labor Review (U.S. Department of Labor), 

10. Evans and Hoffenberg, Review of Economics and Statistics, 1952, 
p. 124, "The Interindustry Relations Study for 1947". 

11. It is necessary to determine by ad hoc procedures the ratio in which 
it is expected these commodities will be produced. As the ratio of outputs 
of joint products seems usually free to vary over quite a limited range, this 
is not a major problem. In any event it is possible subsequently to test 
whether the assumed ratio is the most profitable of the possible alternatives. 

However, admitting joint production into an open model virtually 
necessitates leaving the quantities of all subsidiary commodities undeter 
mined in the otherwise completely specified bill of goods. Such a course in 
turn implies that final demand adjusts itself, via the price system, to the 
relative rates of output specified by the technology of joint production. 

In this footnote "joint production" refers to the case where the produc 
tion of one commodity places some technical constraint on the firm as to the 
production of another commodity. Where an industry produces several com 
modities but there is no such constraint, the case is not one of joint production 
and the analysis can follow the same procedure as in the single commodity 


On the other hand, inter-industry analysis is not well fitted to deal 
with the general case where a commodity is produced in several 
industries. 12 

For all these deficiencies, inter-industry analysis offers a method 
of solving practical problems of the first importance. If it is inelegant 
and crude, this is more than outweighed by its earthy realism. For 
example, its solution of substitution problems by costing the individual 
alternatives, while distinctly gawky compared with the traditional 
use of the infinitesimal calculus, is none-the-less exactly the method 
used by businessmen themselves. Equally its use of approximation 
and trial-and-error methods, though they may appear fumbling and 
inept, is simply designed to produce practical results with equipment 
which is generally available. Inter-industry analysis is in fact the 
most promising development in applied economics since The General 
Theory paved the way for aggregative models of the economy. 


12. Of course if the percentage of total output of the commodity which 
is produced by each of the industries can be pre-determined, the analysis 
can proceed in the usual way. But this is poor consolation. However, in the 
special case where a commodity is a joint product in one industry and an 
independent product in another, the analysis is quite straightforward once 
the ratio of joint production has been determined. 


What is the economic limit to immigration? In particular, in the 
absence of foreign loans, is the true limit provided by the adverse 
effect of immigration on the balance of payments? This problem has 
many similarities with that facing other countries such as India, whose 
population increase derives primarily from the excess of births over 
deaths. But these other countries are not in the happy position of being 
able to regulate the size of their population, and therefore the issue 
does not pose itself to them in quite the same form as to Australia. 

The motives for Australia s active migration policy are usually 
stated to be political, while the limits are social and economic. When 
a change in the policy was decided upon in 1952, economic considera 
tions seemed to be in the foreground. It was a common argument that 
migration should cease as it was increasing unemployment. Indeed, 
popular opinion apparently regards the growth of unemployment as 
indicating the approach of the migration limit. On the other hand, 
most economists have tended to emphasize the impetus migration is 
said to give to internal inflation. Yet a third point of view, represented 
perhaps by Professor Karmel, 2 stresses the adverse effect on the 
balance of payments as being, in the absence of foreign loans, the 
principal limit to immigration. 

It is possible to reconcile these three points of view. It will be 
argued here that some of the effects of a population increase may lead 
to a fall in real income or real consumption per head in Australia. It 
may also lead to a change in the distribution of this income. The 
economic limit is set where this fall in the standard of living together 
with the change in the distribution of income is no longer compensated, 
in the view of the people of Australia, by the political and other non- 
economic advantages of immigration. This definition implies of course 
that there are always people prepared to immigrate, if only Australia 
will let them in. 

1. I am indebted to Professor J. E. Meade, Mr. T. M. Rybczynski and 
Mr. R. G. Lipsey for helpful comment and clarification of a number of impor 
tant points in this paper. They are, of course, not responsible for the views 
expressed. I also wish to acknowledge a debt to Professor P. H. Karmel, 
whose illuminating essay on "The Economic Effects of Immigration" in 
Australia and the Migrant, published by the Australian Institute of Political 
Science (Angus & Robertson, Melbourne, 1953), started me off on this par 
ticular line. Attention should also be drawn to three articles which discuss 
some of the subject-matter of this paper: M. Gottlieb, "Optimum Population, 
Foreign Trade, and World Economy", Population Studies, Sept. 1949; Kings- 
ley Laffer, "The Economics of Australian Immigration", Pacific Affairs, 
Dec. 1952; H. G. Johnson, "Economic Expansion and International Trade", 
Manchester School, May 1955. 

2. P. H. Karmel, op. cit. 



The point of view which regards unemployment as setting the 
limit to immigration tends to forget that the same authorities which 
have encouraged the migrants to come to Australia should be able to 
create the effective demand to provide the necessary employment. 
The element of truth, as we shall see, is firstly that the ability to create 
additional employment may be limited by a shortage of capital, and, 
secondly, that a successful migration programme is difficult when 
there is a margin of unemployment, but that some unemployment may, 
under certain conditions and in the absence of certain other policies, 
be required to avoid inflation. 

Three types of assumption will be made in the course of the 
analysis. It will, for example, be assumed that there is no natural 
increase in population. This is, of course, patently unrealistic, but it is 
a type of assumption which helps to isolate the problem under study 
and simplify the expositoin. The basic argument would not be altered 
if the assumption were relaxed. Another type of assumption is meant 
to be some approximation to reality. For example, we shall suppose 
that diminishing returns tend to rule in the export industries and 
increasing returns in the import-competing industries. To justify these 
assumptions would require considerable statistical detail which must 
be sought elsewhere. Finally, we assume, for example, constant money 
wage rates. This is one of a number of provisional assumptions which 
are relaxed later in the analysis. 

In spite of the long list of assumptions with which we will begin, 
this analysis is meant to throw some light on real problems of con 
siderable importance to Australia. 


The effects of a population increase in the absence of foreign 
trade will first be briefly summarized. It will be assumed that internal 
balance is maintained by fiscal methods, that there is no net population 
increase and investment to begin with, that there is no technical pro 
gress, that the proportion of migrants in the work-force is the same 
as the overall Australian proportion, and that all labour is homo 
geneous, so that the efficiency of a migrant is the same as that of an 

If we suppose that an increase in unemployment would cause 
money wages to fall while a decrease in unemployment or an actual 
excess of demand over supply in the labour market would cause them 
to rise, then we can define internal balance in terms of money wages. 
It is the maintenance of that level of employment at which money 
wages remain constant. It means that total expenditure will have to be 
automatically increased when the population and hence the labour 
supply rises. If we prefer to suppose that money wages could rise but 


not fall, we can simply say that internal balance means the mainten 
ance of the maximum level of employment compatible with constant 
money wages. 

In Australia the ratio to natural resources of labour, combined 
with its present proportion of capital, is probably below the optimum 
or not far above it. Therefore, if the quantity of labour increases and 
is accompanied by an increase in capital such as to maintain the pre 
vious ratio of capital to labour, the average product of labour might 
rise or at least would not fall sharply. But in the short run, with a 
given supply of capital, an increase in population is fairly certain to 
lead to a fall in the average product of labour. Indeed, it is likely to 
vary by industry; in some industries the ratio of labour to natural 
resources an<^ capital may well be below the optimum. But the experi 
ence of the last few years suggests that overall, with capital constant, 
the average product of labour would fall as the result of a population 

If the ratio of capital to labour is to be restored to its previous posi 
tion, there will have to be an increase in investment above its initially 
assumed zero level. Now there is no reason why investment should auto 
matically increase, as it depends on decisions by private enterprise and 
by governments which may be influenced by many other factors apart 
from the population increase. If we assume for the moment that invest 
ment is increased so as to restore the pre-existing ratio of capital to 
labour, there will be two effects. 

First, resources will be diverted from consumption to investment. 
This is a short-term effect, as we are assuming that the extra invest 
ment in any given period is sufficient to create the necessary capital 
to balance the population increase of that period. The reduction in 
consumption will under our assumptions be obtained by fiscal methods. 
It would be brought about by inflation if internal balance were not 

Secondly, there is the long-term effect on the average product of 
labour of increasing labour and capital in a fixed proportion with an 
unchanged quantity of natural resources. As has been mentioned above, 
at Australia s present stage it is possible that this might lead to an 
increase in the average product, but at some stage of course the average 
product of labour must start declining. 

If, as has possibly been the case in Australia, the increase in in 
vestment is inadequate to restore the ratio of capital to labour, the 
short-term shift from consumption to investment will be less, but the 
long-term fall in the average product of labour will be greater. 

With constant money wages, a fall in the average and hence the 
marginal product of labour will involve some rise in the general level 
of prices. Our assumption of internal balance is stated in terms of 


money wages and not of prices. With a constant degree of monopoly, 
any alteration in the relationship between them reflects a change in 
the marginal productivity of labour. 


Still assuming that investment is increased so as to maintain the 
pre-existing ratio of capital to labour, if the economy is now opened 
up to international trade, the population at which the average product 
of labour is at a maximum will, even with unchanging terms of trade, 
be lower than in the closed economy. 

This would be true even if cost conditions were much the same 
throughout Australian industry. A country shut off from international 
trade and hence obliged to produce a wide range of goods which in 
the open economy would be imported, needs a large population, and 
hence a large home market, to obtain the benefits of the division of 
labour. In the open economy, specialization is possible with a much 
smaller population. 

This factor is reinforced by another consideration somewhat more 
special to Australia. Since Australia s export industries are, compared 
with other industries, generally subject to diminishing returns at a 
fairly early stage, the relative importance of industries subject to 
diminishing returns will be higher in the open economy. So it is more 
probable that when labour and capital are increased in a fixed pro 
portion, the average product of labour falls, or does not rise as much 
asi it would in the closed economy. 

The population at which the average product of labour is at a 
maximum may, for brevity, be termed the " optimum " population. 
Then, as we have seen, the optimum population will be lower in the 
open than in the closed economy. But it should be noted that, for any 
given population, as long as there is any benefit from international 
trade, the average product of labour must be higher in the open eco 
nomy. It follows that, when the population is at the optimum in the 
open economy, although the population will be less, the average pro 
duct of labour must be greater than when the population is at the 
optimum in the absence of international trade. 3 

It will be assumed that in the rest of the world the population and 
the average product of labour are constant, and that internal balance 
is being maintained. We ignore the fact that an increase by immigra 
tion of the Australian population must be balanced by an equal abso- 

3. It was pointed out in The Australian Tariff: An Economic Inquiry, 
by J. B. Brigden and others (1929), and has become an oft-repeated economic 
doctrine in Australia, that the optimum population would fall if the tariff 
was removed. This has tended to be confused with the quite distinct propo 
sition that with an increase in population the optimum tariff rises. Both 
propositions may be true but one does not automatically follow from the 


lute decrease in population in the rest of the world. If the migrants 
come in the main from Britain, Australia s principal trading partner, 
then some consideration should perhaps be given to the effect of the 
emigration on Australia s foreign trade. Nevertheless the effect of the 
immigration is likely to be much more significant. 

The increase in expenditure necessary to maintain internal balance 
with an increased population can be expected to lead to an increase 
in imports. This is the first reason why a deficit may develop, and can 
be described as the "income effect" of the population increase on the 
balance of trade. 

This increase in imports does not follow automatically from assum 
ing that the marginal propensity to import of a given population is 
positive. The way the increase in expenditure is allocated among differ 
ent goods depends on the inter-action of three concurrent changes in 
our model. First, the population is increasing. Secondly, real disposable 
income per head may have altered, probably having fallen. 4 Thirdly, 
the proportion of national income devoted to investment will have 
risen. The more investment rises the more real disposable income per 
head available for consumption falls in the short run and rises in the 
long run. 

How a change in real disposable income per head affects the de 
mand for imports depends upon the income elasticity of demand. If 
imports have an income elasticity of demand greater than unity, a fall 
in income per head would mean a reduction in the proportion of income 
spent on imports. It is now possible that, although the increase in popu 
lation causes aggregate disposable income to rise, expenditure out of 
disposable income on imports falls absolutely. But this would require 
a large fall in disposable income per head. Furthermore, it is doubtful 
whether Australia s imports as a whole have an income elasticity of 
demand greater than one. If the income elasticity of demand for im 
ports is unity then, provided aggregate disposable income rises, an 
increase in consumption imports is certain. Similarly it is certain if 
the income elasticity of demand is less than unity or if real disposable 
income per head rises. 

Finally, it may be a reasonable presumption for Australia that 
the import content of marginal investment is greater than the import 
content of marginal consumption. In this case an increase in invest 
ment will cause a rise in the proportion of total expenditure devoted 
to imports. It is therefore a further reason why the population increase 
can be expected to increase imports. 

4. It will be recalled that we are assuming that internal balance is 
being maintained by fiscal methods. Hence, if investment increases more than 
private savings, there will have to be a rise in tax collections to maintain 
balance. This is the reason for the reference to disposable income or income 
after taxes. 


In addition to the income effect of a population increase on the 
balance of trade there are the "price effects", since an increase in 
demand for the products of some industries is likely, even with money 
wages constant, to alter their prices. 

By how much expenditure on different groups of home-produced 
goods rises depends upon the same three factors which determine by 
how much expenditure on imports rises. Here it will be assumed that 
there is some increase in expenditure on all the main groups, although 
real income per head may fall and the income elasticity of demand 
for some groups may be greater than unity. 

The increased expenditure on home products, including export 
able and import-competing goods, will tend to increase the pressure 
on natural resources of all kinds. If we use the term "rent" to describe 
the payment, per unit of given quality, to all those factors whose quan 
tity remains fixed, then rents will rise. The principal fixed factor is 
natural resources, but rent can also be taken to include the payment 
to the owners of any capital goods whose quantity does not increase. 
Money wages remain constant, for we are assuming that the initial 
increase in incomes was just sufficient, at the constant money wage, to 
create an additional demand for labour equal to the increased labour 

So prices of home-produced goods will rise, the whole of the 
increased price going to the higher rents. This rise in prices with 
constant money wages represents a fall in real wages. It reflects a fall 
in the average and marginal product of labour due to the operation 
of diminishing returns. 

If the foreign elasticity of demand for exports is less than infinite, 
prices of exportable goods will then rise. The rise in rents which is 
the cause of this rise in the prices of exportable goods will have been 
due partly to the increased expenditure on other home-produced goods 
the production of which requires natural resources which are, at least 
to some extent, substitutable with the natural resources used in the 
production of exportable goods. Hence, unless natural resources are 
completely immobile as between export and other industries, for the 
prices of exportable goods to rise it is not actually necessary that some 
of the increased expenditure resulting from the population increase 
is spent on exportable goods. But since some of the increased expendi 
ture will undoubtedly be spent on exportable goods, we can be doubly 
sure that in the export industries there will be a rise in rents and 
thus, if the elasticity of demand for exports is less than infinite, a rise 
in prices. If the elasticity of demand is greater than unity the value 
of exports will then fall. This fall in exports caused by the operation 
of diminishing returns would be the second reason why a deficit may 
result from the population increase. 


On the other hand, if the foreign elasticity of demand for exports 
were less than unity, the rise in the price of exportable goods would 
increase the value of exports. This factor would then be responsible for 
improving the balance of trade. Although some statistical studies seem 
to have led to the conclusion that elasticities of demand in foreign 
trade are surprisingly low, this is, in my view, an unrealistic hypothesis 
for Australia when anything but the very short run is considered. The 
full implications of an inelastic demand for exports are not always 
appreciated. It means that a reduction in the volume of exports due 
to government policies or to poor seasons would raise the value of 
exports. An export tax would improve the balance of payments. The 
country could obtain a greater volume of imports for a lower volume 
of exports. Hence the degree of trade restriction is below the optimum. 
The very fact that this solution to Australia s balance of payments 
problems has not been widely canvassed suggests that an inelastic de 
mand for exports is not a realistic hypothesis. 

If the foreign elasticity of demand for exports were infinite the 
prices of exportable goods would remain unchanged, unless the com 
plete elimination of exports were insufficient to provide for the extra 
home demand for exportables. 

Some of the increased expenditure will also be spent on import- 
competing goods. Although in Australia natural resources are un 
doubtedly less important in the production of import-competing goods 
than in the production of exportable goods, there will still be some ten 
dency for the prices of these goods to rise owing to the increase in 
rents. On the other hand, if we assume that, unlike the export indus 
tries, the import-competing industries are subject to significant econo 
mies of large-scale production, then there will also be an opposite 
tendency causing the prices of these goods to fall. Hence it is quite 
possible, and it will be assumed in the subsequent analysis, that in spite 
of the rise in rents, prices in the import-competing industries fall with 
an increase in output. A fall in the prices of import-competing goods 
will lead to a fall in imports and therefore could offset some part, or 
conceivably the whole of the deficit in the balance of trade caused by 
the income effects and the effect on exports of diminishing returns 
in the export industries. But the economies of large-scale production 
may be subject to some time-lag, and it is possible that this favourable 
effect on the balance of trade becomes strong only when the rise in 
expenditure has been maintained for some time. 

These primary price effects are likely to have secondary effects. 
Thus, if, as is quite probable, the home demand for exportable goods 
is inelastic, the rise in price will lead to a decrease in expenditure on 
other goods, including imports and import-competing goods. Hence 
this secondary effect taken by itself tends to improve the balance of 
trade. Furthermore, the fall in demand for import-competing goods 


will in itself tend to cause a rise in their prices, raising not only imports 
but also affecting expenditure on exportable goods again. But we have 
now arrived at a tertiary effect. 

The fall in the prices of import-competing goods caused by the 
original increase in expenditure will not only lower imports but may 
also affect expenditure on exportable goods. If import-competing 
goods and exportable goods were readily substitutable, either directly, 
or indirectly through home-trade goods, there would tend to be a fall 
in the demand for exportable goods. On the other hand, the fall in 
the price of import-competing goods has raised real income, and the 
demand for exportable goods probably rises when real income per head 
increases. On balance no substantial change in exports may result from 
the secondary effects of the operation of increasing returns in the 
import-competing industries. 

It must be remembered that these secondary and tertiary effects 
will be outweighed by the primary effects. Thus the secondary fall in 
the demand for import-competing goods will certainly be offset by the 
primary rise, so that on balance there will be an increase in demand 
for import-competing goods. 

So far we have been assuming that capital and labour are in 
creasing proportionately. If capital remained constant while the popu 
lation increased, the average and marginal product of labour would 
tend to fall much more rapidly and widely than when the ratio of 
capital to labour was being maintained. Although a tendency for the 
average product of labour to rise is still likely to show itself in those 
industries which require an increase in demand to enable them to make 
full use of their capital, prices generally would tend to rise more or 
fall less when capital is constant than when it is increased proportion 
ately. So if the elasticity of demand for exports is greater than unity 
the deficit would be greater. 

Hence a temporary rise in investment, while it may raise the 
short-term deficit insofar as a shift from consumption to investment 
raises imports, will reduce the long-term deficit. 

Irrespective of whether additional investment takes place or not, 
it seems reasonable to conclude that the initial impact of a population 
increase is to cause a balance of trade deficit. But it is not impossible 
that the operation of increasing returns in the import-competing 
industries is sufficiently strong and rapid, or the demand for exports 
sufficiently inelastic, for such a deficit to be avoided. 


Whether a depreciation of the exchange rate or a lowering of 
the internal cost level would be an adequate method of eliminating 
the balance of trade deficit depends on the elasticities of demand for 


imports and supply of exports in Australia, and on the elasticities of 
the rest of the world s demand for Australian exports and supply of 
Australian imports. 5 

It is probable that the rest of the world s supply of imports into 
Australia is highly elastic. Not only is Australia one of many buyers 
in the markets of most of the goods she imports, but manufactured 
products which form the predominant part of Australia s imports 
are generally in highly elastic supply in the producing countries. As 
already discussed, the elasticity of demand for exports is also likely 
to be greater than unity, although it will be far further from infinite 
than the elasticity of supply of imports. 

On the other hand, both the demand for imports and the supply 
of exports may be very inelastic. The supply of exports is inelastic, 
at least in the short run, for many reasons, some of which are common 
to agricultural exporting countries. The inelasticity can be attributed 
not only to diminishing returns but also to a decline in the amount of 
work per person engaged in the export industries, which follows upon 
an increased income per head. The demand for imports can be expected 
to be very inelastic at a low level of imports, once the quantity of im 
ports has been reduced to certain basic materials needed for production 
and to certain essential components of investment programmes which 
are so specialized that their production would be quite uneconomic 
in Australia. 

If the elasticity of demand for exports is greater than unity, it 
follows that, provided at least one of the home elasticities the elas 
ticity of demand for imports or the elasticity of supply of exports 
is greater than zero, a depreciation will improve the balance of trade, 
though indeed a very substantial depreciation may be necessary to 
eliminate even a small deficit. 

But if both of these home elasticities were zero, an alteration in 
the exchange rate would make no difference to the balance of trade 
deficit. Furthermore, not only could depreciation not remedy a deficit, 
but it would be certain that there is a deficit to remedy. For, with a 
zero elasticity of demand for imports, the only factor which could 
otherwise have avoided an external deficit in the first place, namely 
the operation of increasing returns in the import-competing industries, 
would have no effect on the balance of trade. Provided the income effect 
on imports was positive, imports would have been certain to increase. 
At the same time with the elasticity of demand for exports greater than 

5. It will be evident that I draw heavily in this paper, and in particular 
in this section, on Mrs. Joan Robinson s partial equilibrium analysis of the 
effects of an exchange rate adjustment on the balance of trade. See "The 
Foreign Exchanges" in Essays in the Theory of Employment (Oxford, 1947, 
Basil Blackwell), reprinted also in the American Economic Association s 
Readings in the Theory of International Trade (Philadelphia, Blakiston Co., 


unity, exports would still have been certain to fall, provided any part 
of the increased income resulting from the population increase was 
spent on exportable goods. 

These extreme conditions might be implied in the argument that 
the balance of payments deficit provides a limit to population increase, 
for not only depreciation, but also an import tariff would be unable to 
remedy a deficit. 

It is in fact impossible for the elasticity of demand for imports 
to be zero over the whole range of the demand curve. If it was zero 
at any and every price it would mean that Australia is prepared to pay 
all its income and more to obtain a given quantity of imports. For 
any quantity of imports there must be some price, however high, at 
which exactly that quantity will be demanded. It follows that, pro 
vided the depreciation is sufficiently great, it can always remedy a 
balance of trade deficit. 

It may of course be true that there is some minimum or subsistence 
basket of goods which every member of the community must have to 
live on whatever is considered a subsistence standard of living. This 
basket is very likely to include imports and home-produced goods with 
a basic import content. But the elasticity of demand for these goods 
cannot continue to be zero once income per head has fallen below the 
level required to pay for the basket. 

It is perhaps more reasonable to assume the supply of exports to 
be perfectly inelastic, particularly in the short run. But if some time 
is allowed and the depreciation is sufficiently great, the supply of 
exports should also increase. The demand at home for exportable goods 
can no more be completely inelastic over its whole range than the de 
mand for imports can. Furthermore, while the supply of specific pro 
ducts may be completely inelastic, as the price offered for exports rises, 
other products will become exportable. 

It can therefore be concluded that, if the elasticity of demand for 
exports is greater than unity, a balance of trade deficit caused by the 
population increase could be remedied by depreciation. 

If the elasticity of demand for exports is less than unity then in 
the first place a balance of trade deficit is less likely. In the second 
place it becomes possible that a depreciation could not remedy a balance 
of trade deficit even though the home elasticities are greater than zero. 
For a depreciation to be effective it is a sufficient condition that the 
sum of the foreign elasticity of demand for exports and the home 
elasticity of demand for imports is greater than unity. 6 But even if 
it is not, a depreciation may still be able to remedy a deficit if the home 

6. These statements of elasticity conditions are strictly accurate only 
if we start in external balance. But since we are concerned with an initial 
deficit they are subject to an adjustment which will be slight if the initial 
deficit is not very great. See A. Hirschmann, "Devaluation and the Trade 
Balance", Review of Economics and Statistics, Feb. 1949. 


elasticity of supply of exports is low enough. In Australia one suspects 
that the low elasticity of supply of exports would save the situation 
and indeed makes the choice of assumption about the elasticity of 
demand for exports rather unimportant. If the elasticity of supply 
of exports is actually zero, then provided the elasticities of demand 
and supply of imports are greater than zero, a depreciation must im 
prove the balance of trade. 

How will the terms of trade be affected by the initial impact of 
the population increase and by the subsequent alteration in the ex 
change rate? 

If both the elasticity of supply of imports and the elasticity of 
demand for exports were infinite, then the rise in the home demand 
for exportable goods would not affect the price of exports while any 
change in the prices of import-competing goods would not affect the 
prices of imports. Similarly the subsequent depreciation would leave 
the relative prices of imports and exports unaffected. In other words, 
if Australia played such a small part in the market for its imports and 
exports that no change in Australian supply and demand conditions 
or in the Australian exchange rate could affect world prices, then the 
terms of trade would remain unaltered even though a deficit may have 
been caused by the population increase and this deficit has been re 
medied by depreciation. 

But if the prices of Australian exports are influenced by the 
quantity of Australian supplies on the market, while the elasticity of 
supply of imports remains infinite, two cases can be distinguished 
fairly easily where the terms of trade must improve. 

If the economies derived from large-scale production in the import- 
competing industries were so great that the resulting fall in imports 
was large enough to offset the other factors making for an external 
deficit, then depreciation would not be necessary. The rise in the price 
of exports, which will have resulted from the increased home demand 
for exportable goods, would be the end of the story. With constant 
import prices, an improvement in the terms of trade would then have 
taken place. A similar result would ensue if the population increase 
did cause a deficit, but if the elasticity of supply of exports were zero, 
so that the subsequent depreciation did not affect the foreign price 
of exports. 

But since it is improbable that the population increase fails to 
create a deficit, or that, if the subsequent depreciation is sufficiently 
great, either the elasticity of demand for exports remains infinite or 
the elasticity of supply of exports remains zero, a somewhat more com 
plicated analysis is called for. 


To restate the problem, we want to know how export prices will 
move relative to import prices if an increase in population takes place 
and if simultaneously expenditure is adjusted so as to maintain con 
stant money wages while the exchange rate moves so as to maintain 
external equilibrium. We shall assume that the elasticity of demand 
for exports is greater than one and less than infinite. Hence it is 
possible for Australia to affect its terms of trade, and provided the 
elasticity of supply of exports and the elasticity of demand for imports 
are not both zero, for external equilibrium to be maintained by ex 
change rate adjustment. 

There is one reason why an improvement in the terms of trade is 
likely to result from a population increase. Natural resources, the 
supply of which is fixed, will become scarcer so that rents will rise 
relative to wages. Hence the prices of goods in the production of which 
natural resources are more important will rise relatively to the prices 
of goods in the production of which labour is more important. If capital 
has been increased proportionately with labour, then the prices of 
those goods which are "natural-resource-intensive" will rise relative 
to the prices of goods which are "labour-plus-capital-intensive". Since 
in Australia exportable goods are generally more "natural-resource- 
intensive than goods competing with imports, this factor creates some 
presumption that the prices of exportable goods will rise relative to 
the prices of importable goods, so that the terms of trade will improve. 

In a very simple model, with only two commodities exportables 
and importables with perfect mobility of factors between the indus 
tries producing these commodities, with no economies of scale, with 
the fixed factor, natural resources, more important in the production 
of exportables, and provided there is not actually a decrease in expen 
diture on exportables, it would be certain that an increase in the vari 
able factor, labour, would improve the terms of trade. 

Economies of scale in the industries producing importables would 
be an additional factor causing the price of exportables to rise relative 
to the price of importables, this being a second reason why the terms 
of trade may improve. 

But the real world is not as straightforward as our simple model. 
First, we should allow for the case where capital is not increased 
proportionately with labour. If no increase in capital took place at all, 
the terms of trade would only improve if exports were more natural- 
resource-plus-capital-intensive" than importables. In the case of Aus 
tralia there does not seem to be any certainty that this is so. Hence, if 
the increase in capital has been insufficient to maintain the original 
ratio of capital to labour there is less likelihood that the terms of 
trade improve. 

Secondly, since import-competing products are not perfect sub 
stitutes for imports, the analysis cannot be carried on in terms of two 


commodities only. Some of the increased expenditure will have been 
spent directly on imports, quite apart from any change in imports due 
to a change in the prices of import-competing products. To remove 
the balance of trade deficit due to this * * income-effect a depreciation 
is necessary additional to the depreciation needed to remove the deficit 
due to the rise in rents. This factor is likely to cause a deterioration 
in the terms of trade. This deterioration will be the greater the more 
of the increased expenditure has gone on imports, the less is the elas 
ticity of substitution between imports and import-competing goods and 
the greater is the elasticity of supply of exports. If there had been no 
increased expenditure on imports or the elasticity of substitution were 
perfect, this "income effect" would not operate. 

Thirdly, since natural resources are not perfectly mobile between 
industries, whether the prices of exportables rise relative to the prices 
of import-competing products depends also on how much of the initial 
increase in expenditure is spent on each of these products, on the de 
mand relationships between them and on the degree of immobility. 

If natural resources are perfectly immobile between industries 
then we can be sure that the population increase raises the price of 
exportables relative to the price of import-competing goods only if the 
former are subject to diminishing returns and the latter to increasing 
returns. As more labour enters the exportable industry the average 
product of labour falls; as more labour enters the import-competing 
industry the average product of labour rises. So, provided expenditure 
on both goods increases, the price of exportables must rise and of 
import-competing goods fall. But if both industries are subject to 
increasing or to diminishing returns, how their relative prices move 
depends both on which industry yields more rapidly increasing or de 
creasing returns and on how much of the increase in expenditure 
goes to each product. 

It seems, therefore, that there is no clear presumption that the 
terms of trade would improve or worsen as the result of a population 
increase. But one may perhaps be permitted a "hunch". The main 
factor is probably that the increased population will spend a consider 
able part of its higher total income on imports and that the deprecia 
tion needed to eliminate the resulting deficit is likely to worsen the 
terms of trade unless the elasticity of supply of exports is very low. 
This would be of far greater importance than the various "price" 
effects arising from the rise in rents and from the economies of scale. 
In other words and this is not a new discovery in the theory of inter 
national trade income effects are likely to outweigh price effects. 

Finally, it should be noted that, if the import content of marginal 
investment is greater than the import content of marginal consumption, 
then in the short run an increase in capital, by increasing the income 
effect on imports, makes necessary a greater depreciation and hence a 


more adverse movement in the terms of trade. On the other hand, as 
we have seen, the effect of an increase in capital is to make a long-run 
improvement in the terms of trade more likely. 

It is now possible to come to some provisional conclusions. These 
are subject to the important simplifying assumptions that there is no 
technical progress and in the absence of the population increase 
no net investment. If no attempt is made to increase investment when 
population increases, there may be a fall in real income per head for 
two reasons. First, the ratio of labour to capital and natural resources 
has increased. Secondly, the terms of trade may possibly have wor 
sened. If some investment takes place to balance the population in 
crease, the long-term fall in real income owing to the changed factor 
proportions will be less and may be completely averted. A long-term 
fall in the terms of trade will be reduced or an improvement strength 
ened. But there will have to be a short-term fall in real consumption 
per head and, if the import content in investment is higher than in 
consumption, a short-term fall in the terms of trade superimposed on 
the long-term rise or fall. 


A depreciation of the exchange rate, particularly if it has to be 
frequent or continuous, may be impracticable. Various kinds of insti- 
titutional obstacles are conceivable, but perhaps the main reason why 
the authorities might be reluctant to employ the exchange rate weapon 
would be a fear of destabilizing speculative capital movements. It will 
also be generally accepted that a reduction in the internal cost level 
is likely to be impossible. Hence it may be necessary to remedy the 
balance of payments deficit with an import tariff. The effects of tariffs 
on the internal distribution of income will be considered later. The 
effects of the population increase on the so-called "infant-industry" 
argument for protection will be disregarded. 

In any given situation there is an optimum tariff at which the 
increase in real income resulting from the beneficial effects on the 
terms of trade of a marginal increase in tariffs is just offset by the 
fall in real income resulting from the maldistribution of resources 
brought about by the tariff. If both the elasticity of demand for exports 
and the elasticity of supply of imports were infinite, the optimum tariff 
would be zero. 

The level of the optimum tariff may change when the population 
increases. If our previous analysis led us to the conclusion that the 
population increase would cause a deterioration in the terms of trade, 
and if the foreign elasticities of demand for exports and supply of 
imports fall as Australia s exports and imports rise, then the optimum 
tariff would rise with a population increase. Nevertheless, if an increase 
in the tariff is to eliminate the whole or a substantial part of the exter- 


nal deficit resulting from the population increase, it could be expected 
that the tariff would have to be raised above the optimum. 

Therefore, if we consider what seems the more probable case, 
that the population increase did cause an external deficit and that, if 
this deficit were remedied by depreciation, there would be a net decline 
in the terms of trade, then it is possible to say that if tariffs are used 
to remedy this deficit, there are three reasons why income per head 
may fall as a result of the population increase. 

First, there is the fall due to the changed factor proportions 
within Australia. Secondly, there is that fall in real income brought 
about by tariffs which is equal to the fall which would have been 
brought about if the external deficit had been remedied by deprecia 
tion modified by the optimum tariff. Thirdly, and this is the new cate 
gory, there is that fall in real income caused by the maldistribution 
of resources resulting from a level of tariffs above the optimum. This 
can be attributed to the institutional or speculative factors which have 
made depreciation or a reduction in the internal cost-level difficult or 

These generalizations must be modified for the case where the 
elasticity of supply of exports is zero. Then, if we disregard the effects 
on capital movements and on the internal distribution of income, there 
would be no difference between the effect of depreciation and of a tariff. 
The change in the distribution of resources and in the terms of trade 
brought about by a tariff would be the same as the change which would 
be brought about by depreciation. Furthermore, if the zero elasticity 
of supply of exports were combined with an infinite elasticity of supply 
of imports, neither a tariff nor depreciation would cause any change in 
the terms of trade. 


Let us now remove the important assumption that internal balance, 
and hence constant money wage rates, are maintained in Australia. 

There are two reasons why inflation may not be avoided when a 
large-scale immigration programme is in progress. First, the govern 
ment may find it politically difficult to reduce consumption by fiscal 
methods in order to offset the rise in investment needed to maintain 
the capital-labour ratio. Secondly, it may be not only politically diffi 
cult but also undesirable, from the point of view of the migration 
policy, to maintain that slight excess of supply over demand in the 
labour market which is generally necessary to avoid a rise in money 
wages. The existence of a "margin" of unemployed greatly increases 
the difficulties both of obtaining and of absorbing migrants. 

If direct controls and wage restraint make it possible to maintain 
a high but stable level of total expenditure such that there is an excess 
of demand over supply in the labour market without wages continually 
rising, our analysis remains unaltered. But if it is not possible to con- 


trol the inflation, there will be a continuous increase in expenditure 
over and above the increase which would be necessary to maintain 
internal balance with an increasing population. In this case a continu 
ous or periodic depreciation, or if this is impossible, constant increases 
in tariffs, will be necessary to maintain external balance. 

Furthermore, even if there is a "margin" of unemployment, if 
prices have risen owing to a decline in the average product of labour, 
a fall in the terms of trade, or an increase in the tariff above the opti 
mum, money wages will rise if some part of wages, at least, is tied to 
the cost of living. But provided all money wages do not rise propor 
tionately with prices, this rise will be at a decreasing rate and will not 
be continuous. 

It may be that in some industries there is, at least in the short run, 
a minimum ratio of capital and natural resources to labour, and that 
it is possible neither to increase the quantity of capital nor to transfer 
capital or natural resources from other industries. In this case the 
ability of these industries to absorb labour is limited. If in all indus 
tries there is such a minimum ratio of the fixed factor to labour and 
if the fixed factor is fixed for each industry and not only for the coun 
try as a whole, so that it is perfectly immobile, then beyond a certain 
point the marginal product of labour will be zero. Additional labour 
cannot be employed irrespective of how great an increase in expendi 
ture takes place. This is an extreme situation which is unlikely to be 
approached in Australia unless there is a large and sudden increase 
in population unaccompanied by an increase in capital. But it may be 
a fair description of conditions in those under-developed countries 
suffering from "disguised unemployment". 

We also assumed earlier that labour is homogeneous. But there is 
reason to believe that, owing to higher mobility, both voluntary and 
enforced, to deliberate selection by the official migration authorities, 
and to other factors, the average migrant has been more efficient from 
the point of view of the Australian economy than the average Aus 
tralian. Hence the marginal and average product of labour are likely 
to have fallen less in the diminishing returns industries and to have 
increased more in the increasing returns industries. The fall in real 
income due to the changed factor proportions within Australia will be 
less, while the "price" effects are more likely to have brought about 
an external surplus rather than a deficit. But the income effect will be 
unaffected and will still pull in the direction of a deficit. 


The effect of the population increase on the internal distribution 
of income has so far been neglected. It is likely to influence the com 
munity s judgment about the desirability of the population increase 


In a simple model the population increase will cause the rate of 
real rents to rise relative to the rate of real wages. More broadly, 
incomes of the original inhabitants will be redistributed towards the 
owners of the fixed factors and away from people who compete with 
migrants. The extent to which this represents a limit to population 
increase depends first on whether such a redistribution is in a desired 
direction or not, and secondly whether methods of redistributing in 
comes back again are feasible. 

The desirability of the redistribution must depend on some sort 
of arbitrary criterion. One could say that a marginal redistribution 
against labour and in favour of rentiers is always bad. 7 Or one might 
regard any redistribution involving a large and sudden fall in real 
income to any section as bad. More simply, one could assume that the 
initial distribution of income is the best and that a change in any direc 
tion is undesirable. 

In practice adequate compensation is unlikely. Policy must take 
into account that an indirect redistribution by means of population 
increase may be more readily accepted by the losers from the process 
than deliberate acts of redistribution, even if they are specifically 
designed to offset the effects of the population increase. 

Yet one particular method of internal redistribution of income 
is very relevant to the present argument. A tariff will shift incomes 
away from the producers of exportable goods towards the producers 
of import-competing goods. If import-competing goods are labour- 
intensive while exportables are natural-resource-intensive, there may 
be an additional reason for raising the tariff when the population in 
creases. Then the tariff will lessen not only the effect of the population 
increase on the terms of trade but also on the internal distribution of 

If the elasticity of supply of exports is zero then, as we have seen, 
a uniform ad valorem import tariff will have the same effect on the 
balance of trade as a depreciation. But the important distinction is 
that the depreciation will give a bonus to producers of exportables. 
Hence, once we take the internal distribution of income into account 
and wish to avoid a shift of income towards producers of exportables, 
the lower the elasticity of supply of exports the more desirable becomes 
a tariff as a remedy for the balance of trade deficit. 

The internal distribution of income may influence the various 
factors which determine the impact of the population increase on 
foreign trade. Thus the distribution of income may affect the com 
munity s marginal propensity to consume different goods. It may 
affect various of the elasticities. It is likely to influence the propensity 

7. This would be in the tradition of Australian economic thought. See 
The Australian Tariff: An Economic Inquiry, op. cit. 


to save and hence the probability of inflation being avoided or of 
sufficient investment taking place. 

Yet it is difficult to say in what direction these effects would 
operate. One may agree that if the population increase raises the share 
of national income going to rentiers and if rentiers have higher than 
average incomes, there will be a shift in aggregate demand towards 
goods with a high income elasticity of demand. Similarly one might 
expect the community s propensity to save to rise. But there is no 
reason to expect the share of wages or of rents in the national income 
to alter in a particular direction. On the one hand the number of wage- 
earners increases while the number of owners of fixed factors (rentiers) 
does not change. But on the other hand, the average income of wage- 
earners falls and of rentiers rises. 


Let us now summarize the limits to population increase, remember 
ing that this is a static analysis of a very dynamic problem, and that 
we assume no technical progress and no net investment in the absence 
of population increase. The analysis is best applicable to a large once- 
for-all immigration movement. But it could readily be extended to a 
dynamic model which allows for rates of population increase, capital 
formation and technical progress, and for the expectation by the com 
munity of a gradually rising standard of living. 

First, if no increase in investment takes place, there is likely to 
be a fall in the average product of labour and hence in average real 
income. If sufficient investment takes place to avoid this fall, there 
will instead have to be a short-term fall in real consumption per head. 
This short-term fall in real consumption or the alternative long-term 
fall in real income provides the first limit. 

Secondly, if a long-term balance of trade deficit results, and if it 
is possible to remedy this deficit by depreciation, there may have to 
be a long-term fall in the terms of trade. If an increase in investment 
takes place, the long-term fall in the terms of trade will be less, but 
provided the import content in marginal investment is higher than in 
marginal consumption, there will be an additional short-term fall. 

No long-term balance of trade deficit would result if the fall in 
imports resulting from increasing returns in the import-competing 
industries and from increased home expenditure on the products of 
industries subject to diminishing returns offsets, first, the rise in im 
ports owing to the greater total expenditure, and, secondly, the fall 
in exports owing to diminishing returns in the export industries. If 
the demand for exports is inelastic there will be a rise in the value 
of exports and hence even less probability of a balance of trade deficit. 

Furthermore, even if such a deficit does result, it is, as we have 
seen, by no means certain that the terms of trade after the deprecia- 


tion has taken place would be adverse relative to the situation before 
the population increase. Hence this factor may not operate as a limit 
to population increase at all. 

Thirdly, it may not be possible to remedy a balance of payments 
deficit by depreciation. It can then be remedied by raising import 
tariffs. If the elasticity of supply of exports is greater than zero and 
if the tariff was initially at the optimum, the tariff may then have to 
be raised above the optimum. This will lead to the third reason why 
real income per head may fall. 

Fourthly, the population increase may be unavoidably associated 
with inflation, with all its social and economic disadvantages. If de 
preciation is impossible the inflation may provide a further reason for 
an increase in tariffs above the optimum. The internal and external 
effects of inflation may be the most important practical limits to popu 
lation increase by migration. 

Fifthly, the population increase may affect the internal distribu 
tion of income in a way which is considered undesirable by the com 
munity or by whoever decides what the limits to population increase 
are. It may not be practicable to offset these effects by other measures 
within the control of the authorities. 

Sixthly, a definite limit to population increase is presented by 
unemployment caused by a shortage of capital and natural resources. 
If a minimum ratio of the fixed factor to labour is required, then 
beyond a point any additional labour is bound to be unemployed. 
Yet it is possible that a reduction in the average working hours enables 
the existing quantity of the fixed factor to be spread over the whole 
employable population. Even if there is unemployment, the newcomers 
need not starve since income can be redistributed from the employed 
population. So even this does not provide an absolute limit to popula 
tion increase. 

Seventhly, there may be a minimum real income per head repre 
senting a subsistence basket of home-produced and imported goods. 
The community may prefer a population size which keeps real income 
per head well above this minimum, but this certainly does provide an 
absolute limit. 

Finally, if a zero elasticity of supply of exports were combined 
with a zero elasticity of demand for imports, then neither depreciation 
nor tariffs could remedy a balance of payments deficit, and this would 
be an eighth possible limit to population increase. But it is impossible, 
as has been pointed out, for either the elasticity of demand for imports 
or the elasticity of supply of exports to be zero over the whole of their 



1. Introduction 

In 1952 the Australian Agricultural Council adopted the aims 
put forward by the Commonwealth Government for increasing agri 
cultural production in the following five years. The amount of the 
increased production sought by the Government varied for different 
products but for wheat the area aimed to be sown in 1957-8 is 113 per 
cent of the average area sown over the years 1947/8-1950/1, and for 
wool the production aimed at is 114 per cent of the average production 
over the years 1947/8-1950/1. It is evident that the attainment of these 
aims would necessitate a large increase in farm investment. 

This article outlines an attempt to gain some insight into some of 
the factors which influence farmers in making their decisions on expen 
diture for farm investment. 

The problem of finding which factors were influential was ap 
proached in two ways. First, some readily available and measurable 
factors, which it was thought would influence farm net investment, 
were selected. Then the effect of these factors on the farm net invest 
ment of a sample of farmers during the years 1949/50-1952/3 was 
measured statistically. Secondly, these farmers were asked why they 
had purchased each investment item bought between 1949/50-1952/3. 
The reasons they gave for making these purchases were analysed to 
determine which were the most important reasons, which reasons were 
common to various avenues of expenditure such as plant and machin 
ery, building, and clearing, and the association, if any, between the 
reasons and the amount of expenditure. 

A sample of 300 farmers was selected at random from 3,148 wheat 
and sheep farmers in the eastern wheatbelt of Western Australia. Of 
these 300 farmers 240 were interviewed. Complete financial records 
for the years 1948/9-1951/2 were available for 137 farms, or 4-6 per 
cent of the farm population. 

In deciding what would be the most appropriate factors to select 

* The writer wishes to thank Mr. H. P. Schapper for his advice and 
helpful criticism and for making available the data used in this work. Grate 
ful acknowledgment is made to Professor E. J. Underwood, Director of the 
Institute of Agriculture, University of W.A., for the opportunity to carry 
out this work and for his help and encouragement at all times, and to the 
Rural Credits Development Fund of the Commonwealth Bank of Australia 
for generous financial assistance. 



for correlating with net investment some results of research by Coch- 
rane, 1 Klein, 2 Katona 3 and Ashby 4 were considered. 

In view of their studies it was decided to test whether net income, 
age of farmer, years spent farming present property on own account, 
size of debt at beginning of period, amount of debt repayment, and 
amount spent on replacements were influential factors in determining 
farm net investment. 

2. Definition and Description of the Factors 
Net Investment 

For the purpose of this study net investment is denned as the 
total expenditure on the purchase of additional items of plant and 
machinery, building, fencing, water supplies, and clearing during the 
years 1949/50-1952/3. An adjustment was made to this figure where 
there had been an increase or decrease in the numbers of livestock 
carried between the beginning and end of the period. Expenditure on 
both repairs and replacements was excluded from the net investment 

A list was made of all plant and buildings owned by each farmer 
and the age of each item noted. For any item less than five years old 
the farmer was asked whether it was an addition or a replacement 
and to explain why he had bought it. Plant was valued by the farmer 
at what he thought each item would bring at a clearing sale on the day 
of the interview. Buildings were usually valued at the cost of erection. 
These values were used as an estimate of the expenditure on plant and 

Expenditure on clearing was obtained from the taxation returns. 
Only contract clearing was shown as a separate deduction and no 
estimate was made of expenditure on clearing done by the farmer. 

The farmer was asked how much he had spent on additional 
fencing and water supplies for the period 1949/50-1952/3. This lump 
sum was used as the estimate of fencing and water expenditure. 

Stock, other than sheep, were valued at the value shown in the 
taxation return. It was found that farmers valuations of sheep for 
taxation purposes varied from five shillings to three pounds per head. 
Also, individual farmers occasionally changed their valuation figure 
from year to year. To obtain uniformity, ease of calculation, and to 
overcome the problem of varying valuations the most common value 
of a pound per head was used for each year. 

1. Cochrane, W. A., "Farm Family Budgets A Moving Picture", Rev. 
Econ. Statist., 29: 189-98. 

2. Klein, L. R., "Estimating Patterns of Saving from Sample Survey 
Data", Econometrica, 19: 438-55. 

3. Katona, G., "The Effect of Income Change in the Role of Saving", 
Rev. Econ. Statist., 31: 95-103. 

4. Ashby, A. W., "The Farmer in Business", J. Agric. Econ. Soc., 10, 
No. 2: 91. 


In addition to the total figure for farm net investment for the 
period 1949/50-1952/3 the net investment made in each of the two- 
year periods 1949-51 and 1951-3 was calculated. The figures for the 
two-year periods were not as good an estimate of investment expendi 
ture as the figure for the whole period because expenditure on fencing 
and water was available for only the whole period and adjustments 
had to be made to expenditure on clearing because the years for which 
taxation returns were available did not coincide with the investment 

These combinations of years 1949-53, 1949-51, 1951-3 were selected 
for two reasons. First, periods of not less than two years were made 
because of the "lumpy" nature of investment. The two- and four-year 
periods partly damp down the fluctuations due to an unusually great 
expenditure in any one year. Secondly, the net incomes were available 
for the years 1948/9-1951/2. An examination of the yearly figures 
showed that for each of the years in the two periods 1948-50 and 1950-2, 
the annual income was roughly the same within each period, whereas 
between the periods the net incomes doubled, i.e. the 1950-1 income was 
double that of 1949-50. 

The investment period was a year later than the income period 
because farmers usually receive their main cheques, those for wheat 
and wool, late in their financial year. Furthermore, from what some 
of the farmers said, it appears that to avoid indebtedness, they pay 
cash from the income they have received and do not spend from income 
which they anticipate receiving. Therefore purchases were usually not 
made until the year following that in which the income was received. 
This delay was accentuated, also, by the lag in the supply of orders. 
For these reasons it was decided that the comparable investment 
and income periods would be 1949/50-1952/3 and 1948/9-1951/2, 

In Table I is shown the amount spent on net investment, in each 
of the periods under consideration. 

This table shows that the chief avenues of farm investment (plant, 
building, clearing, etc.) accounted for approximately the same share 
of the total expenditure in each period. That is, the increase in income 
and investment did not greatly change the direction of investment 

The table also shows that the amount of net investment spending 
rose considerably between the first and second two-year periods. It rose 
to 230 per cent, while income rose to 194 per cent, of the levels in the 
first two-year period. Is this greater change in investment than in in 
come due to the change in income or to other causes? 

This cannot be answered definitely for several reasons. When the 
amount of investment was calculated no allowance was made for the 
difference in value between similar items, one of which might have 


Direction and Amount of Investment Spending 





Total Expenditure on Plant 




Average Expenditure on Plant 




% of Total Expenditure 




Total Expenditure on Building 




Average Expenditure on Building 




% of Total Expenditure 




Total Expenditure on Fencing and Water 

Not available 


Average Expenditure on Fencing and Water. . 

Not available 


% of Total Expenditure 

Not available 


Expenditure* on Clearing 




Average Expenditure on Clearing 




% of Total Expenditure 




Increase in Livestock Value 


Average Yearly Farm Change 




% of Total Expenditure 




Total Expenditure on Investment 




Average Farm Expenditure 




% Total 




* This does not include cost of clearing done by the farmer, it is only 
the amount he spent on contract clearing. 

been obtained four years previously and have decreased considerably 
in value, and one purchased recently and worth nearly the new price. 
This would make the value of investment higher in the second than in 
the first period even though exactly the same number and quality of 
items were bought. Also, no allowance could be made for changes in 
valuation as the seasons changed. The survey occupied a period from 
mid-May to mid-September and machines such as drills or combines 
would have been worth more while seeding was in progress in May 
and June than they would be once seeding had ceased. It is doubtful 
if this caused a very big error. There was considerable inflation during 
the period under consideration which partly offset the difference be 
tween actual purchase price and present price because second-hand 
machinery did not fall in value as much at it may have done if prices 
had been stable. Another factor which may have limited investment in 


the first period and tended to increase it in the second was the increas 
ing availability of plant and material in the latter years. A further 
factor which may have increased investment spending in the second 
compared with the first period was the introduction of special depre 
ciation allowances. 

That the increase was due to some of these factors rather than to 
the rise in income is suggested by considering the number of items 
bought. The number of buildings erected rose to 180 per cent of the 
first period and of machines purchased to 130 per cent, while the 
figure in Table I indicate rises of 280 per cent and 212 per cent, respec 
tively, in the amounts of money spent on these items. 

Although it is not shown in Table I, some farmers had a negative 
investment in both periods. This was due to the decline in livestock 
causing a disinvestment greater than the net investment due to pur 
chase of plant, buildings, etc. In the first two-year period, 22 of the 
farmers had a negative investment while 4 had a negative investment 
in the second two-year period. This was partly due to bad season caus 
ing a decline in stock numbers in the first period, and partly to the 
constant valuation of stock while other investment expenditure rose. 
Considering the period 1949-53, 6 farmers had a negative investment. 

For the whole period the yearly net investment for each farmer 
ranged from 35 to 2,250. For the first two-year period 1949-51 the 
net investment ranged from 450 to 2,050 and for the second two- 
year period 1951-3 it ranged from 30 to 2,850. These figures show 
that there was considerable variation in the amount of net investment 
spending between the individual farmers. In Section 3 there is a 
discussion on the effect of the factors selected had in influencing these 

Net Income 

This is defined as the gross income from all sources as shown on 
the farmer s income tax return less all allowable farm tax exemptions 
except for those of a capital nature, viz. clearing, boring, and dam sink 
ing and depreciation. Depreciation was excluded because the amount 
of machinery varied from farm to farm and because some farmers had 
not used the special depreciation allowances. Therefore to place all 
farmers on the same footing this exemption was not deducted from 
the gross income. 

Income was separated into the three periods, 1948-50, 1950-2 and 
1948-52 as for net investment. The large increase in incomes for 1950-2 
compared with U948-50 was partly due to the boom in wool prices. 
Thus income from sheep and wool made up about 39 per cent of gross 
income in the first of the two-year periods and 50 per cent in the 
second of the two-year periods. Wheat made up about 58 per cent and 




49 per cent of the gross income in the successive two-year periods. The 
size and range of the net income for each period is shown in Table II. 

Average, Median and Range of Yearly Incomes for Three Periods 


Net Income 




















Farmers with incomes below the average in the first period re 
ceived a relatively greater percentage rise in income in the second 
period than did farmers with incomes above the average. 

The increase, from 1948-50 to 1950-2, in net income (median) was 
93 per cent, in gross income 78 per cent, and in farm expenditure 63 
per cent. Thus there was a large increase in the amount of money 
available from net income for allocation between farm investment and 
non-farm investment, debt repayment, saving, taxation and con 

Age of Farmer 

This was taken as the farmer s age at the time of the interview. 
In a partnership the age of the partner having the final managerial 
responsibility was selected. The range in age was 22-72 years. The 
average and the median age was 47 years. 

Tears Spent Farming the Present Property on Own Account 

This factor was selected because it was considered that where a 
farmer had been on a property for many years there would be fewer 
investment opportunities than on a property recently purchased. The 
period ranged from 2-47 years with a median of 16 years and an average 
of 17J years. Farmers who had been farming on their own account 
less than five years were included if previously they had been working 
the property for a relative and so had the complete financial records. 

Size of Debt at Beginning of Period 

This was obtained by capitalizing the interest paid in 1948-9, as 
shown in the income tax returns, at a rate of 4 per cent. This pro 
cedure gives the average indebtedness of the farmer during the year. 
How the debt was distributed in 1948-9 is shown in Table III. 



Amount of Debt Outstanding 1948-9 








900 1 + 

% of Farmers 








Amount of Debt Repaid 

This was calculated as the difference between the farmers in 
debtedness, calculated as above, for the years 1948-9 and 1951-2. 

Table IV shows the year by year position of both debt repayment 
and debt incurrence. There were 108 farmers with some indebtedness 
during the period, but the table appears to show a greater number as 
some farmers borrowed in all three of the years under consideration. 
Of the 108 farmers, 20 fully repaid their debt, 50 reduced it, and 38 
owed more in 1951-2 than they did in 1948-9. 

Debt Repayment and Incurrence 1948-52 



No. of 



No. of 


in each 

























It is possible that the rise in farmers incomes caused the appar 
ently contradictory situation of a large rise in income being associated 
with a reduction in debt repayment and an increase in the number 
borrowing, because the large amounts of provisional taxation assessed 
on their income caused some farmers to borrow to pay their taxation. 

Amount Spent on Replacements 

This consisted of expenditure only on plant and buildings, because 
expenditure on water and fencing replacements was not available. The 
amount of expenditure was estimated in the same way as expenditure 
on additional investment goods. Over the whole period the average 
expenditure was 584 compared with 631 on the same items of net 


3. Discussion of Factors 

The results of the statistical analyses show that of tiie six factors 
studied income alone had a significant relation to the level of invest 
ment spending. It appears that expenditure on replacements may also 
be related but it was found that the apparent correlation is due to 
both replacement expenditure and investment expenditure being 
positively correlated with income. 

The two factors which show least correlation with net invest 
ment, namely age of farmer and size of debt at beginning of the period, 
are those selected as being likely to have the effect of depressing the 
level of investment. 

In the case of age of farmer, it is suggested that this low corre 
lation may have been due to a lag in investment created by the shortage 
of money during the depression and shortages of labour and materials 
during the war and post-war years. It is probable that farmers over a 
wide age range needed to make large investment expenditures when 
finance and materials became more available in the late forties and 
early fifties. Under these circumstances it is probable that any in 
fluence age may have would be hidden. 

In the case of size of debt at the beginning of the period the low 
correlation may have been due to the selection of a poor measure. Thus 
while it was shown that size of debt apparently did not influence the 
level of investment spending it may be that a measure which related 
debt and capacity to repay would have provided a measure with a sig 
nificant correlation with the amount of net investment. 

The factor years spent farming present property on own account 
was used to obtain some measure of the effect of past spending on in 
vestment on present spending. It was assumed that farmers who had 
long occupied a property would have largely carried out their plans 
for developing it, whilst those newly on a property would still have 
many improvements to carry out. Whilst not significant, there is a 
much greater correlation than with the last two factors considered. 
That this was not a significant correlation may be due to the point 
made previously regarding the backlog of investment due to the de 
pression and the war. 

The simple correlation between debt repayment and investment 
approached closely to the 5 per cent level of significance. In association 
with income, debt repayment was tested in a multiple correlation with 
investment but was not significantly correlated. 

To differentiate further farmers were classed according to whether 
they had no debt, had increased their debt, had repaid all their debt, 
had repaid more than half their debt, or had repaid less than half 
their debt. Those classes with significant differences between their in 
vestment expenditures are shown in Table V. 



Debt Repayment and Investment 


Farmers who had 

Spent on 1 


Less than 656* 

More than 656 

Increased Indebtedness 
Repaid all Debt 


25 (1) 
5 (2) 

No Debt in Period 


18 (3) 

* 656 was the medium amount of net investment. 

(1) X (2) 2 = 30-4468** 1 d.f. 

(2) X (3) x*= 8-0317** 1 d.f. 

x2 6 635 for significance at 1 per cent level, and 10 827 for significance 
at 0-1 per cent level. 

Using the Chi Square test for significance it was found that farm 
ers who were not in debt, or who were increasing their indebtedness, 
spent significantly greater amounts on investment than those farmers 
who repaid their debt in the period of the survey. The farmers who 
were increasing both debt and investment were probably partly re 
sponsible for the lack of an inverse correlation between debt repayment 
and investment. Those farmers who were repaying debt did not have a 
significant difference in the amount of investment compared with those 
who had no debt. That farmers who were increasing their debt should 
have a high rate of investment was not unexpected as most of them had 
borrowed to expand their farm area, which necessitated the purchase 
of extra equipment to work the new ground. 

Replacements spending did not have an effect on investment spend 
ing. It was included because, as with debt repayment, it was thought 
that anything which competed with investment for a share of net 
income might influence the amount of investment. (Family expendi 
ture was not considered as a factor because few farmers had balance 
sheets and so the amount was not generally available.) 

Net income is shown to have a high correlation with net invest 
ment in each of the three periods examined. 

4. Analysis and Discussion of Farmers Reasons 
for Investment Expenditure 

To gain a knowledge of the factors influencing their investment 
decisions farmers were asked, (a) the reasons for their purchases of 
all plant and machinery in the previous five years, (b) the reasons for 
the erection of all buildings built during the last five years, and (c) 
the reasons for clearing operations done in the last five years. Unfor 
tunately, in the last group a considerable number of farmers were 
asked the reasons for clearing done in the last year or two instead of 
over the five-year period. 


Reasons for Farm Investment and Their Frequency of Occurrence 

132 of 137 




72 of 137 

i? f 


81 of 137 



Specific job 






Technical and 


Expansion or 


None before 












Labour relations 


Supplement or 









Economic and 




All of the reasons given by the 224 farmers visited were analysed 
and those reasons with a similar meaning grouped into classes. The 
classes formed from the reasons given for the investment groups, plant, 
building and clearing are those shown in Table VI. The numbers shown 
are for those farmers in the sub-sample of 137. In some cases no record 
was made of the farmer s reason for his investment expenditure and 
the percentage is of those giving reasons, not of those who made an 

In each of the investment groups about one-third of the farmers 
gave expansion as the reason for their investment expenditure. In two 
cases this expansion was made partly as a result of the Commonwealth 
Government s call for increased production but usually it was associ 
ated with the individual s desire to improve his own position. In the 
case of clearing, this reason was given much more frequently by the 
lower and middle income groups than by the higher income groups. 
This class expansion is important not only because of the frequency 
with which it was given but because expenditure associated with it was 
usually for large amounts, i.e. purchase of tractors, seed drills, ploughs, 
etc., erection of buildings, and costs of clearing. 


The second class of reason is "improve facilities". Into this group 
were placed reasons such as * * more convenient ", " independence ", " too 
small before", and "better facilities". About a quarter of the farmers 
in each group gave this reason for their investment spending. It was 
given most frequently as a reason for building, but was usually asso 
ciated with the construction of additions to existing sheds rather than 
with the erection of new buildings. "With machinery, except in the case 
of shearing plants where the farmer wished to make himself indepen 
dent of his neighbours or shearing contractors, this reason was usually 
given for expenditures on items such as post-hole diggers and borers, 
grain augers, lighting plants, etc. In clearing, also, it was associated 
with cleaning up odd corners or pockets of timber and it was not asso 
ciated with large amounts of expenditure. This reason is in contrast 
to the previous one in that it mainly comprises expenditure on getting 
things just right rather than on large developments to increase pro 
duction or income. That this reason should occur so frequently was 
probably an expression of the good times farmers were enjoying at 
this period, which allowed them to obtain items they could have done 
without if finance had not been easily available. 

Least frequently given was the reason "taxation deduction". For 
a part of the period of the survey special depreciation allowances for 
expenditure on plant and building were available, while expenditures 
on clearing, dam or bore sinking, and purchase of rabbit netting were 
allowable as total exemptions from income for taxation purposes. These 
figures support the point made previously that these allowances had a 
small direct effect on farm investment expenditure. 

Brief comments on the other classes of reasons are made below. 
Most prominent of these was "specific job". It was the most frequently 
given reason for plant and machinery purchases. It took the form of 
the answer "I bought a scarifier so I could scarify the land", i.e. the 
obvious answer to any question asking why one had bought a piece 
of equipment. It was usually amplified by a further reason. The fact 
that farmers who bought machinery averaged two reasons each was 
not so much that they gave a different reason for each item of plant 
but that two or three classes of reasons were given for one item, and 
the rest of the items purchased were bought for reasons in one or 
other of these classes. In the case of building the obvious answer of 
"protection" was not often given but that indicative of expansion, 
namely "none before", was most important. This may mean that the 
farmer considers it to be self-evident that it is necessary to have a 
building, but that this is not the case with implements, where various 
ones do similar work. 

Equally frequently given, for plant, was the class of reasons "tech 
nical efficiency". This class of reasons included "economy", "timeli 
ness" or "reserve" and in the case of clearing, "scientific advances", 


improve rotation" and "grow clover". This reason was important 
for clearing because it was associated with clearing large areas of light 
lands which were largely worthless before the part trace elements play 
in plant and animal nutrition was discovered. For machinery, also, 
this reason was often given for expenditure on expensive items of plant. 
It concerned the utilization by the farmer of new developments to 
increase the efficiency with which he could run his farm. Much sand- 
plain, for instance, has been converted from a rabbit-breeding area to 
highly productive clover pastures due to these discoveries. 

The reason "labour" in the case of machinery, was usually con 
cerned with labour-saving devices such as bag-loaders or the purchase 
of a second tractor to avoid night work. With building it was associated 
with the erection of cottages, or quarters, for employees. As the intro 
duction of tractors lowered the labour requirements of farms the fact 
that workers cottages took priority over farm houses (13, 13; 20, 35; 
were the respective numbers erected in each of the two-year periods) 
suggests that the improvement of housing of employees became essen 
tial if labour was to be either retained on, or attracted to, farms in 
the post-war years. 

The class of reasons "psychologic and economic", contains the 
reasons of those farmers who were clearing because they did not wish 
to see any land idle, or Crown land unselected. 

Finance was mentioned as a reason for clearing. That it was not 
more frequently given was probably due to the question being, Why 
did you buy (or clear) ... ?" If it had been extended to ask why 
it was bought at a certain time the financial reason would probably 
have occurred more frequently. In the case of clearing two farmers 
said that when prices were high was the best time to develop, and the 
other one said he did so because he had the money available. 

The class of reasons for investment in building and machinery 
were tested, using a Chi Square test, to see if they differentiated be 
tween high and low investment spending. No difference was found by 
these tests. 

5. Conclusion 

It was found that the proportion of net income allocated to invest 
ment changed significantly following a general doubling of farmers 
incomes. Whether this change was due to the change in the level of 
income received or to effects due to increasing availability of materials 
and the method of estimating net investment could not be decided with 
the information available. 

Examination of the reasons for investment showed that a great 
number of investment purchases were made to expand or develop the 
property. Nearly equally important, at this time, were purchases to 
make things easier, or more convenient, or more pleasant on the farm. 


Important, too, was the desire to increase the efficiency of utilization 
of land or machinery and to introduce economy into the production 

It would seem that investment is a function of income, but pro 
vided that income is satisfactory, considerations of increasing ease and 
comfort of working conditions, improving techniques of production, 
and expansion of the production process are the chief factors influenc 
ing farmers in their investment spending. 

Further work on the relationship of debt repayment, replacements 
spending and investment to income would probably be of value in pre 
dicting how farm investment will change as incomes change. 

Institute of Agriculture, 
University of W.A. 


The results of the analyses of the relation between net investment 
and the factors selected are shown below. 


Farmer s average yearly net farm investment (1949-53) and 

r 5 

(1) Age of farmer =0-0235 n.s. 6 

(2) Size of debt at beginning of period = 0-0482 n.s. 

(3) Years spent farming present property 

on own account = 0-1082 n.s. 

(4) Debt repayment =0-1334 n.s. 

(5) Amount spent on replacements = 0-1858* 

(6) Average yearly net income (1948-52)= 0-5045*** 

Also correlation of 

(7) Net investment 1949-51 and net 

income 1948-50 = 0-2040* 

(8) Net investment 1951-3 and net 

income 1950-2 = 0-4723*** 

Regression Equations 

Correlation ( 6 ) y = 297 5 + 1348 x 

(7) y = 277-1 + 0-0628 x 

(8) y = 295-6 + 0-1407 x 
Where y = net investment, x = net income. 

5. r is the correlation coefficient. r = 0-1679 for significance at the 5 
per cent level. 

6. The 5 per cent level of significance is shown by *; the 1 per cent 
level by **; 0-1 per cent level by ***, and not significant by n.s. 


Multiple Correlation 

Average investment 1949-53 on average income 1948-52 and aver 
age yearly expenditure on replacements. 

Regression t 1 23 264*** 

& 8 income t = 6-347*** 

& replacements t = 0-763 n.s. 

7. t is a statistic used for comparing regression coefficients. 

8. b is the regression coefficient. It measures the rate of change of a 
dependent variate as the independent variate changes. 

An Episode in the Development of Australian Wool Markets 


From 1868 to 1871 the Australian wool-growing industry was 
faced with its most severe crisis between the forties and the nineties. 
A heavy and sustained fall in prices was aggravated by widespread 
drought in the late sixties, by an upward trend in costs particularly 
in wages and shearing costs which reflected the general upswing in 
economic activity after the post-gold-rush deflation, by the heavy bur 
den of indebtedness incurred during the buoyant expansion of the 
early sixties and by the reluctance with which consumption standards 
were adjusted to altered conditions. By its nature the crisis precluded 
two avenues by which the individual wool-grower may have sought 
relief. Unable to reduce production costs by lowering wage-rates, he 
was equally powerless to economize by reducing labour requirements 
per unit of production. Such short-term expedients as were adopted 
were patently uneconomic and had led to decreasing returns by 1870, 
while a tight market for pastoral finance drastically curtailed long- 
term projects to increase productivity. Apart from minor economies in 
running expenses, therefore, only two lines of adjustment afforded 
any prospect of success. The first lay in the development of supple 
mental income-producing activities like tallow production. The other, 
to which this paper is devoted, was the attempt to reduce marketing 
and associated costs and to increase gross realizations by reshaping 
the channels and altering the techniques by which Australian wool was 

In broad terms the existing export mechanism consisted of the 
consignment, through intermediary agents in Australia, of 80-90 per 
cent of the clip to agents in London who arranged for its sale by auction 
at the grower s risk. This procedure involved a normal delay of up to 
five months between shearing and the receipt of the proceeds from 
London. Two main techniques had been involved to overcome this delay, 
A small local market, which had achieved some degree of institutional 
stability by the sixties, eliminated the problem entirely for the few 
small growers who patronized it. Discountable liens on wool, becoming 
more important as the direct links between individual growers and their 
English financiers weakened, provided accommodation for the greater 
number of the remainder. This mode of finance was central to the 
business tactics of the Australian exporting agents and, indeed, to the 
organization of the whole export trade. Liens required an endorsement 
by a third party before they were discounted by the banks. Two pres 
sures tended to narrow the choice of endorser to the exporting agents. 



On the one hand this was still the era of the agency, in which nearly 
every squatter required the services of an agent for the conduct of 
his business and, above all, for the consignment of his wool. To this 
agent, who knew the clip and in whose hands it rested, he naturally 
tended to turn for endorsement. On the other hand, preferential treat 
ment appears to have been given to bills known by the bank to have 
the backing of one with a knowledge of and interest in the produce, a 
tendency which was reinforced by the development of wealthy con 
cerns specialized in wool-exporting. This, in turn, provided the endorser 
with good business reasons why he should handle the export of the clip. 
It seems certain, in fact, that by the end of the sixties he had estab 
lished an actual right to control, or at least to oversee, the consignment 
of the hypothecated produce. 1 

Among the exporting agents in Australia there existed a most 
significant grouping. The numerically smaller section, composed of 
specialized wool or stock and station agencies and other concerns whose 
primary connections were with the wool trade, was responsible for 
consigning an average of over 60 per cent of the wool exported through 
Victorian ports in the two seasons 1870-2. The remainder was handled 
by merchants whose interests were rather more widely spread and to 
whom the export of wool was a sideline. 2 This latter group of general 
merchants provided the leadship in the incident under review, while 
the specialized houses tended to stand aloof. 

To understand their role it is necessary to go back to the end of 
1868. In December the directors of the Colonial Bank of Australasia 
decided that, in response to urgent representations from graziers, the 
Bank would be willing to undertake the consignment and sale of wool 
in London. 3 The reception given to this announcement indicates that 
dissatisfaction with marketing methods was being felt even before the 
full gravity of the price situation was realized. The offer of an altera 
tive to the existing market channels 4 naturally aroused opposition from 
sections of the mercantile community which condemned the move as 

1. See the law case involving the London & Australian Agency Cor 
poration Ltd., reported in the Argus, 25th October 1872; also a letter from 
G. Walker (Inspector of the Bank of N.S.W.) to the manager of the Bank s 
Melbourne branch, 18th June 1870, in the possession of Goldsbrough, Mort 
& Co. Ltd., to whom the author is indebted for permission to examine and 
use manuscript records relating to its activities in the nineteenth century. 

2. Examples of the three types of concerns are, respectively, Richard 
Goldsbrough & Co., G. D. Gill & Co., and Buckley & Nunn. The calculations 
in this paragraph have been made from material contained in the Victorian 
Custom Bill of Entry, a detailed analysis of imports and exports published 
by authority in The Journal of Commerce of Victoria, Melbourne weekly. 

3. Melbourne Argus, 13th January 1869. 

4. While S. J. Butlin, Foundations of the Australian Monetary System, 
(M.U.P., Melbourne, 1953), pp. 507-8, makes it clear that the Banks had 
exercised this function in the 1840 s, controversy contemporary with this 
1868 move, though not entirely unanimous, leaves little doubt that the prac 
tice had been largely if not wholly discontinued and that this was, to all 
intents and purposes, a real innovation. 

1955 WOOL PRICES, 1867-75 277 

bad banking practice and as an unwarranted interference with the 
business of established concerns. 5 On the other hand, many squatters 
felt that direct bank participation in the marketing process would 
not only reduce the financial charges burdening them but that other 
specifically marketing costs would be saved by the elimination of the 
middlemen-handlers. Even prominent and wealthy graziers supported 
the allegation that . . . 

"The entire profits of pastoral tenants . . . have been well-night 
swallowed up by the combined charges of commission agents; 
and now that wool has fallen and a succession of bad seasons has 
been experienced, it is impossible for the squatter to bear these 
exactions any longer." 6 

The directors decision did more, however, than bring discontent 
to the surface. It emphasized the insecurity of the position the general 
merchants held in the wool trade. They acted as pastoral financiers, 
agents and shippers, and occasionally as buyers in the Sydney and 
Melbourne wool markets. The first two of those interests had been 
steadily undermined since the late fifties by the development of the 
large specialized wool houses. As the organization of the trade and 
their position in it was largely determined by the institutions for the 
provision of short-term credit to both the wool industry and the export 
trade, the new role of the Colonial Bank seemed a further threat. Per 
haps the threat was not a serious one, 7 for their position was bulwarked 
by the institutions for the provision of long-term finance, but it must 
be considered in conjunction with other tensions. Commissions yielded 
by a depreciated commodity were falling; financing producers on a 
falling market was in fact a gamble, and the protective measures which 
that role necessitated were not popular ones; the direct interests of 
merchants who produced or bought wool were suffering. To the mar 
ginal wool-merchants these represented a formidable set of circum 
stances. It was for these reasons that, after the reports of the first 
sales of the 1869 clip had arrived from London, the mercantile com 
munity initiated a movement for the reform of the wool trade. 


In Sydney, an unofficial meeting of merchants held early in 
October 1869 decided that it was necessary to improve the manner in 
which Australian wools were sold in London. A long controversy in 
the correspondence columns of the London Times had confused rather 

5. See, for example, the letters from James McBain, a dissenting direc 
tor of the Bank and manager of one of the larger specialized wool houses, in 
the Argus, 23rd and 25th January, and the Argus leader of 28th January 1869. 

6. Reported in the Argus leader, 6th February 1869. 

7. In 1879, a decade later, 8-7 per cent of the import of Australasian 
wools into London was conducted by nine banks. Vide The Australian Insur 
ance and Banking Record, 17th March 1890, Melbourne monthly. 


than clarified the most appropriate points for reform. In communi 
cating with the Melbourne Chamber of Commerce, therefore, the meet 
ing suggested that a committee be appointed to examine the organiza 
tion of the trade by making an on-the-spot investigation in London. 8 
Kepresentative of wool-growers, merchants and bankers met in Mel 
bourne early in November. As it was felt that "the growers were en 
titled to dictate to their agents at home how and when their wool should 
be sold , 9 a group was nominated to join with that already named by 
the Sydney meeting. 10 The agents at home , against whom the attack 
was levelled, were, in fact, those at whom criticism and demands for 
reform were most readily levelled. Specialized wool-import merchants 
having well-established contacts with colonial export agents, their 
functions were to supervize the storage of the wool, to prepare it for 
sale, to engage a broker to sell it at the auctions and to render the 
account sales to the grower. Their position was therefore central and 
at the same time particularly vulnerable. Yet among those nominated 
to investigate the probity and efficiency of the London trade the Vic 
torian mercantile group included, paradoxically, Messrs. F. G. Dalgety, 
W. F. Moore, R. Gibbs, P. W. Flower and F. Huth, all London wool 

It seemed, however, that the appointment of these men from 
among the ranks of those vitally interested in the workings of the wool 
trade was a natural step. Not only were they resident in London but 
they were the experts who knew better than others the practices and 
customs of the trade, who could discern the bottlenecks and wastages 
and who were in the best position to press for any reforms they might 
recommend. Their interests, moreover, appeared to coincide with those 
of the merchants, bankers and commission agents of the colonies. They 
too were feeling both the financial gamble and the reduced commission 
incomes. Blackwood, the colonial partner of the Melbourne unit of the 
Dalgety network, had, in fact, informed the Melbourne meeting that 
both he and his London firm favoured modifying the organization of 
the London sales. 

Yet the first fundamental cleavage in interests and approach be 
tween the mercantile group in London and the colonial merchants and 
wool-growers was revealed on the receipt, by the Melbourne Chamber, 
of Dalgety s letter accepting the convenership of the joint committee 
appointed. Though willing to institute a public inquiry if it were 
earnestly desired, he felt that "the Importers Committee have already 
carried out the wishes of the colonists so far as they can at present 

8. For an account of the activities of this meeting see the Sydney 
Morning Herald, 6th October and 3rd November 1869. 

9. Reported Argus, 3rd November 1869. 

10. The N.S.W. representation consisted of Sir Daniel Cooper, Messrs. 
John Peter, Donald Larnach and William Mort, all resident in London. 

1955 WOOL PRICES, 1867-75 279 

be carried with advantage to the growers and to the trade in general". 11 
The committee of which he wrote was that of the New South Wales 
and Van Dieman s Land Association, an organization of London wool 
importers formed in 1836, whose last general meeting had been held in 
1846. 12 In sympathy with the demands being made in London and 
Australia, and to protect their own interests, the members of the com 
mittee had decided, in October 1869, to increase the number of auction 
sales series from four to five in the coming season. This was the extent 
of their palliative action, for though, after reports had reached them 
of the Sydney meeting, they had had before them a motion calling for 
the reduction of selling brokers commissions from 1 per cent to -J per 
cent, it had been withdrawn without discussion. For the importers 
it had been sufficient, that is, to endeavour to increase the gross prices 
realized by increasing the number of sales in the hope that smaller 
offerings would encourage better biddings. 

The growers, however, wanted to carry the matter much further. 
A specific set of problems and demands was forwarded to London for 
the guidance of the joint committee appointed. Indicative of the gen 
eral malaise was the request that it consider the value of changing 
the whole fabric of the market by greatly increasing the number of 
sales series even to the extent of abolishing their periodicity altogether, 
or by facilitating direct shipments to other English or continental 
ports. 13 Their real concern, however, lay in the charges made against 
their wool. Two fertile fields for discontent related to the weights on 
the basis of which the pastoralists were paid. One arose from the varia 
tion between station weights and warehouse weights, due mainly to 
climatic differences, which had formerly seemed to favour the grower. 
Now, it was alleged, all increases were being weighed out in London. 
The other concerned the calculation of the allowance which it was neces 
sary to make the buyer for the weight of the wool-pack the "tare". 
Again the growers claimed that this always favoured the buyer and 
reduced the quantity of actual wool for which payment was made. Two 
further requests affected their realizations more tangibly. The com 
mittee was asked to scrutinize closely the possibility that more efficient 
and economic management could produce lower warehouse charges, 
which were deemed to be disproportionately high, and to endeavour 
to effect some reduction in the commissions paid both to importing 
merchants ( !) and to selling brokers. If the colonial merchants, obvi 
ously unable to sympathize wholly with all these demands, were never 
theless willing to lend them their support in the hope of realizing their 

11. Argus, 4th March 1870. 

12. The Sales of Australian Wools in London Report of the Commit 
tees, Minutes of the Committees and Evidence, London, 1870, p. 62 ; hereafter 
referred to as the Committees Report. 

13. See also the opinions of "Anglo-Australian" recorded in the Euro 
pean Mail and reprinted in the Argus, 17th February 1870. 


own more modest claims, no such considerations affected the attitude 
of the importing merchants in England. Their position, clearly enough, 
was that while they might, like Dalgety, feel the need for some reform, 
that could constitute no more than a slight modification of existing 
institutions and practices. When, therefore, the representatives of New 
South Wales and Victoria met jointly in London and appointed a sub 
committee, five of whose eight members were of the London importing 
trade, to conduct a public inquiry, "informed circles" were in little 
doubt about the way in which the conflict of interests which they repre 
sented would be resolved. 

By the time the subcommittee commenced its hearings in January 
1870 it had become apparent that the embarrassment which the colon 
ists proposals presented to the majority of its members was not to be 
lessened by the presence of Sir Daniel Cooper, the enfant terrible of 
the gathering. First Speaker in the N.S.W. Legislative Assembly, 
baronet, and now a wealthy merchant resident in London, he had 
become recognized as the unofficial spokesman of the growers. Cease 
lessly he put the squatters side of the question ; constantly he sought 
clarification, poking at the curtains which modestly covered the more 
tender or unsightly areas of the trade and accepting the barely dis 
guised contempt and rebukes of the witnesses ; continually he returned 
to the attack, making himself "troublesome and conspicuous". 14 The 
combined skill of the chairman and the witnesses was barely sufficient 
to stem his questions and divert his suspicions. With a show of com 
pleteness, however, the subcommittee called for evidence from selling 
brokers (who, on their second appearance, insisted on doing so jointly), 
from import merchants and from warehousemen. Their report on the 
evidence, containing their recommendations, was completed in Febru 
ary and signed by all members of the separate N.S.W. and Victorian 
committees 15 with the exception of Sir Daniel Cooper and Mr. John 
Peter from the elder colony, and forwarded to Sydney and Melbourne. 16 

The expectations of the cynics were fulfilled. While * The conveni 
ence of merchants themselves would be materially promoted if wool 
could be sold to advantage in London or elsewhere whenever they saw 
fit ... your committee have no change to recommend, and are convinced 
that monthly or private sales and direct shipments to other ports would 
operate most prejudicially to the best interests of the trade". 17 Ware 
housing was "upon the whole satisfactory"; "it would be imprudent 
to disturb the method of tareing. 18 While the committees were willing 

14. "Anglo-Australian s" report of the proceedings of the committees 
appearing in the Argus, 14th April 1870. 

15. A delegation from South Australia, nominated too late to partici 
pate in the inquiry, declined to add their names to the others. 

16. A copy of the report and the minutes of evidence was reprinted in 
serial form in the Sydney Morning Herald, between 5th and 19th May 1870. 

17. Committees Report, p. ii. 18. Ibid., p. iii. 

1955 WOOL PRICES, 1867-75 281 

to give some support to the value of a reduction in brokers charges, 
the commissions charged by importers were considered commensurate 
with their place in the trade. On the whole, "Your committee are un 
animously of the opinion that the mode in which wool sales have for 
very many years past been conducted has been that most conducive 
to the best interests of the flock-owners ; and that those interests could 
only be imperilled or sacrificed by disturbing that policy or substituting 
an experimental one." 19 

A special subcommittee of the Melbourne Chamber of Commerce 
was appointed to consider these findings. Though prefaced by the 
statement that it modified the conclusions of the London meeting only 
with caution", and though it laid down that "the utmost that can be 
ventured upon is gradual modification", its report 20 reflects the depth 
of feeling in the colonies. "Without in the least insinuating any dis 
paragement of the skilled witnesses . . . ", it reads, "it is beyond ques 
tion that their judgments and opinions . . . take a very strong bias or 
colour from the situation in which [they] find themselves." It was 
disturbed, too, by the "many features partaking of the character of 
monopoly". The weight of the London committees argument against 
an extension of the number of sales was recognized, however, and it 
contented itself with a vague advocacy of the minimization of such 
artificial restraints to trade. On the questions of warehousing and 
brokerage a strong plea for reform was entered. Two suggestions of 
greater novelty were also made. One was the reorganization of the 
N.S.W. and V.D.L. Association, or its possible replacement by some 
body which was visualized as a London Chamber of Australian Com 
merce. The other, which the general committee of the Chamber was un 
willing to accept, was the recommendation that the usuance on wool 
drafts on London be extended from sixty to ninety days. 

In Sydney considerable perturbation was aroused by the failure 
of two of the colony s representatives to sign the London committees 
report. Mr. John Peter in a separate statement found that he disagreed 
widely, though not fundamentally, with the majority. Sir Daniel Cooper 
condemned nearly every branch of the London trade, and he extended 
his remarks to include the main report and the investigating sub 
committee itself. In the letter in which he explained to the London 
committee his reasons for not attending their final meeting, he said : 
"The report speaks almost as much in the name of the New South 
Wales and Van Dieman s Land Association as your own, and it is diffi 
cult in one or two places to make out which committee is meant when 
the word is used." 21 In no less direct terms did he make his recom- 

19. Committees 9 Report, p. iv. 

20. Appearing in the Argus, 13th June 1870. 

21. That letter was reprinted in the Sydney Morning Herald on 23rd 
May 1870, together with all the other documents relevant to the activities of 
the N.S.W. representation. 


mendations to the colonists : "Begin your action at home, inform your 
selves well, combine for mutual protection, act deliberately and you 
will succeed; but if you rely on aid from this side, you may expect 
much but will obtain little." 22 These words were to form the creed of 
the woolgrowers but the mercantile community, seeing that they had 
conjured up a djinn over which their control was problematical, en 
deavoured to reduce their impact. They issued a report which, while 
directing attention to the more outstanding of the abuses, minimized 
the importance of the attitude of the London committees. 

By August of that year, 1870, certain changes could be noted. 
Tentative inquiries about direct shipments had arrived from England 
and France ; 23 new docks in London had forced a reduction in ware 
house charges; above all, the importing merchants had been induced 
by competitive moves in Australia 24 to force the selling brokers to 
lower their commissions to per cent. Though these signs of improve 
ment were received gratefully by the pastoralists neither they, nor the 
realization that over-production and not jobbery was the cause of 
falling prices, provided more than scant comfort as prices continued 
downward through the first six months of the year. So bleak did the 
outlook seem, in fact, that the importing merchants association in 
London decided to cancel the increase in the number of sales and to 
hold only one in the second half of the year. Hardly had this been done 
than the Franco-Prussian War broke out, at once diminishing the com 
petition from two of the major European consumers. 

Throughout the entire 1870-1 season there was a continual under 
current of discontent among the growers. It was a subdued murmur, 
however, as if it were realized that nothing of value could be achieved 
while the current European political situation lasted. Moreover, even 
the most voluble malcontents were pleased by the marvellous resilience 
shown by the market, for while predictions at the opening of the war 
had warned of dire times ahead, in fact the price fall was not nearly as 
great as expected. 26 

The following season was ushered in amid more congenial omens. 
Prospects of renewed French and German competition were high. There 
was talk of the removal of the American tariff. Yet the movements 
initiated in and by the crisis years were continued. The Melbourne 
Chamber of Commerce, wishing to follow up its previous suggestion 
of liberalizing the constitution of the importers association, found 
that it had to accept a fait accompli. The old Association, without warn 
ing anyone above all the colonists* who wanted their interests directly 

22. Ibid. 

23. See Argus, 17th August 1870. 

24. Argus leader, 13th August 1870. See also Sir Daniel Cooper s letter 
to The Times, 16th March 1871. 

25. See, for example, R. Goldsbrough s monthly circular in the Journal 
of Commerce of Victoria, 20th July 1871. 

1955 WOOL PRICES, 1867-75 283 

represented on any new organization had wound up its affairs and 
had been replaced, slightly enlarged but otherwise unref ormed, by the 
Colonial Wool Merchants Association. 26 

Meanwhile, the agitation among the growers had flared up again. 
The initiative was, by now, slipping quite definitely from the hands 
of the colonial merchants, for with the prospect of economic recovery 
their interest had diminished. Public meetings were held in the main 
Australasian cities from which memorials presenting the growers 
claims were sent to the London Association. Their scope was admittedly 
smaller than it had been two years previously, but while some dealt 
with old subjects others embodied new complaints. The memorials 
called for an increase in the number of sales to six a year, for a further 
reduction in warehouse charges and for some alterations in the methods 
of sampling and lotting the wool for sale. To these was added, in strong 
terms, disapproval of selling brokers who acted as buying brokers at 
their own sales, a dual capacity which had aroused indignation when 
the London committee of inquiry had revealed its existence in 1870. 
A further technique for encouraging competition among the buyers, 
which had been mooted by the South Australian delegation in 1870 
and which was .unanimously advocated by these meetings, was the re 
duction of the unit in which bids could be made at the auctions. The 
final demand was for the abolition of the irritating but customary 
allowance of 1 Ib. per cwt. to the buyer for " draft". 

These memorials were turned over by the Colonial Wool Mer 
chants Association to a subcommittee for investigation. Its report 27 
was more conciliatory than that of the 1870 committee had been. It 
formulated a careful defence of the existing practices in landing and 
weighing, sampling and lotting, and on the question of tare. The mem 
bers frankly admitted that they were divided among themselves on 
the number of sales that should be held during the year, offering the 
difficulties of organization and the opposition of the buyers as the main 
reasons for their recommendation to give the five sales system a further 
trial. Negotiation, it promised, would be instituted or continued to 
effect a reduction in minimum bids and in warehouse charges. The un 
easy position of the importers was reflected, however, in their reply 
on the problem of selling brokers serving two masters, a vacillating 
reply which was far from satisfying to the colonists. Their defence of 
the allowance of draft was spirited and involved, and they warned that 
any serious attempt to abolish it would lead to a serious contest with 
the buyers from which they obviously recoiled. Throughout the report 

26. Melbourne Chamber of Commerce, Annual Report, 1871-2. 

27. This, together with the minutes of evidence, was published in 
pamphlet form by the Colonial Wool Merchants Association, London. It has 
been impossible to locate a copy of it other than that appearing in the Argus, 
29th February 1872, which contains only those portions of the report "that 
it concerns the public to know". 


ran the theme that was patently designed to quieten the colonists: 
* This, it would say, is a matter which is best approached by giving 
explicit instructions to your consignee. Direct that he warehouse only 
in stores complying with such and such conditions; that he sell only 
through brokers who act in such a way and who conduct their sampling 
and lotting on such and such principles. " 

This advice appealed to the Melbourne Chamber of Commerce to 
which once more a copy of these proceedings was despatched. 28 Not 
that it was entirely taken in by so facile a solution or that it did not 
make some attempt to win back from the growers the initiative which 
the latter were beginning to wield somewhat hotheadedly. It did, how 
ever, accept the division between those customs which were sanctioned 
or regulated by the Association and therefore amenable to corrective 
action from it, and those which were matters of individual preference 
which effectively narrowed the scope of discussion to the questions 
of draft and the frequency of sales. On both these matters the Mel 
bourne Chamber was forthright. Of the periodic sales, indeed, it was 
led to wonder "whether this artificial arrangement is not in some re 
spects unsuited to modern circumstances and whether the violent oscil 
lations of the price of wool during the last two years . . . may not be 
reasonably attributed to some extent to the artificial restriction on the 
sale of the article . 29 

The reception of the report at public meetings in other cities, on 
the other hand, was neither so calm nor so considered. A further 
memorial 30 was prepared at the request of the Sydney meeting and, 
by March, signed by 211 growers including some of the most influential 
in the four eastern colonies. This spared neither the arguments nor the 
prejudices of the London subcommittee. Accepting unreservedly only 
the findings on bidding, and reluctantly admitting pleasure that the 
cause for complaint over many technical problems had diminished, it 
took objection at the outset to the biased composition of the 1871 
English subcommittee, feeling no doubt that Sir Daniel Cooper and 
prominent growers at the time in London should have been invited to 
participate. In round terms the pastoralists dissociated themselves from 
the fears and caution of their colonial agents and merchants. Their 
theme was: "Why should not the two parties enter into a serious 
contest ? Their responses on other questions were delivered in terms 
no less blunt. In short, the growers, as distinct from the merchants in 
either Sydney or Melbourne, threw down an unambiguous challenge to 
those conducting the London sales : We must not be prevented from 

28. See the Argus, 27th March 1872, for the report of the meeting held 
to consider them. 

29. Ibid. 

30. Dated 26th March 1872, it was reprinted in the Argus on 23rd 
April 1872. 

1955 WOOL PRICES, 1867-75 285 

paying due regard to our own pecuniary interests by sentimental solici 
tude as to the feelings of our London agents. " 

Nevertheless, even strong words were hardly sufficient to force 
the reforms which they desired. Not more than three or four of the 
buyers in the London saleroom signified their willingness to bid in 
farthings instead of halfpence when at length the importing merchants 
induced the selling brokers to accept such bids on some wools. The 
remainder of the three hundred greeted it with a storm of dissent". 31 
This led to revised opinions. When, by March 1873, the Melbourne 
Chamber had finally formulated its attitude to the London Associa 
tion s failure to achieve this and other desired reforms, many growers 
accepted its reiterated belief that the only way to act was through the 
agents. 82 It shared, however, the London committee s fear that the con 
sequence of that course would be ignominous collapse, for it was fore 
seen that the complete unanimity of growers and agents that would be 
needed would be almost impossible to obtain. Though still expressing 
dissatisfaction about the degree of progress attained, a wearier note 
had entered the deliberations of this body. Since the spectacular rise 
during 1871-2 prices had, after all, been more satisfactory. The urgency 
of the pressures which had originally dictated mercantile participation 
in the agitation had been dissipated. 

The initiative had, in fact, been firmly grasped by the wool- 
growers. In London a meeting of pastoralists resident there had sent 
a deputation to the importers committee to discuss the draft and the 
dual capacity of selling brokers. More significantly, a Pastoral Cham 
ber of the Riverina had been formed specifically to mount permanent 
guard over the growers interests. The President of that body, W. A. 
Brodribb, was given a roving commission to investigate conditions in 
England on behalf of this organization. 33 The ground covered was that 
which had been traversed with such regularity since 1870. In one re 
spect, however, he moved into new fields. He determined to explore, in 
some detail, the value of the alternatives offered by the Antwerp and 
Berlin markets towards which tentative moves had been made over the 
previous four years. Inquiry revealed that Berlin woolbrokers were 
willing to offer substantial concessions on their charges, 34 and having 
learnt that the savings to be effected in warehouse charges, from the 
allowance of actual tare only and from the non-allowance of draft, 
outweighed the extra costs of insurance and transport, Brodribb de 
cided to send a trial consignment there in the following season. Though 

31. Argus, 8th April 1872. 

32. Argus, 19th April 1873. 

33. W. A. Brodribb, Recollections of an Australian Squatter, Sydney, 
n.d., p. 182. 

34. W. A. Brodribb, Results of Investigations and Correspondence in 
Regard to the Wool Trade . . ., Melbourne, 1875, p. 28. These were his reports 
to the Pastoral Chamber. 


similar inquiries were directed to Antwerp, his search for alternative 
markets was not restricted to Europe, for even before his trip to 
England he had offered part of his clip for sale in Melbourne. 35 


That latter action highlights one of the strange features of this 
whole period. While the agitation had, over a period of five years, 
resulted in a 35 per cent reduction in warehouse charges, had forced 
down the combined commission paid to consignees and brokers from 3^ 
per cent to 2 per cent, and had secured certain technical modifications 
in the saleroom, the attention of the merchants and the growers had 
been almost exclusively devoted to the London market, and no attempt 
had been made to develop the alternative markets close at hand in 
Sydney and Melbourne. Even stranger is the apparent reluctance, 
until 1872, of the local w r oolbrokers to exploit the unrest and dissatis 
faction by drawing attention to their own facilities. Admittedly, T. S. 
Mort, the leading woolbroker of Sydney, had played a prominent role 
in the initial direction of the campaign in that city in 1869 though 
emphasizing that the interest was strictly that of a large wool pro 
ducer 36 and had, at the opening of the 1869-70 season, issued a cir 
cular emphasizing the benefits to be derived from selling locally rather 
than consigning. 37 Nevertheless the quite substantial body of brokers 
in Sydney and Melbourne remained self-effacingly discreet until the 
three leading Melbourne houses announced, in August 1872, that they 
would sell without any allowance for draft. 38 This move, "in com 
pliance with the written request made by the leading wool-growers", 
was received with immediate protests from the buyers in the colonial 
market. Their acquiescence was secured only by a compensating varia 
tion in the customary tare allowance. 39 Nevertheless it left a recurring 
irritation between selling brokers and buyers which culminated in a 
buyers strike in November 1873, for the foreign buyers, in particular, 
resented being made the lever for the abolition of the allowance in 
London. 40 This, and an increased advocacy of the advantages of the 
local market in the 1872-3 and 1873-4 seasons, were the only moves 
made by the selling brokers. As reference to Table I will indicate, 
moreover, this silence was not engendered by any increased patronage 
of the local sales. On the contrary, the offerings on the Melbourne mar- 

35. Brodribb, Recollections . . ., p. 188. 

36. Sydney Morning Herald, 6th October 1869. 

37. Ibid., 15th September 1869. 

38. See their advertisement inserted in the Argus, 28th August 1872. 

39. See the monthly report of the London and Australian Agency Cor 
poration Ltd., Argus, 10th October 1872 ; also the public notice published by 
the three brokers, Argus, 25th September 1872. 

40. See, in particular, Jules Renard s letter to the Argus, 12th Novem 
ber 1873. 

1955 WOOL PRICES, 1867-75 287 

ket declined both absolutely and as a proportion of total Victorian ship 
ments during the crisis years. 

Melbourne and Geelong Wool Auctions 

Local Auctions 41 

Proportion of 




Total Exports 
from Victoria 43 





































































The fact is that the colonial markets were not only vastly smaller 
than that in London, but they differed qualitatively. Only two or three 
of the buyers who operated in them in 1870 did so on foreign account 
or to manufacturer s order. The majority were essentially speculators 
buying either on their own account, or on that of English dealers, for 
resale in London. Moreover it was the small growers who appreciated 
most of the main advantage to be derived from the local sales that 
of speedy realization and immediate settlement. Those few large 
squatters who patronized them did so on the specific condition that 
they retained the option of shipping to London if the price offered 
was unsatisfactory. The rule of thumb adopted was that they would 
offer locally when prices were high and stable while shipping direct 
to England when they were low or when a rising trend was discern 
ible. 43 Consequently the fall in price between 1867 and 1871 drained 
away a substantial proportion of those large clips marketed in Mel 
bourne in 1866-7-8. The circumstance which dictated the offer of small 
clips in that city led also to their sale virtually without reserve, and 
partially accounted for the increasing ratio of sales to offerings which 
the table illustrates. 

41. Local sales and offerings have been estimated from the weekly 
reports of sales issued by the selling brokers and are subject to slight upward 

42. Estimated by R. Goldsbrough & Co. and published in the Argus, 
24th February 1875. 

43. Cf. R. Goldsbrough s letter to J. Badcock, Melbourne manager of 
the Bank of N.S.W., 5th May 1871, in the possession of the company. See also 
the Royal Commission on Railway Construction, Report and Minutes of 
Evidence, South Australian Parliamentary Papers, 1875, Vol. 2, paper 22, 
particularly question No. 658. 


Though the figures are subject to a variety of influences, and their 
interpretation requires considerable caution, the steady upward trend 
in local offerings and sales, and particularly in the ratio of sales to 
offerings after 1870-1, is a reasonably clear sign of the progress and 
consolidation of the position of the local markets. It is, moreover, in 
dependent both of the discontent of the growers with the London 
system and of the belated efforts made by R. Goldsbrough & Co., Hast 
ings, Cuningham & Co., and the London and Australian Agency Cor 
poration Ltd. to exploit that discontent. The explanation of the trend 
which in fact represents the first sign of the coming thirty years 
struggle between the colonial and the London markets, is to be found 
in developments which have only indirect relations with the events 
described in this paper. One was the granting of preferential rail 
freight rates by the Victorian Government which had the effect of 
extending the area from which the Melbourne brokers were able to 
draw their constituents. 44 Another was the rapidly changing composi 
tion of Victorian pastoral activity. In the three years 1865-7 the aver 
age number of sheep carried on what the Government Statistician de 
noted stations" was 7,237,000 and, on properties not connected with 
stations, 1,453,000 ; by the period 1873-5 those figures were 5,691,000 
and 5,345,000 respectively indicating a larger number of smaller pro 
ducers. Of greater importance, however, were the effective opening of 
direct cable communication with Britain late in 1872 and the arrival 
of a greater body of buyers purchasing directly for consumers in Eng 
land, on the Continent and in the United States. Speedy communica 
tion meant that manufacturers could afford to establish their own re 
presentation in the colonies for, with it, the limits they set for their 
buyers still accurately reflected the English market situation on which 
they were based when they arrived in Australia, instead of being six 
weeks out of date as they had been previously. This accounted for the 
augmentation of European buyers in Australia. To these was added 
a contingent of buyers on American account their number had been 
estimated at fifteen in 1871-2 who, following the lead of the Germans, 
were endeavouring to find a way of avoiding some of the expenses 
attendant of purchasing in London. The operation of buyers of this 
nature imparted a different character to the local markets. Prices, in 
stead of being determined by what speculators considered a profitable 
margin below the London price, tended to approximate more closely 
that price less the transport differential. Indeed the American buyers 
found transport costs direct from Australia to the East Coast were 
only slightly more than those from London and their bidding, to the 

44. Royal Commission on Railway Construction, op. cit. passim; Select 
Committee on the River Murray Traffic, Report and Minutes of Evidence, 
South Australian Parliamentary Papers, 1870-1, paper 86, particularly 
questions 34 and 400. 

1955 WOOL PRICES, 1867-75 289 

delight of the local brokers, reflected that realization. There were, of 
course, many more obstacles in the way of the development of these 
sales and it was many years before they lost their primarily speculative 
character, but the operation of these buyers did lift the level of the 
prices realized and therefore the popularity of the markets. That, rather 
than the actions of brokers or the discontent of growers, provides the 
explanation for the developments of this period. 


Though our knowledge is still far too fragmentary and uncertain 
to allow of dogmatic assertions, certain tentative conclusions may be 
drawn from this whole episode. It seems that the Anglo-Australian 
wool importers in London occupied a position in, and exerted an in 
fluence on, the trade far stronger than that allotted them by contem 
porary commercial theory. Their compact monopolistic character en 
abled them, collectively, broadly to control the flow of wool to the 
market and the practices and scales of charges adopted in London. 
Their large internal financial resources, backed by their connections 
with various sections of the English short-term money market, from 
which combination their restrictive power was largely derived, made 
them the fountainhead of the credit on which the whole trade was 
dependent. Short-term finance for the grower was provided, in the 
manner indicated above, by the exporting agent. He in turn obtained 
his more liquid funds by drawing upon an English importer, with 
whom he had more or less rigid connections. 45 Until alternate financial 
institutions were developed until the colonial banking system pro 
vided widespread full-line credit from station to saleroom in the man 
ner indicated by the Colonial Bank ; until the local wool export agencies 
had attained financial independence ; and until the local markets had 
developed to the stage where they could provide popular and effective 
alternatives to the London sales until these alternatives were available 
the London importers were able to retain the dominance which their 
financial power gave them. The rigidities enforced by this short-term 
credit structure were buttressed by the form of long-term capital insti 
tutions which tended to bind growers more closely to particular export 
agents and to the London market. The limited and circumscribed out 
look, the concentration on matters which were essentially minor and 
peripheral, and the rarity and ineffectiveness of radical suggestions in 
a movement which developed the incentive, the arguments and the 
organization to effect an entire transformation of the marketing struc 
ture, can be explained satisfactorily only by reference to these financial 
relationships and to the divergence of interests between the colonial 

45. They ranged from the status of valued clients to that of colonial 
partners in a world-wide network, e.g. Dalgety s. 


groups. By contrast, when in the 1890 s the growers were faced with 
a far graver crisis, the technological state of the pastoral industry and, 
more importantly in the present context, the organization of the wool 
export trade had been so modified that the responses called forth 
differed significantly both in nature and success. 

Australian National University. 



The year 1955 may properly be regarded as marking the ten-year 
anniversary of our Employment Act here in the United States. To be 
sure, the statute itself (Public Law 304, 79th Congress) was not passed 
until February 1946, but throughout the year 1945 the proposal for 
such a law was being debated in and out of Congress, and two bills 
of very different character were winding their way through the Senate 
and the House of Representatives. 

In the end, features of both bills were blended in a composite 
statute. The Senate bill s theory that a prospective employment or 
production "gap" could be reliably measured by available statistical 
techniques and prevented by compensating doses of Federal spending 
was muted but not deleted from the final act. From the House bill the 
major positive contribution was the idea of a high-level professional 
economists group to make continuous study of the complex interplay 
of economic forces and events having significant impact on the pros 
perity of the country. Such a Council of Economic Advisers, estab 
lished in the Executive Office of the President (created in 1939), was 
assigned the function of technical advice to the President and his 
Cabinet of department Secretaries (or ministers). The purpose was 
to shape an integrated economic policy to be presented to the Congress 
by the Executive Branch at the opening of its session each January. 
Thereafter, the Council s services were available in connection with 
special messages of the President, the signing or vetoing of economic 
legislation, or the preparation of Presidential speeches. 

The introduction of this idea of a purely analytical or research 
staff "at the summit" of executive policy consideration had its counter 
part as to the legislative branch of government. The original Senate 
bill had proposed a joint committee of both Houses to shape up an 
"economic budget." Under the Employment Act, a Joint Committee 
on the Economic Report of the President makes immediate and inten 
sive study of the Economic Report and submits to the Congress its 
own critique and recommendations, together with supporting material. 
The Joint Committee s report has on several occasions split into major 
ity and minority reports along straight party lines. Effort is made, 
however, to present a basic report that is accepted by all committee 
members, albeit with dissenting opinions or supplemental views at 
tached. Sometimes these are signed by a single Senator or Representa 
tive ; often by two or three jointly. 

* This article was made available through the courtesy of the Institute 
of Public Affairs, Melbourne. 



But this annual view of the President s Economic Keport does 
not constitute the sole or even the major activity of the Joint Economic 
Committee. It has, in practice, become a continuously active research 
or " pondering" committee. Equipped with a permanent staff of pro 
fessionally trained economists and statisticians, it sets up numerous 
ad hoc subcommittees for the intensive study of salient economic pro 
blems, using public hearings, temporary or part time specialists from 
outside government, and much staff service from the various executive 
departments and independent commissions. Both the subcommittee 
reports and their hearings are issued in printed form. 

Thus the essential character of the Employment Act finally passed 
by the Congress was not that of commitment to any specific theory or 
policy of how full employment can or should be maintained. It had 
become a broad methodological measure designed to promote the use 
of modern techniques of statistical measurement and economic analysis 
to detect internal strains in the economy at the earliest possible time 
and to suggest prompt and consistent measures toward the lessening 
of such strains and the promotion of sustained high-level use of our 
national economic resources. 

Problems Encountered by the C.E.A. 

Looked at in the present ten-year perspective, there seems ample 
evidence that the decision to set up a Council of Economic Advisers 
in the Executive Office of the President and a Joint Economic Com 
mittee in the Congress was well-conceived in the light of our traditions 
of free business enterprise and representative government. To be 
sure, many problems have arisen in defining the functions of the two 
new agencies and in getting each understood, accepted, and adequately 
used in its respective province. The Joint Committee got off to a slow 
start but has since got into its stride as a uniquely useful adjunct to 
Congressional procedure. The Council of Economic Advisers came io 
the verge of extinction at the age of six years, but has now been re 
stored to a gratifying state of health and service in its appointed 

One of the basic issues in the emergence of the Council into our 
frame of government, perhaps the crucial issue was to establish clearly 
the professional character of the agency and the advisory role of its 
members and to safeguard them against political involvement. The 
vice-chairman of the initial Council was a distinctly political appointee, 
and after he succeeded to the chairmanship his increasingly active 
participation in party affairs evoked much criticism both in and oat 
of Congress. There were strong Congressional threats of abolishing the 
Council in 1952, ending in a compromise. The Council s operating 
funds were cut one-third, expiring explicitly in March 1953. This 
enabled it to continue in being until the new Administration could 


decide on its own course whether to allow the Council to lapse per 
manently, to request new funds to restore it to its original character, 
or to modify it in more or less drastic ways. 

Mr. Eisenhower s decisions, though somewhat deferred in the rush 
of many claims on his time, were decisive and, from the present 
writer s view, most gratifying. He had, in the campaign, been accused 
of having the military mind." Whatever that may connote in general, 
in this instance it seems to mean that he appreciates the value of staff 
work and knows how to select able staff specialists and to make 
effective use of their skills. He indicated at once that he realized that 
he would need the best intelligence service he could secure in the 
field of economic affairs. He tendered the post of chairman of the Coun 
cil to Dr. Arthur F. Burns, a scholar of unquestioned prestige among 
economists and statisticians, then director of research for the National 
Bureau of Economic Research an institution that for more than 
three decades had specialized in the study of the business cycle and 
the problems of economic stabilization. 

To Dr. Burns the President entrusted not only the task of recruit 
ing personnel for the Council and its staff but also of advising the 
Administration as to changes in administrative organization that 
seemed wise in the light of six years of actual operation. There was 
before the President at the time the recommendation of the (ex-Presi 
dent) Hoover Commission on Governmental Organization that the 
three-man Council be superseded by a single Economic Adviser to the 

On June 1, 1953, President Eisenhower sent to the Congress Re 
organization Plan No. 9, in which he recommended continuance of 
the three-man Council but with the chairman clearly designated as 
responsible administrative head. He was to exercise full authority in 
selecting staff and directing their work and to have full responsibility 
in reporting to the President on the activities of the Council. This does 
away with the anomalous "co-ordinate" relation of Council members 
that had plagued the Council in its early years. The position of vice- 
chairman was abolished, leaving "the members of the Council other 
than the Chairman in an equal status" and the President free to decide 
whom he wanted * to act as chairman of the Council on such occasions 
as necessity may arise therefor." 

The other major change introduced by Reorganization Plan No. 9 
consisted in putting an interdepartmental economic advisory board 
on a permanent and formal basis. There had been something similar 
on an ad hoc basis in connectiaon with the last two Economic Reports 
of the President during my tenure of office (which terminated in 
November 1949). But "in order to make the work of the Council of 
Economic Advisers more effective at the top policy level of the execu 
tive branch the President instructed the heads of the several depart- 


ments and agencies, "or the representatives they may designate, to 
serve as an Advisory Board on Economic Growth and Stability, under 
the chairmanship of the chairman of the Council of Economic Ad 
visers. " In practice this board consists of the Under Secretaries of 
the Treasury, the departments of Commerce, Labour, and Agriculture, 
and such other agency heads as the chairman of the Council may call 
upon. This conference group may properly be said to be the heart of 
the Council s influence on economic thinking at the Cabinet level. 

The President himself has also regularized a weekly conference 
with the chairman of the Council of Economic Advisers, to which he 
gives adequate time and close attention. The great importance he 
attaches to this staff arm of his office and his desire to bring it to 
maximum usefulness were expressed in his message to the Congress 
transmitting his plan for its reorganization. The President there said : 
"The legislative history of the Employment Act of 1946 makes it 
clear that it is the determination of the Congress to help develop a 
strong economy in the United States. ... A strong economy means a 
free economy ... an expanding economy ... a humane economy . . . 
I believe in the basic principles of the Employment Act, and it is my 
purpose to take the appropriate actions to reinvigorate and make more 
effective the operations of the Council of Economic Advisers. Our 
needs for proper advice on economic matters are equalled only by our 
needs to have the best advice and planning on matters of national 
security. . . . The duties of the President require that he be fully in 
formed of major economic trends and activities in order to recommend 
proper measures for the consideration of the Congress, and to take 
into account economic realities in seeing that the laws be faithfully 

President Eisenhower s intention "to reinvigorate and make more 
effective the work of the Council of Economic Advisers" has been con 
sistently and rigorously carried out. All the members he has appointed 
have been of high professional standing, and they have kept almost 
entirely free of any activities that could reasonably be called "poli 
tical. The Chairman of the Council is very chary of public appearances 
and refrains from press interviews, thus avoiding political involve 
ment. Necessary contacts with political reality are facilitated by a 
friendly relationship between the Chairman of the Council and Dr. 
Gabriel Hauge, a member of the President s personal staff in the 
White House, and himself a trained economist. The Council has come 
to a position of important but unobtrusive usefulness throughout the 
executive establishment. It has regained public respect, and an appoint 
ment to any one of its three posts is regarded as a high honour and a 
great opportunity for public service by our best economists. Only two 
major issues seem to me to be still in need of resolution. They may be 
labelled as "anonymity" and "continuity." 


Whose Economic Report? 

In the first two annual economic reports and the first mid-year 
reports (now discontinued) the entire document was signed by the 
President, with only some technical statistical and methodological 
appendices attributable to the Council as such. In July 1948 Mr. 
Truman insisted that the major part of the document appear over the 
signatures of the Council members as A Report: The Economic Situa 
tion at Mid-year by the Council of Economic Advisers. I exerted every 
effort as chairman to have this "report" of the Council strictly limited 
to factual material, without policy conclusions or recommendations. 
Beginning with the Economic Report of January 1950 (under my 
successor) the Council document was given joint billing, on cover 
and title-page, with the President s policy recommendation as "The 
Annual Economic Review by the Council of Economic Advisers." It 
did not abstain from value judgments and, in its closing section freely 
expounded the Council s position on "Needed Policies." This practice 
was continued in the Economic Reports of 1951 and 1952. I see in it 
two threats to the most successful long-run functioning of the Council. 

(a) As a practical matter, the presentation of a policy document 
over the signatures of Council members in the same state paper as 
that submitted by the President of the Congress creates a dilemma. 
Either these professional economists must present a brief for what 
ever policies the President and Cabinet recommend ; or else they must 
argue for a different course (with perhaps different opinions among 
the members themselves). In fact, the latter situation developed in the 
final report of the Truman Council, when Vice-Chairman Clark in 
serted a "separate note" explaining why "I do not join in the analysis 
and policy discussion in Chapters III and IV." The Economic Report 
of the President is an official paper of the political chief of state. As 
such, "it is inevitable and entirely proper that it should blend political 
considerations with more rigorously economic ingredients in its formu 
lation of practical policy. But there is no reason whatsoever why the 
Council should desire, or the President permit them, to present under 
their own names an economic analysis in the detail which clearly 
points to recommendations, and still less reason to include explicit 
recommendations of their own". 1 

(b) As an issue of theory, there is no reason to suppose that 
economists are, by their technical training, equipped to render authori 
tative judgments on matters of over-all strategy or specific tactics for 
the economy in the face of the complex total situations that have to 
be met in a real world. If any line of academic training and research 
qualifies a man for that task, it should be that of the political scientist 

1. E. G. Nourse: Economics in the Public Service (New York, Har- 
court, Brace & Co., 1953), p. 399. 


or student of public administration. To my mind, there is an inherent 
inconsistency in having one who is ticketed as an economic adviser 
undertake to discuss the soundness of executive policy even on econo 
mic issues. To assume such a role implies that he is fully informed as 
to the extra-economic (or in a perfectly proper sense, political) con 
siderations which the President and his Cabinet and White House 
aides have taken into account in arriving at the Administration posi 
tion, and that it would be proper for him to reveal these political 
motivations and discuss them on their merits. But if the economist is 
not both informed as to the circumstances and convinced of the pro 
priety and wisdom of these adaptations of strictly economic findings 
he cannot speak in public on policy matters without embarrassing the 
President or compromising himself." 

The practice thus far followed by President Eisenhower and Dr. 
Burns tends to continue and confirm the precedent inaugurated by 
President Truman in 1948 (when he said it was not to establish a 
precedent) of making the Economic Report a Council document. In 
both years all that bears the President s signature has been a brief 
letter of transmittal to the Congress, giving its members " largely in 
the words of the Report itself, what I consider to be its highlights." It 
is not strange, in these circumstances, that commentators increasingly 
refer to the document as "the Council s Economic Report." 

The arrangement has, to be sure, worked smoothly in these years 
when the views of President and economic adviser have conformed so 
closely. But it simply postpones the issue of what to do when a chair 
man of the Council of Economic Advisers sincerely believes the Ad 
ministration is set on economically harmful courses. For him to resign 
in such a contingency (as has been suggested) would mean that the 
Executive Office would never have the advantage of a vigorous (but 
confidential) presentation of possible dangers or shortcomings of 
policies which might seem to them to be attractive. To have it under 
stood that Council members would resign just because they could not 
endorse current White House policy would defeat a uniquely valuable 
purpose of having a professional staff in the economic sphere. (It was 
an entirely erroneous assumption that I myself resigned on such 

Continuity of Experience 

Turning now to the issue of continuity of personnel, it is my view 
that the apparatus of economic advisorship needs primarily to be an 
adjunct of the office of the Presidency and only secondarily have ties 
to the personality of the particular President in office. The value of 
the Council s advice to an incoming President depends in no small 
measure on the member s familiarity with the process by which the 
policies of the preceding Administration were arrived at and, likewise, 


on their having been during previous months or years engrossed in 
watching the trends in various parts of the economy and the impact 
of recently enacted laws or recent administrative policies. No newly 
appointed member of the Council, however eminent his attainments, 
can possibly have just this kind of intellectual momentum to bring to 
the consideration of the grave policy questions on which the new 
Administration will have to make early decisions as to the position it 
will take. Thus one, two, or three hold-over appointments would seem 
to be indicated depending on the character of the current incumbents. 

If any member was of dubious professional standing or had turned 
in an incompetent or partisan performance under the outgoing Presi 
dent, he should be promptly replaced on strictly professional consid 
erations. It would be ideal if the incoming President had a trusted 
adviser with whom he had already worked in some economic connec 
tion and who could immediately be installed in the vacant position. 
Here he would be able promptly to acquaint his chief with intimate 
details of how the agency was operating and what steps might be con 
sidered for making it more useful to the new President. At the same 
time he could acquaint the Council members with their new chief s 
intellectual qualities and administrative attitudes. Thus both parties 
to the advisory relationship would most quickly and accurately find 
how or whether they could effectively work together and what other 
replacements should be made and how soon. If, as is quite likely, the 
.new President were to have an entirely new Council by the end of 
his first term of office, that would be something quite different from 
having President X dismiss President Y s Council on Inauguration 
Day and start to struggle with continuing economic problems with an 
advisory staff unfamiliar with the ways of governmental structures, 
the idiosyncracies of the incumbents of high Civil Service positions and 
the status of pending economic issues. It would rise above any such 
concept of professional advisorship as that Republican economists 
could not suitably serve a Democratic President. 

In part, of course, the needs for continuity could be served by 
having the staff protected by their Civil Service status. But the staff 
can make their potentialities of service effective only "through chanr 
nels" which means through Council members and particularly the 
personal contact of their chairman with President and Cabinet officers. 
It takes some time for such Council-staff working arrangements to be 
come established. And even the nominal protection to the continuity 
of staff personnel may be circumvented through devices well known to 
the initiated such, for example, as changing the formal set-up of a 
service or denying funds to one which is not technically abolished. 
Thus, in the opening months of 1953 an almost complete break-up of 
the experienced staff of the Council was effected by those unfriendly 
to the Council by insisting that dismissal notices were sent out some 


time before the funds would actually lapse. It will take some time for 
young economists and statisticians of promise to regain a feeling of 
confidence that this agency presents as secure a prospect of a profes 
sional career as do many other agencies in or out of Government. 

The Joint Economic Committee 

In contrast to the ups and down in the life of the Council of 
Economic Advisers, the Joint Committee on the Economic Report 2 
which was set up in the Congress, has had a more steady trend of 
growth from rather limited beginnings to a broad and active pro 
gramme of continuous work. It has taken seriously the mandate in 
the Act that it make a continuing study of matters relating to the 
Economics Report. It maintains a small professional staff which, by 
the co-operative skill of its directors and members and the latent auth 
ority of its Congressional position, can draw upon the rich resources 
of the varied personnel of the Executive departments and agencies 
outside the Government. It utilizes fully the characteristic device of 
a legislative body to hold extensive public hearings on the several 
phases of the Economic Report of the President (which is presented 
each year at the opening of the Congress) and on such timely topics 
as monetary policy, taxation reform, and the impact of automation. I 
have referred elsewhere 8 to this as a unique type of Congressional 
committee, having no interest, affiliations or direct power over appro 
priations but devoted (so nearly as may be in this imperfect world) 
to the achievement of non-partisan intellectual leadership in the legis 
lative plans of our Government. In a word, a " pondering" committee. 

It is a fact worthy of note, perhaps even of surprise, that a com 
mittee of this politically unglarnorous sort has been so attractive to 
members of the Congress in their choice of committee assignments. 
The present chairman of the committee is a past president of the 
American Economic Association; another member is a former college 
president ; four have been prominent business or banking executives ; 
one a candidate for Vice-President, and two were state judges. Half 
of the members are men of such party prominence and political senior 
ity that they can command practically any committee post they desire. 
Reverting to our theme of continuity of staff experience transcend 
ing political alignments, the career of Dr. Grover Ensley, Director of 
Staff for the Joint Committee, is encouraging. After serving as econ 
omist in the office of Republican Senator Flanders, he became staff 
director for the Joint Committee under the chairmanship of Demo 
cratic Senator Mahoney. He remained in that post under the chair 
manship of Republican Representative Wolcott, and continued undis 
turbed after Democratic Senator Douglas became chairman. 

2. Now generally referred to as the Joint Economic Committee. 

3. Op. tit., p. 427. 


All in all, it is my personal belief that recent developments in 
perfecting administrative arrangements for carrying out the purposes 
of the Employment Act have gone far toward capturing the values 
inherent in that innovation in our government practices. 

After ten years of designing, experimenting, and slightly revising 
the devices of a Council of Economic Advisers and a joint congres 
sional committee on economic policy, these operating features of the 
Act seem to have earned widespread approval and confidence both in 
Government circles and outside. It seems safe to predict that they 
will not be abandoned, and there is no active move discernible to 
alter them in material ways. 

In the nature of the case, the Council of Economic Advisers will 
be shaped as to its personnel and its pattern of operation by the per 
sonality of successive Presidents. They must learn how to use this 
staff arm most effectively. And no less must their successive appointees 
learn how to serve the Presidency most helpfully. This requires that 
its members and particularly its chairman remain faithful to the in 
tellectual ideals of their profession, that they bring realistic knowledge 
of the business world to their desks, and that they adapt themselves 
to the changed atmosphere of a political environment without becom 
ing politically involved. 

Much has been learned from the experience in both the Executive 
Office and in the Congress during the first nine years of operation. 
Perhaps the greatest lesson has been the realization that such an in 
tellectual approach to public affairs is a permanent need of a demo 
cratic system. 

Washington, U.S.A. 

1919-20 to 1929-30 

Although a great deal of discussion has taken place on the subject 
of Australian public capital formation in the 1920 s, adequate esti 
mates of the addition to the capital stock by public authorities in the 
period have not been made. Completed estimates for the years 1919-20 
1929-30 are presented here in the hope that those interested in the 
period may find them useful as source material. Comments on the 
estimates are confined to some general explanation of the attached 

Three main periods of public capital formation stand out in 
Australian history. Of these, estimates have already been made for the 
first, the seventies, eighties and early nineties of the nineteenth 
century, and for the third, the years since the Second World War. 
Those for the post-1945 period appear in the annual Commonwealth 


White Paper on National Income and Expenditure in the form of 
estimates of expenditure by public authorities on new works and 
maintenance. They are calculated in a way which bears similarities 
to that used here to arrive at public capital formation in the 1920 s. 
The present estimate includes all the categories which make up the 
figures for "new works and maintenance" in the White Paper in 
addition to maintenance expenditures of public authority business 
undertakings, advances to settlers, Commonwealth Government ex 
penditure on the erection of houses, purchases of land and buildings 
and expenditure on the construction of assets for defence purposes 
within Australia, all of which are specifically excluded from the 
definition used by the Commonwealth Bureau of Census and Statistics. 

These differences arise from the basic concept of capital forma 
tion adopted in this paper. Public capital formation is taken to be 
the actual yearly expenditure by all public authorities on the exten 
sion and maintenance of the stock of durable assets. Capital formation 
is measured entirely on the basis of actual outlays for these purposes, 
no attempt being made to allow for changes in the value of public 
capital goods either because of price changes or because of change in 
ownership. 1 

Essentially this procedure is the same as that adopted in estimates 
already made of public capital formation in the first of the three 
periods alluded to earlier. 2 The present estimates for the 1920 } s are, 
in general, directly comparable with those of Butlin and de Meel for 
the nineteenth century but the difference in period has meant that 
special problems of interpretation have arisen in the estimate for the 
twenties and some new categories of assets have been identified. The 
categories added are electricity, closer settlement, housing and a 
residual category for minor industrial undertakings. In addition, a 
sub-classification of public buildings has been made to establish a 
separate category of public buildings for purposes of education. 

The reason for the separation of expenditure on capital equip 
ment required for the generation and transmission of electricity hardly 
needs elaboration. The inclusion of a separate series of expenditure 
associated with the promotion of closer settlement of land, however, is 
less easy to justify. The items which comprise this category are 
expenditures on subdivision of blocks and other expenses directly 

1. In the case of a few local government expenditures it has been found 
necessary to take annual changes in the value of assets to represent capital 
formation per year. Where this has happened there may be some revaluation 
included in the estimates. 

2. N. G. Butlin and H. de Meel, Public Capital Formation in Australia: 
Estimates 1860-1900 (Australian National University Social Science Mono 
graphs, Canberra, 1954). This differs from the procedure of Wilson, Public 
and Private Investment in Australia (roneo), where estimates of public in 
vestment are confined to selected items of gross loan raisings and changing 
indebtedness of semi-governmental and local government bodies. 


incurred by the State and Commonwealth Governments as well as 
advances made to settlers under both soldier settlement and closer 
settlement schemes. In the case of advances to settlers the State was 
neither responsible for the actual investment nor did it receive a 
return on it. This type of expenditure has been included since it has a 
special importance in the nineteen-twenties. 

Expenditure on housing by the Commonwealth Government on 
the erection of dwellings under the War Service Homes Act which is 
involved here was too large to be included in a miscellaneous category. 

The creation of a special category for industrial undertakings 
other than railways, telegraphs, water and sewerage and electricity, 
was prompted by the fact that such undertakings were large in num 
ber and that there has been some controversy on the question of their 
importance in the Australian economy in the 1920 s. They include 
enterprises operated by the State with a view to some form of com 
petition with private undertakings of a similar character and are, 
principally, saw-mills, stone quarries, butchers establishments, sugar 
mills and coal mines. Local authority gasworks also appear here. Com 
panies established by the Commonwealth to supply defence require 
ments are not included but appear under the heading of defence 
expenditure. Commonwealth Government subscriptions to the capital 
of Amalgamated Wireless of Australia have been classed as miscel 
laneous. Expenditure on the Commonwealth Shipping Line falls within 
this category. 

The three types of public authority identified in these estimates 
are the Commonwealth Government, State governments and local 
governments. The only problem of classification on this score arises 
in the allocation of expenditure by semi-governmental authorities. In 
view of the many variations in the structure, social control and source 
of funds of these bodies, distinctions between them are necessarily of 
an arbitrary nature. In the main, local government expenditures refer 
to municipalities and most semi-governmental expenditures are in 
cluded in the State government category. The criterion for such in 
clusion is that the authority concerned must have drawn on the loan 
fund of the relevant State government. Those that did not are counted 
as local authorities. Since financial procedure varied between States, 
total expenditures should be used for purposes of inter-state com 

Outlays on assets in the Northern Territory have been included 
with Commonwealth Government expenditure. Expenditures in de 
pendencies not on the mainland and on Commonwealth offices overseas 
have been completely omitted. 

In addition to the adoption of a wider definition of capital forma 
tion and the presentation in terms of categories, the present estimates 
differ from the White Paper in that they try to differentiate between 


new works and maintenance. Sceptics of this procedure are invited to 
content themselves with the estimates of gross capital formation. 
Nevertheless, the division is made here for the benefit of those who 
desire some information about the level of replacement expenditure 
and who do not require a high level of accuracy. 

The availability of a large number of official financial statements 
which distinguish explicitly between repair and replacement, on the 
one hand, and new capital expenditure on the other has been taken as 
justification of this attempt. The procedure adopted has been to 
extract these actual maintenance expenditures from the relevant 
reports where they are available and where it is felt that the con 
ceptual problems involved in the distinction are not too great. For 
the latter reason, all figures of expenditure on roads, bridges and 
harbours and on miscellaneous assets are presented as gross amounts. 
This has also been done in the case of expenditure on closer settlement 
and on the Commonwealth Shipping Line because the records of these 
do not provide a basis for any useful break-up. The quality of the local 
government statistics does not allow the distinction to be made for 
public buildings. 

It has sometimes been necessary to take depreciation allowances 
to represent maintenance expenditure where no direct figures are 
available. This has occurred most frequently in the case of "other 
industrial undertakings. If neither maintenance expenditure figures 
nor depreciation allowances are available, as often happens in the 
case of local government expenditure, an estimate has been made on 
the basis of the value of the assets of the undertaking in existence. THis 
type of estimate is important in the maintenance expenditure figures 
on electricity. 

A detailed list of sources is appended to this paper. Here we do 
no more than provide a general outline of the nature of the sources 
and of the way in which they have been used. Whenever possible the 
Annual Reports of industrial undertakings have been used to extract 
the information relating to the undertakings. Where figures of new 
capital expenditure were not available, however, recourse was had 
to the Loan Fund Statement of the government concerned. This was 
the main source for other types of new capital formation. The third 
principal source was the Consolidated Revenue Fund Statement of 
each government. Maintenance expenditure estimates for categories 
other than industrial undertakings came almost entirely from this 
document and occasionally new capital formation estimates, particu 
larly in the case of the Commonwealth. In addition some use was 
made of Trust Fund Statements. Estimates of local government ex 
penditure were based on tables of expenditure by these authorities in 
the statistical collections of the relevant States. ^ ^ SINCLAIR 
Australian National University. 





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Australia Gross Capital Formation All Authorities, 1919/20-1929/30 

( 000 ) 


Q land 

S. Aus. 



W. Aus. 

C/W G.C.F. 










618 82 




























































































Australia Gross Capital Formation by State Governments, 


( 000 ) 


Q land 

S. Aus. 



W. Aus. 



























































































Australia Gross Capital Formation by Local Government Authorities, 

( 000 ) 


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S. Aus. 



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...1, Railways 

(a) Commonwealth 

Statement of Receipts and Expenditure of the Port 
Augusta-Oodnadatta Railway. 

(b) States 

Loan Fund Statements. 

Annual Reports of Railway Commissioners. 

2. Telegraphs 

Annual Report of the Post-Master-General s Depart 

3. Water and Sewerage 4 
= (a) New South Wales 

Annual Report of the Metropolitan Board of Water 

Supply and Sewerage. 
Annual Report of the Hunter District Water Supply 

and Sewerage Board. 

Statements of Receipts and Expenditure of the Irriga 
tion Areas. 
Municipalities Sewerage Special or Local Fund : 

Balance Sheet and Revenue Account. 
Municipalities Water Supply Special or Local Fund: 

Balance Sheet and Revenue Account. 
Shires Sewerage Special or Local Fund : Balance Sheet 

and Revenue Account. 
Shires Water Supply Special or Local Fund; Balance 

Sheet and Revenue Account. 

(b) Queensland 

Annual Report of the Metropolitan Board of Water 
Supply and Sewerage Board, Brisbane. 

Annual Report of the Irrigation and Water Supply 

Return of Receipts and Expenditure, Assets and Liabili 
ties of Waterworks. 

Statement of Receipts and Expenditure of the Metro 
politan Water Supply. 

Statement of Receipts and Expenditure of the Metro 
politan Sewerage. 

(c) South Australia 

Annual Report of the Public Works Department. 

(d) Tasmania 

Statement of Loans by the State to Local Bodies. 
Return of Waterworks. 

3. Unless otherwise indicated, serial sources exist throughout 1919/20- 

4. Wherever possible new capital expenditure has been extracted from 
the above reports rather than from the financial statements of the State 
Governments. All maintenance expenditures came from these reports except 
where they had to be estimated. 


Statement of Local Bodies* Loans. 
Return of Water Trusts. 

(e) Victoria 

Annual Report of the State Rivers and Water Supply 

Statement of Capital Expenditure of the Melbourne and 
Metropolitan Board of Works. 

Statement of Capital Expenditure of the Geelong Water 
works and Sewerage Trust. 

Statement of the Capital Expenditure of the Bendigo 
Sewerage Authority. 

Statement of the Capital Expenditure of the Ballarat 
Water Commission. 

Statement of the Capital Expenditure of the Ballarat 
Sewerage Authority. 

Municipalities Statement of Assets and Liabilities. 

(f) Western Australia 

Annual Report of the Metropolitan Water Supply, 
Sewerage and Drainage. 

4. Electricity 

(a) New South Wales 

The Auditor-General s Report on State Industrial 

City of Sydney Electricity Works Fund : Balance Sheet 

and Net Revenue Account 1919-1928. 
City of Sydney Summary of Assets and Liabilities 

Municipalities and Shires Electricity Works Trading 

Undertakings: Balance Sheet and Revenue Account. 

(b) Queensland 

Annual Report of the Irrigation and Water Supply 

Return of Receipts and Expenditure of Local Authori 
ties which are Electrical Authorities. 

(c) South Australia : , 

Return of Revenue and Expenditure of Corporations 
and District Councils. 

(d) Tasmania 

Loan Fund Statement. 

Annual Report of the Hydro-Electric Department. 
Statement of Loans by the State to Local Bodies. 
Statement of Local Bodies Loans. 

(e) Victoria 

Loan Fund Statement. 

Municipalities Statement of Assets and Liabilities. 

(f ) Western Australia 

Annual Report of the Department of Public Works and 
Trading Concerns. 


5. Other Industrial Undertakings 

(a) New South Wales 

The Auditor-General s Report on State Industrial 

Loan Fund Statement. 
Gasworks Trading Undertakings: Balance Sheet and 

Revenue Account, 
i -{?> (b) Queensland 

Annual Report of the Commissioner of the State Trade 


Annual Report on Government Central Sugar Mills. 
Loan Fund Statement. 

(c) Tasmania 

Annual Report of the Public Works Department. 
Loan Fund Statement. 

(d) Victoria 

The Auditor-General s Report on Government Business 

Municipalities Statement of Assets and Liabilities. 

(e) Western Australia 

Loan Fund Statement. 

Annual Report of the Department of Public Works and 
Trading Concerns. 

(f) Commonwealth 

Statement of Receipts and Expenditure of the Common 
wealth Shipping Line. 

6. Roads, Bridges and Harbours 

The main sources were Consolidated Revenue Fund Statements, 
Loan Fund Statements and Trust Fund Statements. In addition the 
following sources of local expenditure were used : 

(a) New South Wales 

City of Sydney City Fund : Revenue Account. 
Municipalities and Shires Special and Local Funds. 
Municipalities and Shires General Fund. 

(b) Queensland 

Statement of Expenditure of Cities, Towns and Shires. 

(c) South Australia 

Return of Revenue and Expenditure of Corporations and 
District Councils. 

(d) Tasmania 

Statement of Loans by the State to Local Bodies. 
Statement of Local Bodies Loans. 
Summary of Municipal Receipts and Expenditure. 
Marine Boards and Harbour Trusts: Revenue Account. 

(e) Victoria 

Municipalities Statement of Revenue and Expenditure. 
City of Melbourne Statement of Revenue and Expendi 


Melbourne Harbour Trust Statement of Receipts and 

Geelong Harbour Trust Statement of Receipts and Ex 

(f ) Western Australia 

Municipalities Statement of Revenue and Expenditure. 
Road Districts Statement of Receipts and Expenditure. 

7. Defence Construction 

Commonwealth Consolidated Revenue Fund. 
Commonwealth Loan Fund. 

8. Public Buildings: Education 

(a) Commonwealth 

Trust Fund Australian Soldiers Repatriation Account. 

(b) States 

Consolidated Revenue Fund Statements. 
Loan Fund Statement. 

9. Public Buildings: Other . 

For the Commonwealth and State Governments the sources were 
the Consolidated Revenue Fund Statements and the Loan Fund 
Statement. The sources for local expenditure were as follows: 

(a) New South Wales 

City of Sydney City Fund: Revenue Account, 1919- 


City of Sydney: Summary of Liabilities and Assets. 
Municipalities Loan Fund. 
Municipalities and Shires General Fund. 

(b) Queensland 

Statement of Expenditure of Cities, Towns and Shires. 
Return of Assets of Cities, Towns and Shires. 

(c) South Australia 

Return of Revenue and Expenditure of Corporations 
and District Councils. 

(d) Tasmania 

Statement of Loans by the State to Local Bodies. 

Statement of Local Bodies Loans. 

Return of Revenue and Expenditure of Cemetery Trusts. 

(e) Victoria 

Municipalities Statement of Revenue and Expenditure 
and Assets and Liabilities. 

City of Melbourne Statement of Revenue and Expendi 

(f ) Western Australia 

Municipalities Statement of Revenue and Expenditure 
and Assets and Liabilities. 


10. Closer Settlement 

(a) New South Wales 

Closer Settlement Account. 

(b) Queensland 

Loan Fund Statement. 

(c) South Australia 

Loan Fund Statement. 

(d) Tasmania 

Loan Fund Statement. 

(e) Victoria 

Annual Report of the Closer Settlement Board of Vic 
toria. ; ; } 

(f) Western Australia 

Loan Fund Statement. 

(g) Commonwealth 

Soldier Settlement Fund of the Commonwealth. 

11. Housing 

Commonwealth Trust Fund War Service Homes Ac 

12. Miscellaneous 

In addition to the Consolidated Revenue Fund Statements and 
Loan Fund Statements of Commonwealth and State Governments, the 
following sources were used : 

(a) New South Wales 

City of Sydney City Fund : Revenue Account. 
Municipalities and Shires Special and Local Funds. 
Municipalities and Shires General Fund. 

(b) Queensland 

Annual Report of the Prickly Pear Commission. 
Statement of Expenditure of Cities, Towns and Shires. 

(c) South Australia 

Return of Revenue and Expenditure of Corporations 
and District Councils. 

(d) Tasmania 

Statement of Loans by the State to Local Bodies. 

Statement of Local Bodies Loans. 

Summary of Municipal Receipts and Expenditure. 

(e) Victoria 

Municipalities Statement of Revenue and Expenditure. 
City of Melbourne Statement of Revenue and Expendi 

., (f) Western Australia 

Municipalities Statement of Revenue and Expenditure. 



That the supply of wool is highly inelastic has long been recog 
nized. Apart from its general effect of accentuating price fluctuations 
induced by changes in demand conditions, this phenomenon has a par 
ticular importance for the Australian economy. Mrs. Robinson, for 
instance, has emphasized that the steadiness of the output of wool con 
tributed significantly to the benefit this country derived from depre 
ciation in 193 1. 1 Likewise, in the discussions of the case for a protective 
tariff, writers rightly have pointed to the inelastic supply of export 
production as one of the conditions conducive to maximizing benefits 
or minimizing losses from the operation of the tariff. 2 It is clear from 
the facts of the situation, if not from the discussion, that the pastoral 
industry was a major point of reference. 

On the other hand, the factors which actually cause wool pro 
duction to be so unresponsive to price movements in the short run 
have not been outlined at all adequately. The purpose of this note 
is to point out several factors bearing on the inelasticity of Australian 
wool production which appear to have eluded earlier writers. 

Dr. Gerda Blau, in her classic paper, enumerated four factors 
affecting the supply of this commodity. 3 These were (1) the lack of 
alternative uses for resources (particularly land) used in wool pro 
duction; (2) the condition of joint production with meat, which is 
more important for crossbred wool than for merino ; (3) the length of 
the production period, and (4) the rigid nature and relative impor 
tance of overhead costs. 

In the supplement to Blau s paper, sponsored by the International 
Wool Secretariat, Berry has traversed the same ground but has elab 
orated Blau s first point with reference to migration of labour to and 
from non-rural employment. 4 He claims that the lack of urban indus 
trial development in association with the extensive form of pastoral 
occupation (coupled with the predominant position of the family in 
the work force) is conducive to limited migration of labour. Australia, 
with its industry far from decentralized, would appear to fit Mr. 

1. Joan Robinson, Essays in the Theory of Employment (2nd ed., 
Oxford: Basil Blackwell, 1947), p. 146. 

2. See, for example, D. B. Copland, "Notes on Tariff Theory with 
Special Reference to the Australian Tariff", Economic Record, Vol. XI, Sup 
plement (March 1935), p. 33. 

3. Gerda Blau, "Wool in the World Economy", Journal of the Royal 
Statistical Society, Vol. CIX, Part III (1946), pp. 190-3; also United Nations 
Food and Agriculture Organization, World Fiber Survey (Washington, 
1947), pp. 88-92. Substantially the same explanations of the inelasticity of 
supply are given by R. B. McMillan, "Organised Marketing of Wool", Eco 
nomic Record, Vol. XXV Supplement (August 1949), pp. 60-2, and P. Nettl, 
"Some Economic Aspects of the Wool Trade", Oxford Economic Papers, 
Vol. 4, No. 2 (July 1952), pp. 180-1. 

4. D. Berry, Wool in the World Economy, 1946-51 (London: The Inter 
national Wool Secretariat, 1952), pp. 16-17. 


Berry s conditions perfectly. But there seems little evidence to suggest 
that immobility of labour is peculiarly characteristic of the pastoral 
industry or, for that matter, that it has ever proved to be the brake on 
economic development in the Australian scene that it has been in other 

With the assertion that the long production period in sheep-raising 
greatly complicates production decisions there can be no quarrel. 5 The 
nature of costs and the limited alternative production possibilities are 
also vital clues to the explanation of the inelasticity of supply. But 
the analysis needs to be carried further, at least so far as Australian 
experience! is concerned. 

Take first the question of costs. Recent cost data simply serve to 
confirm the Australian cost evidence adduced by Dr. Blau in support 
of her contention that overhead costs represent a high proportion of 
total costs in sheep-farming. 6 Speaking generally, and subject to the 
usual reservations attaching to agricultural cost estimates, the recent 
figures for eastern Australia point towards a distribution of aggregate 
costs of the following order: cost of production requisites, up to 15 
per cent; wages (excluding shearers allowances), 10 to 15 per cent; 
shearing expenses 10 to 15 per cent on inland properties, 5 to 8 per 
cent on tableland properties; maintenance and depreciation on plant 
and improvements, 10 to 15 per cent ; rates and insurance, 3 to 4 per 
cent; operator s allowance (imputed), 7 to 20 per cent; interest on 
investment (imputed), 23 to 30 per cent. 7 

A grazing firm, having variable costs so small a proportion of 
total costs, provides a perfect textbook example of the case where an 
entrepreneur can maintain production in the face of a drastic fall in 
price. Moreover, the resources used in pastoral production, particularly 
the land itself, offer unparalleled opportunities for a flexible policy of 
investment and disinvestment over time. 

Having stressed the importance of fixed (overhead) costs in wool- 
growing, some writers proceed to describe the costs of the correspond 
ing resource services as " rigid" or "inflexible". 8 In so doing, they 
have overlooked one important clue as to the lack of supply response 
in the wool industry, namely the flexibility of factor prices. This flexi- 

5. Berry, rightly, is also inclined to give some weight to the uncertainty 
attaching to price expectations, especially so far as this is aggravated by the 
long period of production. 

6. For a review of recent cost estimates see Keith O. Campbell, "Aus 
tralian Wool Supply Prospects", Economic Papers No. 10 (Sydney: The 
Economic Society of Australia and New Zealand, 1955), pp. 42-8. 

7. Ibid., p. 48. 

8. Blau, op. cit., p. 191; Berry, op. cit., p. 13; Nettl, op. cit., p. 180. 
Some governmental reports, especially those oriented towards depression 
conditions, also stress the inflexibility of wool costs. This theme is, for in 
stance, constantly reiterated in the Report of the Wool Advisory Commission 
Appointed to Enquire into the Economic Condition of the Wool Industry in 
Queensland (1939). 


bility in large part reflects the inelasticity of the supply of resources 
used in the industry. 

The relevance of the supply conditions of factors to the explana 
tion of supply responses in agriculture was first pointed out by John 
son. 9 His discussion was primarily concerned with the response of 
the aggregate agricultural industry in recession and inflation. The 
problem here essentially is to develop an explanation of the inelastic 
aggregate supply function of agriculture compatible with shifts be 
tween individual products as relative prices change. Johnson s basic 
argument is, however, equally applicable to a single constituent in 
dustry, especially if, as in Australian sheep-farming, alternative pro 
duction opportunities are circumscribed. 

To the extent that the prices of factors of production used in wool- 
growing are as flexible as wool prices themselves, the rational grazier 
is unlikely to reduce the rate of input of the resources in question in 
the face of a decline in wool prices. 10 Given a widespread tendency for 
costs to fall commensurately with declining revenue, the grazier may 
find his most profitable level of output very nearly coincides with that 
which prevailed before the decline in wool prices. Flexibility of factor 
prices equally well explains the failure of wool production to expand 
under the stimulus of rising prices. 11 

The most important set of resources having short-run flexible 
prices are those furnished by the farm family. 12 These comprise typi 
cally, the operator s labour services and those of his family, together 
with the land and capital assets which he owns. In the compilation of 
cost figures, the rewards to these factors are usually imputed, and their 
relative significance in recent times is typically understated.. In actual 
fact, the payments for such services represent residual claims on in 
come. Alternative opportunities for employment of these factors being 
circumscribed, especially in a period of depression, payments for ser 
vices are as flexible as commodity prices. Under current conditions, 
these costs make up about two-thirds of the aggregate costs of wool- 
growing. In Australia, of course, a high proportion of grazing land is 
held under lease from the Government, but rentals appear to be flexible, 
particularly in the downward direction. 

9. D. Gale Johnson, "The Nature of the Supply Function for Agri 
cultural Products", American Economic Review, Vol. XL, No. 4 (Sept. 1950), 
pp. 539-64. 

10. It is, of course, conceivable that differential flexibility in factor 
prices might open up possibilities of factor substitution, causing the inputs 
of a factor, the price of which is very flexible, to be increased. 

11. It is wrong to infer (as some writers on the Australian tariff appear 
to have done) that the failure of output to respond to price changes neces 
sarily means that marginal cost curves of firms in the industry are steeply 
rising, e.g. D. B. Copland, "A Note on Tariff Theory", Economic Record, 
Vol. X, No. 18 (June 1934), p. 87. 

12. For a more detailed examination of the nature of supply functions 
of factors used in wool-growing, see Campbell, op. cit., pp. 51-4. 


Other farm-furnished resources also tend to have highly inelastic 
supply functions. This applies especially to sheep which may be pur 
chased as replacements on dry-sheep properties. Agricultural wages 
also demonstrate a considerable degree of flexibility. This is usually 
explained in terms of an inelastic supply function, reflecting in par 
ticular the lack of alternative employment opportunities in time of de 
pression. However, in the Australian pastoral industry, where mini 
mum wages are determined by compulsory arbitration and accordingly 
other factors perforce operate, rates (especially those for casual em 
ployees such as shearers) are still quite flexible (see Table I). In 1949, 
special loadings (known as wool value allowances) were by consent 
introduced into the pastoral award, thus giving overt recognition to 
the fact that graziers were paying more than award rates. These wool 
value allowances are related by a formula to the prevailing price of 

Detailed indexes of the prices of such goods and services, used in 
wool production in Australia, as are recorded by the Statistician are 
also reproduced in Table I. Table II contains similar price indexes for 
New Zealand, another important supplier of raw wool. In general, 
the cost information available from that country serves to confirm the 
general thesis presented above. 

The prices of production materials, as might be expected, show 
the least correlation with wool prices and hence the greatest rigidity. 
However, the prices of some of the commodities, which are locally pro 
duced, appear to be fairly sensitive to general inflationary and de 
flationary movements in the national economy, movements which are 
attributable, at least in part, to changes in wool values. The greater 
rigidity of cost items of non-rural origin is, however, not likely to in 
fluence greatly the course of wool production because (1) such costs 
represent a small proportion of aggregate costs and (2) some of the 
items like sheep dip are in the nature of fixed coefficients of production. 

In summary, the nature of the supply functions of the principal 
factors used in wool production is such that production tends to be 
little affected in the short run, either by a rise or a fall in the price of 
wool. As was indicated earlier, this set of circumstances assumes impor 
tance because possibilities of shifts into alternative lines of production 
(enterprises) are limited in Australian agriculture. 

Two reasons are usually given for the limited amount of trans 
ference that takes place between woolgrowing and other enterprises. 
The first is the fact that a certain proportion of the wool clip (especially 
the merino clip) is derived from properties in the semi-arid interior, 
where environmental conditions prohibit any alternative land use. 
Somewhat similar limitations might also apply to parts of the table 





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i l C<) i i i i i l i i 

<N <N CO 05 * * *O 

nt Statistician. The wool 
d Shepherds Wage were 
the ration allowance. The 
ing year and April of the 
r price used was that of 


the Govern 
g exclusive of 
of the precedi 
49. The timbe 



l 1 



Sources: The original price series on which this table is ba were prepared by 
series represented average prices for the y ending 30th June. The Shearers 
age minimum rates paid in four principal dicts at 31st March, the former 
of prime ewes was the average of the wholle price quotations for Novem 
year in North Canterbury, quotations wh were not recorded after April 
uilding A. 






The second explanation is that wool (particularly wool of lower 
counts) is, in varying degrees, a joint product with meat. Some sheep, 
as well as being wool producers, are potential meat animals or at least 
producers of fat lambs. This means that, in certain parts of the in 
dustry, production decisions are made with reference to meat prices 
and that, in the extreme, wool may continue to be produced on animals 
raised primarily as meat producers irrespective of the level of wool 

But there are two additional enterprise relationships which are 
especially relevant in explaining wool production trends in Australia, 
where quite an important section of the sheep industry is found in 
and around the wheat belt. The first is the so-called supplementary 
relationship, which provides one economic basis for the combination 
of the sheep enterprise with wheat production. 13 This relationship is 
perhaps best illustrated by means of production-possibility curves. In 
contrast to the usual competitive situation (Fig. 1), the production- 







FIG. 1 


FIG. 2 


FIG. 3 

possibility curve, when supplementarity prevails, is of the form shown 
in Fig. 2. The curve between A and B is a straight line, indicating that, 
with given resources, sheep (wool) production can be expanded to 
some degree without requiring any corresponding reduction in the out 
put of wheat. Stated more precisely, the marginal rate of substitution 
of wool for wheat is zero within this zone. After point B, normal sub 
stitution relationships between the two enterprises prevail. This phe 
nomenon arises primarily from the seasonality of rural operations, 
coupled with the fact that there is available a steady flow of services 
from the fixed resources on the farm, especially from the permanent 
and family labour. By appropriately timing operations, it is possible to 
expand sheep numbers quite considerably before this enterprise be 
comes competitive with wheat production. Within the area where strict 
supplementarity prevails, the relative prices of wool and wheat play 
no part in determining the number of sheep carried. To the extent that 

13. Combination of sheep production with wheatgrowing is therefore 
not merely a matter of "good husbandry" as McMillan suggests (op. cit., 
p. 61), but rather is sound economics. 


farmers are operating in the competitive zone there will be some trans 
ference from wool to wheat following a drop in the price of wool rela 
tive to the price of wheat. However, the existence of the supplementary 
relationship does tend to set an economic limit to movement out of wool 
production. Similarly at the other end of the curve the presence of 
supplementarity may set a limit to transference from wheat to wool 
production if the ratio of wool to wheat prices increases. 

The second enterprise relationship which is of significance in the 
wheat-sheep zone is the complementary relationship. This provides the 
economic basis for crop rotations and so-called ley-farming which are 
becoming increasingly important in south-eastern and south-western 
Australia. Such a relationship exists when expansion of one enter 
prise, a leguminous pasture for instance, causes the aggregate yield of 
the second enterprise (wheat) to increase, i.e. the marginal rate of sub 
stitution of pasture for wheat is positive where complementarity pre 
vails. This is illustrated in Fig. 3. As with the supplementary relation 
ship, the complementary phase eventually gives way to the competitive 
phase (at point D). Extremely high wool prices relative to the wheat 
price may encourage the typical farmer to extend his pasture at the 
expense of wheat. But the presence of such a relationship does again 
set an economic limit to the transfer of pasture land to wheat produc 
tion, no matter how unfavourable the ratio of wool to wheat prices 

These two production relationships then would seem to form an 
essential part of any explanation of inelasticity of wool production in 
this country. 

University of Sydney. 


In recent economic analysis, some use has been made of models 
in which the economy is divided into two sectors, firms and house 
holds, with, correspondingly, two markets, a goods market and a 
labour market. 1 The purpose of this note is to examine some of the 
difficulties involved in the use of the aggregates " goods" and 


In an earlier article we showed that, on the assumptions of full 
employment, profit maximisation, and monopsony or oligopsony in 
the labour market, the existence of an excess of vacancies over unem 
ployed men is not sufficient evidence of disequilibrium in the labour 

1. See particularly Bent Hansen: A Study in the Theory of Inflation 
(London, 1951), and Ralph Turvey and Hans Brems: "The Factor and 
Goods Markets", Economica, N.S., Vol. XVIII, No. 69, Feb. 1951, pp. 57-68. 


market. 2 We argued, in other words, that the concept of "the" labour 
market may involve an illegitimate aggregation 3 of individual demands 
and supplies. If this is correct, the Factor Purchase Function is also 
a difficult concept. Some consequences of this result may be explored 
a little further. Hansen shows that the term ex ante demand may 
be used in three senses. 4 These are : 

(a) planned purchases those which are considered most prob 

(b) optimum purchases those which would be most profitable; 

(c) active attempts to purchase. 

The essence of our earlier argument was that, while the demand of 
each firm in sense (b) may be equal to its supply, demand in sense 
(c) can still exceed supply, and thus cause an .excess of vacancies and 
a misleading impression of disequilibrium. 5 If we define the Factor 
Gap as demand in sense (c) minus supply, as Hansen suggests is 
proper for some purposes, 6 then we can have an ostensible gap without 
disequilibrium. Let us call such a situation Open-Gap Equilibrium, 7 
In Open-Gap Equilibrium, the Factor Purchase Function is zero. 
Thus suppose that Open-Gap Equilibrium obtains: the economy is in 
full equilibrium, with a zero goods gaps, and all firms are equating the 
marginal revenue product of labour with its marginal cost to them 
although there is an excess of vacancies at the ruling wage rate. Now 
assume that a permanent increase in the rate of investment or govern 
ment spending opens a goods gap. In period 1 it is closed by running 
down stocks. But, provided that the increase is not large enough to 
lift employers demand curves for labour above the corners in their 

2. "The Factor Gap and the Level of Wages", Economic Record, Vol. 
XXX, No. 59, Nov. 1954, pp. 187-99. 

3. A mathematical treatment of aggregation problems will be found 
in H. Theil: Linear Aggregation of Economic Relations (Amsterdam, 1954). 
Professor TheiFs object is to construct aggregates such that the macro- 
models relating them will be consistent with the micromodels relating the 
microvariables of which the aggregates are composed. Our purpose, on the 
other hand, is to examine the implications of some aggregates actually in use. 

4. Op. cit., p. 24. 

5. Hansen states incorrectly, p. 64, that when optimum purchases can 
just be carried out, demand is equal in all three senses. He does not appear 
to consider the possibility of active attempts to purchase exceeding optimum 
purchases except through "sham magnification". 

6. Op. cit., p. 65, where it is suggested that this is the appropriate 
definition when it is desired to concentrate on the expected increase in prices. 

7. This study was originally suggested by the remarkable fact that, 
although control over maximum wage rates in New Zealand was abolished 
in 1950, when there were well over thirty thousand notified vacancies, the 
number of vacancies did not show any significant decline until 1952. The 
imperfections of New Zealand s wage statistics do not permit a definite 
conclusion, so we limit ourselves to suggesting that Open-Gap Equilibrium, 
with a zero Factor Purchase Function, may provide part of the explanation 
of this phenomenon. 


marginal cost curves, 8 there is no increase in factor income in period 2 
the Factor Purchase Function is zero. For period 2, the ex ante 
goods gap is exactly repeated, there being 110 increase in disposable 
income (we neglect the possibility of an immediate dividend increase), 
and must be closed, either now or in a later period, by a price increase 
which cannot, however, cause any further shift in the demand curve 
for labour. Hence the opening, by increased demand, and the closing, 
by increased prices, of a goods gap, may, if it is not too large, occasion 
no change in the factor market save an increase in that ostensible and 
false gap which consists of vacancies advertised by firms that are in 
equilibrium. "What has happened is that firms money saving has 
increased and households real saving. It is, therefore, the increase in 
the cost of living, rather than the operation of the multiplier, which 
will provide the stimulus to a w r age increase. 9 It should be remembered, 
of course, that these criticisms of the Factor Purchase Function only 
apply in full employment ; but it is in a world of full employment, and 
partly for the study of inflation, that the concept has been developed. 


The aggregation of any collection of non-homogeneous goods into 
one market presents an index number (aggregation) problem. Hansen s 
solution, in his study of open inflation, is to assume a single com 
modity. 10 He then, on the same page, goes on to talk of the demand 
for investment commodities and, later, of changes in the demand for 
them. 11 If there is only one commodity, investment can only be in 
stocks of that commodity, which is an undue restriction on the model. 12 
This restriction could be avoided, at the cost of some additional com 
plication, by dividing the economy into three sections, Households, 
Consumer Goods Industry, and Investment Goods Industry. 


Aggregation into a single goods market has some further implica 
tions. One of the most remarkable innovations in this type of period 

8. See my article "The Factor Gap and the Level of Wages", op. tit., 
pp. 190, 192-3, 197. 

9. Models of an economy in which wages are closely related to the cost 
of living will be found in Turvey: "Some Aspects of the Theory of Inflation 
in a Closed Economy", Economic Journal, Vol. LXI, No. 243, Sept. 1951, 
pp. 531-43. The relative importance of demand-induced and price-determined 
wage increases in the inflationary process of the last fifteen years is dis 
cussed by A. J. Brown: The Great Inflation 1939-1951 (London, 1955). We 
may note that, if wage increases at full employment were determined by 
a positive factor purchase function, then, in a two-sector, one-commodity 
model, wage increases would bear a fixed relationship to increases in the 
cost of living. 

10. Op. cit., p. 160. 

11. Ibid., p. 171. 

12. Hansen also assumes a single scarce factor, labour, p. 160, but 
avoids the difficulty that this must give constant returns by assuming that 
it is combined with a given stock of capital equipment. 


analysis is the aggregation of consumer goods and investment goods. 
It is argued that the ex ante equality of saving and investment is a 
necessary but not a sufficient condition of equilibrium because it is 
possible that 

la S a = O = a positive or negative Goods Gap + 

an equal Factor Gap of opposite sign. 

There is, however, the further possibility that a zero Goods Gap equals 
an Investment Goods Gap plus an equal Consumer Goods Gap of 
opposite sign, and this can hardly be dismissed as a matter of trom 
bones and ear plugs. Since this method of analysis has such strong 
Scandinavian roots, it seems appropriate to quote Lundberg: "This 
much we do maintain, however, that the distinction between capital 
and consumption goods is fundamental for an understanding of the 
functioning of the capitalist system." 13 This distinction cannot be 
recovered from the term on the left hand side of the equation 
(I a S a = Goods Gap + Factor Gap) because ex ante Investment 
includes, inter alia, planned investment in stocks of consumer goods. 


We now have reason to question Turvey s assertion that "the 
division between the factor and goods market is ... the most useful 
of the possible single divisions, at least for short-run analysis". 14 Our 
objection to this division is that we gain a Factor Purchase Function 
which, at full employment, is discontinuous and sometimes zero, at 
the expense of losing the vital distinction between consumer and capital 
goods. This may not be a very good bargain. 



In a note in the last Economic Record, 1 Mr. Hagger suggests that 
economists have been erroneously assuming the validity of a unit 
multiplier when there is an equal change in both government expendi 
ture and taxes. A closer examination of Mr. Hagger s note, however, 
reveals that he has unfortunately misinterpreted his own model. A 
correct interpretation leads to the reinstatement of the balanced-budget 
theorem and accordingly the removal of any signs of anxiety exper 
ienced by economists since reading the abovementioned note. 

13. Erik Lundberg: Studies in the Theory of Economic Expansion 
(London, 1937), p. 169. 

14. R. Turvey: "Some Notes on Multiplier Theory", American Economic 
Review, Vol. XLII, No. 3, June 1953, p. 292. 

1. A. Hagger, "The Balanced-Budget Theorem." Economic Record, 
May 1955. Pp. 95-97. 


Mr. Hagger is concerned about the application of the Haavelmo- 
Samuelson theorem when the level of tax collections cannot be in 
dependently determined, but is a function of the tax structure and the 
level of national income. This case is covered by the general theorem 
enunciated so neatly by Samuelson. 2 The operative condition in the 
theorem is that both government expenditure and the level of tax col 
lections should change by the same amount. Since government expendi 
ture is a part of national income, the level of personal disposable 
income remains unaltered under these conditions no matter why the 
tax level changes. Thus with all other things remaining unchanged, 
a change in government expenditure leads to the same change in 
national income. 

If this can be demonstrated generally, it must be true for any 
specific model including the linear one selected by Mr. Hagger. The 
reason he arrives at a different result is that in moving from his 
equation (2) to equation (3) he overlooked the fact that an increase 
in government expenditure also increases national income. Hence, it 
is not possible to assume AY to be equal to zero, so that instead 
of equating AG to Ac? it should be equated to AcZ-feAY. Thus 
equation (3) should read 

AG (l-b)+b.e. AY 
1 b + be 

BO that AY= "" 

i a 

AY , 

This result can of course be vitiated by relaxing the assumption 
that "other things remain constant." A number of items of national 
expenditure have been held constant in this simple model, as well as 
assuming the consumption function remains unchanged for any altera 
tion in the tax structure. Any change in the levels of investment, 
exports or imports as well as any shift in the consumption function 
will affect the unit multiplier, provided these factors are not each 
directly related to personal disposable income. In other words, if the 
levels of investment and imports are functions of personal disposable 
income and if the level of exports remains constant and there is no 
shift in the consumption function, the unit multiplier still holds. 

The unit multiplier theorem accordingly holds in a much wider 
number of cases than Mr. Hagger supposes, although, of course, it can 
be upset with complete generalization. But what economic theorem can 
withstand being generalized? 

University if Melbourne. 

2. P. A. Samuelson, "Simple Mathematics of Income Determination." 
Essays in Honour of Alvin Hansen (Norton) 1948. Pp. 133-155. 



In the note on which Professor Coohrane has commented I raised 
the question "How can the balanced-budget theorem be demonstrated 
for a model which differs from the one normally used for the purpose 
in making Tax Collections induced rather than autonomous ? " I now 
think that to give a full answer to this question we have to distinguish 
three cases. 

The first is the case where the change in Tax Collections involves 
no change in tax structure. In terms of the model used in my note 
this case can be characterised by 

The second is the case where the change in Tax Collections involves a 
change in the tax structure such that the average tax rate changes but 
not the marginal tax rate. This case can be characterised by 

AT = iAcZ+ eAY 
The third case is the one which can be characterised by 

AT= Ad-f A(eY) 

Here, of course, the change in Tax Collections involves a change of 
tax structure of such a kind that both average and marginal tax rates 

In writing the note I had in mind the second of these two cases. 
Professor Cochrane is, of course, quite right in saying that, in handling 
this case, I made the mistake of characterising it by 

and that, had this mistake not been made, I would have been led to 
the usual conclusion namely that 


This case, however, seems to be less interesting than the third 
since, in practice, any attempt on the part of a Government to bring 
about a tax-financed increase in its spending would almost certainly 
mean a change in the marginal, as well as the average tax rate. It is, 
accordingly, worth pointing out that, in this case too, our model in 
dicates an increase in National Income of the same amount as the 
increase in Government Expenditure. 1 This can be easily demonstrated 
starting from the expression 

Y = a + 1)Y M leY + I + G + E M. 

The primary concern of my note was with the mechanics of demon 
strating the theorem when Tax Collections are induced. I made the 
incidental point, however, 2 that once we pass from the very simple 

1. The same is also true of the first case. 

2. In footnote 1 of my note. 


model customarily used to discuss the theorem to something a little 
more realistic, the theorem ceases to hold in quite the form in which 
it has sometimes been stated. 

It seems worth emphasising that this point has not been upset. 
All that Professor Cochrane has shown is that the "unit-multiplier" 
version of the theorem still applies if our only refinement is to make 
Tax Collections induced rather than autonomous. As he is no doubt 
well aware, it ceases to apply if the basic model is refined in other 

University of Tasmania. 


There is no risk in predicting that the year 1954 will in the history 
of economics live on as the date of publication of one book, alongside 
though not on the same level with 1776 and 1890. Schumpeter s post 
humous opus maximum 1 neither fashions nor reshapes a new science 
but, by surveying its variegated past, setting it in its historical and 
social context and critically assessing achievements and failures from 
the viewpoint of one of the most analytically poignant and scholarly- 
passionate of contemporary economists, it creates a new situation. Only 
yesterday a competent reviewer could observe that the history of 
economic thought was fast becoming a threadbare matter \ Nobody 
who has read this tome of 1,200-odd pages, containing more than 
600,000 words and treating of 1,000-2,000 authors, can fail to feel that 
this diagnosis does not hold any more. There is still a Golden Fleece 
to win. 

Written in a style a judicious critic has called " crabbed " but 
which according to him an Englishman would not have scorned to 
choose, the book shows the brilliant author at the acme of his capacities 
at an age when ludicrously antiquated statutes require an academic 
teacher to retire (though not at Harvard) ; taking delight in covering 
a canvas of immense and multifarious dimensions; arguing with un 
canny resources of flexibility and lucidity, learning and wit ; impishly 
rejoicing in turning tables and in excavating deeply buried victims of 
professional narrowness ; and passing judgment on great and small in 
the grand manner of a general criticizing troops and leaders after 
large-scale manoeuvres. 

The gratitude we all owe to this dazzling book is not lessened by 
the doubt whether an undertaking of this scope did not exceed the 
powers even of a writer of Schumpeter s energy and endowment and 

1. Joseph A. Schumpeter, History of Economic Analysis. Edited from 
manuscript by Elizabeth Boody Schumpeter. George Allen & Unwin Ltd., 
London; and New York University Press; 1954. Pp. xxv -f 1260. $17.50. 


who was able to devote to it the last nine years of a solitary scholar 
living in semi-cloistral seclusion at Harvard University, sheltered by 
an exceptionally efficient economist-wife ... at some intellectual dis 
tance, it would seem, for she tells us that he spoke about his work only 
at two brief interviews granted to her when publishers grew too restive 
a curious fact which has not prevented her from making a great 
book out of what at Schumpeter s death appeared to be a labyrinthine 
formation of manuscripts and drafts in every conceivable degree of 
precarious finality. In one important case (the chapter on Adam 
Smith) she decided to insert a draft definitely discarded by the author 
showing, not only here, the ruthless common sense of a first-rate ad 

As a matter of fact this is not one book but four or five books : 
first, a history of economic analysis (which in Schumpeter s language 
meant not only theory, a word he often puts in significant quotation 
marks) but also statistics (to him the object of a rather ineffectual 
kind of unrequited love) and history (to which he rightly gives pride 
of place and by which, somewhat doubtfully, he understood also em 
pirical research into present-day conditions) ; secondly, a series of com 
memorative tributes to a large (but by no means complete) number of 
economists, mainly French and Italian, who did not contribute a jot 
to economic analysis but worked rather efficiently with crude and out 
dated tools; thirdly, a series of poignant but sketchy essays on the 
intellectual and social backgrounds of various epochs, often only of 
slight or no significance for the works of economists ; fourthly, a little 
Palgrave supplying thumb-nail sketches of the lives and writings of 
all economists and many other writers; fifthly, a short but powerful 
introductory dissertation on the methodology and sociology of economic 
science. This is a Rabelaisian feast but which would have required more 
than one cook; and if the reader should on many occasions feel that 
important propositions are left unsubstantiated and that other matters 
are all too glibly glossed over, he is not to blame. 

Moreover, the book is written on more than one level. Some pages 
seem to address themselves to quite untutored students, some to candi 
dates for a Ph.D. thesis, while others read like monologues in the work 
shop or echoes of imaginary conversations with those few colleagues 
the author would not have put in the first category. Only the chapters 
closely corresponding to Schumpeter s regular Harvard lectures are 
highly polished, ready for the use of undergraduates and indeed in 
dispensable to them. I venture to suggest that a separate and cheap 
edition of that string of concise and incisive monographs on well- 
known bones of academic contention (e.g. Say s Law, Quantity 
Theorem, Production Function, Utility and Welfare), which to my 
mind form the hardest core of the book, would raise the level of eco 
nomic teaching in our time more than any other single work. Taken 


as a whole, this is thank God no textbook. It requires intellectually 
mature readers able to take things of unequal value in their stride: 
passages of great luminosity and weight, others skating with delightful 
virtuosity over very thin ice, others simply exasperating because im 
pressionistic, arbitrary and displaying dangerous forensic abilities for 
which the greatest Greek sophists would have envied the author. 

To argue cases where Schumpeter is in error, partly owing to his 
temperament and personal " ideology" as defined by himself, partly 
owing to the physical impossibility of remembering exactly what he 
had read of more than a thousand authors, not a few of whom have 
written many large-sized volumes, would obviously distort the propor 
tions of a note to which for editorial reasons only one word could be 
allotted for roughly every five hundred Schumpeter wrote in this book. 
In his admirable review in the Quarterly Journal of Economics Lionel 
Robbins has noted some of those untenable positions. Here I should 
only like to add the warning that the reader unfamiliar with Aristo 
telian, Roman, medieval and much later thought, e.g. Knapp s State 
Theory of Money and its alleged political sequelae, should verify each 
statement by consulting the texts. To my mind they are in some sig 
nificant cases diametrically opposed to what Schumpeter makes them 
say. It seems strange that an author who began as a jurist should have 
confused the Institutes of Gaius with those of Justinian whose con 
ceptions of natural law differ profoundly, a howler which would tell 
heavily against any law school undergraduate. Aristotle s Physics (by 
Schumpeter somewhat snobbishly styled Physicae Auscultationes, 
without explaining this title which turns out to be a Byzantine trans 
lation of a Greek term that denotes works not written for the general 
public but which had to be supplemented by oral teaching, a title 
which even so scholarly an author as Professor Ross does not use) are 
obviously and fatally misquoted. Hardly less grave mistakes have 
marred Schumpeter s comparison of Quesnay s and Aquinas s concep 
tions of natural law. If Schumpeter had only stooped to consult Pro 
fessor August Oncken s Geschichte der National-okonomie Vol. I, Die 
Zeit vor Adam Smith (Leipzig 1902), which has lost only little of its 
value in the course of half a century, he would have gained a more ade 
quate notion of the relation of * ordre naturel and ordre positif of 
Quesnay (and he would not have retained the long-corrected error 
which makes him the son of a lawyer). The list could easily be ex 
tended, but even if thirty errors of some magnitude should be found, 
they would, on the average, occur only on every fortieth of these large- 
scale pages. The real problems raised by this book have to be sought 
in a deeper stratum. 

Among its main achievements I would rank first the demonstra 
tion that more than in any other science the systematic approach must 
be paired with the genetic and that the history of economic thought 


(using the term in a sense similar to that of R. G. Collingwood s Idea 
of History, not that of Schumpeter to whom "thought" means nothing 
but the dismal residue of former philosophies obscurely floating in the 
amorphous "mind of the public") is indispensable to a clear under 
standing of analysis in general and "theory" in particular, for reasons 
the exposition of which forms one of the already classic sections of the 
book. Not less important is the fact that Schumpeter, who set out to 
write a history of theorems not of men and movements, was by the 
very logic of his task and by his great sense of what really matters, 
led to include writers and ideas far removed from the august sphere 
of the beloved system of Walras equations. Three hundred large pages, 
crammed with fact and comment, are devoted to pre-Ricardian thought. 
They vindicate the merits not only of mercantilist but also of Cameral- 
ist and late Scholastic work to which he was perhaps congenitally at 
tracted, being one of the last distinguished Hapsburgians whose great 
epoch was that of Counter-Reformation and Baroque. For the first time 
Adam Smith (he writes A. Smith in quite unjustifiable deviation from 
good English usage which demands the full name or the monumental 
Smith) appears not only as a sifter, clarifier and unifier of his free- 
trade precursors and adumbrators of a logic of the market, but as the 
crest of a long wave of what he calls "consultant administrators" 
a great improvement in perspective won, however, at the high price of 
forgetting that the famous formula at the beginning of the Fourth 
Book of the Wealth of Nations is matched by a quite different definition 
of political economy in the later chapters of the same book; and of 
committing the unpardonable sin of not devoting to the founder of 
our science a separate chapter. The reason for this lapse from grace 
is probably due to the original intention of choosing theorems as his 
heroes, not authors. This motive may also explain, but cannot justify, 
Schumpeter s somewhat thinnish treatment of Ricardo (whose work 
he considers not as the continuation of Smithian economics but as a 
grand detour, here following the tradition of the German Historical 
School) in a chapter on the Ricardians, under the rather improper title 
"Review of the Troops". 

Like Robbins in his book The Theory of Economic Policy in Eng 
lish Political Economy (reviewed by me in Kyklos, 1st February, 
1954), Schumpeter is perhaps best in his critical account of John 
Stuart Mill, slightly less final on Marshall and, of course, most sympa 
thetic in his appreciation of Walras and Boehm-Bawerk. What he has 
to say on authors of the twentieth century is mostly slight and scrappy. 
Of the profound transmutations, searchings and experiments which 
make our own time one of the most fascinating periods of economic 
thought, he seems to have sensed little and approved less. The chapter 
on the Theory of Games, "Leontieff s Linear Programming" (sic), 
the work of the Cowles Commission, etc., remained unwritten, and there 


is no indication whatsoever that if written it would have touched the 
root of the matter. Of the German scholars who insisted on a re-con 
sideration of the very foundations of traditional theory (von Gottl- 
Ottlilienfeld and Othmar Spann) he speaks with unveiled hostility 
and even flippancy. Curiously enough, he also scorns Senior s insis 
tence on a clarification of fundamental notions (which he mistakes 
for mere squabbles over terminology) . His impatience with this author 
made him even overlook the fact that the Appendix on Ambiguous 
Terms to Whateley s Logic had been, according to the clear statement 
of the Preface, contributed by Senior himself. 

To the last Schumpeter remained not only loyal to, but also im 
prisoned by, the initial vision 7 (his hardly less ambiguous term for 
what was formerly called intuition or Anschauung) of Walras work 
which he considered as the Magna Carta of economic analysis, with 
two far-reaching consequences. He remained spellbound by the task 
of dynamizing the equations of his true master, a forlorn hope, as 
Arthur Smithies aptly calls it. (What good could have come from the 
endeavour to "dynamize" Archimedean physics? Certainly not Gali 
lean science.) Secondly Schumpeter continued to identify "theory" 
with the elaboration of "models", i.e. thought-experiments which are 
in our science indispensable but are essentially unable to perform the 
work of a true theory of economic life seen as a whole and in its funda 
mental relations to the realm of politics, ethics, social and cultural life 
a very old and still new type of theory which is required in order 
to clarify and guide action in concrete situations, the Rhodes of all 
economic thought, analytical or synthetical. The deeper reason for this 
attitude lies in Schumpeter s technical and after all " positivistic " 
conception of science. True knowledge he identified with "tooled know 
ledge , and thus the history of economic thought was for him the uni- 
dimensional process of shaping and reshaping of such tools, in ever 
more complete freedom from the intrusion of other intellectual and 
practical pursuits. This had not been the original and everlasting mean 
ing of theory, but it stands out as a most lucid expression of the charac 
ter of this age which spurns the spirit and all knowledge of essences 
which it considers as delusive symbols of bondage . . . only in order to 
become enslaved to all kinds of machinery, intellectual and otherwise. 

Did Schumpeter realize the dialectical implications of this atti 
tude ? In the draft of his Mexican lectures included in his book he sees 
in the pure analytical structures at the altars of which he worshipped, 
the ideal tools of economic planning on the largest scale ever, dreamt 
of : a science which would perform the same services to social life as 
natural science to the domination of the forces of nature. A tool-making 
science devoted to the free pursuit of knowledge for the sake of know 
ledge becomes the handmaid of a style of life Schumpeter must have 
loathed profoundly. Perhaps this recognition goes far to explain the 


utter despondency that speaks out of his latest pictures. Another factor 
in the play may be discerned in the last finished chapter of the book, 
a painfully measured neither unjust nor just appreciation of the 
work of Keynes with whom for more than one decade he had been 
engaged in a silent contest for leadership which was in truth an Agon 
between two ideas: the economic analyst as Schumpeter dreamt him 
and the political economist in a wider and more fertile sense as Keynes 
had described him in his Marshall Memorial. The political economist 
had conquered. 

University of Sydney. 


The Central Council of the Economic Society met during the 
A.N.Z.A.A.S. meeting in Melbourne during August. Professor Wilfred 
Prest was appointed President of the Society, and the following 
officers were also elected: 

Hon. Secretary: Mr. B. F. Holder. 

Hon. Treasurer: Professor Sir Alexander Fitzgerald. ,. 

Hon. Asst. Secretary /Treasurer: Mr. A. D. Barton. 

Hon. Editor of the Economic Record: Professor R. I. Downing. 

Editorial Board: Professor H. W. Arndt, Professor S. J. Butlin, 
Dr. E. P. Neale, Sir Lennon Raws, Professor C. G. F. Simkin. 
Hon. Auditor: Mr. W. Stewart. 

The long and valuable services to the Society of Mr. G. A. Weller, 
the retiring President, were recognized by his election as an Honorary 
Life Member. Sir Lennon Raws, who has been a member of the Econo 
mic Society since its inception, was also elected Honorary Life Member. 

The Thirty-first Meeting of the Australian and New Zealand As 
sociation for the Advancement of Science was held in Melbourne from 
17th to 24th August 1955. Dr. H. C. Coombs presided over Section G. 
His presidential address "Economic Development and Financial 
Stability " is printed elsewhere in this issue. 

During this meeting four symposia were held: "The Future of 
Australia s External Trade" (Professor G. Firth, C. D. Kemp and 
G. Warwick Smith) ; "Direction of Current Economic Growth with 
Special Reference to the Allocation of Resources between Agriculture 
and Industry" (Dr. K. 0. Campbell, D. M. Hocking and N. Wills) ; 
"Wage Determination in the Australian Economy" (Dr. J. E. Isaac, 
Professors T. Swan and K. Walker) ; "Economic Development of Aus 
tralia since 1850" (N. G. Butlin, Dr. E. Dunsdorfs and D. H, Merry). 

Other papers read included : * The Changing Pattern of Private 
International Investment" (Dr. H. F. Bell) ; "Sterling Area Domestic 
Policies and Convertibility" (Dr. J. 0. N. Perkins) ; "Progress Re 
port on an Investigation into the Structure of Australian Industry, 
1946-7" (Associate-Professor B. Cameron); "A New Look at the 
Mechanism of the Australian Economy" (R. G. Mountain) ; "Current 
Research into the Cost of Labour Turnover" (W. J. Byrt) ; "Saving 
and Investment in New Zealand" (G. P. Braae) ; "The Method of 


NOV., 1955 NEWS AND NOTES 331 

Economics" (K. D. Rivett) ; "The Social Survey An Outmoded 
Sociological Method" (G. B. Sharp); "A Survey of Expenditure 
Patterns of Graziers, 1949-54" (Dr. K. 0. Campbell and R. W. 

List of Branch Secretaries 
Victoria: D. M. Hocking, 185 Glen Iris Road, Glen Iris, S.E.6. 

New South Wales: N. Runcie, The New South Wales University 
of Technology, Kensington, Sydney, N.S.W. 

Western Australia: W. R. Rogers, 25 Hobbs Avenue, Dalkeith, 

South Australia: J. G. Medwell, Dept. of Economics, University 
of Adelaide, S.A. 

Tasmania: D. E. Kirby, Box 665E, G.P.O., Hobart, Tasmania. 

Queensland: A. S. Holmes, Dept. of Economics, University of 
Queensland, St. Lucia, Brisbane, Qld. 

Canberra: Dr. A. R. Hall, Australian National University, Can 
berra, A.C.T. 

Wellington: I. F. E. Wilson, 328 Lambton Quay, Wellington, 

Christchurch: W. Rosenberg, Canterbury University College, 
Christchurch, N.Z. 

Dunedin: A. D. L. Lamont, 16 Asquith Street, Dunedin, S.W.I, 

Auckland: A. R. Bergstrom, Economics Department, University 
College, P.O. Box 2553, Auckland, N.Z. 


On page 34 of the May 1955 issue of the Economic Record, 
equation (la") should read: 



War Economy 1939-1942. By S. J. BUTLIN. (Australian War Memor 
ial, Canberra, 1955.) Pp. xvii + 516. 25/- Aust. 

This book is the second to appear of those planned as Series 4 
(Civil) of the official history of Australia in the war of 1939-1945. 
The first ten chapters bring the story to roughly the end of 1940 and 
beginning of 1941. For the period of 1941 up to the attack on Pearl 
Harbour in December some of the sectional narratives of the first nine 
chapters are continued and are then followed by a closing summary 
assessment of Australia s state of preparedness to meet the "immedi 
ate and terrifying" threat of full-scale war in the Pacific. 

The task of the author in tracing and interlacing the many 
strands was indeed formidable. If it be the mark of a good artist to 
compose a picture with an economy of selection which permits him 
to convey his purpose with clarity and conviction, Professor Butlin 
must be accorded high praise as an artist-historian. The structure of 
his work, he says, represents "an uneasy compromise between chrono 
logy and clarity." As historical narrative it had to pay due regard to 
development in time, but, as the purpose was to portray the changes 
in a totality called "war economy," sectional developments, "taken 
up roughly in the order in which their subjects demanded serious 
government attention," had to be shown to fit together. The reader 
must needs keep his wits sharp as he follows the overlying narratives, 
but he is aided in seeing how they fit together by the author s skill 
and quickly finds himself absorbed in an enlivening story. 

How ready was the Australian economy to face the demands of 
war in September 1939? Professor Butlin states that "between the 
end of the War of 1914-18 and the Imperial Conference of 1937 it is 
not easy to find any evidence that Australians had any conception of 
the economic implications of a new war." By 1937 the threat of war 
was real enough. The Imperial Conference of that year did at least 
produce a definiteness of purpose and precision of action within 
Australia in the next few months to ensure raw material supplies 
(especially foods) to the United Kingdom in the event of war. 

By mid-1939 the British and Australian Governments had reached 
substantial agreement or understanding on the sale of the whole wool 
clip and of the export surplus of Australian meat, dairy produce, eggs, 
dried and canned fruits, sugar and base metals. Moreover, attention 
had increasingly been concentrated on local munitions production and 
on projects related to it, culminating in the establishment of a new 
Department of Supply and Development. Concern with manpower 



supply and control (which had already engaged the attention of the 
Manpower Committee within the Department of Defence) produced 
the concurrent National Registration Act, the (defective) manpower 
and (futile) wealth censuses, and the preparation of the List of 
Reserved Occupations. 

These, and other preparations were more or less included in the 
epitome of planning measures written into the Commonwealth War 
Book months before the war broke out. Professor Butlin stresses, 
however, the inadequacy of the War Book planning. Its conspicuous 
gaps indicated that even planning had not reached a definite paper 
form when hostilities came. Both surface indications and the current 
state of the public mind pointed to unpreparedness of the economy 
itself. Usable data from the National Register were not ready, neither 
was there a manpower organisation beyond the first step of manpower 
officers under the Manpower Committee. Aircraft production was still 
in the elementary stage, as was munitions production. No war budget 
existed and a peace budget designed for peace-time commitments had 
to serve. The vigorous implementing of the pre-war plans for export 
contracts and pressure for ships to carry the exports, the excited 
efforts to conserve oversea markets for producers not covered by 
contracts, the discussion constantly of war-time policies in terms of 
their effects on employment, the acceptance of modest tax increases as 
though they were disastrous all these and other evidences of a pre 
dominant " business as usual 7 mentality clearly indicated the general 
unreadiness for the war. 

Nor was this initial reluctance to accept adequate adaptation 
completely dispelled by the end of the second year of the war. By the 
beginning of 1941 Australia s war economy had "something of the 
appearance of a jig-saw puzzle barely commenced. Individuals and 
organisations were busily at work on small, mainly unrelated sections. 
Whether they would all fit together in the end was not yet a serious 
question and in any case the full pattern was still uncertain." Pro 
fessor Butlin as an historian makes no pretence that foresight can 
ever be as clear-eyed as hindsight. But he does point to the dragging 
weakness which would undoubtedly have hindered adaptation even if 
foresight had been much clearer, namely, the public unwillingness to 
accept economic sacrifices. 

Each of the chapters of the book dealing with a major area of 
the jig-saw puzzle focuses on a particular type of problem but always 
with an eye to the interlinking with the problems of other major areas 
and with those of the economy as a whole. Price control the first 
control to be fully developed administratively and to be made effect 
ively operative was such an area. In the first two years it attained 
its objectives to a high degree. This was because (apart from the choice 
of a Commissioner who was an economist) there was the combination 


of "a fairly easily manageable price problem, an approach which 
looked to other controls for basic support, and a setting of attainable 
rather than ideal standards of control." 

Other major areas of special but ramifying problems were the 
export industries, shipping, external finance and controls over exter 
nal trade, the supply, training and allocation of manpower, and, cen 
trally to them all, the war-time budgets. The story of some of them 
(for instance, shipping) is very intricate but each is handled with 
great skill by the author. 

Such a short review as this can do but the scantiest justice to 
this excellent book. Its readers will look forward with lively anticipa 
tion to rewarding study of the second volume. 

University of Western Australia. 

Wartime Agriculture in Australia and New Zealand 1939-50. By J. 
and A. A. Boss. Food and Research Institute, Stanford Univer 
sity. 353 pages. Price 78/9 Aust. 

This book reviews in a vigorous fashion the wartime contributions 
of agriculture in both Australia and New Zealand. It is a story of 
what was, on the whole, a worthy effort in the face of many difficulties. 

The authors show how the pre-war pattern of agriculture set 
limits in both dominions to what could be accomplished during the 
war period. The depression of the thirties had hit both countries but 
was particularly severe in Australia where wheat growing, which was 
only second in importance to wool production, was in a serious posi 
tion. The Australian dairy industry was also depressed because of 
higher costs than those operating in New Zealand. 

The lack of clear leadership in agricultural policy in Australia 
is criticized. This was partly due to the pre-war marketing problems, 
which were very acute. Right up to the end of 1941 disposal was the 
difficulty rather than production. As a result farmers were often 
advised to produce less rather than more. It was difficult to develop 
enterprise and initiative while these conditions existed. 

The chapter on Rural Manpower makes challenging reading. The 
loss of country workers was not serious during the first two years of 
the war but after the outbreak of war in the Pacific with the imminent 
threat of invasion the demand for men for the fighting services be 
came imperative. There was also an urgent call for men for the muni 
tion factories and for the construction of the many requirements of 
war. As a result there was a great rush of men from the farms just 
as the demand for the produce from the land was greater by far than 
could be supplied. Permanent male labour fell to 80 per cent while 


the vitally important seasonal labour fell at one point to 44 per cent 
of the 1939 level. 

The Manpower Directorate did its utmost to provide the most 
essential labour requirements but it became impossible to fill the ever 
growing demand for food which continued to come from Britain and 
also in growing quantities from the fighting forces in the Pacific area. 

The authors do not attribute blame for the position but point out 
the tragedy of the agricultural industry being robbed of the chance 
of giving great service because of the shortage of men and material. 
The position was gradually retrieved after the middle of 1943 but 
the return of men from the armed forces was painfully slow. 

The story of the struggle for scarce materials is well told. There 
were shortages in almost all requirements but perhaps the most serious 
was the shortage of superphosphate after Japan had seized the sources 
of supply of rock phosphate in Nauru and Ocean Islands. Chart 8, 
p. 115, shows how the Australian supply of fertilizer fell to half the 
pre-war tonnage while in U.S. the supply was doubled. The shortage 
had a disastrous effect on many forms of production. One slight com 
pensation was that the inevitably severe rationing gave the opportun 
ity to guide production towards the most essential requirements. 

The authors are critical of the Australian price policy. They 
point out that there was a division of responsibility insomuch that 
neither export nor contract prices were under the control of the 
Prices Commission. It is thought that too much stress was placed on 
stabilisation and that price was not used sufficiently to guide pro 

The movement of meat prices is said to have been too timid and 
that export prices should have been higher. This rather ignores the 
fact that U.K. strove to hold prices of meat from various sources 
reasonably in line and that there was no hope of gaining higher prices 
for meat from Australia particularly when we could ship so little. 
Moreover it was not the lack of price that kept down meat production 
during the first two years of the war but the acute shortage of refriger 
ated space and the need to turn good meat into canned products. 

When the demand expanded so dramatically late in 1942 there 
was confident expectation of expanding meat production in spite of 
the shortage of labour and material. In fact the tonnage of meat pro 
duced for 1942-3 was well above pre-war average. Then the drought 
of 1944 and 45 reduced the sheep population by the "staggering loss 
of 27 million sheep" and dealt a heavy blow at both dairy and beef 
production. Under these conditions extreme meat prices would only 
have helped the man who had stock to sell at the expense of the man 
who had to buy to replace losses. As it was many young females were 
killed for meat when they should have been kept for breeders. The 
effect of that record drought cannot be overstressed. During 1940 and 


41 Australia had much produce that could not be shipped but when 
the demand for food became most urgent the capacity to supply was 
drastically cut by stock losses which limited production for years 

There is more justification for the criticism that butter prices were 
kept too low for too long, and that the increased price that was paid 
from June 1943 should have been secured earlier. The pity of it is 
that the increase that was plainly necessary should have been asso 
ciated with the so called "cost of production" with all its manifest 
weaknesses. This plausible method of deciding market prices has since 
led the industry into many grave difficulties. 

Many references are made to the "surplus complex" which 
affected not only planners in Canberra but also commercial men who 
claimed to be essentially practical. The irony is that the complex that 
seemed so strange when the book was written does not seem so silly 

The authors point to the greater drive in the current agricultural 
policy and the lift in output over recent years. The need for further 
production is stressed in order to help maintain Australia s trade 
balance and to supply the needs of a fast growing population. Emphasis 
is placed upon the policy adopted by the Agricultural Council which 
set out in April 1952 a number of "production goals." On the whole 
these should prove useful but it is well to remember that peering into 
the future of agricultural markets is a misty business. This is illus 
trated by the goal set up for wheatgrowers in 1952 of 13*65 million 
acres whereas in 1955 farmers are being urged to reduce the^current 
acreage of slightly over 10 million ! 

The New Zealand account which is written by A. A. Ross reveals 
many problems similar to those operating in Australia. Owing to an 
acute balance of trade position before the war New Zealand started 
with a low level of essential supplies. Shortage of superphosphate was 
acute there also but because their pastures had been top dressed over 
a longer period and more liberally than in Australia there was suf 
ficient residual supply in many areas to maintain production. 

There was a serious shortage of tractors for much of the time but 
later the Dominion seems to have been more successful than Australia 
in securing supplies of this essential plant. 

The lack of refrigerated space checked expansion of the meat 
industry in 1940 and 41 but over the whole period "meat production 
rose to unprecedented heights". 

Dairy production fell somewhat on the pre-war average but in 
view of all the shortages the decrease in tonnage was remarkably 
small. Great credit is given to the Director of the Dairy Division whose 
prestige and personality enabled him to hold the confidence of the 
dairy industry. 


New Zealand seems to have been remarkably successful in stabilis 
ing the price level of primary and other products. Far from paying 
subsidies to maintain production under the terms of the guaranteed 
price scheme, any surplus between the price received and the price 
payable to farmers was retained in the pool account as a reserve against 
a recession of overseas prices." Thus it was that both the meat and 
dairy industries finished up the war with big sums of money in their 
reserve account. 

Boss sums the matter up rather modestly when he says "under 
the conditions in which New Zealand found herself during the war 
years, government intervention into food and agricultural matters 
proved on the balance to be successful. 

Both the Australian and the New Zealand sections contain full 
and well chosen appendix tables and indexes. 

I have noticed two typographical errors, one on page 170 where 
the percentage of production represented by wool and wheat have 
been transposed; the other on page 207 where 1953 is used instead 
of 1943. 

On the whole I have found the reading of Wartime Agriculture 
a stimulating experience and commend it to all interested in the im 
provement of our primary industries. 

Tarlee, South Australia. ; 

Public Capital Formation in Australia: Estimates 1860-1900. By N. 
G. BUTLIN and H. DE MEEL. (Department of Economics, Austra 
lian National University, Canberra, 1954.) Pp. 226. No price 

The results of Mr. Butlin s labours to produce reliable quan 
titative information regarding the major determinants of Australian 
development have long been eagerly awaited. This first instalment 
dealing with public investment in each of the six colonies fully justi 
fies that eagerness. Careful consideration of the economc content 
of the concepts involved before attempting to measure them is always 
necessary before any empiric investigation begins. On the other hand, 
particularly in historical investigations, it is often true that the only 
available data are in a form that makes it impossible to provide aggre 
gates that are those theoretically desirable, and some compromise is 
necessary. Mr. Butlin and his colleagues however appear to have made 
their compromises with great skill and great honesty. The discussion 
of the source material used and its pitfalls will be of great service to 
further investigations, if indeed there is room for any more work to 
be done in this field. 


No reviewer could presume to criticise the detailed figures pre 
sented. One might perhaps have asked for some further analysis of 
them, perhaps even at the elementary level of some graphical repre 
sentation to indicate trend movements and to compare the patterns 
between the various colonies. Clearly however the major analysis, both 
theoretical and statistical, must await the production of comparable 
figures on the private sector, which it is understood may shortly be 
expected. At that stage, the appetite which has been so strongly stimu 
lated by the present monograph may be fully satisfied. At that time, 
also, a proper assessment of the present monograph will be possible. 
But, in the meantime, no economic historian, development theorist, or 
economic statistician should fail to study this monograph with the 
utmost care, respect and gratitude. 

University of Sydney. 

Atlas of Australian Resources. Prepared by the Department of 
National Development, Canberra. Edited by KONRAD FRENZEL. 
(Angus and Robertson, Sydney, 1954.) Ten maps with com 
mentaries, 10/6 each, Aust. 

The first ten maps of the series which is to consist in all of 
forty-two maps appear in this issue. They must be obtained in one size, 
28J inches by 30 inches, in three slightly different forms, in loose 
sheets, unfolded, folded, or linen-strip mounted. Each map is accom 
panied by a commentary in a separate booklet of 8-16 pages. Except 
for some small-scale climate maps they are all on the one scale, 
1:6,000,000 (94.7 miles to 1 inch) using a polyconic projection. 

All of the large-scale maps are most attractively printed in 
colour over a base map showing principal rivers, lakes, coastal feat 
ures, mountain ranges, railways, and centres of population. Contour 
lines are not given but a considerable number of heights of individual 
points (not named) are included. 

Nothing like this has been previously attempted in Australia and 
the atlas as a whole marks a great step forward in the mapping of 
information about the country as well as in setting a high standard of 
attractive cartography. The Editor, Dr. Konrad Frenzel, pointed out 
in an article published in the Australian Geographer (March 1953), 
that the compilation of resources maps has become, during the post 
war period, the business of government departments which have re 
quired them for the purposes of economic planning, Europe, for 
example, having now at least eighty Resources Atlases. This Austra 
lian Atlas grew from maps made for State and Commonwealth use, 
not intended for publication, which by their diversity led to the 


recognition of the need for co-ordination and standardization on an 
Australia-wide basis. 

The ten topics illustrated in this first set of maps may perhaps 
be best subdivided according to subject matter. Five are concerned 
with the simple mapping of information supplied by the respective 
authorities Rainfall, Temperatures, Underground Waters, State and 
Local Government Areas and Mineral Deposits. The Soils map is a 
reprint, with a new logically worked out colour scheme, of J. A. Pres- 
cott s well-known map published as Bulletin No. 177 by C.S.I.R.O. in 
1944. It has a useful accompanying commentary by J. K. Taylor, 
Chief of the C.S.I.R.O. Division of Soils. The other four maps are 
also based on information from official sources but involve more diges 
tion of the material ; they are those showing Climatic Regions, Agricul 
tural Production, Population Density and Distribution, and Major 
Developmental Projects. 

In all cases great attention has been given to obtaining the best 
visual results by the skilful use of colour tones, size and shape of 
symbols, and choice of material ; in many cases matters which are not 
thought suitable for visual representation are dealt with in the Com 
mentary. Visually perhaps the most pleasing is the Soil map, the 
least successful may be that illustrating Underground Water Re 
sources, in which too much is attempted and as a result the facts are 
difficult to distinguish. The use of the same base map is of great assist 
ance in comparing one map with another, though as a map it has 
some deficiencies which should perhaps be attributed to the National 
Mapping Section, Department of the Interior, which supplied the 
information. Maps from this source will be looked on as authoritative 
and it is a pity to find some things appearing which are not only in 
disagreement with official State geological and other maps but also 
with publications of the National Mapping Section itself. Some 
examples of this are: the Lennard River of the West Kimberley is 
here shown flowing into King Sound instead of into the Meda River; 
Hamersley is spelt Hammersley, Urandangi is spelt Urandangie, some 
rivers are marked with The " as a prefix, The Finke, and The Wilton 
for example, both of which are marked in the usual way by the 
National Mapping Office topographical map of the Northern Terri 
tory admittedly these rivers are often referred to in this way, but 
then so is the Mulligan, here shown as Mulligan River. 

The map of Climatic Regions, prepared by officers of the Meteoro 
logical Branch, is the least satisfactory and the most ambitious of the 
three climatic maps in the set. Those showing rainfall and temperature 
succeed in getting a great deal of useful information, some of which 
is not readily available, on to each sheet, and that is all that they 
attempt. The Climatic Regions map uses the facts of rainfall, tem 
perature, etc., to distinguish different types of climate throughout 


Australia. The regions adopted do not correspond to those of any of 
the world climate classifications which have been made by geographers 
and others, nor is any mention made of the basis of climate classifica 
tion or of the difficulties inherent in the problem. Though entitled 
"Climatic Regions " the map shows five climatic types in colour, 
Sub-Equatorial, Tropical, Sub-Tropical, Dry Continental, and Tem 
perate, sub-divided into five " Geographic types," coastal, highland, 
inland, interior, and alpine, shown by over-printed hatching, thus 
distinguishing in all sixteen * climatological divisions. Most of these 
are further sub-divided, giving twenty-one further divisions. The 
Commentary gives only a general description of the characteristics 
of each type and an even vaguer idea of the basis on which boundary 
lines between them are drawn. The most useful part of the map and 
of this part of the Commentary is the large number of individual 
stations for which five items of climatic data are given. 

The Agricultural Production map is a useful one which succeeds 
in giving a great deal of information without becoming overloaded. 
Percentage of cropped area to total area is shown on a local govern 
ment or county basis, according to the State. Five categories are 
illustrated in different shades of green, ranging from 0-1 per cent 
1 per cent cultivated land to total area, to 20-43 per cent, based on 
average acreages from 1945-6 to 1950-1. These small divisions are 
grouped into statistical divisions for each of which a divided circle 
shows, in colour, the value of the yield of each crop with more than 
4 per cent of the total within that area, for the same years. Five 
grain crops, two vegetable, three fruit, sugar-cane, hay, and a grouping 
of "other crops" under each head are shown, seventeen in all. Studied 
closely this map brings out very well which are the dominating crops 
of the major areas, but as the circles show the average annual value 
of crop yields within each statistical division in proportion to its 
share in the total, some of them are very small and the detail is dif 
ficult to distinguish. The map makes clear the great importance of the 
wheat belt not only for wheat but for nearly all the other most valu 
able crops, except sugar. 

A map of perhaps more ephemeral value but of great interest at 
present is that showing major developmental projects, public and 
private which were under construction or recently completed, author- 
orised or planned in 1953, classified according to the type of project, 
nature of works, the stage of the construction or planning, the respon 
sibility for the enterprise, and the estimated capital cost. 

One of the most difficult achievements is the mapping of popula 
tion in a country like Australia where density is so low in rural areas 
and so high in some urban areas. This population map gives a much 
truer general picture than most previous attempts by showing centres 
of population down to those of 1,000 inhabitants and indicating the 

1955 THE WORLD S FOOD 341 

density of the rest of the area by the use of seven grades of colour, 
the lowest representing population of 0-25 per square mile, the 
highest over sixteen per square mile. Centres of population are repre 
sented by spheres of twenty-seven sizes whose volumes are propor 
tional to the centre of the population range in each category. The 
large number of small townships, the small number of middle-sized 
cities, and the sudden jump to the size of the capital cities is well 
brought out by this method, but the smallness in size of so many of 
the spheres, especially in those showing centres of under 4,750, where 
the interval between categories is only 250 or 500, makes it impossible 
to measure at a glance the size of one small town against another. 
Figures used are those of the 1947 census ; a 1954 version would make 
an interesting comparison. 

Space does not allow the discussion of the other maps and com 
mentaries, of which perhaps the Minerals map is of greatest present 
interest, bringing together information not only on the location of 
mineral deposits but also of their mineral groups, economic import 
ance to the Australian economy, and the size of deposit. 

University of Melbourne. 

The World s Food. By M. K. BENNETT. (Harper, New York, 1954.) + 282. $4.00. 

This survey of the "interrelations of world population, national 
diets and food potentials" by the Director of the Stanford Food 
Research Institute can expect a large audience. But the subject is so 
vast, so diverse, so intricate, that it defeats even so well qualified an 
expert as Dr. Bennett. Indeed, he does not really attempt it. Professor 
Stamp made a more courageous effort in his Land for Tomorrow 
which can still be recommended as the best brief survey of world 
population and food supply. This reviewer found the omission of 
any reference to the capacity of the world s agricultural land to pro 
duce food, a serious one. To Dr. Bennett, as to most economists, con 
siderations of soil, climate and topography, which in large measure 
determine the pattern of world agriculture, appear to be of relatively 
minor significance; though there are a few, and for the most part 
misleading conclusions drawn from these facts of world geography, 
in a chapter dealing with contrasts in food consumption. 

Dr. Bennett is in fact entirely concerned with food consumption, 
and for almost half of the book with consumption in the U.S.A. Part 
One summarises the work that has been done on the growth of world 
population, and Dr. Bennett has no difficulty in disposing of the 
cynical view that the only way to avoid world catastrophe is to with 
hold medical and scientific knowledge so that the old checks to popu- 


lation growth may still apply. The long Part Two deals with the 
pattern of food consumption in the U.S.A. and changes that have taken 
place over the last century as the nation grew richer. Can similar 
changes be expected in other parts of the world as they too experience 
increases in per capita incomes ? In the concluding section Dr. Bennett 
provides an answer in part; increases in incomes wherever they have 
occurred have led to profound changes in consumption patterns ; rice 
and wheat in particular replace other cereals. Dr. Bennett takes issue 
with the F.A.O. over its estimates of per capita calorie intake and 
availability, and denies that there is such widespread calorie defi 
ciency. Are we to conclude then that most of the world s population is 
adequately fed? It is difficult to answer questions like this when the 
experts are so divided. There are two countries, however, which might 
suggest an answer to these and other questions. Dr. Bennett and other 
economists, too, will find a profitable field for enquiry in Malaya and 
Venezuela as to what happens to consumption patterns when an under 
developed country starts to develop rapidly. 

University of Melbourne. 

United Nations: The Determinants and Consequences of Population 
Trends. (New York, 1953.) Pp. xii + 404. $4.00. 

This volume is the result of a recommendation adopted by the 
Population Commission of the United Nations that "the Secretary- 
General should survey the existing scientific studies concerning the 
relationships between population trends and economic and social 
factors and prepare a summary of the findings of such studies with 
special reference to problems of economic development." Part One 
contains a brief history of world population and a survey of popula 
tion theories. Part Two contains a detailed account of the main econo 
mic and social factors affecting mortality, fertility and migration, 
together with an analysis of changing age distributions and some fore 
casts of future population. Part Three covers the economic and social 
effects of population changes with special reference to the effects of 
population growth on per capita output and to the problem of under 
developed areas. 

Although the volume deals with practically all demographic pro 
blems of interest, it would not be correct to call it a treatise on demo 
graphy. For it is essentially a summary of the findings on these pro 
blems by writers of many countries and of many ages. There are well 
over two thousand titles in the bibliography which have provided the 
material for the text. There has been no attempt at a critical appraisal 
of the so-called "scientific findings" of the various writers. The word 
"scientific" has often been interpreted very generously by the com- 


pilers. Conflicting views are often recorded side by side with little 
discussion of their plausibility. Indeed many of the * * findings are little 
more than untested hypotheses. For example, this is surely the case 
with the Marxian view that under socialism the population growth will 
tend to conform to the rate which appears best in the interests of the 
country under consideration a view which is stated without comment 
alongside much more plausible hypotheses about the relation of re 
sources to population (p. 161). Similarly on p. 160 three estimates of 
world population in about 2000 A.D. are given. These are Notestein s 
of 1950 based on component projections for major regions, Clark s 
of 1949 based on a constant 1 per cent per annum rate of growth and 
Pearl s of 1936 based on a logistic projection. No evaluation of these 
is made and it is difficult to see why Pearl s was even included in view 
of its doubtful logic and obvious under-estimation. 

In making the above criticisms I am well aware that the volume 
is intended to be no more than a summary of findings. But it seems to 
me that the lack of discrimination in compiling some sections of it 
must detract from its value. Neverthless the volume will undoubtedly 
prove a very useful reference book for demographers and economists. 
It is a comprehensive treatment of the subject except that there is 
little reference to the pro-natalist policies of the 1930 s. This exception 
no doubt reflects partly the switch in interest to the problems of under 
developed areas and partly the view that the rise in the birth rate in 
* advanced areas over the past decade or so has rendered pro-natalist 
policies less necessary. 

University of Adelaide. 

Approaches to Economic Development. By NORMAN S. BUCHANAN and 
HOWARD S. ELLIS. (The Twentieth Century Fund, New York, 
1955.) Pp. xiv + 494. Price $5.00. 

In this book the authors have, in considering the problems and 
policies of economic development, painted a large canvas in clear bold 
relief. Thus in the rapidly expanding gallery of works on this subject 
it is likely to stand out as the necessary introduction for all interested 
students. In this respect, however, it is a great pity there was a pub 
lication delay of nearly two years, for in the meantime some very 
good smaller studies have overcome many of the * third-dimensional 

The work itself falls into three parts. The first includes a con 
sideration of demographic and cultural factors and it is pleasing to 
see in an American study an understanding that work as a means of 
obtaining higher incomes may not be so highly esteemed in all 


Part II gauges the progress of economic development from an 
historical angle and the authors consider economic progress in Eng 
land, Western Europe, Japan and the U.S.S.R. In Part III, the first 
chapters consider the priorities of development and the methods of 
finance. The last chapters include an examination of the position of 
international trade in development and the particular responsibilities 
of the U.S.A. in this direction. 

Yet there is, even within such a broad sweep, much that is missing. 
Perhaps the essential criticism lies in the fact that the mechanics of 
development are not explained. For instance the difficulties associated 
with utilizing surplus rural labour are not mentioned and indeed, it 
seems as though the authors do not expect any when, for example, they 
imply that existing food consumption would suffice when the under 
employed labour is utilized (page 436). This may be true with in 
flation; but the authors regard inflation with terror. Yet for all its 
faults deficit financing can speed economic development and especially 
in an isolated economy. 

In Part II the chapters on economic development in Europe seem 
disappointing compared with those concerning Japan and the U.S.S.R. 
This may have resulted from giving too much weight to transport and 
market aspects as against the political and legal features. For instance, 
other than the early enclosures in England following the acute labour 
shortages after the Great Plague in 1349, the reasons for the rural 
contrast in Europe must be sought in non-economic conditions. English 
and French political and legal development was broadly similar until 
the sixteenth century, but from then on the English peasant became 
freer while the French peasant was crushed with feudal reaction. 

Perhaps it is a pity the authors do not examine aspects like these 
instead of concentrating on the physical side of historical development 
for, as they suggest in Part I, non-economic questions are extremely 
important, and may provide a better lesson for today s developmental 

As the authors suggest, the problem of birth prevention bristles 
with difficulties/ Yet it is unlikely that any form of birth control 
could work in poor peasant societies as population growth is caught 
in a vicious circle. To the individual peasant a larger family means 
more workers in toil when the proprietor is worn down through ill- 
nourishment and disease. Later marriages can only spell illegitimacy, 
while moral restraint is difficult to practise when sex is about the only 
pleasure for which an immediate outlay is not essential. 

The authors may be on dangerous ground in suggesting the Catho 
lic Church as largely responsible for the lack of development in Latin 
America. Spain, when master of Europe and colonizing nation of these 
areas, was Catholic, and at the beginning of a process of capital forma- 


tion. Perhaps the static equilibrium in Latin America can be explained 
most satisfactorily through a Toynbee challenge and response analysis, 
and the continued strength of the particular type of Catholicism in 
the Spanish world may well be the effect of some alternative lapse. 
Questions like these are important, for answers can explain whether 
traditional moves and folklores automatically change with the process 
of development or make it abortive. 

But in relation to the whole work these are minor points. Perhaps 
in a second edition the authors will include considerations of the more 
recent studies on the mechanics of development and enlarge the his 
torical section to give greater emphasis to cultural and political points. 
Chapter 19 gives an excellent general view of economic development 
for those who have insufficient time to read the whole book and, as 
the work has the advantage of being intelligible to the layman, it fre 
quently becomes too laboured and long for the practising economist. 

University of Melbourne. 

The Indian Land Problem and Legislation. By G. D. PATEL. (N. M. 
Tripathi, Bombay, 1954.) Pp. xvi + 534. 30/- stg. 

The importance attached to land reform as a necessary basis for 
economic development and rural betterment in under-developed coun 
tries is evidenced in a special resolution of the General Assembly of 
the United Nations (401 (V) November 1950) and in a United Nations 
Monograph arising out of that resolution. 1 Proposals for land reform 
have a prominent place in the Indian Five Year Plan, and virtually 
all the Indian States have introduced legislation. The community pro 
jects, which are perhaps the most striking and significant Indian con 
tribution to increasing production and promoting social welfare in 
village societies, may be prejudiced unless they are effectively under 
pinned by the removal of the most patent discriminations and ex 
ploitation resulting from systems of land tenure. 

Dr. Patel s book is a monumental attempt to describe the various 
and complicated relationships arising out of existing systems of tenure, 
and evaluate the results of land reform attempts so far made. The 
book deals with land reforms in Bombay and with all-India reforms 
including Bhoodan Yagna, consolidation of holdings, tenancy, jagir 
and zawindari abolition. Not the least of the contributions which he 
makes is to clarify the meaning of these terms, interpret the various 
forms as matters of historical growth and assess their socio-economic 
importance. It is also refreshing to have an objective, non-partisan 

1. Land Reform. Defects in Agrarian Structure as Obstacles to Eco 
nomic Development. United Nations, New York, 1951. 


treatment. The book brings out the extreme difficulty in converting the 
complex patchwork of tenure into some sort of orderly system or 
systems which will work in a society in which, in any case, there is 
little enough land to go round. 

One of the most interesting chapters deals with the Bhoodan 
Yagna, which Nehru describes as * a strange phenomenon, which can 
not be explained by economists or other experts" certainly strange 
to Western eyes because it demonstrates an attempt on a large scale 
to solve a basic economic problem by the application to it of spiritual 
values. The movement, inspired by Shri Vinoha Bhave, the " spiritual 
successor of Mahatma Gandhi," and with little opposition save from 
Communist and Peasants and "Workers Parties, appeals to those with 
land to donate land voluntarily to those without it or with too little. 
It would appear that some 2,400,000 acres had been donated by early 
1954. Dr. Patel gives a sympathetic, if restrained appraisal, and deals 
in what appears to be an impartial manner with its critics. 

Each chapter concludes with a critique of the particular reform 
under discussion and there is a final over-all assessment. Dr. Patel 
brings out the striking diversity of the reforms attempted, the problems 
involved in fixing compensation (including the financial implications), 
the difficulties in moving ahead of public opinion, the importance of 
vested interests, and then considers the criteria which should be 
adopted. While being far from uncritical, he considers that the net 
effects have been beneficial in removing unnecessary intermediaries, 
strengthening the position of tenants and generally levelling up "the 
status of the tillers of the soil in the agricultural ladder." He con 
cludes that land has practically ceased to be a commercial investment 
for non-agriculturalists, but adds that "it is yet to be ascertained 
whether the existing level of production has been stepped up and 
whether the relations between landlords and tenants have become more 
harmonious, resulting in the solidarity and development of the village 
economy." One hazards the opinion that a great deal will depend on 
the extent to which alternative agencies are successfully established 
to offer the services (such as providing credit) previously provided 
by landlords, the success of the community projects in improving 
techniques and promoting community participation in capital forma 
tion and other activities, and the extent to which pressure on the 
land is reduced by the provision of alternative employment oppor 

Dr. Patel provides highly important documentation on a range 
of significant attempts to solve intractable problems, and a most useful 
assessment of the results. 

Victoria University College, Wellington. 


Migration and Economic Growth a study of Great Britain and the 
Atlantic Economy. By BRINLEY THOMAS. No. XII, Economic and 
Social Studies, The National Institute of Economic and Social 
Research (Cambridge, 1954.) Pp. xxv + 362. 42/- stg. 

Economic historians have long asserted the great influence of the 
international economy upon Britain s own economic development; 
first, in the period preceding the Industrial Revolution, when overseas 
trade quickened the rate of the metropolis internal metabolism; 
secondly, when that phase of industrial expansion was over and when 
British exports were predominantly people and capital rather than 

Recently, the more statistically-minded of economic historians 
have been filling out that thesis. To understand British economic 
development in the nineteenth century it is necessary now to study 
not only the homeland itself but its world-wide spheres of influence 
its formal and informal empires. Apart from this book of Professor 
Thomas, the important studies of Cairncross, Lewis, Rostow and others 
have done much to give this new dimension to our knowledge. 

Migration and Economic Growth most closely supplements Cairn- 
cross Home and Foreign Investment 1870-1913; in fact, it is a full- 
length amplification of the argument in a chapter in the last-named 
volume, namely: periods of active emigration were also periods of 
heavy borrowing by foreign countries. Thomas book is, of course, 
chiefly concerned with the U.S.A. and Canada, although he devotes a 
chapter to British settlement in the other Dominions a factor which, 
like investment, only became really significant in this century. 

At once it should be said that this is a well-planned, systematic 
and thorough piece of work. The author begins by expounding hypo 
theses, not only his own but also those of his economist predecessors 
from the mercantilists onwards. His own framework of ideas is implied 
in the subtitle of this book. Britain and the U.S.A. are seen as a trans 
atlantic economy and the flow of labour, capital and commodities from 
Britain as inter-regional movements within that economy. This notion 
could, of course, be extended to the other parts of the world. The 
validity, or perhaps the distinctiveness, of the concept of the Atlantic 
economy appears to be partly geographic and partly historic it was 
the most important field of international mobility in the last century. 
The other vital element of the argument is based upon the statistical 
analysis of the growth of this economy in terms of the minor secular 
fluctuation, a period of eighteen years approximately. 

The major analytical parts of this book elaborates the main thesis 
in relation to the statistics (described and examined in Part II) ; the 
changing institutional context of migration and investment; and the 
changing structure of society in America, the receiving country. Out 


of this emerges Thomas chief conclusion, a push-pull formulation: 
periods of heavy emigration from Europe more or less coincided with 
periods of relatively heavy investment overseas and a high birth-rate 
with the result that, until the first quarter of this century, there was 
an inverse relation between the secular cycles of construction in the 
two countries. When, as in the years 1888-1900 British capitalists were 
investing at home, migration slackened; again during 1900-1913 when 
considerable waves of population flowed into the U.S.A., capital flowed 

This is a suspiciously neat analysis of the economic development 
of these two major world powers and the author freely admits that the 
complex relationships between the two countries require further 
empirical investigation. However, one can see immediately the force 
of his suggestion that this self -regulating rhythm has been brought to 
a halt by two factors: U.S.A. s closed-door policy to migrants since 
1921 and 1924, and the inability of Britain to invest abroad so freely 
as in the past. 

This situation raises questions of current policy and this book s 
last chapter "The Atlantic Economy: Old and New" is a lively- 
minded contribution to the problem of relaxing the grip of restriction 
and poverty on the world today. If Britain s position was so pivotal 
in the last century, that of the U.S.A. is undoubtedly so at the present 

Professor Thomas conclusion a somewhat optimistic one is to 
look to it to do what Britain did up to the outbreak of the first world 
war: "The rhythm of growth in the old Atlantic economy was such 
that Great Britain spent its income from abroad in one phase on 
investment overseas and in the next on goods for home consumption, 
thereby ensuring a remarkable freedom from fundamental disequili 
brium. It should not be beyond the wit of man to devise conditions 
which will enable the new international economy to attain the same 
object even though conditions are so different." Are the exigencies 
of America s future existence likely to engender this "sweet reason 
ableness ? 
University of Sydney. ALAN BIRCH 

Retail Trading in Britain 1850-1950. By JAMES B. JEFFREYS. (Cam 
bridge University Press, 1954.) Pp. xviii + 476. 50/- stg. 

This study is a further addition to the already significant output 
of the National Institute of Economic and Social Research in Great 
Britain and is in effect a complementary volume to Dr. Jeffreys earlier 
work, The Distribution of Consumer s Goods. 

The plan of the book can be simply stated. The first three chapters 
(pp. 1-120) attempt to summarize the main features of the develop- 


ments in retail trading in Britain over the last hundred years. Chap 
ter iv (pp. 121-125) is an introductory chapter to the detailed studies 
of fifteen different groups of trades which follow in the next fifteen 
chapters (pp. 126-443). The book is rounded off with a useful index 
and a number of interesting illustrations. 

Dr. Jeffreys does not aim at providing a complete view of retail 
trading. Although small scale trading is not entirely neglected, the 
emphasis throughout is heavily in favour of large scale retailing, 
i.e. the Co-operative Societies, Department Stores and multiple shop 
retailing. This limitation is of course of some significance, as in Great 
Britain it has been estimated that small scale retailing is still respon 
sible for approximately two-thirds of the total retail turnover and 
comprises about four-fifths of the total number of retail establishments. 
Yet despite this limitation Dr. Jeffreys has produced a valuable book. 
Gathering information from nearly a thousand firms and organizations 
in the distributive trades, he has presented for the first time, estimates 
of the total number of multiple shop branches in the United Kingdom 
in different years between 1875 and 1950. For the first time too, he 
has also constructed estimates of the shares of the different types of 
retailer in the total retail trade and in the retail trade of individual 
commodities between 1900 and 1950. Indeed one of the features of the 
book is the continuous attempt to arrive at precise information by 
measuring the changes in the retail trade. There are ninety-one tables. 

The conclusions which emerge although clearly and well stated are 
nevertheless not surprising. The growth and increasing significance 
of large scale distribution is strongly underlined. The influence which 
this growth has had on integrating production and distribution is 
also stressed. The effects of these movements have been a reduction in 
the number of middlemen ; economies in production by the concentra 
tion of demand on a limited number of types of goods ; and, in a meas 
ure, large-scale retailing has helped stabilize manufacturing prices. 
Not all trades and commodities have been equally affected but the 
general pattern obtains. 

The book is of more use to the historian than to the economic 
theorist. Indeed the latter would have to search long and hard for any 
connection between his work and what the author has written. 

University of Sydney. 

Principles of Public Finance. By HUGH DALTON. (New Edition, Rout- 
ledge and Kegan Paul, London, 1954.) Pp. xvi + 255. 10/6 stg. 

Dalton s Principles of Public Finance have been reprinted twenty- 
one times so far. This is an indication of the book s deserved popu 
larity. There was a time when teachers of public finance were looking 


for text books emphasising the relation between public finance and 
all other economic aggregates in the Keynesian sense. The outcome of 
this tendency was a flood of works which treated Keynesian economics 
rather than public finance. Alvin H. Hansen s works in this field 
were probably the most successful. What the student now wants, after 
having grasped the inter-relation of macro-quantities, is a detailed 
knowledge of the principles of public finance. And Dalton gives him 
this in an interesting and lucid way unrivalled by any other work on 
the same subject known to the present writer. 

The above remarks apply to the twenty reprints of the first edition. 
They apply in an even more pronounced degree to the new edition 
under review. What better luck can a student have but to share the 
mature knowledge of Dalton, the academic, with the fascinating ex 
perience of Dalton, the former Chancellor of the Exchequer? The 
revised edition is, therefore, highly recommended to any student of 
public finance. It maintains the simple clarity of the first edition; it 
has gained in readability by better subdivision of the subject matter 
(long paragraphs have been cut up into shorter ones) ; much of the 
old literary polemics has been cut out; emphasis is laid on the 
administrative aspects of public finance ; and finally, not only has the 
text been brought up to date, it includes some stimulating discussions 
of Mr. Dalton s own work at the Treasury. We are, as it were, let into 
his confidence. The revised edition is the successful rejuvenation of a 
reliable old friend. 

Canterbury University College, Christ church. 

Economic Activity Analysis. Edited by 0. MORGENSTERN. (Wiley, New 
York, 1954, lithographed.) Pp. xviii + 554. $6.75. 

This symposium is a weighty contribution to the literature on 
input-output analysis. The volume is in three Parts : I, Economic pro 
perties of the input-output system; II, Mathematical properties of 
linear economic systems ; III, Meta-Economies. It seems a pity in 
cidentally that Chicago and Princeton choose to call linear general 
equilibrium analysis by the name "activity analysis." Input-output, 
or inter-industry, analysis is a well established label while, for related 
developments in the theory of the firm, Dorfman uses the suggestive 
title "mathematical programming." 

Part I will prove a valuable reference work to economists inter 
ested in input-output analysis. Students who prefer their Walras pre- 
digested will find the first essay even more valuable. This essay 
also contains a summary of the conditions for a unique solution of a 
general equilibrium system. The second essay is a critique of assump 
tions in input-output analysis and a review of its applications. The 

1955 RICARDO 351 

third essay by Balderston and Whitin discusses the aggregation pro 
blem. The importance of this contribution is the greater because the 
ultimate success of input-output analysis is likely to depend upon the 
extent to which the complementarity conditions of aggregation can be 
satisfied. The fourth essay is concerned with the alternative methods 
of valuation at producer s price or purchaser s price in constructing 
the input-output table, and the argument is extended to foreign trade. 
These last two essays are notable for their combination of theoretical 
enquiry and manipulation of data in the published United States 

Part II is an exploration into the mathematical basis of input- 
output analysis. Most economists will find this heavy fare. Certainly 
this reviewer found it difficult to see the wood for the trees. 

Part III contains two essays. The first is a translation of Karl 
Menger s earlier work on the logical derivation of the law of diminish 
ing returns. Irrespective of its intrinsic importance, it is difficult to 
justify the inclusion of this essay in a volume on input-output analysis. 
The volume concludes with a challenging essay by Morgenstern on 
experiment and computation which raises issues of the first import 
ance to all economists. 

Canberra University College. 

The Works and Correspondence of David Ricardo. Edited by PIERO 
SRAFFA with the collaboration of M. H. DOBB. Vol. X, Biographical 
Miscellany. (Cambridge University Press, 1955.) Pp. x + 424. 

24/- stg. 

It is difficult to conceive that anyone could know Ricardo, even 
at a distance of more than a century, without liking and admiring him 
very much as a person, and without wishing to know him better. In 
this volume, the Biographical Miscellany which completes Mr. Sraffa s 
edition of the Works and Correspondence, we are introduced to 
Ricardo s family parents, brothers, sisters, and children ; we are told 
all that patient research can uncover about his childhood and educa 
tion, his marriage and independence; and we learn as much as it is 
possible to know, given the surviving documentary records, of the way 
in which "one of Fortune s chief favorites" (the words are his own) 
operated as a stock-jobber and loan-contractor in war-time Britain. 
To this is added a selection of private letters which in one way or 
another throw light on Ricardo s character. The series includes, for 
example, an early letter from Ricardo to his father-in-law Edward 
Wilkinson, offering a dispassionate but (for Ricardo) surprisingly 
hard-hitting analysis of the way in which Wilkinson had alienated the 
love of his own children, and thereby provoked the family dissensions 


then being experienced. Or again, Ricardo s letter to Miss Mary Ann, 
a young lady who had asked for his autograph, in which he threatens 
to take a mean advantage of the request by writing to her about rent, 
profit or currency. Finally, the Biographical Miscellany contains the 
full text of Ricardo s Journal of a Tour of the Continent in 1822. 
(" . . . Mrs. Ricardo keeps a keen look out after silk and lace, the two 
commodities in which she appears prepared to lay out all her money. 
I am incessantly telling her that I will have no smuggling, and if 
anything is seized I will be an evidence against her.") 

It is good to find that Mr. Sraffa is able to refute completely the 
accusations made by Professor N. J. Silberling some thirty years ago 
concerning Ricardo s personal integrity both as an economist and as 
a member of the Stock Exchange. The charge was that he had tried, 
by his writing on Bullion in 1809-10, to bring about a fall in the Funds, 
from which he would benefit as a leader of the " bear-jobbers." Any 
lingering doubts (if such exist) that this may have contained some 
substance will be dispelled in the chapter of Volume X headed "A 

In describing the quality of the editor s work, reviewers of earlier 
volumes have laid claim to most of the superlatives which might other 
wise have been inserted at this point. One can only add that the 
present Biographical Miscellany forms the perfect conclusion to a 
magnificent edition. 

University of Melbourne. 


A Theory of Economic-Demographic Development. By HARVEY 
LEIBENSTEIN. (Princeton University Press and Geoffrey Cumber- 
lege, Oxford University Press, 1954.) Pp. xi + 204. 42/- Aust. 
This book is a further important contribution to the study of popu 
lation problems by the Office of Population Research of Princeton 
University. Previous studies in the series were mainly empirical. Mr. 
Leibenstein has attempted an essay in pure theory. 

The author develops models not demanding advanced mathematics. 
Nevertheless at times the argument becomes tedious. In part this arises 
from over-elaborate expositions of what he proposes to do, in part 
from methodological digressions which halt the flow of the argument, 
and at times from rather involved formulations to prove propositions 
which appear, if not self-evident, relatively simple. 

The central problem of the study is exploration of conditions 
necessary for a break-through from Malthusian conditions. This re 
quires the simultaneous consideration of the effects of changes in 
economic conditions on the size and composition of a population, and 
of changes in the size and composition of a population on the economic 
system and the rate of economic development. 

The author begins with an examination of a stable system in 
demographic and economic equilibrium, and then considers conditions 
likely to initiate an increase in average real income. This leads to con 
sideration of factors which affect the future course of real income, and 
therefore cause a return to a Malthusian situation, or an escape from 
it: the latter requires a destabilizing force of sufficient minimum 
magnitude (of investment, or innovations, or emigration) for the 
income raising forces to dominate the income depressing forces. While 
this happens to be a truism, it does raise important applied problems. 
For example, the author demonstrates that in some circumstances, a 
series of strategically placed displacements through time, would be 
more effective than a single displacement of equal magnitude. A con 
cluding chapter attempts a re-formulation of Optimum Population 

One agrees with the author that to suggest means of testing pro 
positions developed ... is, at present, otiose." Nevertheless his essay 
is a suggestive, rigorous, pioneer attempt, very much needed, to re 
formulate population theory, bringing in significant "non-economic" 

Victoria University College, Wellington. 

A Study in the Theory of Economic Evolution. By T. HAAVELMO. 
(North Holland Publishing Co., Amsterdam, 1954.) Pp. v + 114. 
15/- stg. 

This monograph explores the possibilities of a general theory of 
economic evolution, one capable of explaining widely different pos 
sibilities of growth and of identifying conditions under which these 
might occur. Haavelmo studies many variants of a general model 
using four basic variables output, population, capital and "know- 



how. They are all linked in a production function, but dynamic pos 
sibilities are provided by laws of population growth, by an "accumu 
lation function," or by a trend of "know-how." 

He succeeds almost too well in finding explanations of divergent 
paths of growth. Even slight differences in structural parameters or 
initial conditions can, in time, lead to very different results. Further 
possibilities of divergence arise from cumulations of * random shocks 
in models which allow for stochastic elements or processes. It appears, 
moreover, in an original chapter on interregional economic relations, 
that trade may fail to promote greater uniformity in economic develop 
ment between regions. 

These results have an obvious usefulness in drawing attention to 
the great variety of possible explanations for different regional levels 
of income and rates of economic progress. They may also prove useful 
in paving the way for more general or more realistic theories of 
development. But they are reached by a most dry mathematical argu 
ment, whose level of abstraction is such that only the briefest and 
barest references are made to facts, statistics or other theories of 
economic evolution. The one exception is a penetrating summary of 
the Malthusian and Classical dynamics. 

Auckland University College. 

The Attack on Big Business. By P. D. GLOVER. (Graduate School of 
Business Administration, Harvard; Bailey Bros, and Swinfen 
Ltd., London.) Pp. xvi + 375. 48/- stg. 

Big business or the large corporation is one of the main character 
istics of the American scene. In spite of the fact that there must be 
some connection between this form of organisation and the rapid 
development of the American economy, big business has been under 
continuous attack from a wide range of critics since its rise to promin 
ence. Professor Glover s aim is to present a survey and study of this 
vast mass of criticism, in such a form that businessmen, in formulating 
policies and reaching decisions, might do so in full knowledge of the 
criticism that is directed against them. 

The first part of the survey deals with the attack that has been 
made on economic grounds. This attack, the author shows, still rests 
upon the belief in the ideal nature of pure competition it is concerned 
with "how existing opportunities and techniques are exploited, up to 
an equilibrium position, not with how new ones are brought into exist 
ence and old ones recede. However, much of the hostility towards big 
business does not stem from the economic but is based on political and 
social considerations on the one hand and ethical and moral on the 
other. The features of these attacks are presented in Parts II and III. 

In the final part, after a brief critique of the critics the author 
proceeds to prescriptions for action. He is of the opinion that facts 
indicate that big business deserves much of the credit for the high 
standard of living and the unequalled rate of technological advance in 
America, but to meet the social and moral criticism, he suggests firstly, 
that businessmen should "broaden their concept of corporate objec 
tives and policies so that recognised corporate goals will more clearly 
include accomplishments on more than the economic plane;" and 


secondly, that businessmen should contribute to a more realistic under 
standing of the large corporation, by giving research students and 
educators access to their records in order that they might find out for 
themselves the true nature of the corporation. 

Many would say that these prescriptions do not go far enough. 
One interesting suggestion, that does go further, is that very large 
corporations, should have on their board of directors, men who are 
appointed from outside, as guardians of the public interest. 

University of Adelaide. 

The Theory of Collective Bargaining. By W. H. HUTT. (The Free 
Press, Glencoe, Illinois, 1954.) Pp. 150. $3.00. 

Professor Hutt s book on the Theory of Collective Bargaining, 
first published in 1930, has been republished in the United States of 
America, this time with preface by Ludwig von Mises. 

The essay is still quite topical. For instance, Professor Hutt con 
tends that trade unionism cannot raise the wages share of the national 
income. This is in line with current thought that, in the United States 
and the United Kingdom at least, trade unions cannot hope to raise 
the wages share of the national income in its primary distribution, 
except perhaps for a short period of time. 

Professor Hutt also contends that if one section of workers do 
gain an increase in real wages, this is at the expense of other sections 
of workers. The argument is virtually an attack on the device of 
limitations of numbers and any restrictive device which interferes with 
the free play of the market. There is considerable quotation of authors 
writing in the 19th and 20th centuries, and a challenging historical 
approach, but no concession to the institutional approach. 

On page 143 Professor Hutt writes, "It often appears to the 
writer that the continued appearance of industrial depression in 
Great Britain is primarily due to the widespread existence of monopo 
listic bodies on both sides which (quite apart from their having caused 
equipment and labour to remain idle by policies aiming at * not spoiling 
the market ) have destroyed the sensitiveness of the price and par 
ticularly the wage system." 

In his preface to the new American edition, Ludwig von Mises 
writes (page 9), "On a free labour market there prevails a tendency 
to make unemployment disappear. Not to interfere with the operation 
of the labour market is the only effective full employment policy." 

These two quotations make it clear why the reader can be par 
doned if he gets the impression that these two gentlemen are supporters 
of laissez-faire and hostile to the institution of trade unionism. 

University of Western Australia. 

Economic Survey of Europe in 1954. Prepared by the Research and 
Planning Division of the United Nations Economic Commission 
for Europe. (Geneva, 1955.) Pp. xii + 316. 17/6 stg. 

This is the eighth annual report reviewing with the aid of a 
wealth of data current economic trends against the background of 
recent years. Of seven chapters the first is of particular interest to 


trade cycle students. It analyses the cyclical movements in production 
in Western Europe during 1950 and 1954 and concludes, contrary to 
the belief expressed in earlier annual surveys, ". . . that the Korean 
boom was followed, not by a period of general stagnation but rather 
by a series of distinct though overlapping setbacks . . ."; first the 
textile slump, then the engineering recession, followed by the steel 
and coal recession. Western Europe s balance of payments is analysed 
in chapter 4, special note being made of this area s unexpected im 
munity from adverse repercussions following the industrial recession 
in the United States. 

Chapters 2, 3, and 5 present a useful descriptive survey of recent 
changes in Eastern Europe and Soviet Russia, notably the new 
emphasis" since 1953 on trade with the rest of the world as well as 
within the group. Finally, special problems of balanced economic 
development are studied, chapter 6 describing problems of disparities 
in regional development and industrial location in Europe, taking in 
chapter 7 France as a case study. 
University of New England. E - A - BOEHM 

La Psychologie Economique. By P. L. REYNAUD. With contributions 
by G. Katona, A. Lauterbach, J. Stoetzel, J. Sauerwein and A. 
de Vulpian. (Librairie Marcel Riviere et Cie, Paris, 1954.) 
Pp. 260. 700 frs. 

This book consists of four parts: a survey of the psychological 
foundations of the works of economists during the period 1900-1951 
(Reynaud), an essay on "economic psychology" and its tasks (Katona 
and Lauterbach) a psychological study of consumption (as an econo 
mic category) in France (Stoetzel, Sauerwein and Vulpian), and an 
analytical and critical bibliography. 

The first part describes the amazingly variegated pattern of 
psychological foundations of economic theory. Being descriptive, 
and covering a large number of writers, it is unfortunately somewhat 
arid. It gives the reader the disconcerting impression that not all is 
well with the psychological foundations of Economics: there is too 
much contradiction, the foundations are too often built on the sand of 
introspection or daring generalisations. 

The second part shows the way to an improvement of this situa 
tion: research on behaviour, the making of decisions, motives, etc., as 
far as affecting economic life. The third is an example of what can be 
done by the method of "sondages" to shed light on the economic 
phenomenon called consumption. 

The book ought to interest those who are anxious to make Econo 
mics more realistic and are interested in the human side of economic 
Christchurch, N.Z. c - WESTSTRATE 


BLAINEY, GEOFFREY: The Peaks of Lyell. (Melbourne University Press, 
1954.) Pp. 310. 30/- Aust. 

BUTLIN, S. J.: War Economy 1939-1942 Australia in the War of 1939-1945. 
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COOMBS, H. C. : The Development of Monetary Policy in Australia. (Univer 
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The rarity of analytical statements in their own field by Australia s 
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He demonstrates from postwar experience that an effective monetary 
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GIFFORD, J. K., WOOD, J. VIVIAN, and REITSMA, A. J.: Australian Banking, 
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BELSHAW, CYRIL S.: In Search of Wealth. (American Anthropological Asso 
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BERLE, ADOLF A.: The Twentieth-Century Capitalist Revolution. (Macmillan, 
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BLODGETT, RALPH H.: Our Expanding Economy. (Rinehart, New York, 
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KENDRICK, M. SLADE: A Century and a Half of Federal Expenditures. 
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KNOWLES, WILLIAM H. : Personnel Management: A Human Relations Ap 
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MANDELBAUM, K. : The Industrialization of Backward Areas. (Second edi 
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MEHTA, M. M.: Measurement of Industrial Productivity. (The World Press, 
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terdam, 1954.) Pp. 420. No price stated. 

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PHELPS, ORME W.: Introduction to Labor Economics. (Second edition, Mc 
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ROTHSCHILD, K. W.: The Theory of Wages. (Blackwell, Oxford, 1954.) 
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SOZERI, SALAHADDIN : Der Wirtschaftsaufbau der Tiirkei nach dem Zweiten 
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SRIVASTAVA, K. N.: Industrial Peace and Labour in India. (Kitab Mahal, 
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STAMER, HANS : Die wirtschaftlichen Auswirkungen der landlichen Siedlung. 
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THOMPSON, C. H., and WOODRUFF, H. W. : Economic Development in Rhodesia 
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VARSHNEY, R. L.: India s Foreign Trade. (Kitab Mahal, Allahabad, 1954.) 
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VOL. 15, PABT 3, 1955 

Completeness, Similar Regions, and Unbiased Estimation Part II 

E. L. Lehmann and H. Scheffe 

Certain Modified Forms of Binomial and Poisson Distributions V. M. Dandekar 

A note on the Structure of a Stochastic Model considered by V. M. Dandekar . . D. Basu 

Analysis of Dispersion for Multiply Classified Data with Unequal Numbers in Cells 

C. R. Rao 

Approximate Probability Values for Observed Number of "Successes" from Statistically 
Independent Binomial Events with Unequal Probabilities John E. Walsh 

Tables of Two-sided 5 per cent and 1 per cent Control Limits for Individual Observations 
of the r-th Order Motesaburo Masuyama 

Modified Mean Square Successive Difference with an Exact Distribution . . A. R. Kamat 
Estimation and Tests of Significance of the Components of a Time-Series O. Suryanarayana 
A Note on a Form of Tchebycheff s Inequality for Two or More Variables . . . . D. N. Lai 

Unbiased Test for a Specified Value of the Parameter hi the Non-Central F Distributions 

N. Marakathavalli 

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The Quarterly Journal of the Royal Ecenomic Society 

No. 259 SEPTEMBER 1955 Vol. LXV 

Economic Foundations of Wage Policy J. R. Hicks 

What All is Utility? M. Friedman 

A Rejoinder Sir Dennis Robertson 

The Economics of Socialism Reconsidered H. Smith 

Convertibility and Triangular Trade as Safeguards Against Economic Depression 

C. M. Wright 

The Concept and Measurement of Foreign Exchange Reserves W. M. Brown 

"Product Elasticities of Substitution" in International Trade R. J. Nicholson 

A Rejoinder Sir Donald MacDougall 

Trade Imbalance, Gains from Trade and National Income Change . . V. K. Ramaswami 
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Industrial Production and Profits in the United Kingdom and the United States 

"E. H. Stern 


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Volume XLV ARTICLES: September, 1955 

Financial Aspects of Economic Development J. G. Gurley 

Factor Proportion in Underdeveloped Areas R. S. Eckaus 

Cotton Mechanisation and Economic Development J. H. Street 

Spatial Equilibrium: Livestock-Feed Economy K. A. Fox and R. C. Taeuber 

Soviet Price Reductions for Consumer Goods C. D. Campbell and R. G. Campbell 

Review of Books, Titles of New Books, Periodicals, Notes 

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Vol. VIII, No. 3 August 1955 

P. BATTARA, La definizione del reddito nazionale (I). H. J. BRUTON, Productivity, 
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No. 140 July 1955 Vol. XXXVI 

40th Year of Publication - - Editor: Dr. OM PRAKASH 

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ARTICLES: Some Questions on Economic Growth By MAURICE DOBB. Present Pro 
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Development Specially contributed. Nationalised Road Transport Services in Hyderabad 
-By R. V. Rao. Schumpeter and his Ideas on Economic Development By SAMPAT 
PAL. On the "Transition" from Feudalism to the Burgeois Revolution By H. KOHA- 

NOTES and MEMORANDA: Robbins on the Economist in the Twentieth Century By 
J. K. M EHTA. Buchanan and Ellis on Approaches to Economic Development By B. C. 
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The Discoveries and Mercantilism J. H. Dales 

Canadian Monetary Thought and Policy in the 1920 s Irving Brecher 

Consumption Levels in Canada and the United States, 1947-50 Jean Mann Due 

Grants in Lieu of Taxes on Crown Property hi the United Kingdom . . Douglas H. Clark 
The Capacity Concept and Induced Investment Raymond T. Bowman and Almarin Phillips 

Taxation and "Fair Shares" under the Labour Government Arnold A. Rogow 

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Vol. 23, No. 1 March 1955 

The Kate of Interest in the Trade Cycle Theories of Professor Hayek . . G. F. D. Palmer 

Die "Christeuke" Siening van die Aard en Omvang van die Ekonomiese Wetenskap 

Professor B. Van Deventer 

Industrial Profits since the War P. K. Lomas 

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Seven Centuries of Building Wages E. H. Phelps Brown and Sheiia V. Hopkins 

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The I.C.F.C. Revisited Brian Tew 

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Vol. XXIII (1), No. 60 CONTENTS October 1955 

1. Safety First and Hedging By L. G. Telser 

2. The Use of Index Numbers in Demand Analysis By R. Bergstrom 

3. The Pareto Distjribution and the Cofob/Douglass Production Function in Demand 

Analysis By H. S. Houthakker 

4. A Note on Block Tariffs By A. Gabor 

5. Block Tariffs; A Comment By P. E. Watts 

G. Economic Planning and the Long Term Programme By J. Mitchell 

7. A Note on Specialisation in Graham s Model By L. McKenzie 

8. Uncertainty and the Cobweb Theorem By F. H. Hahn 

9. Components of a Change in the Balance of Trade By G. D. N. Worswick 


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August 1958 

D. COCHRANE: The Australian Economy, July, 1958 143 


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Volume XLVIII JUNE 1958 Number 3 

Cost of Capital and the Theory of Investment Franco Modigliani and M. H. Miller 

Policy Analysis , . . C. E. Lindblom 

Capital Longevity and Economic Development R. C. Blitz 

Mathematical Note on Optimum Longevity , . . F. M. Westneld 

"People s Capitalism" and Stock-Ownership Victor Perlo 

The Production Ceiling and the Turning-Point K. D. Roose 

Ricardo and the 9&% Labor Theory of Value ... G. J. Stigler 

Advances in Game Theory H. M. Wagner 

The Dollar Shortage Re-Revisited C. P. Kindleberger 

The Permanent Income Hypothesis H. S. Houthakker 

The Mutual Influence of Mitchell and Commons Joseph Dorfman 

The Union and Wages in Basic Steel: 

A Comment Lloyd Ulman 

Reply Albert Rees 

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The Economic Record 

Vol. XXXIV August, 1958 No. 68 

1. Recent Trends 

A short while ago a paper on the Australian economic situation 
would have opened with a discussion about the factors affecting the 
inflationary situation or perhaps an explanation of how any redress- 
ment of the balance of payment deficit would add to the inflationary 
pressure. In these circumstances statistics of unemployment were a 
secondary consideration. Today we are no longer in this position and 
while unemployment statistics do not tell the whole story they are the 
first piece of information to be studied. Over the past two years the 
balance of weight on the economic see-saw has slowly shifted. From 
an inflationary situation the economy moved for some months to a 
delicate balance and although economic policy has been designed to 
maintain this position there are signs that the see-saw has continued 
past the horizontal position and is beginning to dip gently in the 
opposite direction. 

Several factors have contributed to this situation. As the full 
impact of the supplementary budget of March 1956 was gradually felt 
by the economy, demand slowly decreased to a level that could be 
accommodated by the supply of goods and services available under the 
tightened import conditions. But even so it was by no means certain 
that this situation would continue. Wool prices rose steadily throughout 
the 1956/7 season. The increase in export receipts together with the 
reduction in import payments produced a balance of payments surplus 
and a substantial rise in our international reserves. 

The rise in wool incomes might well have led to increased expendi 
ture. Indeed a slight strengthening of the labour market took place 
around the middle of 1957 1 while industrial production expanded after 
the steady contraction of the previous twelve months. The stage seemed 
set for expansion. An expansion which might well have been met by a 
relaxation of import restrictions. Everything depended upon the price 
of wool in the 1957/8 season. 

The answer was not long coming. Wool prices sagged at the opening 
sales and continued to fall throughout the season. Neither the expected 
revival of inflationary pressure nor the hoped for relief from import 
restrictions materialized. The balance of payments steadily weakened. 
Nevertheless industrial production steadied and the level of employ 
ment continued to grow. At the same time industrial capacity expanded 
while unemployment became more prevalent. 

1. See H. W. Arndt, "The Australian Economy", Economic Record Decem 
ber 1957, p. 302. 





2. Employment 

The position with regard to employment and unemployment is 
shown in Table I. The number of persons registered for employment 
with the Commonwealth Employment Service during the first half of 
1958 was considerably in excess of the number registered in the same 
period in 1957. In a similar manner the number of vacancies registered 





Excess of 

Number on 


February . . 
March . . . 



















Sir I 























September . . . . 
November . . 
December . . 

February . . 















April . . . 

















Sources . Commonwealth Statistician, Monthly Bulletin of Employment 


Dept. of Labour and National Service, Monthly Review of 
Employment Situation. 

during the first half of 1958 was well below the number registered in 
the same period in 1957. As one measure of the extent of unemployment 
it is worthwhile looking at the difference between these two series. The 
excess of persons seeking employment over registered vacancies shows a 
strong rising trend of unemployment in 1958, particularly when each 
month is compared with the corresponding month of the preceding 
year. The same movement is present in the number of persons receiving 
unemployment benefit. 2 

2. If the reader is interested to graph these series the underlying trend can be 
clearly seen against the seasonal movement. Unfortunately the seasonal pattern of the 
last two years is sufficiently different from that during the near zero unemployment 
era to make it exceedingly difficult to construct a satisfactory deseasonalized series. 




Against this picture of steadily increasing unemployment can be 
seen a slow but consistent expansion of employment. During the twelve 
months ended June 1958 civilian employment increased by 21,200 
persons. Manufacturing absorbed 50 per cent of this increase while 
Commerce took about 35 per cent. The increase in Commerce was 
almost entirely in Retail Trade. Employment in Building and Con 
struction and transport fell sharply over the year as a whole but 
picked up during the last four months. After showing a strong in 
crease up to March 1958 employment in Manufacturing steadied and 
then showed a slight drop. This was largely seasonal and the next few 
months should show increases in manufacturing employment at least 
up to Christmas 1958. 

Changes in Civilian Employment (a) 

Industrial Group 

June 1957 
June 1958 

Feb. 1958 
June 1958 

Mining and quarr 
Manufacturing . . 



+ 10-2 
+ 1-7 
+ 3-9 
+ 7-6 
+ 3-1 
+ 4-2 
+ 3-2 


+ 3-4 
+ 2-6 
-f 0-3 
-f 1-3 
+ 1-7 

Building and cons 

truction . 


Property and fina 
Commerce . . 


Health . . 

Education . . 

+ 21-2 

+ 0-8 

(a) Excluding wage earners in rural industries and private domestic 

Source : Commonwealth Statistician, Employment Statistics. 

Exactly what the overall rate of unemployment is at present is dif 
ficult to say. The excess of persons seeking employment over registered 
vacancies as a percentage of the wage and salary earners in civilian 
employment is one convenient estimate. This calculation yields an 
unemployment rate of 1-8 per cent. However, during the same period 
that civilian employment increased by 21,200 or 0*7 per cent, the pro 
portion of persons seeking employment to civilian employment rose by 
0-5 per cent. Unfortunately these percentages do not account for the 
increase of approximately 2 per cent which should have taken place 
in the work force from migration and natural increase. 3 Accordingly 
the figure of 1-8 per cent is probably a slight under-estimate of the 
state of unemployment. 

The real fear, however, arises not from the absolute level of 
unemployment but from the fact that the upward trend of unemploy- 

3. The failure of the official statistics on employment and unemployment to 
add up to the increase in the work force leads to the obvious conclusion that errors 
probably exist in the statistics of civilian employment or unemployment or both. 




ment shows no sign of abatement and if ignored could have important 
repercussions on our economic future. In an economy which has been 
geared to development any serious set back to investment could impair 
the rate of progress for a considerable period of time. 

3. Price Stability and the Economic Tempo 

There has been a great deal of discussion in the post-war period 
regarding the difficulty of achieving price stability while maintaining 
a policy of full employment. It seems to have been generally accepted 
that if full employment is defined as a situation where the number of 
people seeking employment is exactly equal to the number of jobs 


Prices and Wages 

(Percentage change on preceding quarter) 


Prices (a) 

Prices (b) 


Prices (c) 





4- 1-9 

4- 3-1 

4- 1-0 


+ 1-3 

+ 2-2 


+ 0-9 
+ 0-9 

+ 0-3 

+ 1-0 

+ 1-7 

+ 1-3 

+ 0-2 



+ 0-9 
+ 0-5 


+ 1-0 
4- 1-9 

+ 0-4 

+ 1-2 

+ 1-8 








+ 0-7 
+ 0-7 




+ 1-3 

(Percentage change on preceding June) 

June, 1957 
June, 1958 

+ 1-9 



+ 1-6 

(a) Interim price index excluding potatoes and onions. 

(b) Index of basic materials. 

(c) Excluding gold. 

(d) Per adult male seasonally adjusted. 

Sources: Commonwealth Statistician, Monthly Review of Business 

Commonwealth Statistician, Monthly Bulletin of Employment 

Commonwealth Bank, Statistical Bulletin. 

available, 4 it is impossible to overcome the upward pressure upon 
wages and prices. Just what degree of unemployment is required to 
remove this pressure has been the subject of hot debate. Clearly it 
differs among countries and at different periods of time but the effect 
of the recent unemployment hints at an answer for Australia. 

The changes that have taken place in prices and wages during the 
last two years are shown in Table III. Retail prices increased by only 

4. This would roughly correspond to the equality of persons seeking employ 
ment with registered vacancies in Table I, although regional disparities would 
have to be taken into account. 


1-9 per cent between June 1957 and June 1958 as compared with 
4-7 per cent over the preceding twelve months. Part of the relative 
stability is due to the fall in the price of basic materials. The changes 
in wholesale prices reflect this fall. Part is also due to wage policy. 
No change took place in the basic wage between May 1957 and May 
1958 and the increases which did take place were both reasonably small. 

The decisions of the Commonwealth Conciliation and Arbitration 
Commission were undoubtedly influenced by the balance of payments 
but this is only one side of the picture. If excess demand had been 
present there would have been a tendency for average weakly earnings 
to have risen without any need for increased award rates to push them 
up. In fact the movement in average weekly earnings is consistent with 
a small push from increased wage rates and almost no pull from 
demand. The increase in the basic wage in May 1957 seems to have 
passed into average earnings with a slight lag. It remains to be seen 
whether the slightly higher degree of unemployment has had any 
dampening effect on the way in which the increase in May 1958 has 
been passed into average earnings or whether some part might have 
been absorbed in over award payments. 

In addition to retarding the rate of increase of average earnings 
so that they follow award wages fairly closely the removal of excess 
demand, with its associated price stability, has also had the effect of 
reducing the pressure for a wage push on the award rates themselves. 
The Commonwealth Arbitration Commission and State Wages Boards 
seem to have been able to hold wage rates fairly constant for long 
periods and finally raise them by small amounts without any strong 
union resistance and outcry. 

But what has been the effect of the stability of prices and wages 
on productivity ? Two opposing claims have been made in recent years. 
On the one hand it has been suggested that excess demand is a pre 
requisite to any rise in productivity. Industry, it is asserted, is stimu 
lated by constantly rising prices and needs the pressure of excess 
demand to keep it in top gear. Any withdrawal of this pressure is likely 
to have adverse reactions on productivity with the attendant risks of 
stagnation and unemployment. 

The opposite claim suggests that apart from the need to restrain 
price increases for balance of payments purposes there is reason to 
believe the removal of excess demand and the resulting increase in 
competition would step up productivity. Continuous inflationary press 
ure is likely to breed a little slackness which would soon be eliminated 
if excess demand were removed. It is true that a period of readjustment 
might be necessary in which the total level of output would drop 
slightly as some overtime disappeared, but it is argued, this would be 
a once for all drop and from then on output would proceed to rise 
steadily again. Further, the new rate of growth of output might even 
be higher than that taking place before the readjustment. This would 
be so if the removal of excess demand eliminated a few high cost 




producers and led to a general tightening of efficiency on the side 
of both management and labour. 

The first view has received a certain amount of support from the 
economic conditions which have prevailed in the United Kingdom since 

1955 when monetary controls were applied to overcome inflations. 
Industrial production in 1956 was 0-5 per cent lower than in 1955 but 
rose by 1-5 per cent between 1956 and 1957. These rates compare with 
an average increase in industrial production of 7 per cent per annum 
between 1952 and 1955. Employment in manufacturing rose by 0-5 per 
cent between 1955 and 1956 and was constant between 1956 and 1957. 

On the other hand the Australian economy seems to provide sup 
port for the second point of view. It is still a little early to see the 
complete picture and unfortunately no official indexes of industrial 
production or of real domestic product are available to assist analyses 
of this type. Nevertheless a glance at the movement of industrial pro 
duction of most commodities over the first eleven months of 1957/8 5 
is sufficient to show that the anti-inflationary measures applied during 

1956 have not brought the level of output to a halt. The Australian and 
New Zealand Bank s Index of Factory Production summarizes these 
figures into the startling result that factory production in the first 
eleven months of 1957/8 was 8 per cent higher than in 1956/7. Factory 
production over the two previous years increased by 5 and 4 per cent 
respectively. Since the increase in factory employment in 1957/8 was 
approximately 1 5 per cent, a rough estimate of the increase in factory 
production per man would be over 6 per cent. For 1956/7 the increase 
in factory production per man was around 3 per cent. 

4. Recent Economic Trends 

Some of the factors contributing to the rise in production are 
shown in Tables IV, V and VI. 

Domestic Supplies 







Gross National Product 
Non-farm (a) 








+ 342 

+ 259 





+ 97 






+ 439 

+ 83 " 

Imports, etc 





+ 105 

Less Kxports, etc 





+ 169 

Domestic Supplies 




+ 107 

+ 357 

(a) Unfortunately it is not possible to remove farm wages from this item. 
Source : National Income and Expenditure 1957-58. 

5. These figures can be seen in the Commonwealth Statistician s Monthly 
Bulletin of Production Statistics, July 1958. 



Absorption of Domestic Supplies 








Personal consumption (a) . . 
Gross private investment 
Fixed capital equipment .... 
Non-farm stocks 










+ 202 

+ 9 
- 70 

+ 260 

+ 71 

Farm stocks 
Public authorities 




+ 20 

- 10 

+ 46 

Gross Domestic Expenditure . . 




+ 107 

+ 357 

(a) Includes financial enterprises. 

Gross domestic expenditure increased by 357 m. or 6-5 per cent 
in 1957/8 compared with an increase of 107 m. or 2 per cent in 
1956/7. Allowing for price changes there was a rise of approximately 
4 per cent in real expenditure in 1957/8 and a fall of 3-4 per cent in 
1956/7. The increase in domestic expenditure in 1957/8 was met partly 
from an expansion of domestic production and partly from an expan 
sion of imports. The value of production in the non-farm sector of 
the economy rose by 259 m. or 5 per cent. 6 Using the interim retail 
price index as a deflator the real increase in non-farm production in 
1957/8 was 2-6 per cent. For 1956/7 the comparable figure was 1-5 per 
cent. Taking account of changes in the work force the increase in non- 
farm product per head was about 2 per cent in 1957/8 and 1 per cent 
in 1956/7. 

How do these figures compare with the increases in factory pro 
duction indicated by the Australia and New Zealand Bank s index? 
As no industrial breakdown of the gross national product is available 
it is difficult to assess the proportion of gross non-farm product con 
tributed by manufacturing with any degree of precision. However, we 
know that about one-third of the work force, excluding rural workers, 
is engaged in manufacturing activities and less than 50 per cent of 
the wages and salaries and company income in 1956/7 originated in 
manufacturing. Accordingly, as the increase in productivity in the 
service industries is probably negligible it seems reasonable to assume 
that manufacturing output per head is at least twice the total non- 
farm output per head. This would yield increases of at least 4 per cent 
and 2 per cent for 1957/8 and 1956/7 respectively. These figures bear 
the same relative relationship as the Australia and New Zealand 
Bank s estimates in the previous section but they are slightly lower 
in absolute terms. However, in view of the roughness of the statistical 

6. Farm wages are caught up in non-farm product so that farm product is 
really only the income of farmers (excluding pastoral companies). In so far as 
falling farm incomes led to a lower farm wage bill in 1957/8, the percentage rise 
in non-farm product is an under-estimate. Current company reports also indicate that 
company incomes in 1957/8 may prove to be under-estimated. 




calculations the two sets of estimates would appear to be consistent, 
so that further support is given to the thesis that economic stability 
might have given a fillip to productivity in Australia. 7 

Unfortunately the external picture is not so bright. The move 
ments of export and import prices (see Table III) indicate that a 
strong deterioration has taken place in the terms of trade. In the first 
nine months of 1957/8 there was a 13 per cent fall in the terms of 
trade. The effect of this adverse movement in external productivity 
has been to reduce real national product by about the same amount 
as internal productivity has increased it. Our overall progress in 
1957/8 has accordingly been negligible. The major impact of the reduc 
tion in external productivity has fallen on the farmer. To the extent, 
however, that non-farm incomes have lagged behind the improvement 
in internal productivity part of the burden has been absorbed by the 
non-farm sector. 


Indicators of Business Activity 
(Percentage change on corresponding quarter of preceding year) 


Building Commencements 





Houses and Flats 



















+ 3-9 



- 7-1 

+ 9-2 

+ 11-0 



+ 4-1 


- 8-8 


- 5-2 

+ 9-1 



+ 4-2 

- 9-1 


+ 0-5 


+ 9-5 



+ 4-5 

H- 3-0 

+ 11-0 

+ 14-1 


+ 11-0 




+ 5-6 

+ 3-1 

+ 12-3 

+ 16-5 





+ 5-6 

+ 12-8 

+ 0-3 

+ 4-3 

- 8-1 

+ 14-7 

+ 0-1 


+ 5-7 

+ 13-9 

+ 4-4 

+ 7-7 

+. 9-3 

+ 20-0 



+ 14-4 + 3-3 


+ 8-8 

Source : Commonwealth Statistician, Monthly Reinew of Business Statistics. 

Despite the greater stability in retail prices in 1957/8 compared 
with 1956/7 retail sales continued to expand. Whereas the volume of 
sales in 1956/7 compared with the preceding year was approximately 
the same there was an increase of 3 to 4 per cent in volume in 1957/8. 
Professor Arndt has outlined the resemblance between 1956/7 and 
1952/3 as years of domestic recession following boom years and balance 
of payments difficulties. 8 The data of Table V indicate that real con- 
consumption per head fell 2 per cent in 1956/7 and recovered strongly 
in 1957/8 with an increase of approximately 3 per cent. 

7. This is far from the final word on the Australian situation but it should 
be noted that it would be very upsetting to find that the United States of America 
was the only country which responded when excess demand was removed. 

8. H. W. Arndt, "The Australian Economy", Economic Record, December 
1957, pp. 287-290. 




The year 1957/8 has therefore produced some apparently curious 
movements. While unemployment has been gradually increasing con 
sumer expenditure has also shown a steady expansion. 9 Perhaps con 
sumer expenditure is going to prove just as resilient in post-war 
Australia as in the United States of America ! Rising productivity has 
undoubtedly contributed to this result but it is difficult to avoid the 
conclusion that hire purchase has played an important role. 


Amounts Financed Under Hire Purchase Agreements 
(Percentage change on corresponding quarter of preceding year) 


Miotor Vehicles, 
Tractors, Etc. 

Plant and 

Household and 
Personal Goods 



September . . 
December . . 

+ 5-9 
+ 9-5 
+ 14-8 
+ 8-4 

+ 36-3 
+ 4-9 
+ 20-5 
+ 24-3 

+ 3-8 
+ 32-9 

+ 1-3 

+ 4-7 
+ 12-1 

+ 14-5 


September . . 
December . . 

+ 0-7 
+ 12-5 
+ 20-5 
+ 26-3 

- 8-1 
+ 25-8 
+ 11-7 
+ 9-8 


+ 55-2 
+ 61-2 
+ 50-3 

+ 12-4 
+ 22-8 
+ 30-3 
+ 31-5 

Source : Commonwealth Statistician, Monthly Review of Business Statistics. 

The increase in outstanding balances of hire purchase finance 
businesses in 1957/8 was about 10 per cent greater than the increase 
in the preceding two years combined. While motor vehicles have been 
well supported an increasing share of the finance available has gone 
to household and personal goods. There seems little doubt that tele 
vision has had the major influence on expenditure in this direction. 

While it must be admitted that the expansion of hire purchase 
finance has assisted the growth of production during the past year it 
is nevertheless disquieting to find consumer expenditure expanding so 
lustily at a time when more expenditure should be undertaken on 
capital formation, both public and private, and further, that there is 
no simple way of controlling hire purchase if the need arises. All States 
must be concerned at the flow of funds into hire purchase companies 
at the expense of their public works. It would seem therefore that the 
time has arrived for co-operation between States in the direction of 
enforcing minimum deposit ratios, possibly combined with a maximum 
period of payment. 

In addition concern has been expressed that something should be 
done to protect the consumer both on the borrowing and lending side. 

9. It is interesting to observe that twelve months ago nearly all the complaints 
about unemployment came from employers and not trade unions. Labour did not 
seem to lose confidence as quickly as management and continued to spend. The 
result of this spending has been the gradual cessation of complaints about unemploy 
ment from employers while labour is only now beginning to be concerned. 




There is clearly a need to ensure the public has adequate information 
about the financial strength of companies to which they are lending 
money. Legislation with regard to the issue of prospectuses and a 
tightening of control by Stock Exchanges could cover this matter. It 
should not be difficult also to frame legislation to protect borrowers 
by ensuring the conditions under which hire purchase finance is 
provided are clearly set out and that repossessions are controlled. 

5. Balance of Payments 

Despite the steady decrease in the price of wool and metals over 
the past year the fall in international reserves between June 1957 and 
June 1958 amounted to only 42 m. Earlier fears of a somewhat larger 
decline in international reserves were based mainly upon the assump 
tion that imports would be slightly higher and the capital inflow 
slightly lower than the levels which actually obtained. The inflow of 
private funds was the same in 1957/8 as in 1956/7, but net receipts 
from government loans were 13 m. in 1957/8 compared with net pay 
ments of 3 m. in 1956/7. 


Balance of Payments 
(A million) 




Current Account 
Exports f .o.b 




Imports f.o.b 




Trade balance 

- 47 



Invisibles (net) 




Current account balance 




Capital Items 
Public and private borrowing 




Movement in international reserves 

- 73 


- 42 

Source : Gommonwealth Statistician, The Australian Balance of Payments, 
1953/4 to 1957/8. 

Imports during 1957/8 failed to reach the target rate by 20 m. 
Although import restrictions were relaxed slightly in the second 
quarter of 1957/8 so as to allow the annual flow of imports to rise 
from 775 m. to 810 m., it is interesting to observe there was no 
change in the quarterly import rate. The quarterly flow of imports 
during 1957/8 compared with 1956/7 was as follows: 

September quarter 







At the present level of import restrictions it would seem that a 
regular flow of imports should be maintained during the ensuing year 
and the total should not exceed 800 m. As there have been few com 
plaints about import restrictions in recent months it might even be 
wondered whether they are really pinching very much, and what the 
effect would be if they were lifted. The disinflationary economic policy 
initiated by the supplementary budget of March 1956 has clearly had 
a marked effect on the demand for imports. If our export position were 
a little stronger it would certainly be worthwhile trying to remove the 
restrictions but it might not be wise to risk a run of imports now. 

Owing to drought conditions the wool clip in 1958/9 will be about 
3 per cent down on the 1957/8 clip. There is reason to believe wool 
prices will not sag any further but exactly when and by how much they 
are likely to recover is difficult to judge. Assuming the closing prices 
for wool are maintained during the coming year 10 the wool cheque 
could drop by 60 m. The outlook for wheat is very bright. The 1958/9 
crop should reach and even surpass the post-war average of 160 m. 
bushels. Production in 1957/8 was 96 m. bushels. The effect would 
be to raise the export receipts from wheat by approximately 20 m. 11 
If metal prices continue to hold and even rise very slightly, butter 
output improves, and industrial exports expand very slightly under the 
impetus of the recently instituted export consultative committee the 
drop in total exports could be 30 m. or less. A forecast of the balance 
of payments for 1958/9 would accordingly be as follows : 12 


Exports f.o.b 785 

Imports f.o.b 800 

Trade balance .... 15 
Invisibles (net) . . . . 210 

Current account balance 225 

With an inflow of capital around 125 m. the fall in international 
reserves in 1958/9 would be of the order of 100 m. If the inflow of 
capital should drop to 100 m. the fall in international reserves would 
be around 125 m. With the level of international reserves at 30th June 
1958 standing at 525 m. the deficit on the balance of payments for 
the coming year can therefore be faced with a certain degree of con 
fidence. The recent announcement by the Minister for Trade that 

10. The price used is the average for April-May 1958 of 54 pence, which is 
slightly below the closing price in June. This compares with an average of 62-45 
pence for the whole of 1957/8 season. 

11. Assuming the 1958/9 crop reaches 180 m. bushels and that 80 m. bushels are 
consumed at home we have 100 m. bushels of wheat available for export in 1958/9 
against 63 m. bushels in 1957/8. If stocks are increased by 10 m. bushels, exports 
could rise by 50 per cent to yield an addional 20 m. 

12. The balance of payments forecast may prove to be on the pessimistic side. 
Reports at present being received from U.S.A. are unanimous in declaring that the 
downward movement has been arrested. The strength of the upturn is still ques 
tionable but some assistance to export prices could be provided during the year. 


import restrictions will not be altered seems to be a sound decision at 
this stage of the year. 

6. Economic Prospects and Policy 

Although the consequences of the prospective deficit in the balance 
of payments are not alarming when viewed against our international 
reserves it is nevertheless essential that this imbalance should be con 
sidered in the wider economic context of rising unemployment and 
stability of wages and prices, and the longer term movements of these 
factors. The rise in internal productivity and the relative stability of 
wages in 1957/8 has done much to improve our ability to compete with 
imports. Unfortunately falling export prices have more than offset 
any advantages gained on the import side. In the short period our 
international reserves can be used to take the strain, but if export 
prices do not recover, imports will eventually have to be reduced. In 
the meantime if no change takes place in external productivity, and 
prices in the rest of the world are reasonably stable, increases in wages 
cannot exceed internal productivity 13 without endangering the state 
of employment unless import restrictions are tightened still further, 
tariffs raised or the rate of exchange depreciated. 14 

In practice it seems unlikely that the rest of the world will main 
tain constant prices. In fact a long term upward movement in prices 
of around 1 per cent per annum might not prove disastrous and might 
even have some beneficial effects. 15 Unfortunately it is not possible to 
say how rapidly productivity is increasing in Australia but in view 
of the high and fairly constant proportion of national product that 
has been devoted to capital formation and our earlier discussion on 
productivity it would be upsetting to find the long term rate was less 
than 2 per cent per annum. This would permit wages to rise on the 
average at some 3 per cent per annum. The rate of increase of nominal 
wages in 1957 was well within this margin while the rate of increase 
of average weekly earnings was such as to give reasonable hope of 
accomplishing the objective in the longer term. 

It should be the aim of economic policy to ensure this objective is 
achieved. The pull of excess demand should not be allowed to rein 
force any wage slide, but at the same time demand should be adjusted 

13. It is important to realize that wages can rise as fast as the average rate of 
increase of productivity without any effect on the general level of prices. There 
has been a tendency on the part of some people to think that because the wage bill 
is roughly 50 per cent of the national income, price stability can only be maintained 
if wages increase at half the average rate of increase of productivity. This is clearly 
not so. If productivity increases by 5 per cent and prices are constant, the national 
income will rise by the same amount. Wages and non-wage incomes can accordingly 
each rise by 5 per cent without affecting the balance. 

14. If it is desired to correct the balance of payments deficit by wage adjust 
ments it would be necessary to reduce wages to the extent of the loss of external 
productivity. If wages could be restrained within the limits of increases in internal 
productivity the balance of payments adjustments would in general be better under 
taken through the rate of exchange. 

15. It is important however to add that short-term expectations should not be 
allowed to become too certain or else any benefits of the long-term upward movement 
in prices will be lost. 


to supply so as to absorb any increase in the work force and accordingly 
maintain economic activity at a near full employment level. If wage 
rates are pushed up too rapidly it may prove difficult for economic 
policy to operate effectively as the appropriate measures to safeguard 
employment can frequently only be taken with regard to the likely 
movement of export prices. 16 

The current situation provides an excellent illustration of this 
difficulty. We have seen that despite the stability of prices and wages 
in the past year there will be a substantial balance of payments deficit 
in 1958/9. The present level of import restrictions prevent the deficit 
from getting out of hand but the intensification of these restrictions to 
remove another 100 m. of imports would be neither economically 
desirable nor politically popular. The alternatives at this juncture are 
to depreciate the exchange rate or to wait and see whether export 
prices recover and in the meantime use up portion of our international 

In 1957/8 the proportion of the national income earned by farmers 
was the lowest in the post-war period. If wool prices do not recover 
this proportion will be even lower in 1958/9. Depreciation of the 
exchange rate would improve these farm incomes and at the same time 
help to remove import restrictions. If it were thought that export 
prices would not recover a good case could be made for depreciating the 
exchange rate. But it is difficult to be sure about the future movement 
of export prices. The wheat outlook is very heartening, metal prices 
are hardening and it is still possible that wool prices might rise in the 
coming season. A revival of activity in the United States of America 
would tend to assist any upward movement. While it is true that 
farmers are receiving low incomes at present they have had a series 
of excellent years in the past and should accordingly be prepared to 
stand a few lean years. 17 Finally we have at last achieved price and 
wage stability and with reasonable international reserves we are in a 
much better position than hitherto to face the adverse balance of pay 
ments. It is of course rarely possible to give a cut and dried answer 
to problems of this type, but my own feelings are that on balance 
there are better reasons for leaving the exchange rate where it is than 
altering it, and that strong efforts to maintain economic stability and 
encourage internal productivity might be more rewarding. 18 

16. This emphasizes the fact that the government cannot indefinitely shirk its 
responsibilities with regard to wage determination. It may well be that the best way 
of safeguarding full employment and the balance of payments is for the government 
to make clear its opinions regarding the consequences of any wage claims before the 
Commonwealth Conciliation and Arbitration Commission. 

17. If farmers are not so prepared the alternative is to set up a wool stabilization 
scheme. There is no reason why farmers should get all the advantages of a free 
market and none of the disadvantages. 

18. Even though it is not possible to find conclusive evidence it is difficult 
not to feel that the high rate of capital formation in recent years must have made 
some contribution towards import replacement and that future development will 
do even more. 




If these efforts are to be sucessful it is essential that the recent 
Commonwealth Budget should live up to the Treasurer s aim of main 
taining a rate of expenditure in the economy in 1958/9 which will be 
only just " sufficient to support the necessary increase in activity but 
not more than that". 19 The economic effects of the budget can be best 
assessed by preparing a forecast of the demand and supply situation 
in 1958/9. Assuming that internal productivity increases by 2 per cent 
and that it is desired to raise the level of employment by 2 per cent, 20 
the value of Domestic Supplies in 1958/9 in terms of prices at 30th June 
1958 would be as follows : 


1957/8 Forecast 

Gross national product 



+ 241 

Imports etc 

1 030 

+ 11 

Less Exports etc 


+ 24 

Domestic supplies 


+ 276 

This forecast also allows for the fall in export income indicated 
in the previous section. 

Real personal consumption expenditure per head of population 
recovered in 1957/8 to the highest level in the post-war period. Assum 
ing a further increase of 1 per cent in real personal consumption per 
head, personal consumption expenditure will reach 3,960 m. 21 Public 
authority expenditure may be estimated from the Commonwealth and 
State Budgets, while gross private investment may be estimated (or 
should I say guessed) from information relating to the trends of its 
main components. Collecting this information together yields an esti 
mate of Domestic Expenditure in 1958/9 as follows : 


1957/8 Forecast 

Gross private investment 
Dwelling s 



+ 12 

Other building 


- 14 

Trucks cars etc 


+ 14 

Other capital equipment 


- 11 

Fixed capital equipment 

1 020 

+ 1 

Non-farm stocks 



+ 50 

Public Authorities 


+ 55 

Personal consumption expenditure 


+ 140 

Gross domestic exoenditure . 


+ 246 

19. Budget Speech, 1958-59, p. 3. 

20. Raising employment by this amount implies that jobs would be available 
for the additional labour coming on to the market in 1958/9 so that unemployment 
would not get any worse. The present rate of unemployment would accordingly be 
substantially unchanged. 

21. This figure includes expenditure by financial enterprises. 


The overall result shows a slight deflationary gap of some 30 m. 
It is possible, though unlikely, that consumer s expenditure could be 
higher in 1958/9 but it seems more likely that investment in fixed 
capital equipment could be lower than the estimate given. Dwelling 
construction is picking up and could be a litle higher but non-dwelling 
construction could contract still further. Motor vehicle purchases re 
covered rapidly in 1957/8 and while still increasing they appear to 
be hesitating at the moment. Farm investment could show a substantial 
drop in 1958/9 and reduce the estimate for other capital equipment 
by 10 m. 20 m. Finally the stock increase is not excessive and busi 
nessmen might well be prepared to raise their stocks by more than 
50 m. in 1958/9. 

It seems fairly clear the budget has been well framed for the 
purpose of ensuring that excess demand does not reappear in 1958/9. 
It seems equally clear that because of fears regarding the conversion 
of maturing debt the Government has been prepared to err on the 
side of deflation. Last year securities maturing in Australia amounted 
to 399 m., of which 345 m. were converted and the balance of 54 m. 
was redeemed. In 1958/9 debt amounting to 337 m. falls due. Since 
a significant part of this debt is war debt held by a large number of 
individual holders, the Treasury considers that redemptions might 
easily be as high as 80 m. 

This raises several questions. In the first place why should a much 
larger proportion of this year s maturing debt be redeemed than last 
year. Even if there is more war loan maturing and the number of 
individual holders is larger, only 291 m. of the debt maturing is held 
outside Commonwealth Trust Funds. If the small holders of the war 
debt felt (quite unwarantedly) they had been tricked when cheap 
money was abandoned in 1951, do they still feel so strongly now and 
is this sufficient reason for not taking up new bonds at a higher rate 
of interest? This seems doubtful, but perhaps there are other even 
more important reasons. The holders of these bonds may not be pre 
pared to convert because (a) they do not consider the rate of interest 
on new bonds to be high enough, (b) they may not consider bonds a 
good hedge against inflation, or (c) they may wish to use the money 
for some other purpose such as the purchase of durable consumer goods. 

It may be thought that it is only if the money is to be spent on the 
purchase of goods and services that the Treasury should be disturbed 
from a budgetary point of view. In one way this is so, but if an 
increasing proportion of the public no longer has faith in bonds the 
Treasury must be even more careful to avoid an inflationary budget. 
It seems doubtful whether more than a proportion (perhaps 25 per cent) 
of the redeemed bonds would be devoted to consumption and this surely 
does not warrant great concern. It is a pity therefore the reasons for 
the uneasiness over the redemption of bonds were not given in the 
Budget. It is also a pity the Treasury s concern over the purely finan 
cial implications of the maturing debt induced it to mix fiscal and 




financial policies in such a way as to lead to confusion over the true 
budgetary position. 22 

Even if the Government has to resort to central bank credit to 
finance its cash deficiency on current and loan account it should not 
be worried about tipping the scales towards inflation. The effect on the 
supply of money can be controlled by the central bank through the 
special accounts mechanism. Furthermore it should be easy to do this 
in 1958/9 as the expansion of money through treasury bill finance will 
be taking place at a time when international reserves are falling and 
could be used as a part substitute for a release of funds from special 
accounts in order to stabilize the banking position. 

Whatever the reasons for the Government s action it is impossible 
not to rejoice at the application of strong budgetary policy. Ineffectual 
budgetary policy has been one of the main causes of Australia s post 
war inflation. Nevertheless, it would have been possible to have given 
more attention to the needs of certain sections of the community. A 
little more generosity could have been shown towards pensioners and 
towards the family man in the lower income bracket. The latter could 
have been assisted by increased child endowment. 

The time has not yet arrived however, when tax reductions can 
be made. So long as the present rate of immigration continues it is 
essential to increase our capital formation before allowing the propor 
tion of consumption expenditure to rise. There was a welcome expan 
sion of investment in 1957/8 and every encouragement should be given 
to increase this investment in 1958/9. The analysis of our prospects for 
the coming year suggests, though it is by no means certain, that the 
drift in unemployment may continue. At least there is no indication 
that the level of unemployment will decrease. Despite the risks asso 
ciated with the balance of payments there are strong reasons for 

22. The cash deficit of ;110 m. relates to the deficit after taking into account 
all revenue and expenditure of the Commonwealth Government including receipts 
and disbursements from the debt maturing in 1958/9. The overall financial commit 
ments of the Commonwealth which are set out in the Budget may be regrouped 
as follows : 



R equiremen ts 
State Loan Programme 





War Service Land Settlement 






Source of Funds 
Budget Surplus 



Loan raisings 



Sinking funds etc 



Less bond redemptions 






Overall cash surplus or deficit 

+ 10 

- 110 


believing the Commonwealth Government would have been taking a 
reasonable chance if it had underwritten a further 10 m. 20 m. 
in the Loan Programme for State works and housing. It is of course 
still possible for such action to be taken when the Loan Council meets 
in January 1959, but time may no longer be on our side. 

Monetary policy should continue to be eased. Encouragement should 
be given to investment, particularly farm investment. Advances during 
1957/8 have steadily expanded and at June 1958 were 9 per cent 
higher than at June 1957. This action has been made possible by the 
release of some 60 m. from special accounts. However, despite these 
releases the ratio of liquid assets and government securities to deposits 
of the trading banks in June 1958 was standing at its lowest level 
for two years. 

Australia has at last achieved internal economic stability. This is 
a major accomplishment for economic policy, particularly as there is 
reason to believe it has been accompanied by a favourable movement 
in our rate of growth. The coming year will again be one in which 
competition will be the key note in business. While the level of econ 
omic activity in 1958/9 should be greater than in 1957/8 there is 
evidence of growing excess capacity in some industries. Further the 
whole of the additional labour which will become available during the 
year is not likely to be readily absorbed and unemployment may even 

Further increases in unemployment must, however, be regarded 
with suspicion and anxiety. It is not easy to maintain just the right 
level of expenditure to balance demand and supply at full employ 
ment, but it should be remembered that while inflation may have its 
problem it is equally true that it would not be difficult for increased 
deflationary pressure to have adverse effects on business expectations 
and reduce the rate of investment. It is essential to ensure that an 
excessive preoccupation with price stability and the balance of pay 
ments deficit does not lead us into this pitfall. The rate of economic 
development that has been so carefully nurtured in the post-war period 
must not be allowed to slow down. 


University of Melbourne. 


Part I of this article summarizes for the benefit of Australian 
readers the main facts about the European Economic Community (or 
Common Market) and about the negotiations for a Free Trade Area. 
Part II assesses the probable effects of the European Economic Com 
munity on Australia s exports. Part III considers the effects of the 
various Free Trade Area proposals on Australia. Part IV suggests 
suitable policies for Australia to follow in prospective negotiations. 

The European Economic Community Treaty and the 
Free Trade Area Negotiations 1 

European Economic Community 

In 1953 six European countries France, Germany, Italy, 
Holland, Belgium and Luxembourg established a common market 
in coal and steel called the European Coal and Steel Community. 
Within this Community all customs duties, restrictions and discrimina 
tion in transport rates affecting coal, steel and steel-making materials 
were abolished. In June 1955 the Foreign Ministers of these six 
countries met at Messina and decided to work towards a common 
market for all products, not just coal and steel. This project became 
known as the Messina Plan. A committee headed by M. Spaak of 
Belgium prepared a detailed report on these proposals in April 1956, 
and a month later this report was approved by the six governments. 
In March 1957 they signed a Treaty in Rome instituting their customs 
and economic union, to be called the European Economic Community. 
So events moved fast. The Treaty was ratified by each of the govern 
ments in the course of 1957, and officially entered into force on 
1st January, 1958. 

The most important feature of the Treaty is that (a) tariffs and 
other trade restrictions between the Six will be gradually removed 
until they make up an area of completely free trade, and (b) a common 
external tariff will be gradually established, so that eventually they 
each levy the same customs duties on goods imported from the outside 
world. The removal of internal tariffs is to be in three stages, the first 

1. The Treaty has been published in English by the Secretariat of the Interim 
Committee for the Common Market and Euratom, Brussels (distributed by 
H.M. Stationery Office, London). A useful survey of the European Economic 
Community and the proposed Free Trade Area, with a discussion of the effects on 
Australia, is in Overseas Trading, 19/3/58 (published by the Commonwealth 
Department of Trade). Apart from articles in The Economist and The Banker, 
valuable references are European Free Trade: A Survey for Industrialists (Federa 
tion of British Industries, April 1957) , Economic Survey of Europe in 1956, Ch. 4 
(U.N. Economic Commission for Europe, Geneva, March 1957) and "The Free 
Trade Area Proposals : A Symposium", Bulletin of the Oxford Institute of Statistics, 
February 1957. 



stage lasting from 4 to 6J years, and the other stages 4 years each. 
At the end of the first stage there will be at least a 25 per cent reduc 
tion of the duty on every product, at the end of the second stage 
at least a 50 per cent reduction, and at the end of the third stage all 
remaining duties will have been removed. The tariff reductions will 
begin 1st January, 1959, with 10 per cent reductions. The common 
external tariff is to be established by stages in a similar way. It will 
be an average of the four existing tariff rates (France, Germany, 
Italy and the Benelux customs union), but with various modifications, 
usually upwards. 

The Treaty has the following other important provisions: 

(a) A common agricultural policy is to be established, involving a 
common managed (but not free) market in agricultural products. 

(b) The various overseas territories (and some former territories) of 
the member countries are to be associated with the Community 
in a special way. Imports from these Associated Territories will 
eventually enter the Community free of tariffs and other restric 
tions. The Associated Territories will be required not to dis 
criminate between imports from any of the six Community coun 
tries but they will still be allowed to impose non-discriminatory 

(c) A European Social Fund and a European Investment Bank will 
be established, as well as a Development Fund for the Associated 
Territories, France and Germany being the main contributors 
to the latter. 

(d) It is intended to achieve eventual freedom of movement of capital 
and labour within the Community, rules of fair competition, a 
common transport policy, the "harmonization" of social policy, 
and particularly common policy of equal pay for men and women 
for the same work, and the alignment of general economic policies 
and legislation so far as is needed to make the Community work. 

(e) Various institutions to conduct the Community have been or are 
to be set up an Assembly, a Council of Ministers, a Commission, 
and a Court of Justice. The European Commission will be the 
main executive body. 

At present European agricultural trade is subject to many forms 
of government intervention of which tariffs are only one. While the 
Treaty provides for internal tariffs to be eventually removed, and a 
common external tariff to be established, other forms of intervention 
are to be co-ordinated rather than removed. The Treaty mentions that 
co-ordination will consist either of common rules concerning competi 
tion, the compulsory co-ordination of the various marketing organiza 
tions, or a European marketing organization. Specific arrangements 
are to be worked out by 1960 ; a European agricultural conference in 
July this year made a beginning with a study of the facts and issues. 
The Treaty provides that during the transitional period long-term 


contracts between member states and a system of minimum prices will 
regulate agricultural trade. 2 

The motivating force of these far-reaching plans is as much 
political and emotional, as economic. The six nations with a combined 
population of 160 million hope to establish a political and economic 
unit comparable to the United States and the Soviet Union. They hope 
to achieve the benefits of large-scale markets to which they believe much 
of the industrial success of the United States is due. For many Euro 
peans the mystique of a United Europe has replaced the emotional 
hold of nationalism or Marxism. 

The main problem in the Community will arise from members 
balance of payments difficulties. The Treaty provides that in emer 
gencies import restrictions will still be permitted, but there must be 
discussions with the other countries, and the use of restrictions should 
if possible be avoided. It is recognized that too much use of restrictions 
in emergencies would negate many of the benefits of the Community. 
In the absence of import restrictions or exchange rate adjustments 
countries will have to rely either on internal deflation or on credit 
arrangements, whereby countries in difficulties obtain sufficient credits 
to tide them over temporary crises. While the advent of General 
de Gaulle appears unlikely to affect France s adherence to the Treaty, 
the continued French balance of payments difficulties create almost 
insoluble problems for the Community at its very outset. Given French 
economic and political policies and a continued refusal to adjust the 
exchange rate, it is at present difficult to envisage any reduction in 
French trade barriers against the other Community countries. 

European Free Trade Area 

Faced with the imminent establishment of a European Economic 
Community which would discriminate against countries outside it, 
and which might strengthen the competitive position of its members 
in third markets, the United Kingdom put up in July 1956 the 
proposal for a European Industrial Free Trade Area. This Free Trade 
Area was to include the United Kingdom, the European Economic 
Community countries, and any other members of the O.E.E.C. who 
wished to join (notably Austria, Switzerland, and the Scandinavian 
countries). Tariff reductions within the Free Trade Area were to 
proceed concurrently with the reductions in the Community. The Free 
Trade Area would not substitute for the Community but would include 
it; the Community would be a smaller circle within the larger circle 
of the Free Trade Area. Apart for membership, the Free Trade Area 
would differ from the Community in three ways: 

(a) Members would not have a common external tariff. Thus while in 
the Community the French and German tariffs on imports from 
Canada would eventually have to be the same, in the Free Trade 

2. See E. M. H. Lloyd "Agriculture and the European Plan", Lloyds Bank 
Review, April 1957, and Agricultural Commodities and the European Common 
Market (F.A.O. Commodity Series, Rome 1957). 


Area the British tariff on imports from Canada could be lower 
than the French and German one. If the United Kingdom joined 
the Community she would have to increase her tariffs on many 
imports from Commonwealth countries, but in the Free Trade 
Area this would not be necessary. So a Free Trade Area would 
conform with her Commonwealth obligations. 

(b) The Free Trade Area would not include agricultural products 
(including feeding-stuffs, tobacco and processed foods). In a 
memorandum published in February 1957, the U.K. Government 
justified this by the need to protect her home agriculture as well 
as to continue Commonwealth preferences on foodstuffs. 3 

(c) The Free Trade Area would not aim at such close economic in 
tegration as the Community; in particular it would not aim at 
the free movement of labour, nor would there be a range of supra 
national authorities and funds. 

The principal technical difficulty in the Free Trade Area proposal 
is concerned with the definition of origin of goods. If member countries 
have different external tariffs a possibility of evasion of high tariffs 
exists. Goods from outside the Area would tend to enter the Area 
through low tariff countries. The problem would be overcome if all 
goods traded within the Area had to have Certificates of Origin. These 
would present numerous difficulties, particularly in the case of goods 
which are imported into the Free Trade Area in a semi-finished state, 
and where only part of the finished product is of Area origin. Although 
an O.E.E.C. Working Party in February 1957 concluded that these 
difficulties could be overcome, 4 the fact remains that because of these 
Certificates of Origin it would not be possible to dismantle customs 
barriers within the Area. 

In 1957 the O.E.E.C. Council of Ministers agreed in principle to 
set up a Free Trade Area, and set up Working Parties to examine 
details. But the United Kingdom proposal has not been acceptable to 
other O.E.E.C. members, and the negotiations have run into increasing 
difficulties. At present it seems doubtful whether the Area will be 
established by January 1959 (in time for the tariff reductions in the 
Community and the Area to run together), and in fact whether it will 
be established at all. The most serious blow to the negotiations came 
early in 1958 when the French Government submitted a memorandum 
to its fellow Community members which appeared to be hostile to the 
whole Free Trade Area idea. Since then discussions have been taking 
place among Community members to establish a common view, and 
alternative proposals, designed to save the Free Trade Area or over 
come some of the difficulties, have been put up by Germany and Italy. 
In 1957 negotiations were held up by the pre-occupation of the Six 

3. A European Free Trade Area (U.K. Memorandum to the O.E E C. 
Cmnd 72, February 1957). 

4. Report on the Possibility of Creating a Free Trade Area in Enrobe 
(O.E.E.C. Paris, January 1957). 


with getting the Community under way ; in the early part of 1958 they 
were held up by French political instability, and now they await the 
French constitutional referendum. Recent political developments may 
have hardened the French position. 

The French memorandum has not been published, but French 
objections (and to a lesser extent the objections of other O.E.E.C. 
members) to the U.K. proposal seem to be along the following lines: 

(a) The Free Trade Area plan is a subtle attempt by Britain to 
destroy the European Economic Community. 

(b) France will not be able to win the same concessions for her 
protectionist point of view in the Area as she has in the Com 

(c) British industrial exports would gain entry into French markets 
but French agricultural exports would not gain free entry into 
U.K. markets. 

(d) Differing external tariffs will enable goods from outside the Area 
to be smuggled in via the low-tariff countries and no Certificates 
of Origin procedure could overcome this. 

(e) The United Kingdom gets the best of both worlds by keeping its 
privileged Commonwealth market while gaining preferential entry 
into the Community. 

(f ) There will be no safeguards in the Free Trade Area no arrange 
ments for "harmonization of costs" or for helping industries in 
difficulties (safeguards which exist in the Community). 

(g) The Area is a purely commercial, and rather negative plan, while 
the Community has the political motive of furthering the unity 
of Western Europe. 5 

The final shape of the European Economic Community Treaty was 
heavily influenced by the need to ensure French participation. Pro 
vision for a Development Fund for the Associated Territories, for 
the "harmonization" of social costs, particularly for the extension of 
the equal pay equal work principle beyond France, as well as numerous 
safeguard clauses, reflect primarily French influence. It also appears 
that the Community s common external tariffs will tend to be high, 
often higher than the arithmetic average of actual existing duties, and 
so closer to existing French and Italian than German or Benelux 
levels. Naturally the French feel unsure of being able to gain similar 
concessions in the larger Free Trade Area although, at the same time, 
these considerations explain why the German approach to the Free 
Trade Area proposal is sympathetic. 

5. The state of negotiations and the various issues have been discussed in 
articles in The Economist, 1/3/58, 15/3/58, 22/3/58 and 5/4/58. Particularly good 
discussions of the French view are in The Eastern Economist, 7/2/58, p. 347, and 
14/3/58, p. 573. See also J. Hennessy "The Free Trade Area Through German 
Eyes", Lloyds Bank Review, January 1958. 



Effects of the European Economic Community on Australia 
Direct Effects 

The direct and immediate effect of the European Economic Com 
munity on Australia s exports is likely to be small or zero. Table I 
shows the value of Australia s exports to the Community. In 1956/57 
these were 238m. or 24 per cent of our total exports. Imports from 
the Community were 7 1m., so that we had a trade surplus with the 
six countries of 167m. 6 


Australian Exports to European Economic 

Community Countries, 1956-57 

A million 

Wool 187-1 

Hides and skins 18-9 

Wheat 5-9 

Barley and pats 5-2 

Lead and zinc metal, concentrates and scrap . . 3-9 

Butter 2-3 

Meat 1-0 

Apples and pears 0-6 

All other . 12-9 


But 80 per cent of exports consisted of wool, and another 8 per 
cent were sheepskins. Here there is unlikely to be any direct effect. 
None of the Community countries has any tariffs on raw wool or sheep 
skins at present, and there will be no external tariff for the Community. 
It is possible that if the Community succeeds in its intention of 
raising the real incomes of its members the demand for wool will 
rise as a result. On the other hand the widening of the European 
market due to the removal of trade barriers may improve the efficiency 
of European synthetics production and so lower the relative costs of 
synthetics. But this factor is unlikely to be very important since total 
synthetic production is at present only very small in relation to Euro 
pean wool consumption, and since much of it is of filament yarn 
which is not directly competitive with wool. 7 

Our metal exports to the Community at present consist mainly 
of lead and zinc concentrates, which are also at present not subject 
to tariffs and where the common external tariff will be low or zero. 
Wool and metals are our only important non-agricultural exports to 
the Community. It would be a different matter if we ever became an 
exporter of, say, aluminium. At present Italy has a 25 per cent duty, 

6. This is the visible surplus only. There was a small invisible deficit of ;16m. 

7. For a thorough discussion of the effects of European integration on the 
demand for wool, on which this paragraph is based, see R. J. Cornish "The Pro 
posed Free Trade Area and Western European Demand for Wool", Quarterly 
Review of Agricultural Economics (Bureau of Agricultural Economics, Canberra), 
July 1957. 


France a 20 per cent duty and Germany a 12 per cent duty on imports 
of unwr ought aluminium. The common external tariff is likely to be 
nearer the present French and Italian level and would mean that while 
imports from French West Africa could enter the Community free of 
duty, imports from Canada or Australia would pay anything up to 
20 per cent. Australia is at present an exporter of unwrought lead and 
zinc metal, as well as concentrates, but while some of the concentrates 
are sold to the Community our metal exports go principally to Britain, 
the United States, Japan and India. If we tried to export the metal 
instead of the concentrates to, say, Germany, we would find that, 
while imports from Belgium could come in freely, our metal would 
have to pay the common external tariff of about 10 per cent. 8 

Australian agricultural exports (excluding wool, hides and skins) 
to the Community added up to only 20m. in 1956/57, less than 10 per 
cent of all our exports to the Community and about 2 per cent of total 
exports. 9 These figures put any problem into perspective. The main 
items are wheat and barley (llm.). Though the detailed agricultural 
arrangements in the Community are not yet known, it is likely that 
they will protect the interests of Community farmers at the expense 
of outside suppliers. French wheat, being "soft", is a close competitor 
of ours, and we can expect to lose markets (both potential and actual), 
though this might be partly offset by reduced French wheat exports to 
Britain. Our exports of apples to the Community are of significance in 
some years, but here our position may be protected by the fact that we 
market in the European off-season. 

Indirect Effects 

The establishment of the European Economic Community could 
affect our exports to outside countries, notably Britain. If a Free Trade 
Area to envelop the Community is not established, Britain could lose 
industrial markets in Europe and elsewhere. This might reduce her 
imports from Australia, not offset by greater Community imports from 
us. But such an effect would be small, if any. If the Belgian textile 
industry gains at the expense of Yorkshire, Belgian wool purchases 
would rise to compensate for lower British purchases. On the other 
hand, reduced British purchases of metals might be balanced by greater 
Community purchases not from Australia but from their Associated 

The establishment of the Community might reduce the outflow of 
capital from Britain to Australia. Capital might be required for her 
own industrial readjustments, and if her real income falls funds avail 
able for investment would fall. Furthermore, British balance of pay- 

8. At present Germany has only a 5 per cent tariff on zinc (unwrought) and 
no tariff on lead. But the French tariff on zinc is 12 per cent and on lead 8 per 
cent, while the Italian tariff on both is 13 per cent. At the time of writing the 
common external tariffs for metals had not been fixed; but they will probably be 
higher than the arithmetical averages of the existing tariffs, close to the French 
and Italian levels. 

9. See Table I; also Overseas Trading, 19/3/58, op. cit. 


ments troubles associated with a f alling-away of export markets could 
induce a U.K. government to limit the flow of capital to the outer 
sterling area and compel the funds to be employed in reorganizing 
British industry. 

Finally, the Community s agricultural arrangements could affect 
the markets for our agricultural products in Britain. On the one hand, 
Dutch butter and French wheat may be diverted from British to 
German markets, the losses to us in Germany being offset by gains in 
Britain. On the other hand there is a danger that European agriculture 
will be strengthened and developed by the new management, with the 
by-product of increased exports to Britain. At present exports of 
wheat, butter and canned meat from the Community compete with our 
exports. The Community s agricultural arrangements will forbid 
dumping within the Community, so that when France has a good wheat 
harvest she will have to dump her surplus in Britain rather than 
Germany. The Community s bargaining position will be strong, so 
that counter-measures by Britain or Australia will be more difficult. 


This analysis has explored some remote possibilities and elaborated 
on very indirect effects. The main conclusions are that (a) wool is our 
main export to the Community, and it is unlikely to be much affected, 
and (b) any effect on our other agricultural exports is likely to be 
adverse though, in terms of figures, not very significant. Losses will 
be more of potential than of actual exports. Australia will not be one 
of the important losers from the establishment of the European Econ 
omic Community. The main sufferers will be our fellow Commonwealth 
members, India, Ghana, Canada and Britain, as well as Switzerland, 
Japan and the countries of Latin America. 


The Free Trade Area and Australia 

If an Industrial Free Trade Area were established on the lines of 
the United Kingdom proposal the further effects on Australia would 
also be negligible. Agriculture would be excluded, and Australia s 
other exports to Britain do not compete with products exported by 
members of the Community. The main losers within the Commonwealth 
would be India and Hong Kong, exporters of textiles. The Community 
countries as a whole are not net exporters of lead and zinc metal. The 
Associated Territories of the Community would not be associated with 
the Free Trade Area, so that there would be no prospective danger 
from the development of metal industries there. 

The dangers as well as the potential gains to Australia will arise 
if Britain is compelled to make concessions to the European viewpoint 
for the sake of saving the Free Trade Area concept. There are then 
three main possibilities, and various combinations of them: (a) the 
ending of preferences for Commonwealth agricultural exports in the 
British market; (b) the establishment of an Industrial Customs Union 


(and not just a Free Trade Area) to include Britain; and (c) the 
partial or complete inclusion of the Commonwealth in a wider Free 
Trade Area, similar to the inclusion of the Associated Territories in 
the European Economic Community. 

(a) At present Commonwealth agricultural produce enters Britain 
generally free of duty. Protection to home agriculture is by means 
of subsidies, not tariffs or quotas. But there are tariffs on imports 
of certain products from outside the Commonwealth, and these 
represent the preferential margin from which Commonwealth 
exporters benefit. Britain may be compelled to remove these pre 
ferences. Either she may let in imports from other Free Trade 
Area countries free of duty, while keeping the tariff on imports 
from countries such as Argentina, or she may sweep away all 
duties on food imports altogether. At present Australian exports 
of only a few products dried, fresh and canned fruit, wine, 
canned beef and sugar benefit significantly from preference. 10 
These account for less than a fifth of our exports to Britain 
about 45m. Only a part of our sugar exports is sold at the free 
market price plus preference; the rest is sold at an annually 
negotiated price on the basis of the Commonwealth Sugar Agree 

(b) If Britain agreed to an Industrial Customs Union all the pro 
blems connected with the definition of origin of industrial goods 
would disappear. The key distinction here between a Customs 
Union and a Free Trade Area is that while within both there 
is free trade, there is a single external tariff around a Customs 
Union, while the members of a Free Trade Area can have differ 
ent tariffs for goods coming from outside the Area. If Britain 
joined a Customs Union (perhaps becoming a member of the 
European Economic Community with respect to everything except 
agriculture) she would then have to raise her external tariffs on 
imports from the Commonwealth to those of the European Econ 
omic Community. If the common external tariffs are fixed as 
averages of the present British tariffs and the present tariffs of 
the other member countries, the common tariffs would probably 
be lower than the external tariffs of the Community alone. Assum 
ing processed foods are excluded from the Industrial Customs 
Union, the only Australian products affected would be zinc and 
lead metal. While zinc metal from Belgium would be able to enter 
Britain free of duty, Australian metal would have to pay the 
common external tariff. The effects would be even more damaging 
on exports of textiles from India and Hong Kong. 

But this possibility appears most remote. To begin with, it 
would not only remove Commonwealth preference on the goods con 
cerned; it would set up an " anti-preference ". Furthermore, if 

10. See W. R. Carney, "The Ottawa Agreement Now", Economic Record, 
May 1956. 


the Customs Union included the Associated Territories of the 
Community, Britain would be giving imports from French 
colonies preference over imports from British colonies, while if 
it excluded the Associated Territories it would conflict with the 
Community Treaty. And if imports from the Associated Terri 
tories were allowed to enter freely into Community countries but 
not into Britain, while Community imports could come freely into 
Britain, there would then still be a definition-of -origin problem. 
Instead of Commonwealth exports slipping into the Community 
via Britain, Associated Territories exports would slip into Britain 
via the Community. 

(c) A third possibility is that part or all of the Commonwealth enters 
the Free Trade Area in the same way as the Associated Territories 
are part of the Community. 11 There are many degrees of such a 
move but in its full sense it w T ould be radical. It would mean the 
end of Commonwealth preference. On balance the gains to Aus 
tralia would probably outweigh the losses. Britain would be a 
net loser, compared with the establishment of a limited Industrial 
Free Trade Area on the lines of her original proposals, but she 
might be prepared to pocket the losses for the sake of avoiding 
the greater losses of being shut out of Europe. 

All members of the European Free Trade Area would have 
equal access to the markets of the Commonwealth and the Associa 
ted Territories. Thus the Commonwealth and the Territories would 
not necessarily cut their protective tariffs, but would cease grant 
ing preferences to their mother countries. Britain would sell more 
to French Africa and France more to Australia. Australia would 
gain by being able to buy on the cheapest market. 12 Commonwealth 
and Associated Territories imports would enter freely into all 
parts of the European Free Trade Area. Australia would lose her 
preferences in the British market, but would avoid being dis 
criminated against in the European market. If these arrangements 
do not include agriculture the effect on Australian exports would 
not be significant; if they do, then there might be a significant 
switch of those of our exports benefiting from preferences from 
Britain to Europe, but it is difficult to say whether on balance we 
would gain or lose. 

This is the most radical version of this possibility. A more 
limited version is that Britain continues giving us preferences in 
her market, and we do not gain free entry into the Community 
market, but we reduce our preferential tariff margin on imports 

11. The suggestion is made, for example, by A. C. L. Day "Salvaging the 
Free Trade Area", The Listener, 1/5/58. 

12. Protection of Australian manufacturing industry need not be affected by 
the ending of Commonwealth preference. In some cases the elimination of preferen 
tial margins would simply mean a shift in the source of imports from Britain to 
other European countries. If total imports would rise as a result, the elimination 
of preferences would have to be accompanied by some increase in the tariff rate 
(i.e. in the tariff applying at present to British imports and which will then apply 
to all Free Trade Area imports). 


from outside Britain. This would be to the gain of the Community 
countries and to the loss of Britain. A reduction in Commonwealth 
preferences might be the quid pro quo France would accept in 
return for consenting to an Industrial Free Trade Area similar 
to the original United Kingdom proposal. From our point of view 
there would be the potential loss of the reserve bargaining power 
inherent in the preferences, but the direct and actual gain in 
cheapening our imports. 


Australian Policy 
In this maze of possibilities, where does the Australian interest lie ? 

Need for Agricultural Stabilization 

The direct effects of the European Economic Community on 
present exports to Europe need not worry us, though it will certainly 
worry other outsiders such as Brazil, Ghana, Japan, not to speak of 
Britain. But the arrangements for agriculture, though still quite in 
definite, have certain potential dangers. 

The European Economic Community will in fact introduce 
regional agricultural stabilization schemes in the same way as Britain 
stabilized her post-war agricultural trade with some countries on a 
bilateral basis by means of long-term contracts. These regional arrange 
ments often have benefits when compared with no stabilization at all, 
but they frequently work out to the loss of countries trading in the 
same products but not parties to the agreement. A counter-move would 
be to re-establish Commonwealth long-term contracts. But in competi 
tive regionalism lies disaster for world trade. It is preferable that 
commodity trade be regulated by a world-wide multilateral system in 
which all producing and consuming countries have a say. Taking a 
long view, a unified world wheat market, regulated on the lines of the 
International Wheat Agreement, is preferable to the Europeans having 
their own arrangements over-influenced by French protectionism 
while Australia tries to gain privileges in the United Kingdom market. 

Britain seriously weakened the International Wheat Agreement 
by withdrawing from it in 1953; the agricultural support and com 
modity stockpile policies of the United States have been the main upset 
in world commodity markets in recent years ; and Australia herself has 
refused to take part in any stabilization scheme for wool, so that her 
advocacy of international commodity stabilization would hardly be 
lily-white. We have all offended, but it remains true that at this stage 
we ought to encourage international stabilization not necessarily as a 
preferable alternative to free trade, but as an alternative to European 
protective regionalism. 

Readiness to Abandon Commonwealth Preferences 

Just as the direct effects of the European Economic Community 
need not worry us, so the establishment of an Industrial Free Trade 
Area on United Kingdom lines would affect us very little. The real 


problem arises when the Community countries finally present Britain 
with the alternative of no Free Trade Area at all or one of the arrange 
ments discussed above, all of which would affect Commonwealth pre 
ference. At that stage Commonwealth countries will enter the negotia 
tions directly, and the U.K. response will depend very considerably on 
Commonwealth attitudes. 

The effects on members of the Commonwealth of a total or partial 
ending of preferences will vary. If the preferences are reduced or 
ended only in the markets outside Britain then Britain will be the 
only significant loser, and this loss may be a fair exchange for the 
gain of a European Free Trade Area. If the preferences are ended also 
in the British market the effects on some colonies and Commonwealth 
members may be significant. But the Australian loss would not be great 
enough to justify blocking a solution. A subsidy of a few million 
pounds would offset the effects on the export industries concerned. 13 
Because our import preferences are probably more effective in raising 
our import prices than the preferences in Britain are in raising our 
export prices there would be a net gain to us from an all-round ending 
of the whole preference system. Furthermore, in return for agreeing 
to a reduction in preferences we may be able to obtain from the Com 
munity countries either preferential entry into their market or con 
cessions to our viewpoint when their agricultural arrangements are 

Pressure through G.A.T.T. 

Finally, the Community s agricultural arrangements and the 
levels of its external tariffs might be influenced by pressure through 
G.A.T.T. The rules of G.A.T.T. allow customs unions, but do not allow 
(a) the establishment of new preferential arrangements other than 
customs unions, or (b) external tariffs for a customs union which are 
higher or more restrictive than existing duties. It is arguable that the 
Associated Territories will be linked to the Community in what is not 
a customs union but simply a preferential arrangement, and that the 
Community s external tariffs will in some cases be higher than the 
average of existing tariffs. But can G.A.T.T. be more than a sounding- 
board? Commonwealth countries are not in a strong moral position 
when preaching against new preferential areas, and there is little sign 
so far that Community countries intend to take much notice of the 
doubts expressed through G.A.T.T. by a large number of countries, 
including Australia. In the final analysis it may be necessary to offer 
something in return if the adverse effects of the Community on Britain 
and other members of the Commonwealth are to be avoided. 


University of Melbourne. 

13. At present most of the export industries concerned, notably sugar and 
dried fruits, benefit from a home price scheme, which means in effect that exports 
are subsidized by home consumers. If preferences were removed a direct export 
subsidy financed by the Treasury might be added. The net effect would be that the 
volume of exports would be the same as before, but the subsidy would enable 
producers to market their produce at the reduced prices brought about by the 
ending of preference. 


Anyone reading the first issues of The Economic Record, which 
appeared in the mid- twenties, cannot fail to notice how alive among 
Australian economists the tariff issue was in those days. Using The 
Economic Record as a gauge, economists interest remained alive 
during the thirties. However, since 1938, with the exception of one 
article in the December 1945 issue, authors have paid little attention 
to Australian trade protection as a policy. In the meantime tariff 
theory has been further developed. 

Government -sponsored investigation of the Australian policy of 
protection dates back to the late twenties and resulted in 1929 in the 
publication of a notable report on the economic effects of the Austra 
lian tariff. This report incorporated a serious attempt to estimate the 
cost of Australian protection. Protective tariffs were mainly justified 
on the grounds that they had assured workers of a larger share in the 
Australian national income, thus stimulating an increase in population. 

The technical problem of estimating the cost of protection was 
taken up again recently in an article by Dr. "W. M. Cor den in The 
Economic Record of April 1957. In the present article attention is 
concentrated on developments in that field of tariff theory which 
concerns itself wdth the effects of trade upon the domestic distribution 
of income. The approach is largely historical and the article mainly in 
the nature of a progress report, but at the end a few brief observations 
are made with regard to the applicability of the theory to the Aus 
tralian scene. Particular and detailed consideration is given to the 
earlier Australian contributions which stimulated the development of 
this part of the theory of tariffs. 

The classical theory was not able to explain adequately how the 
gains from trade are distributed between different factors of produc 
tion such as, for example, "Land" and "Labour", and according to 
Metzler, 1 as far as international trade theory was concerned, "the 
theory of distribution did not become a systematic part of inter 
national economics until the interwar period of the present century". 

The foundations for a more modern and systematic approach to the 
problem of the effects of trade on the distribution of income were laid 
by E. F. Heckscher, in 1919, in an article in the Swedish Ekonomisk 
Tidskrift. 2 

Heckscher s treatment was later refined and elaborated by Bertil 
Ohlin 3 and is nowadays usually referred to as the Heckscher-Ohlin 

1. Lloyd A. Metzler: The Theory of International Trade, Ch. 6, p. 237, 
A Survey of Contemporary Economics (ed. Howard S. Ellis). 

2. For a recent translation of this article see Readings in the Theory of 
International Trade, American Economic Association, No. 13 (Blakiston, 1949). 

3. Interregional and International Trade (Cambridge: Harvard University 
Press, 1952). 



theory 4 which, simplified and summarized, runs as follows : Commodity 
price differences explain trade between countries ; different factor prices 
explain differences in commodity prices; and differences in relative 
abundance of the factors are the main reason behind factor price 
differences. 5 

In the interwar period, after Heckscher s contribution, most econo 
mists would have agreed that international trade could have an effect 
upon the share in the national income of the factors of production. But 
although it was realized that Labour could lose from the removal of 
a tariff on manufactured goods if it entered heavily into their produc 
tion, many economists, such as Haberler 6 and Ohlin, 7 thought it doubt 
ful whether Labour would lose in an absolute sense as well as relatively. 
It was thought by such economists that the rise in the total national 
income occasioned by trade would more than offset a relative worsening 
of Labour s share in this income. Viner, 8 however, pointed out that an 
absolute as well as a relative worsening of the position of Labour was 
quite conceivable. 


In Australia the problem of the effects of trade upon the national 
distribution of income entered the tariff discussions in 1925 in an 
article by J. B. Brigden. 9 The ideas contained in this article had a great 

4. A very helpful abbreviated account of this theory can be found in P. T. 
Ellsworth s International Economics (1st ed., Chs. V and VI). 

5. The Heckscher-Ohlin theory gave rise to the so-called "Heckscher-Ohlin 
law of factor price equalisation". This law states that trade will tend to make a 
country s relatively scarce factors more abundant and its. relatively abundant ones 
more scarce and will therefore tend to decrease the price of the former and increase 
that of the latter. This tendency for international trade to equalize factor prices 
such as wages, interest, rent, etc., was, according to Ohlin, not likely to be complete. 
More recently, however, both Lerner and Samuelson showed that under free trade 
and in the absence of transport costs, complete equalization of the prices, of the 
factors of production, both absolutely and relatively, would have to occur. Haberler, 
on the other hand, is of the opinion that the many assumptions underlying Lerner s 
and Samuelson s conclusions are so restrictive and unrealistic that, although formally 
correct and of pedagogic value, their findings "can hardly be regarded as a valuable 
contribution to economic theory". Balogh and Meade have also shown themselves to 
be concerned about these assumptions. The reader is referred to the following 
literature : 

Abba P. Lerner: "Factor Prices and International Trade", Economica, Feb. 

Paul A. Samuelson : "International Trade and the Equalization of Factor 
Prices" and "Factor Price Equalization Once Again" in The Economic Journal, 
June 1948 and June 1949 respectively. 

Gottfried Haberler : "A Survey of International Trade Theory", Special Papers 
in International Economics, No. 1, Sept. 1955, Princeton University, pp. 19-20. 

T. Balogh: "Static Models and Current Problems in International Economics", 
Oxford Economic Papers, June 1949. 

J. E. Meade: Problems of Economic Union, p. 61, and Trade and Welfare, 

Also: S. F. James and I. F. Pierce: "The Factor Price Equalization Myth", 
Review of Economic Studies 1951-52, XX (2), and P. A. Samuelson: "A Comment 
on Factor Price Equalization", a reply in the same issue. 

6. Gottfried Haberler : The Theory of International Trade, 3rd impr., pp. 

7. Op. cit., p. 307. 

8. Jacob Viner : Studies in the Theory of International Trade, pp. 193-4. 

9. J. B. Brigden: "The Australian Tariff and the Standard of Living", The 
Economic Record, November 1925. 


influence upon the later findings of a committee of experts 10 which 
findings have since been regarded in Australia as a scientific justifica 
tion of the Australian policy of protection. It is therefore of import 
ance to deal with Professor Brigden s article in some detail. 

In presenting his case Brigden began by stressing that Australian 
conditions differed radically from those that prevailed in England in 
the first half of the nineteenth century when the case for free trade was 
vigorously pushed in that country. In England, at that time, existing 
tariffs were on agricultural products and favoured the landed classes. 
Free trade was in the interest of manufacturers and industrial workers 
and therefore of the rapidly increasing city population. In Australia, 
on the other hand, tariffs have been on manufactures and it was 
Brigden s thesis that they have prote+ed the standard of living of 
increasing numbers of wage earners. 

As an argument in favour of tariffs based upon the desire to 
redistribute the national income, the case presented by Brigden in 
1925 in support of the Australian policy of protection in the past was 
not altogether clear-cut. His case was by no means exclusively based 
on the argument that tariffs can achieve a politically desired redis 
tribution of income. It differed in presentation from the usual approach 
and intertwined were several other arguments for tariffs. 

Throughout the argument the case was narrowly linked with an 
increase in population on which the author constantly focused atten 
tion. This introduces a dynamic element into the discussion. Treat 
ment of the effects of trade on the distribution of income usually 
referred to given quantities of the factors of production, including 
Labour and this approach is still the customary one. 11 However, 
Brigden did not discuss the effects of trade or protection upon popula 
tion growth or vice versa. He was content to assume that population 
pressure was there irrespective of the economic policy pursued. The 
introduction of an increasing population, however, leaves less scope 
for making definite statements about Labour s absolute share in the 
national income after protection, because the national income itself 
may have changed, with an increased population, through factors other 
than trade. This does not imply that nothing meaningful can be said. 
If, through increased pressure of population on resources (with or 
without trade), national income per head falls and if a tariff redistri 
butes income to the extent that, for the factor Labour, income per head 
remains the same, Labour is obviously better off than it would other 
wise have been even if the real income of the individual worker has 
not improved. This is exactly what Professor Brigden thought had 
been achieved in Australia. 

10. The Australian Tariff An Economic Enquiry. (Melbourne University 
Press, 1929.) This is the report that has been referred to already. It was written 
by J. B. Brigden, D. B. Copland, E. C. Dyason, L. F. Giblin and C. H. Wickens. 

11. Compare for example Stolper and Samuelson: "Protection and Real 
Wages", Review of Economic Studies, November 1941. Their so-called box diagram 
implies fixed quantities of the factors of production. 


Although not always unambiguous, it would seem that Brigden s 
complete case in defending Australian protection up to 1925 can be 
summarized as follows : 

Australian natural resources of all kinds were unable to support 
an increase in population at the same income per head. This applies 
equally under protection and under free trade. 12 Free trade would 
have done two things: 

(1) It would have forced the increasing population into agricul 
tural production under diminishing returns. 

(2) It would have worsened Australia s terms of trade with the 
rest of the world. 

These two influences are called the "cost" of free trade. Protection, 
on the other hand, involves the "cost" of having to forgo the lower 
cost of imports. This is offset, however, by the avoidance of production 
under diminishing returns and by the avoidance of a worsening of 
the terms of trade. 

Lastly, in spite of an increase in population, the standard of living 
of the wage earner has been maintained at the expense of landowners 
who under free trade would have had higher incomes. 13 

It is not quite clear what Brigden thought had really happened 
to the incomes of landowners. If real income increases less than in 
proportion to the population increase, average real income per head 
must have decreased somewhat. But if workers standards of living did 
not change, the income per head of landowners must have decreased. 
Yet Brigden said that protection had merely prevented a rise in land 
values . With regard to total income per head there is the suggestion 
that it had been higher under protection than it would have been 
under free trade, although still lower than in proportion to the increase 
in population. Protection, he says, "has imposed a reduction of in 
come which might have been as great from a fall in export values 
alone and has maintained an income which certainly would have fallen 
through diminishing returns from land". 

Brigden s original article gave rise to criticism by Benham 14 and 
a discussion followed in The Economic Record, in the statistical issues 
of which L. F. Giblin also took part. 15 

12. See The Economic Record, November 1925, p. 42. 

13. In interpreting Professor Brigden in this way the author has taken the 
liberty of giving his frequently used term "the standard of living" the content 
"the standard of living of the wage earner". This seemed reasonable also in view 
of later developments in the discussion. It remains true, however, that Brigden s own 
article leaves some doubt. On p. 30 we read : "the standard of living resulting to 
the general mass of the community" which seems to support this interpretation. But 
on p. 37 is stated : "Free trade in England made for a higher standard of living . . . 
Protection in Australia may have achieved a similar result". This would seem to 
refer to "standard of living" in the more generally used sense of real income per 

14. F. C. Benham: "The Australian Tariff and the Standard of Living; A 
Reply". The Economic Record, May 1926. 

15. See The Economic Record, May and November 1927. Giblin s Note is in 
the May 1927 issue. 


Benham doubted the factual assumptions, with regard to decreas 
ing returns in Australian agriculture and with regard to the danger 
of worsening terms of trade, which were contained in Brigden s exposi 
tion. The controversy was partly on statistical evidence, where Giblin 
supported Brigden s case. In a restatement, Benham ably refuted the 
diminishing returns argument for protection as developed by Brigden. 16 

With regard to the effect that protection has had upon the Aus 
tralian distribution of income, Benham believed that little could be 
said with any certainty. Although he admitted that protection had kept 
down the value of rural land, he did not believe that it follows that 
under free trade landowners would have received more and Labour 
less. For protection, he said, has also kept down the value of labour 
performed in primary production . . . and it has raised the value of 
city land and urban property in general". Because Benham s views 
would seem to be representative of the main body of economic opinion 
with regard to the effects of protection on the distribution of income 
at that time, it may be interesting to quote him in full: "Possibly 
Protection, coupled with wage regulation, has enabled somewhat higher 
real wages to be paid to certain relatively unskilled workers. These 
may gain, as workers, more than they lose, as consumers, by the in 
creased cost of living : although workers in general seem to the writer 
to suffer from Protection. Such gain as has occurred to the relatively 
unskilled appears to have been balanced by loss to the relatively 
skilled". 17 

If we compare the position of Brigden and Benham with regard 
to the influence of trade on the distribution of income it would seem 
that Brigden s proposition, that Labour had gained from Protection, 
although suffering from invalid theoretical support, would in the 

16. See The Economic Record, November 1927, pp. 240-243. Briefly stated 
Brigden s diminishing returns argument for protection ran as follows : 

Under free trade, people would have been forced into primary industry, because 
there would not have been a manufacturing industry of sufficient size to take care 
of the growing population. This would have involved the cost of having to produce 
under diminishing returns and would have resulted in a lower real national income 
per head. 

Benham s objection to this argument was basically this: If protection thus 
provides for a higher real income per head, manufacturing industry must have been 
more productive than the alternative extension of primary industry would have 
been. However, if this is to be assumed, resources including Labour would not 
under free trade have moved into primary industry beyond the point where their 
productivity in the primary field would have been lower than in manufacturing. As 
soon as that point had been reached, they would have been used in manufacturing 
industry where their productivity, and therefore rewards, would have been higher. 
Because of this Benham saw no reason to assume that real national income per head 
would have been any lower under free trade than under protection. On the contrary, 
he believed, partly on grounds of efficiency, that free trade would have resulted in 
a higher real national income per head. 

Two things may be noted here : 

First, Benham s refutation does not concern possible and perhaps desired shifts 
in the distribution of the national income. 

Secondly, presented in a different way, the diminishing returns argument for 
protection may be quite valid, as mentioned later in this article when Copland s 
contribution is discussed. 

17. The Economic Record, May 1926, p. 39. 


future come nearer the limited theoretical justification of Stolper- 
Samuelson than Benham s more uncertain stand. Benham, however, 
by stressing that Labour contains within itself different categories and 
by stressing the difference between rural and urban land values, 
loosened some of the rigid assumptions that underly the Stolper- 
Samuelson theory. 


The reader of the 1929 Australian Tariff Enquiry will notice the 
resemblance of the ideas contained therein to those to be found in 
Brigden s 1925 article. The discussion in the Enquiry is more compre 
hensive and a statistical attempt is made to measure the cost of pro 
tection, but basically the conclusion is that the tariff in Australia was 
justified. The main conclusion was framed as follows : * The advan 
tage of protection is in the maintenance of a larger population than 
could have been expected at the same standard of living 18 without the 
protective tariff. It is not an advantage to every part of the population 
nor has it produced the maximum income per head. But given the basic 
Australian objective of seeking the largest white population at the 
highest standard of living, 19 we consider that the protective tariff has 
been an effective means of securing it. The practical conclusion is that, 
having established this population, it would be disastrous to abandon 
the policy which has made it possible". 20 

In a review article on the 1929 Tariff Enquiry, J. Viner, 21 al 
though basically critical of its findings, considered the Enquiry a sig 
nificant contribution to the tariff literature. He said "no previous 
study has gone as far as this in exploring the relation between tariffs 
and the distribution of income". 


There is little doubt that this Australian contribution stimulated 
the search for theoretical support of the proposition that a large factor 
of production, such as Labour, will see its position improved, absolutely 
as well as relatively, by means of a tariff on manufactured goods in the 
production of which it enters heavily. 

The argument for tariff protection based on the redistribution of 
factor income was transferred to the United States in 1931 by Professor 
D. B. Copland, one of the authors of the 1929 Tariff Enquiry. 22 In his 
argument, however, Copland did not base his defence of the Australian 
protective policy purely on these grounds. He said : " If, as seems estab 
lished by the investigation, it would have cost more to extend produc 
tion on the land than to have indulged in a limited application of the 
tariff to manufacturing industry, the latter course was economically 
the sounder". 

18. To be interpreted in the same sense as in Brigden s article. 

19. This time perhaps to be interpreted in the ordinary sense of real income 
per head. 

20. See p. 140 of the Enquiry. 

21. J. Viner: "The Australian Tariff". The Economic Record, November 1929. 

22. D. B. Copland: "A Neglected Phase of Tariff Controversy". Quarterly 
Journal of Economics, February 1931. 


It may be noticed that, according to Viner, all that the 1929 
Enquiry had really tried to show was that a redistribution of income 
from landlords and capitalists to an increasing working population 
had been achieved. This desire to redistribute income was basically 
political and therefore not an economic argument for protection. How 
ever, both the Enquiry and Copland mention the increasing cost aspect 
of primary production and contrast this with the situation in manu 
facturing industry. If there are external economies associated with 
manufacturing, it is generally recognized that there is a possibility 
of a loss to a country from free trade. Under free trade such a country 
would specialize in accordance with individual marginal comparative 
cost. When there are external economies (external to the firms or 
industry, but internal to the nation) the social marginal cost involved 
in manufacturing may be lower than the private marginal cost. Yet, 
under free trade, production is decided on the basis of the latter. Some 
protection may therefore be economically justified. However, this does 
not imply that this type of argument received the central attention 
that it perhaps deserved either in the 1929 Enquiry or in Copland s 
1931 article. To the extent that external economies can indeed be 
achieved, there is, in the long run, no cost to the nation involved in 
protection. 23 Yet these "cost" considerations took central place, which 
seems to confirm Viner s contention that the basic conclusion of the 
Enquiry was that the tariif had made possible a redistribution of 
income, maintaining the living standards of an increasing work force. 

This view is further confirmed by Copland himself and by another 
member of the committee which reported in 1929. Professor Copland 24 
stated: "True, on economic grounds it would be wiser to have the 
smaller population at a higher standard of living", and ". . . the 
tariff ... is a method of painless extraction 7 , and it is idle for econo 
mists to ignore such a fundamental fact". 

Professor Giblin 25 in 1936 said with regard to excess costs: 
"The meaning of that is that Australia as a whole is forgoing con 
sumption goods to that value for the sake of additional population and 
employment and also : The benefit is primarily an increase of 
population a political end which cannot be measured in terms of 

Copland s article gave rise to further discussion of the issue of the 
effects of a tariff on the distribution of income. In The Quarterly 
Journal of Economics, November 1938, Karl L. Anderson dealt with 
some of Copland s views in an article entitled "Protection and the 
Historical Situation: Australia". Anderson denied the possibility of 
maintaining the standard of living of an increased labour force by 

23. The same applies to a favourable "terms of trade effect" of the tariff 
which is contained in the discussion in the Enquiry. 

24. Op. cit., p. 308. 

25. L. F. Giblin: "Some Economic Effects of the Australian Tariff". The 
Joseph Fisher Lecture in Commerce. 


means of protection. He asserted that under free trade each of the 
factors of production receives its maximum income because each separ 
ate factor seeks out its most effective place". 26 

Professor Anderson s critique gave rise to a prompt reaction in 
America by Marion Crawford Samuelson. 27 As her reason for wishing 
to examine the validity of Anderson s conclusions, Mrs. Samuelson 
gave that "matters of principle are involved transcending in import 
ance the details of the Australian case, and because Professor Anderson 
has stated boldly and clearly a view widely held by many economists". 

Mrs. Samuelson supported Anderson in his refutation of the 
"diminishing-returns-argument" for protection as it was presented in 
the Australian case. This refutation was along much the same lines as 
that by Benham. 

She rightly criticized Anderson s refutation of the * terms of trade 
argument" for protection. She also took issue with Anderson on the 
effects of the tariff on the distribution of income. In doing so, she 
defended the Australian case in so far as the possibility of maintaining 
Labour s standard of living by means of the tariff was concerned. She 
pointed out that to claim, as Anderson did, that under free trade the 
marginal value productivity of a factor in every use is equalized, really 
proves nothing with regard to the absolute share of that factor. It 
does not imply a maximization of return to that factor. She said : l i In 
fact, if all Australian labour were organized, it would pay them to 
embark on a purposive policy of discrimination designed to render 
unequal the remunerations in different occupations, just as it always 
pays a monopolist to discriminate, if he can". More important than 
this, she said, is the fact that by protection one can change the relative 
prices of the two goods, so that the new marginal value productivities 
(of the factor Labour) will be equalized at a level more favourable in 
an absolute sense to the working class. 

It is perfectly clear, said Mrs. Samuelson, that the imposition 
of a prohibitive tariff on the import of raw silk into the United States 
would increase the rent of the owners of land suitable for the growth 
of mulberry trees and the earnings of workers, if there be such, com 
pletely specialized in the caring for silkworms. What is true of a 
narrowly denned factor of production may also be true of the broad 
categories of land and labour. In the Australian case, where there are 
more or less constant returns to labour in manufacturing, with dimin 
ishing returns in land, the above possibility must be taken very 

It was in 1941 that Stolper and Samuelson took the matter further 
and proved that, under certain assumptions, one of two productive 
factors which was made relatively scarcer by a tariff must of necessity 
gain, not only relatively, but also absolutely. Basically, their argument 
was as follows: 

26. Op cit., p. 103. 

27. See Marion Crawford Samuelson: "The Australian Case for Protection 
Re-examined". The Quarterly Journal of Economics, November 1939. 


Suppose two countries, A and B, produce two commodities, wheat 
and watches, with two factors of production, Capital and Labour. 
A has a relative abundance of Capital, B of Labour. Wheat production 
is Capital intensive, watch production Labour intensive. A tariff is 
now imposed by A on the importation of watches. This will mean in 
creased production in A of watches and both Capital and Labour in 
A will be shifted from the wheat to the watch industry. The result of 
this will be to reduce the proportion of Labour to Capital in both 
the wheat and the watch industry in A. As a result of this, the marginal 
product of Labour must be higher than before and the real wage rate 
must therefore have risen. 

The important difference from earlier reasoning is that Stolper 
and Samuelson proved that under the assumed circumstances 28 
Labour s absolute share must of necessity always rise, quite irrespec 
tive of whether real wages are measured in terms of watches or wheat. 
There is no index number problem. Neither is it necessary to assume 
monopoly in the Labour market. Also, Labour gains even if the real 
national income decreases. 

Owing to the fact that their proof only applied under rigid 
assumptions for example it applied strictly only where no more than 
two factors of production are involved Stolper and Samuelson were 
very cautious with regard to a practical application of their theory. 
They said: "Thus, in Australia, where land may perhaps be said to 
be abundant relative to labour, protection might possibly raise the real 
income of labour" (my italics). 


The contribution by Stolper and Samuelson was generally con 
sidered to be a great improvement in the theory of tariffs. But as 
Metzler pointed out, 29 a number of questions still remained unanswered. 

Stolper and Samuelson developed their theory under the assump 
tion "that the country in question is relatively small and has no 
influence on the terms of trade". Although Brigden and Copland 
expressly assumed an unfavourable effect on the terms of trade from 
a removal of the tariff, the pure terms of trade argument for protec 
tion has, so far, been kept outside our discussion. Metzler, however, 
stresses that whether a tariff increases or reduces the relative returns 
of the scarce factor is not independent of what happens to the terms 
of trade. Whether Labour (if the relatively scarce factor) sees its real 
and relative returns increased or decreased by the tariff depends, 
according to Metzler, upon the magnitude of the favourable movement 
in the terms of trade, compared with the size of the tariff. 30 

What role, then can the terms of trade play ? 

28. Which include full employment of the two given factors. 

29. Lloyd A. Metzler: "Tariffs, the Terms of Trade, and the Distribution of 
National Income". The Journal of Political Economy, February 1949. 

30. Compare also J. E. Meade : Trade and Welfare, Ch. XVIII in his discus 
sion of the "abnormal case". 


Normally the tariff will increase the prices of import-competing 
goods, relative to the prices of export goods, within the country. This 
will attract more of the scarce factors into the import-competing in 
dustries, and in this case the Stolper-Samuelson conclusions stand. This 
relative increase of the prices of import-competing goods will always 
occur if the foreign demand for the products of the country is elastic. 
This can be shown with the use of the Mill-Marshall schedules of re 
ciprocal demand which Metzler uses throughout. Also, if the tariffs 
do not reduce the demand for imports at home to any substantial 
degree, the movement of world prices is likely to be negligible. How 
ever, says Metzler, if the world demand for the tariff-imposing coun 
try s exports is inelastic and if the tariffs do reduce the demand for 
imports in the tariff-imposing country to a considerable extent, the fall 
in world prices of imports, relative to world prices of exports, may 
be so large that domestic prices of imports become lower, in relation 
to export prices, than before the tariffs were imposed, even after the 
tariffs are added to the world prices. 

The main purpose of Metzler s contribution was to find out under 
what circumstances tariffs, because of their effect on the terms of trade, 
reduce the domestic ratio of the prices of import goods and export 
goods. Such a result would mean that the Stolper-Samuelson income 
distribution effect goes into reverse. This would be most important in 
view of the previous discussion. Metzler first set out to find the exact 
conditions which would result in no change at all in the domestic price 
ratio between import prices (inclusive of the tariff) and export prices. 
This, according to Metzler, will be the case when the elasticity of foreign 
demand for the country s exports is exactly equal to the proportion of 
tariff proceeds not spent on imports. 31 If, in other words, the sum of 

31. If ^2 is the elasticity of foreign demand for the country s exports and k its 
marginal propensity to import we have what Metzler calls the "intermediate case" 
if V2 1 k. Metzler proves this proposition with the help of the Mill-Marshall 
type of diagram, assuming two countries Alpha and Beta trading in two com 
modities, wheat and textiles, under the assumption that Beta s reciprocal demand for 
wheat is inelastic. Alpha, imposing a tariff, improves its terms of trade and now 
has to give less wheat in exchange for more textiles. The extra gains from trade 
take the form of tariff revenue, a fraction k of which is again spent on imported 
textiles and the rest on no longer exported wheat. For the relative prices in the 
taxing country to be unaffected by the tariff, the additional demand for textiles 
must match the additional supply. It is sufficient to concentrate on one of the two 
commodities because reciprocal demand schedules present both a demand for one 
commodity and a supply of the other. Equilibrium in the one market therefore 
implies equilibrium in the other. If we now take r to be the tariff, as a percentage, 
then kr was spent on imports and the remainder, or (1 k}r was spent on wheat 
formerly exported. The additional demand for textiles is therefore kr. The additional 
supply of textiles may be derived from the additional wheat consumption in Alpha 
if we introduce ft, the (negative) elasticity of Beta s reciprocal demand. This addi 
tional supply is then ft times the additional wheat consumption in Alpha. We have 
therefore that kr must be equal to (1 k)rft (where ft is negative). For this we 
may write k = (1 k)ft. But we can translate ft into *? 2 , which is the elasticity 
of the ordinary money demand of Beta for Alpha s exports of wheat, according to 
the formula j8 = 1 l/?? 2 . This formula Metzler derives in his footnote 21 as follows : 
"Let t equal the quantity of textiles that Beta is willing to export, and let w represent 
that country s demand for imported wheat. The elasticity ft of the reciprocal demand 

schedule is then . wt. But the quantity t, from one point of view, is simply the 


the foreign elasticity of the demand for our exports and our marginal 
propensity to import equals one, there is no incentive for the Labour- 
intensive import-competing industry to attract more relatively scarce 
Labour and the domestic distribution of income is therefore not affected. 
However, should this sum be smaller than one, then tariffs, so far from 
bettering the position of the relatively scarce factor, will reduce its 
income. 32 

Metzler discussed the practical consequences of the results in some 
detail with special reference to the Australian case, 33 and pointed out 
the inconsistency of using, at the same time, the terms of trade argu 
ment and the redistribution of income argument (i.e. the less elastic 
the foreign demand for wheat and wool, the greater the possibility that 
the tariff will actually redistribute income at the expense of Labour). 

In Metzler s own words " Paradoxical as it seems, the Australian 
manufacturing industries might be better protected and receive more 
encouragement under free trade than under a system of protective 

The question arises whether Metzler s conclusions can be recon 
ciled with the opinion of Heckscher and Ohlin that international trade 
always increases the demand for a country s relatively abundant 

Metzler himself thinks that his conclusions are essentially con 
sistent with the views of Heckscher and Ohlin. The latter economists, 
according to Metzler, compare a state of trade with a state of no trade 
at all, whereas he compares trade with tariffs with a system of trade 
under smaller tariffs. In other words, Metzler points out that his 
argument is only valid for a certain range of tariff changes for which 

total outlay of Beta for imports, w. In money terms, in other words, t = pw, where 
p is the import price of wheat. may therefore be written P = d(pzv} /dw . w/pw. 
Upon simplifying and carrying out the indicated differentiation, this becomes 
ft = 1 -f- dp/dw (w/p) = 1 I/??, the elasticity, y, being defined now in the Mar- 
shallian sense". We now have the following value ior k: k = (1 ~~ k) (1 l/^z). 
This yields ~n 2 = 1 k. If this condition is fulfilled the internal ratio between import 
prices (inclusive of the tariff) and export prices is unaltered by the tariff. 

32. In arriving at these conclusions Metzler made use of A. P. Lerner s 
exposition in 1936. See A. P. Lerner : "The Symmetry between Import and Export 
Taxes", Economica New Series, Vol. 3, 1936. In an article called: "Tariffs, Inter 
national Demand, and Domestic Prices", Journal of Political Economy, August 1949, 
Metzler further refined his formula. In order that the domestic ratio between import 
and export prices be undisturbed, the following more exact conditions must be 
satisfied, conditions which differ according to how the customs revenues are spent. 
The exact condition when customs revenues are entirely spent by the government 

becomes ^2=1 k L . ). When tariff proceeds are entirely spent by private 
\1 + RT) 

traders, the exact condition becomes ty> = 1 & L . , . j ^ e or "ig ma l 

approximate formula, which required that ^2=1 k, is intermediate between these 
two exact conditions. This means that in the case where duties are largely spent 
by private traders % will normally have to be somewhat larger. But, says Metzler, 
"considering the crudeness of most empirical estimates of demand elasticities, and 
considering, further, the difficulties in defining schedules of reciprocal demand 
rigorously, the approximation ... is probably satisfactory for most practical 

33. The Journal of Political Economy, February 1949, pp. 20-22. 


the foreign demand for the country s exports has a certain degree of 
inelasticity. As tariffs move towards the level where they cut off all 
trade, sooner or later the foreign demand for one s exports must 
become elastic. 

Metzler s revision of the Stolper-Samuelson principle, taking into 
account the effects on the terms of trade, was elaborated by A. Y. C. 
Koo in 1953. 34 Koo took matters further and followed up a suggestion 
made by Metzler, that the case where there are duty imports as well 
as non-duty imports should be investigated. He pointed out that the 
Stolper-Samuelson theory, even as revised by Metzler, still rests on the 
implicit assumption that imports consist of only one imported com 
modity to which the tariff applies. In other words, it is basically a two- 
commodity-approach. By introducing three commodities, two import- 
competing goods, one dutiable and one duty free, and the third an 
exportable commodity, Koo shows that the theory needs to be further 
amended. The Stolper-Samuelson-cum-Metzler results, he says, imply 
the assumption that in the duty-imposing country the domestic price of 
duty imports, including the tariff, must move in the same direction as 
the domestic price of non-duty imports. It is therefore important to 
know how the price of non-duty imports reacts to the tariff. Only this, 
combined with knowledge about the relative use of a country s scarce 
factor of production within the duty domestic industry as compared 
with the non-duty domestic industry will make it possible to deter 
mine the effect of a tariff on the domestic distribution of income. 


Kecently, the Stolper-Samuelson theorem was criticized in an 
article by K. Lancaster. 35 

Lancaster says that the Stolper-Samuelson theory as formulated 
does not make allowance for demand factors. His line of reasoning is 
as follows. Relative scarcity or abundance of factors of production is 
not merely a matter of physical endowment of those factors compared 
between countries. Countries may be of equal size and possess equal 
amounts of Capital and Labour and yet differences in their demand for 
Labour-intensive and Capital-intensive goods may make Labour the 
" scarce" factor in one country and Capital the "scarce" factor in the 
other. Quantitative differences in availability of factors do therefore 
not guarantee that under free trade those goods will be imported which 
use a larger proportion of the physically relatively scarce factor of 
production. On these grounds Lancaster suggests that the Stolper- 
Samuelson theorem be reformulated. Instead of "Protection raises the 
real wage of the scarce factor he suggests Protection raises the real 
wage of the factor which in the imported good is relatively more inten- 

34. A. Y. C. Koo: "Duty and Non-Duty Imports and Income Distribution". 
American Economic Review, March 1953. 

35. K. Lancaster: "Protection and Real Wages. A Restatement". The Econ 
omic Journal, June 1957. 


sive . He says : * * Protection will raise the real wage of labour if, and 
only if, the country imports the labour intensive good". 

Although Stolper and Samuelson could perhaps have been some 
what more explicit on this point, I myself have never felt that relative 
* scarcity of the factors * in the Stolper-Samuelson sense was rela 
tive scarcity in the sense of physical endowment regardless of demand 
conditions. In the first place, Stolper and Samuelson based their dis 
cussion on the theory developed by Heckscher and Ohlin, which 
they took further. Ohlin did by no means ignore the influence of 
demand 36 but believed differences in endow r ment to be the more im 
portant factor in trade. 37 Stolper and Samuelson seem to share this 
belief. Although they may perhaps be accused of not explicitly men 
tioning the influence of demand, implicitly their scarcity criterion is 
based on the direction of trade which automatically incorporates 
demand influences. They say: "The introduction of trade will shift 
production in the direction of the good with comparative advantage . 
According to the Ohlin analysis . . . this will be wheat which uses 
much of the abundant factor". Dr. Lancaster has drawn attention to 
the possibility of confusion through loose phrasing. However, there is 
little evidence in the literature that misunderstanding has occurred. 38 


Having outlined the theoretical developments with regard to trade 
and the distribution of income, we may now turn to the problem of 
how relevant the theory is to protection in Australia. 

The first question we may consider is whether in Australia the 
terms of trade effect is likely to have reversed a possible redistribution 
of income effect of the protective tariff, a result which Metzler himself 
considered quite possible. It is generally considered unlikely that on 
the import side Australia is important enough in the world market to 
be able to reduce world prices of its import goods to any appreciable 

36. The following quotations from his book Interregional and International 
Trade may illustrate this : 

Page 37: ". . . the uneven distribution of productive factors will, unless it is 
balanced by a corresponding unevenness in demand, tend to make the factor 
prices different in the various regions, and thereby bring about a certain 
division of labour and trade between them". 

Page 39: A real explanation (of differences in costs of the factors of produc 
tion) ". . . entails a study of the basic data of price formation, above all the 
relative abundance and scantiness of the endowment with the various factors 
in each region, and as a rule also the conditions of demand" (both quotations 
my italics). 

37. Ohlin: op. cii., p. 40: "The great inequality as regards factor equipment 
in the case of no trade means an enormous loss; for it is not balanced by a 
corresponding inequality in demand". 

38. Compare for example Metzler in The Journal of Political Economy, 
February 1949, page 8: "... the scarce factor of production, i.e. the factor relatively 
most important in the industries competing with imports" and again, page 10: 
". . . the scarce factors of production those required in relatively large amounts 
in the import industries . . .". 


extent by means of a tariff. 39 The opinion is also widespread that on 
the export side there are bound to be important terms of trade effects 
of a tariff in view of an inelastic demand for Australia s exports. 

We have seen that Metzler reduced the problem of whether a tariff 
will cause a terms of trade effect to offset a Stolper-Samuelson redistri- 
butiorTeffect to a simple formula. In the Australian case it could not 
cause this if the sum of the Australian marginal propensity to import 
and the foreign elasticity of demand for Australian exports equals or 
exceeds one. Clark and Crawford 40 estimated the marginal propensity 
to import to have been 0-21 in the twenties and 0-25 in the thirties. 
Whether the Stolper-Samuelson theory stands in the Australian case 
for the inter-war period would therefore seem to depend on whether 
tfie foreign elasticity of demand for Australian exports has been less 
than 0-75. 

Although the elasticity concerned is quantitatively unknown, this 
does not mean that nothing can be said. Tariff policy with the aim of 
protecting manufacturing industry is basically a long-run policy and 
underlying Metzler s theory are the basic assumptions of internal and 
external equilibrium, i.e. full employment and balanced trade. Whereas 
it may perhaps be assumed that the short-run elasticities of world 
demand for Australian export products are low, this does not apply 
in the long run. If Australia should gradually protect more and more 
manufacturing industries and thus gradually attract resources away 
from primary production for export, this effect on world supplies has 
plenty of time to call forth adjustment. Marginal producers abroad 
would be drawn in, which results in a high (long-run) elasticity of 
foreign demand for Australia s exports. It is theoretically correct that 
a sudden increase in the overall level of tariffs could cause a con 
siderable short-term improvement in the terms of trade, should the 
short-run elasticity of demand be very low. This could temporarily 
reverse an income redistribution effect. In practice such sudden in 
creases are usually the result of emergency situations. The drastic 
increase in protection in 1929/30, for example, occurred during a 
period of unemployment and unbalanced trade. In spite of the tariff 
Australia s terms of trade became less favourable because the world 
depression had caused a relatively heavy downward shift in the world s 
demand schedule for Australia s exports. 

If we turn from the past to the future, the question is whether 
a return to free trade is likely to worsen Australia s terms of trade 
to such an extent that such a policy, instead of hurting the factor 
Labour, improves its relative as well as absolute position, assuming 
that Labour is the factor that enters relatively most heavily into the 

39. Compare for example W. M. Corden : "The Calculation of the Cost of 
Protection", The Economic Record, April 1957, p. 47 : ". . . the import component 
of the terms of trade effect can be neglected". The fact, however, that in the past 
Britain, receiving imperial preference, has been Australia s major trade partner 
allows perhaps for some influence of the tariff on prices quoted by Britain. 

40. Clark and Crawford: The National Income of Australia, Ch. XI, section 


production of import-competing goods. This would again require a low 
elasticity of foreign demand for the products of Australian soil. But 
once more, from a practical point of view, a return to free trade could 
only be a very gradual process so that overseas supplies of wool, wheat, 
etc., would have plenty of time to adjust themselves. All over the 
world marginal producers of such commodities would gradually drop 
out. The long-run elasticity of foreign demand would again be much 
higher than the short-run elasticity. 

I believe, on the basis of these practical considerations, that Aus 
tralian protection cannot have had the effect of improving the Aus 
tralian terms of trade sufficiently to reverse a possible income redis 
tribution effect. There is no evidence to support such an outcome and 
workers have kept on drifting to the cities. 41 The belief that the terms 
of trade effect cannot have offset a possible redistribution of income 
effect of the tariff does not imply a belief that there has been no 
favourable movement in the terms of trade. As long as foreign 
reciprocal demand is less than perfectly elastic, tariffs can improve 
the terms of trade, provided that there is no retaliation. 42 In this con 
nection it is perhaps interesting to point out that if foreign reciprocal 
demand is elastic, a tariff will improve the terms of trade of the tariff- 
imposing country more if its own reciprocal demand is also elastic. 
A low elasticity of supply by Australia of the primary products that 
it exports, making for a less elastic Australian reciprocal demand, 
would then put the brakes on a favourable movement in the terms of 

The terms of trade effect of a tariff was discussed only because 
of the possibility of a clash between this effect and the Stolper-Samuel- 
son redistribution effect. If it may be assumed as I think it should 
that such a clash is ruled out under Australian conditions, we must 
conclude that formally, in the Australian case, the Stolper-Samuelson 
theory is still applicable. 43 It is important to realize, however, that 
many simplifying assumptions underly this theory as originally pre 
sented, assumptions which were the same as those associated with the 
Heckscher-Ohlin theory. At the same time, as the authors themselves 
suggested, if interest is centred upon what happens in one country 
only, the redistribution effect of trade can to some extent be divorced 
from the Heckscher-Ohlin theorem. As Metzler has put it : l . . . any 
event, other than a change in technology, which leads to a shift in 
resources from one industry to another will increase both the real 
income and the relative income of the factor required in relatively 

41. Such negative evidence however could be misleading. Monopolistic power 
of trade unions and progressive taxation could have made work in the cities more 
profitable. There is also the attraction of urban life. 

42. Although this is perhaps not to be classified as "retaliation" attention may 
be drawn to the increasing agricultural protection in predominantly manufacturing 
countries particularly since the thirties. 

43. The more realistic assumption of elastic foreign demand in the long run 
makes it unnecessary for our present purpose to enquire into the nature and price 
behaviour of non-duty imports since Koo s considerations can only reduce the 
possibility of a clash. 


large amounts in the expanding industry". 44 In the Australian ease 
we would therefore have to show that protection has shifted resources 
from primary into secondary industry and that Labour was required 
in relatively large amounts in the latter industry. 

If we could assume that in the past Land and Labour were by 
far the most important factors of production and that a simple dis 
tinction could be made between primary production consisting mainly 
of export goods and secondary production being mainly in the import- 
competing field, the latter being also far more Labour-intensive, we 
would seem to be justified in concluding that there must have been 
a shift in income distribution in favour of Labour. Although this may 
perhaps seem a reasonable enough description of Australian conditions 
when protection was first applied we should not forget that Metzler s 
statement can only be given rigid content when there are not more 
than two factors of production involved. Even in the early days of 
protection we cannot overlook the factor Capital. Should Capital have 
been required, in the protected industries, in relatively even larger 
amounts than Labour, but both large compared with Land, Capital 
would have profited even more from the Tariff than Labour, both at 
the expense of Land. 45 

It is obvious then, that if we introduce more than one factor of 
production, our footing becomes less certain 46 and it is tempting to 
investigate to what extent the Stolper-Samuelson theory has retained 
practical applicability under actual conditions in Australia since pro 
tection became an established policy. But it would seem more profitable 
under Australian circumstances to direct attention to two other 
assumptions that underly the analysis, namely unchanged technology 
and unchanged total amounts of the factors of production. These 
assumptions clearly illustrate that the analysis is purely a static one. 
However, it must be seriously doubted whether a static analysis is at 
all relevant to the tariff problem in Australia. In the .short run a 
sudden increase in protection may well cause a redistribution of income 
although the effect may be difficult to disentangle from, for example, 
the effect of a world depression. But if we look upon Australian tariff 
policy as a long-run policy with the aim of gradually developing its 
secondary industry, our static model becomes irrelevant. Since pro 
tection the country has been in the process of increasingly rapid 

44. Journal of Political Economy, Feb. 1949, p. 18. My italics. 

45. This does not rule out a redistribution of such capitalist gains to Labour 
by other means such as taxation. Here we are only concerned with a redistribution 
effect of trade protection. 

46. Stolper and Samuelson stressed this themselves. They say: "However, we 
must admit that three or more factors of production within a single country do 
seriously modify the inevitability of our conclusions. It is not only that the relatively 
scarce factor can be denned only circularly as the one whose price falls most after 
trade, but even if we do know the behaviour of relative factor prices, i.e. relative 
shares in the national income, it seems that we cannot infer unambiguously that the 
physical marginal productivities move in the same direction. Even though these 
continue to depend only upon the proportions of the factors in the respective 
industry, diverse patterns of complementarity and competitiveness emerge as 


economic development, The population has increased, production tech 
niques in the fields of primary and other production have improved, 
capital has become more important in primary industry as well as 
manufacturing, and standards of living have risen in all sections of 
the community. In the long run redistribution of income as caused by 
a Tariff should not be regarded as a shift in personal incomes. Even 
if the Tariff should make farming less profitable and cause existing 
farmers a capital loss this will not affect the income of new entrants 
into the occupation. The latter will only enter farming if, on the basis 
of the lower land values, they can make as good a living on the land 
as elsewhere. In a growing economy even actual capital losses are not 
likely and all that can be expected is that additional capital and labour 
resources are relatively more attracted by other than primary produc 
tion. As a percentage of total national income, farm income will fall, 
but individual farm income keeps in step with the prevailing stand 
ard of living. The tariff has tried to direct economic growth largely 
in the direction of manufacturing. If tariff policy is to be judged, it 
has to be on its success or otherwise in achieving this and on whether 
the encouragement of manufacturing has been an important stimulus 
to economic growth, resulting ultimately in higher real income per 

The classical theory of comparative cost which supported the free 
trade doctrine was formally correct on its assumptions, which included 
high elasticities of demand and supply, pure competition and full 
employment, But it could never handle the infant industry argument 
for protection because this implied the dynamic factor of economic 
growth. If in Australia the encouragement of manufacture has stimu 
lated economic growth and yielded external economies to its industries 
we have a dynamic argument for the tariff. This, I believe, the tariff 
has done. To link with such a policy essentially static income redistri 
bution effects can easily lead to confusion as is evident from the litera 
ture on the Australian case in the twenties. I feel that more can be 
gained by regarding the Australian policy of protection in the past as 
an instrument for stimulating economic growth. 

University of Queensland. 


It happens very often that events catch up with the historian of 
contemporary developments. Sympathy rather than criticism seems to 
be called for in such cases. However, in his study of Economic Experi 
ments in New Zeland, 1 Professor Condliffe presents a thesis which 
would appear to need amendment even if the march of political events 
in that country had not put a new complexion on the subject. 

Professor Condliffe s study celebrated the election defeat in 1949 
of a Labor Government which had been in office for 14 years. It was 
published last December in the same month that New Zealand voters 
reversed the process : after eight years in opposition the Labor Party 
(with a very slender majority) is in power again. 

So far as Condliffe s article is concerned this would not matter 
very much if there were no doubt about his conclusions. As things are, 
however, there appears to be a danger that the reader who has no 
special knowledge of the case will mistakenly apply some of these con 
clusions not only to the interpretation of events up to 1949 but also to 
the evaluation of the policy of the present government of New Zealand. 
In particular, he might infer that New Zealanders who are said to 
have "rejected the further extension of intervention based on socialist 
principles" 2 in 1949, have now reversed that decision. 

In fact the voters heard a great deal about "free enterprise versus 
socialism" from the National Party in both election campaigns; but 
the records of the two parties which in turn have ruled the country 
since 1945, and the circumstances of their election defeats, suggest that 
the issue of socialism had very little substance. The real issues were, 
I believe, the growing conservatism and comparatively austere financial 
policy of the Labor Government up to 1949 ; and, in 1957, its election 
platform based on tax remission plus old-fashioned protectionism. 
Apart from that, the label of doctrinaire socialism as applied to the 
New Zealand Labor Party does not check with the record any more 
than the same label applied by Republicans to American Democrats. 
In New Zealand both parties when in power have used the same policy 
instruments on the same ad hoc basis to regulate economic activity, and 
if one is to be labelled socialist then there is a good case for applying 
the same label to the other. 

What Professor Condliffe has done would be easy enough to under 
stand if he had not, before becoming a distinguished American pro 
fessor of economics, been the most eminent of economic historians in 
New Zealand. His main work in this field has enhanced the vigorous 
and scholarly tradition established by Pember Reeves, Scholefield, and 

1. American Economic Review, December 1957, p. 930 ff. 

2. Ibid., p. 944. 



others. 3 In his new article he appears to apply preconceptions formed 
in the nineteen thirties to post-war developments. 

1. The Background 

In an admirable sketch of the background and performance of 
New Zealand s Labor Government from 1935 to 1945, Condliffe s latest 
article makes it clear that socialist doctrines expounded in earlier 
years when Labor was in opposition were not the basis of its policy as 
government. "The land was not socialized, nor farm nor factory pro 
duction, nor banking ; 4 the socialist left wing of the party was all but 
wiped out, its leader, John A. Lee, first losing his ministerial office, 
then his seat in parliament, and finally his membership of the party. 

Yet it does not emerge in Condliffe s account that the "economic 
experiments amounted to no more than a full employment programme, 
strongly flavoured by New Zealand traditions, and at least as innocent 
of socialist aims as Keynes s General Theory. There was a new deal 
for farmers, similar in principle to the American price support pro 
gramme but more conservative in that it turned out to be self -financing. 
Wage earners also had a new deal, and there was an expansion and 
modernization of public utilities and a comprehensive social security 
scheme. These changes appeared to have an adequate economic basis 
because of an increase in the volume of exports and an improvement 
in the terms of trade. (Exports then amounted to over a third of 
national income. ) Full employment, in both Keynes s and Beveridge s 
interpretations of the term, was established in about three years. How 
ever, some of the measures adopted to deal with unemployment 5 proved 
to be redundant, and a longer term effect has been a labour shortage 
which has persisted up to the present day. 6 The absorbtion of the 
unemployed, and accelerated mechanization, resulted in an expansion 
of production at a rate closely approaching the rate of monetary 

Exchange control and quantitative controls of imports were 
adopted in 1938 in the face of a balance-of -payments crisis. There is 
little evidence of the over-importation to which Condliffe refers as a 
cause of this crisis : it can be explained entirely by capital movements. 
Substantial short term balances had been held in New Zealand in 
anticipation that the Government would carry out its expressed inten 
tion of restoring the New Zealand pound to parity with the pound 
sterling. 7 By this time it was evident that such a revaluation was 

3. Condliffe, New Zealand in the Making, 1930; W. Pember Reeves, State 
Experiments in Australia and New Zealand, 1902 ; G. H. Scholefield, Neiv Zealand 
in Evolution, 1908 ; W. P. Morrell, New Zealand, 1935. 

4. A.E.R. article, p. 931. 

5. Unemployment was running at about 10 per cent of the labour force in 

6. The low birth rate of the early thirties and aging of the post-1918 stream 
of immigrants resulted in a decline in number of people of working age as a 
proportion of total population in the forties and up to a few years ago. This trend 
has now been reversed because of the rise in the birth rate and the high rate of 
post-war immigration. The falling average age of the population may have significant 
political and economic implications for the sixties. 

7. Cf. Economic Record, 1939, New Zealand Supplement, especially articles 
by Condliffe, Belshaw and Sutch. 


inconsistent with other (short run) policy aims. Consequently, en 
couraged perhaps by fear of inflation, speculators pulled out. 8 

In war-time these controls of foreign transactions were supple 
mented by price control, credit restrictions, and a comprehensive system 
for the control of manpower and other scarce resources. After the war, 
although the Labor Government had made some progress with the 
dismantling of war time controls by 1949 and the National Government 
carried the process somewhat further, the power to regulate imports 
and foreign exchange dealings has been retained. It has been used 
by each of the successive governments both to protect local industry 
and to deal with balance-of -payments difficulties. This, and the direc 
tion of monetary policy after the war, were Condliffe s main concerns. 

2. Post-war Developments 

Considered as the beginning of an epoch, the years 1945-49 in 
New Zealand s economic experience have quite a different complexion 
from that which they take on in Condliffe s account where they are 
treated as the end of an epoch. They were, indeed, years of reconver 
sion initiating a continuum of post-war experience. The fact that they 
were also the concluding years of a 14-year period of Labor rule 
appears now to have little economic significance. 

Condliffe treats this period as a testing time for a long-term Labor 
policy which concluded with its rejection by New Zealand voters. 
He defines the policy as one of " intervention based on socialist prin 
ciples and says that it had * the ultimate goal of socialization based 
on monetary expansion". However, a close study of what happened 
in the context I have suggested reveals that this was a period of recon 
struction in which war-time emergency regulations were relaxed and 
some progress was made towards working out a policy of economic 
development. For better or for worse a policy of gradual reconversion 
was decided upon and this policy, initiated by the Labor Government, 
was continued by its successors. 

Conditions peculiar to New Zealand in this period can be explained 
partly by the degree of effectiveness of war-time wage and price 
stabilization. The idea of "total mobilization" was taken literally by 
New Zealanders, and this is reflected in the fighting record of their 
troops. On the economic front, stabilization of wages and prices, 
associated with the deferment of maintenance and development ex 
penditures, 9 enabled Britain to secure a major part of the imported 
requirements of some foods at a fraction of the price paid for com- 

8. See Reserve Bank of New Zealand publication, Foreign Exchange, May 
1952, esp. p. 28. As stated here, no official figures or estimates for the outflow of 
capital in the years 1935 to 1938 are available but unofficial estimates place the 
figure at approximately 20,000,000. This was just about the amount of the deficiency 
of overseas reserves of the banking system at the end of 1938 (compared with 1936 
and 1937). 

9. Both in the public and private sectors (and particularly in the field of local 
body expenditure) where the expenditures in question would not have been expected 
to contribute to the war effort. 


parable goods from alternative sources. 10 Restriction of imports also 
implied short term lending to Britain, and by the end of the war New 
Zealand s long-term foreign indebtedness was almost balanced by 
short-term credits in, the form of accumulated sterling balances. Of 
course high taxation and public borrowing contributed to these effects. 

In New Zealand (as elsewhere) there was a lot of talk about 
winning the peace by methods similar to those applied to war. But 
war-time borrowing by the Government, deferred maintenance and 
development expenditures, and the whole rationing system, were ex 
plicitly expedients of war which had a measure of effectiveness only 
because people were assured of a return, both as consumers and pro 
ducers, to conditions of relative freedom. Voluntary acceptance of a 
considerable deterioration of the terms of trade, and a wholesale defer 
ment of demand, go some way towards explaining difficulties of 
economic policy in the immediate post-war period. 

Still, in New Zealand as in Britain, many problems which might 
ordinarily be expected to solve themselves through the interplay of 
market forces remained political problems. There had been little 
devolution of authority from ministerial level and there was no com 
prehensive research or administrative system for economic planning. 
Decisions which might, under different conditions, have been settled 
between buyer and seller, often had to be referred to a cabinet minister 
or even to parliament. As Condliffe suggests, the burden of government 
under such conditions must tend to become intolerable. Apart from 
that, a great deal of entrepreneurial effort was diverted to the political 
arena : political pressure could pay better dividends than enterprise in 

Under the Labor Government there was some loosening of the 
controls which produced this state of affairs, and this process went 
further in the eight years of (nominally) conservative government 
which followed Labor s defeat. The National Government cannot be 
said to have reversed an "extension of intervention based on socialist 
principles". It continued, somewhat haltingly, the relaxation of con 
trols, but it failed to move decisively in the direction of establishing 
conditions in which market forces could function effectively in their 

3. Monetary Experience 

A long tradition of government intervention in the New Zealand 
economy began with planned settlement in the early colonial days. It 
was sustained through the experience of public works development and 
planned immigration under the Vogel Government in the eighteen- 
seventies, and gathered strength in the nineties when the Liberals 
under Seddon carried through their land, labour, and * welfare legis 
lation. 11 Labor built on this tradition in the latter nineteen-thirties, 

10. Compare, for instance, costs and quantities of butter, cheese and meat 
imported into Britain from New Zealand and alternative sources (including the 
United States, in which case cheese is a comparable product). British Board of 
Trade, Monthly Reports. 

11. Condliffe, New Zealand in the Making, gives an excellent account of all 
these developments. See also W. Pember Reeves, op. cit. 


and the post-war National Government showed no sign of abandoning 

However, the extent and persistence of economic regulation since 
the war and the exercise of ministerial discretion in administering it, 
are not fully explained by tradition. Constantly reinforced inflationary 
pressures have had greater immediate importance. Deferred demands 
and excess liquidity left over from the war economy could possibly have 
worked themselves out if either of the two post-war governments had 
" taken off the lid" and allowed the market to establish a new price 
structure and a new system of input-output relations after a period of 
open inflation. Neither was inclined to take the risk, and as long as 
the economy remained excessively liquid, the retention of some direct 
controls was the only alternative. 

Inflationary pressures and policies designed to suppress the symp 
toms of inflation must have an important place in any explanation of 
contemporary economic experience in New Zealand. They partly ex 
plain the halting progress of both governments towards decontrol and 
the recurrent backsliding (with the reimposition of some controls pre 
viously relaxed) more particularly when balance-of -payments difficul 
ties arose. At the same time, there has been a tendency among New 
Zealanders to regard the Prime Minister and Cabinet rather as chair 
man and directors of a board of management and to hold them respon 
sible for the broad lines of production policy and the distribution of 
income. This tendency owes more to long tradition than the first Labor 
Government; and the National Government left the tradition intact. 

The progress of inflation over the last four years of Labor rule 
and the first four under the National Government is indicated by the 
following table, in which the monetary expansion shown is to be related 
to a steady increase in the volume of output at a rate slightly under 
5 per cent per annum : 

Net National Income at Factor Cost, Aggregate Transactions, 
Money Supply, and Liquidity Ratios, 1946 to 1953 









Income 12 
Transactions 13 
Money supply 14 . . 
Liquidity ratio 15 . . 
















12. Official estimates, New Zealand Government Year Book, 1957. 

13. Average for the year of weekly debits against demand deposits at banks. 
Reserve Bank Bulletin, monthly, Wellington. 

14. Notes and coin in circulation and demand deposits at banks at the end of 
March in each year. Reserve Bank Bulletin. 

15. i.e. balances held per unit of transactions settled. (In 1953, approximately 
3-3 was held for every 1 per week debited from current accounts.) See Report of 
the Royal Commission on Monetary, Banking and Credit Systems, 1956, p. 467, 
for an index of velocity based on greater information. See also J. J. Polak, "Mone 
tary Analysis of Income Formation and Payments Problems", I.M.F. Staff Papers, 
November 1957. My liquidity ratio varies inversely with transactions velocity. Polak 
uses income velocity which, in this period, increased at a lower rate than transac 
tions velocity. 


Analysis of the increase of the money supply carried out by the 
Reserve Bank for the period 1939-1950 showed that (a) the balance of 
external transactions, (b) Government transactions, and (c) the ex 
pansion of trading bank advances, contributed almost equal shares to 
the increase in overall liquidity. In the period covered by my figures, 
deficit financing by the Government had virtually disappeared as a 
contributory cause, and a falling trend of liquidity preference had 
become important. 16 Tax revenue plus public borrowing showed a 
surplus over public expenditure in the last four years of the Labor 
Government, and the National Government maintained a similar sur 
plus up to its last two years in office, so that the indebtedness of the 
Government to the banking system was reduced. Expansion of bank 
credit and (up to the recession after Korea) surpluses on account of 
external trade, maintained a high level of personal and institutional 
liquidity in spite of the disappearance of deficit financing of a type 
which directly increases the aggregate supply of liquid funds. 

Subsequently, until a credit squeeze" was applied in earnest in 
1956, increasing bank advances on private account became relatively 
more important, particularly after Korea when annual surpluses on 
account of overseas trade tended to disappear. A high level of liquidity 
in the economy remained a constant source of actual and potential 
further inflation, the ratio of liquid balances to transactions having 
fallen by 1955 to 2-9, compared with a 1938 ratio of 2-55. 17 

Prices and wages rose slowly during the four post-war years of 
Labor Government. Condliffe writes of conditions in this period as 
"deteriorating into a leap-frogging competition among farmers, mer 
chants, manufacturers, and trade unionists for higher prices and 
wages". In fact, this "leap-frogging" did not really get under way 
until the National Government was settled in office. This is shown by 
the following table : 

Wages and Prices: Indexes for Period 1946-1957 

(Base: 1955 = 100)18 






1946 . 

. .. 58-5 
. .. 62-4 
. .. 65-9 





1950 . 

. .. 70-5 
. .. 84-2 
. .. 89-7 






. .. 100-0 
. .. 101-9 
. .. 106-4 





16. Cf. Royal Commission s Report, p. 456 ff. 

17. As defined for the purposes of the following table. This ratio was highly 
stable over the years 1934-40. 

18. N.Z. Monthly Abstract of Statistics, October 1957. 

19. For part of year. (November Abstract shows that quarterly indexes all 
rose slightly over first three quarters of year.) 


Up to 1955 provision for general price control by a Government- 
appointed tribunal was maintained, decontrol having progressed since 
1947-48 by the making of specific exemptions. In 1955 general price 
control was formally dropped as a function of the tribunal ; although 
its powers ("to fix, in such manner as it thinks fit, actual, minimum, 
or maximum price for any goods sold . . ," 20 ) remained unchanged, 
they were to be applied to specified goods only, not to goods in general 
with specified exemptions. The following year the power of exempting 
goods from price control was transferred from the tribunal to the 
Minister of Industries and Commerce. The range of goods subject to 
price control had been substantially reduced. Meantime import and 
exchange controls had been considerably relaxed in practice, though 
the Government still had power to proceed to any length; and each 
step towards the freeing of external trade from direct controls was 
generally followed by at least half a step back because of balance-of- 
payment difficulties. 

The Reserve Bank, under the National Government, was attempt 
ing to make the remaining direct controls redundant by developing 
effective means of controlling credit. Cheap money had been Labor 
policy and the National Government also resisted pressure to allow 
interest rates to rise. This pressure increased from 1952 onwards 
because of the Reserve Bank s efforts to restrict the home supply of 
loanable funds, and because of hardening loan markets in other coun 
tries. In the long-term investment market Government borrowing re 
mained the dominant force on the demand side, and Government lend 
ing through the State Advances Corporation (the largest source of 
housing finance) the biggest single factor on the supply side. Bank 
lending rates, and insurance company and building society rates, were 
also subject to direct regulation by the Government. However, even 
before the Government-controlled system of interest rates was made 
somewhat flexible, the cost of liquidity tended to rise slightly because 
some borrowers were diverted from lower-interest sources to higher- 
interest sources. 

Later, more particularly after the Royal Commission on money 
and banking had reported to the Government, 21 a degree of flexibility 
was introduced into the interest rate pattern. Average rates increased 
appreciably, but Government control remained and the Government, 
while insisting that its policies to combat inflation were being pursued 
vigorously, continued to deny that higher interest rates were a neces 
sary or desirable concomitant of such policies. 22 

Up to the middle of 1952 the Reserve Bank had relied on direct 
control of bank advances and the doubtful powers of exhortation. Its 
policy was (and still is) very much dependent on the approval of the 
Minister of Finance, though it had a greater measure of independence 

20. Cf. New Zealand Official Year Book, 1957, pp. 962 ff., for the terms of the 

21. Op. cit., Wellington, 1956. 

22. Cf. Monetary and Fiscal Policy in New Zealand, Wellington, 1955, pp. 155 
ff. (where an official statement on interest rate policy as presented to the Royal 
Commission by the Treasury, is reproduced). 


in practice after the report of the Royal Commission. Till half-way 
through 1952 its nominal power to vary reserve requirements of the 
trading banks had not been exercised. This had meant that since 1945 
the banking system (with fixed statutory minimum reserve propor 
tions 23 ) had carried sufficient reserves most of the time to increase 
advances three- or four-fold. Then the effects of the minor post- 
Korean recession (including the effects of lagged tax payments on 
income for the boom year) reduced the excess liquidity of the banks 
and their customers. At this point ministerial approval was given to 
the use of variations in trading bank minimum reserve proportions, to 
be administered by the Reserve Bank approximately as they operate 
in the U.S. Federal Reserve system. The proportions were raised, with 
the effect that the five banks 24 now had, 011 an average, about twice the 
reserves they required to carry their existing level of deposits, instead 
of three or four times as much. Also in this year the Government set 
up a Capital Issues Committee (under war-time emergency finance 
regulations!), and the consent of this committee was required for 
capital issues over 10,000 in any 12 months period. 

Subsequently, variations in trading bank reserve requirements 
and high rates on advances to the trading banks by the Reserve Bank, 
brought the liquidity of the economy to a greater extent under the 
control of the monetary authority. Since 1956, although pressure has 
been relaxed at times when there have been signs of deflationary 
pressures becoming really effective, 25 Reserve Bank policy has been 
used to sustain a credit squeeze". 

However, the consequent restraint on expenditure in the private 
sector has been offset to some extent by expansion of public expendi 
ture especially in the last two years of the National Government 
when deficit financing in the special sense of the term as it has been 
used here 26 was revived. 

Under these conditions and particularly since export markets 
have weakened a continued narrowing of the scope of quantitative 
controls of external trade and payments has been accompanied by 
chronic balance-of -payments difficulties. 

4. Conclusion 

The National Government has now passed on to its successors a 
balance-of-payments crisis and an armoury of discretionary powers 
which has been preserved virtually intact. The new Labor Government 
has not a working majority, but it did not need to get legislation 
through parliament in order to extend and tighten exchange and 
import controls and supplementary controls of economic activity. It 

23. Namely, 7 per cent of demand liabilities and 3 per cent of time liabilities. 

24. Each of the five trading banks has an extensive system of branches. 

25. e.g. when annual payments of income tax have been due; and when dif 
ficulties have been encountered in the flotation of Government loans. 

26. i.e. as stated above, deficit financing of a type which increases the liquidity 
of the economy. It implies a cash deficit, or an excess of public expenditure over 
revenue from taxation and public borrowing operations, and it has the effect of 
increasing the net indebtedness of the Government to the banking system. 


simply applied, with greater force, the existing regulations as they 
had been applied in similar but less desperate situations in the previous 
eight years. 

It was not a socialist platform which returned the Labor Govern 
ment. In the matter of tax concessions, which had been a regular 
feature of annual budgets of the National Government, it simply made 
a higher bid. On the protection issue it did essentially the same thing. 
These were the main issues. 

Both parties were committed to the protection of local industry, 
but the former government had persisted (in spite of periodic back 
sliding) with the removal of direct controls of imports by the exemp 
tion of specific types of transactions. It had reached a point where 
further progress in this direction was thought incompatible, unless 
tariffs were revised, with its protectionist policy. The ad hoc nature of 
this policy is brought out starkly by the following official statement : 27 

No major changes were announced in the 1957 Import Licensing Schedule. 
Nine new items including tobacco pipes and a wider range of children s foot 
wear were exempted from licensing if imported from non-scheduled countries, 28 
and control was reimposed on men s nylon socks and women s and girls ankle 
socks. Particular attention was paid to clothing because of imports from 
low-cost countries, and it was announced that licences for certain items would 
be granted on a quantity instead of a value basis. Further decontrol was not 
possible for 1957 as a stage was reached where 80 per cent of imports from 
non-scheduled countries did not require a licence. Any marked increase in 
liberalization will not be possible until the whole structure of import duties 
has been examined in relation to the needs of New Zealand industry. 

Among manufacturers and wage-earners 29 there was considerable 
opposition to "liberalization" even in these terms. Labor offered a 
larger measure of protection, and the greater certainty of protection 
by means of quantitative controls. 

Both Governments had, at times, used monetary expansion in such 
a manner that if it were continued it must have led to a continuing 
process of socialization ; but, oddly enough, it was the National Govern 
ment which devised the more effective means towards such an end. 
This was the combination of increasing government expenditure with 
a "credit squeeze" limiting private expenditure. This was bound to 
increase the share of national resources devoted to public enterprise, 
and this was its effect when, in the last two years of the late govern 
ment, Reserve Bank policy achieved a measure of effectiveness. As a 
proportion of gross national product, central government expenditure 
was substantially reduced from war-time levels by the Labor Govern 
ment, and while Labor remained in office local body expenditure was 
not allowed to rise appreciably above the low war-time levels. Under 
the National Government, central government expenditure was held 
fairly constant in relation to aggregate income and outlay, 30 but in- 

27. New Zealand Official Year Book, 1957, p. 305. 

28. i.e. countries outside the dollar area, excluding Japan. 

29. For over 50 years, since wage arbitration on a national scale became firmly 
established, a community of interests between manufacturers who want a greater 
measure of protection and wage earners who want higher wages, has been a 
significant political factor. 

30. See Report of Royal Commission, 1956, pp. 456-463; and Abstract of 
Statistics, monthly, October and November, 1957. 


creasing expenditure by local bodies resulted in an appreciable increase 
in the relative importance of public enterprise. 31 

In spite of all these things Professor Condliffe is amply justified in 
his inference that the National Party is anti-socialist in its long-run 
intentions, and the Labor Party has socialist leanings. However, when 
the government (whatever its party background) is committed to 
certain specific long-run aims and limited by certain continuing econ 
omic trends, intentions of a general nature may have little significance 
except for platform purposes. This is certainly the case in New Zealand, 
where the government is continuously preoccupied with short-run issues 
arising in the context of a long-run process of population growth and 

Thus short-run problems of economic policy in New Zealand are 
generally placed in a context of rapid population growth and economic 
development. The government, whatever flag it flies, is in business to 
deliver the goods to the voters by the most effective means to hand. 
In these conditions and in a small country with a relatively homo 
geneous population and a strong equalitarian tradition public enter 
prise often appears to be the only means of "delivering the goods ". 

At any rate this is the case as long as New Zealanders are deter 
mined to do things their own way and not rely on foreign investment 
or entrepreneurship, and as long as there is no highly developed home 
capital market. This goes some way towards explaining generations of 
government management (in part or in whole) of export marketing, 
railways, forestry, land development, electric power supply, medical 
and health services, and so on. 32 It explains, too, some of the more 
conspicuous extensions of public enterprise under the late National 
Government as a response to an urgent demand for increased power 
supplies, improved road and rail communications, and manufacturing 
capacity to utilize the rapidly maturing State forests. 

In some respects these are the problems of the relatively under 
developed economy. Measures of income per head, degree of mechaniza 
tion, and urban development, seem to indicate that New Zealand is one 
of the more advanced of modern economies. But in the absence of a 
capital market and a supply of entrepreneurship commensurate with 
the scale of investment required for the maintenance (with current 
standards of consumption) of the current rate of development, govern 
ment initiative remains dominant. 

This state of affairs dates from pioneering days when there was no 
apparent alternative. It endures and, by maintaining conditions un 
favourable for the development to maturity of a private capital market 
and private entrepreneurship, tends to perpetuate itself. 


University of New England. 

31. Economic Survey, 1955, 56 and 57; and Abstract of Statistics, June, 1957, 
pp. 10-11, September, 1957, pp. 7-11. 

32. See Condliffe, op. cit. (New Zealand in the Making}, Pember Reeves, 
op. cit., and W. P. Morrell, op. cit., for historical accounts of public enterprises in 
New Zealand. 

IN THE 1920 s: 


1. The Demand for Cement 

The use of Portland cement on a large scale has been a develop 
ment of the twentieth century. After its discovery in the early nine 
teenth century, its widespread application waited upon the invention 
of the rotary kiln in the 1890 s, which made possible a great reduction 
in cost as well as a standardization of product. The rise in consumption 
in Australia was remarkable. By 1913 it had reached 325,000 tons, 
then, after a decline during the war, it rose again to a peak for the 
1920 s of over three-quarters of a million tons in 1927-28. 

A major source of this demand for cement lay with public authori 
ties, particularly for such works as dams, irrigation channels and 
pipes, and water supply and sewerage. 1 By 1914 the Interstate Com 
mission considered that the demands of the various State Governments 
had reached exceptional proportions , 2 and these demands increased 
with the active developmental role played by governments in the 
twenties and the necessity of constructing a road system to cope with 
the flood of cars unleashed in this decade. In New South Wales, in the 
six years up to 1926, the consumption of cement for State purposes, 
including the requirements of the Public Works Department, the 
Metropolitan Board of Water Supply and Sewerage, the Sydney Har 
bour Trust and the Railway Commissioners averaged 60,000 tons per 
annum, 3 while in one year, 1923-24, it was over 70,000 tons. 4 If the 
other States consumed cement at the same rate per head as N.S.W., 
total demand from State Governments in the middle twenties would 
have been about 200,000 tons, or two-fifths of the total Australian 
consumption. These N.S.W. figures probably do not include cement 
purchases by local authorities, so that total purchases by public auth 
orities would be higher by that amount. 

1. Many of the cement products for public works were manufactured by private 
firms, which depended on government spending for their main market. Perhaps the 
most important was the principal manufacturer of concrete pipes in Australia, Hume 
Pipe Company (Australia) Ltd. The manufacture by this firm of centrifugally spun 
reinforced concrete pipes was based on a process invented by the brothers W. R. and 
E. J. Hume. The invention revolutionized pipe manufacture and the rights were 
sold throughout the world. (Annual Reports, 1920-21 to 1929-30.) One of the firm s 
subsidiaries placed such value on the inventive activities of W. R. Hume that it 
insured his life for 20,000. (Hume Steel Ltd. Directors Report, Year ended 
30 September 1929.) 

2. Interstate Commission, Tariff Investigation, Portland Cement Report, 
26 May 1915, p. 4. 

3. Report of Parliamentary Committee on Public Works on Proposed Works 
for the Manufacture of Portland Cement at a Site at Carlos Gap, 18 Nov. 1926, 
p. vii. 

4. R. T. Ball, Minister for Public Works, NSW. Parl. Debates, 24 Sept. 
1924, p. 2210. 



It was not only in the public sector that the use of cement in 
creased. In the twenties the construction of buildings was revolu 
tionized by the application of reinforced concrete. Until then, in Sydney 
at least, legislation had limited the use of this material, 5 and the first 
building of reinforced concrete was not constructed there until 1910 
this was Angus and Coote s premises facing the central entrance of 
the Queen Victoria markets. 6 As the advantages of reinforced concrete 
and the technique of its construction became more widely known its 
use rapidly extended. 7 In the cities it was also used in conjunction with 
another new building process the steel frame to erect the large 
buildings that high land values made necessary. Both these develop 
ments completely altered methods of building construction and opened 
new avenues for the utilization of cement. 

The demand for cement, therefore, was much more buoyant than 
for traditional building materials such as bricks. It was supported 
from two sources: bricks relied principally on general private build 
ing, while cement found equal support from public investment. In the 
depression, of course, both these props were to prove weak. But in 
the twenties not only was the base for the demand broader, but the 
improvements in the quality of cement, the spread in knowledge of its 
usefulness and the increasing number of uses to which it could be put, 
meant that it was replacing other building materials as well as creating 
new demands. 

Under these influences the consumption of cement expanded at a 
different pace and in a different pattern as compared with other build 
ing materials. For instance, brick output in the twenties grew to 
807,000,000 in 1923-24, fell a little in the next two years and then 
reached a peak for the twenties of 838,000,000 in 1926-27, only slightly 
higher than the 1923-24 figure. 8 Cement output, on the other hand, 
grew continuously from 1923-24 to 1927-28 and during this period 
increased by over fifty per cent. 

In many uses cement is complementary to other building materials, 
but bricks and wood undoubtedly felt its effect as a competitive 
material. This effect is hard to demonstrate as inter-commodity com 
petition was only one, and not the most important, influence on the 
price and output patterns of building materials. However, contempor 
ary observers thought they saw the influences of this competition ; for 
instance, in 1924, the Age noted with pleasure that the brick combine 

5. As one contractor complained: "In Australia the use of cement is in its 
infancy; our builders are builders of iron, stone and brick. As far as Sydney is 
concerned, the Building Act forbids the economic use of reinforced concrete. Amend 
this Act, then our architects will soon show how great roomy buildings will be 
erected without such ponderous walls as are being erected in Sydney today." Evi 
dence of James Angus, Appendix to Interstate Commission Report, op. cit., p. 29. 

6. Australasian Manufacturer, 3 May 1919, p. 20. 

7. In the 20 s the advantages of concrete over other building materials were 
seen to be in cost, strength, durability, maintenance and freedom from fire. See 
e.g. Australasian Concrete, Mar. 1921, p. 5, and Australasian Engineer, 31 July 
1925, p. 5. 

8. Production Bulletin, No. 23, p. 148. 


in Melbourne had been forced to reduce its prices, and it thought that 
the prime reason must be the use of reinforced concrete in the build 
ing of large premises". 9 Also, although competition from cement would 
be felt mainly by bricks, Jobson, in discussing the depressed conditions 
in the timber trade, noted that * timber is not now as favoured as it was 
for buildings, and the preference for any construction of importance 
is for steel and cement". 10 

2. The Industry Before the War 

To meet the rapidly rising demand, local production expanded to 
reach an estimated 200,000 tons by 1913. 11 Official statistics are few, 
but a picture of this growth can be given for New South Wales ; there, 
production was 13,400 tons in 1902, 68,333 tons in 1908, 108,390 tons 
in 1911 and 127,981 tons in 1913. 12 However, notwithstanding the 
expansion of their plant, local manufacturers were unable to meet the 
demand, and imports grew from 25,700 tons in 1907 to 125,600 tons 
in 1913. 13 

The local industry had the double protection from overseas com 
petition of a high tariff and the high transport costs of cement. The 
importance of this protection in 1913 can be seen in the table below : 

Imports of Portland Cement 


Continental Kingdom 

F.o.b. cost per cask 5/- 5/- 

Freight and other charges 3/6 4/3 

8/6 9/3 

Duty 3/4 2/6 

On wharf at Sydney per cask 11/10 11/9 

Thus freight, etc., as percentage of f.o.b. value . . 70% 85% 

Thus duty as percentage of f.o.b. value 66-7% 50% 

Source : Interstate Commission Report, op. cit., p. 3. 

With such a high level of protection, local manufacturers were in 
a favourable position, and it was only because of their inability to 
expand at a sufficient rate that imports were continued. The price of 
imports was used to set the price in the market ; thus the secretary of 
the Commonwealth Portland Cement Company stated that "our policy 
has always been to keep just under the imported price". 14 This sellers 
market meant that the price of cement in Australia was over double 
that in the United Kingdom, and that there was no inducement for 

9. Age, 10 Sept. 1924, p. 9. 

10. Jobson s Investment Digest, Aug. 1928, p. 388. 

11. Interstate Commission Report, op. cit., p. 4. The Commission considered 
that this figure was calculated with "fair accuracy". 

12. Annual Report of the Dept. of Mines, NSW., for the Year 1918, p. 49. 

13. Overseas Trade Bulletins, Nos. 5 and 11. 

14. Interstate Commission Report, op. cit., p. 5. 




Australian producers to compete amongst each other. In New South 
Wales there were two producers : the Commonwealth Portland Cement 
Co. Ltd. with an output of around 100,000 tons and Goodlet and Smith, 
a much smaller producer. These two companies had a " loose arrange 
ment as to price, and always knew each other s quotes for government 
business. 15 

This market situation made cement manufacture a very profitable 
undertaking, and just before the war several new firms entered the 
industry. Although the war reduced import competition to a minimum, 
the demand for cement also fell since there was a decline in the quan 
tity of public works and building. However, the new entrants in the 
industry did not drastically upset the relationships between the firms ; 
the Interstate Commission in 1919 found "there is no formal agree 
ment between the cement manufacturers, but there is an understand 
ing between the principal manufacturers and they fix prices". 16 

3. The Growth of the Industry in the Twenties 

Output figures are available for New South Wales during the 
twenties, but they were collected for the Commonwealth as a whole 
only from 1923-24. Even after that year there are no separate statistics 
published for the other States. 

( 000 Tons) 






C wealth 
























































1. Consumption taken as output plus imports. 

2. Calendar year ended six months previously. 

Sources : N.SW. output from NSW. Statistical Register, 1919-20 to 
to 1929-30, and NSW. Official Year Book, 1926-27, p. 346. 
Commonwealth output from Production Bulletins, Vols. 18 
to 24. 
Imports from Overseas Trade Bulletins, Vols. 17 to 27. 

The growth in output for the Commonwealth was rapid; it in 
creased by roughly one half in the four years between 1923-24 and 
1927-28, and probably increased about threefold between 1920 and 

15. Ibid., p. 4. 

16. Interstate Commission, Prices Investigation. No. 12 Report, Rents, 24 Apr. 
1919, p. 34. 


1927-28. New South. Wales was the most important State, producing 
over half the total output. Local production met nearly all the demand 
and imports were limited to certain high-grade cements. 17 The ex 
clusion of imports was assisted by the freight and by a high tariff of 
B.P.T. I/-, I.T. I/-, G.T. 1/6 per cwt., which had been imposed orig 
inally in 1914. Because of the war it had not been needed and it was 
left unaltered in the general tariff adjustment of 1920 at the request 
of the cement manufacturers, not because they thought it unimportant, 
but because they thought it was already sufficient to exclude foreign 
competition. 18 

The expansion in production was the result both of the growth of 
existing firms and of new firms entering the industry. The profits of 
established companies were very satisfactory and acted as a strong 
inducement to new firms. For instance, Kandos Cement Co. Ltd. paid 
10 per cent dividends for every year of the twenties ; 19 after it became 
a public company in 1924 Australian Cement Ltd. paid between 10 per 
cent and 15 per cent, 20 while the Adelaide Cement Co. Ltd. between 
1921-22 and 1929-30 normally paid 1.5 per cent and also made a bonus 
share issue in 1924-25 of 55,000 to a shareholders capital of 126,000. 21 
However, entry into the cement industry was not easy, since large 
amounts of capital were needed and the established firms were formid 
able prospective rivals. 

In New South Wales, at the beginning of the decade, there were 
two companies in existence and these remained the major producers. 
The Commonwealth Portland Cement Co. was a private company in 
which the entire shareholders funds were held in England; by 1928 
these funds amounted to 600,000, assets were 1,448,000 and the 
capacity of the works at Portland was about 200,000 tons per annum. 22 
This company remained the only one in which there was a substantial 
foreign shareholding. Kandos Cement Company Ltd. was roughly the 
same size and its works at Kandos also had a capacity of about 200,000 
tons per annum. 23 Three other companies were established in New South 
Wales to manufacture cement. One was the Standard Portland Cement 
Co. Ltd. which began production in 1926-27, 24 and which had a capacity 
of about 100,000 tons. 25 This firm was also at Kandos, so that Com 
monwealth, Kandos and Standard were all on the Mudgee railway line, 

17. Parliamentary Standing Committee on Public Works, op. cit. f Minutes of 
Evidence, p. 4, Evidence of G. W. Mitchell, General Manager, State Industrial 

18. Statement by W. M. Greene, Minister for Trade and Customs, Parlia 
mentary Debates, Vol. XCV, pp. 9126-27. 

19. Kandos Cement Co. Ltd., Directors Reports, years ended 30 June 1921 to 

30 June 1930. 

20. Australian Cement Ltd., Directors Reports, years ended 30 November 
1925 to 30 November 1930. 

21. Adelaide Cement Co. Ltd., Directors Reports, years ended 31 May 1920 to 

31 May 1930. 

22. Jobson s Investment Digest, Mar. 1928, p. 106. 

23. Ibid. 

24. Standard Portland Cement Co. Ltd., Directors Report, year ended 30 June 

25. Jobson s Investment Digest, loc. cit. 


Portland being 112 miles from Sydney and Kandos 154. In this area 
the necessary raw materials limestone, shale and coal were all ad 
jacent to one another as well as being close to transportation by rail. 
The two other New South Wales cement works were established by 
powerful companies whose major interests lay outside this industry. 
The Sulphide Corporation Ltd. had refining works for base metals at 
Cockle Creek; there it established cement works which, by the end of 
the decade, had a capacity of about 100,000 tons. 26 Southern Portland 
Cement Ltd. was situated at Berrima and was formed jointly by Aus 
tralian Iron and Steel Ltd. and Howard Smith Ltd. ; it began produc 
tion in 1929 and capacity was scheduled to be 120,000 tons. 27 

In Victoria there was virtually only one producer, Australian 
Cement Ltd., with works at Fyansford, near Geelong. This company 
was formed in 1925 to take over an existing company, Australian Port 
land Cement Co. Pty. Ltd., and its capacity towards the end of the 
twenties was about 200,000 tons. 28 Alarmed by the development of new 
companies in New South Wales the company made a policy of con 
sistently maintaining capacity in excess of demand so as to discourage 
potential competitors. 29 

The size of the companies was much smaller in the other States. 
In South Australia there were two established companies Adelaide 
Cement Co. Ltd. (40,000 tons) which began production in 1914, and 
South Australian Portland Cement Co. Ltd. (30,000 tons), dating 
back to 1891. In Queensland there was only one firm Queensland 
Cement and Lime Co. Ltd. (55,000 tons), which began production 
during the war. 30 In Western Australia, the Western Australian Port 
land Cement Co. Ltd. was formed in 1918 and produced its first cement 
in 1920 ; in 1927 it was reconstructed into a new company Swan Port 
land Cement Ltd. 

It was in Tasmania that the only unprofitable cement venture took 
place. National Portland Cement Ltd. was established at Maria Island 
off the east coast of Tasmania and began production there in 1924. For 
several years in the mid twenties production averaged around 30,000 
tons, but there were continual difficulties and operations finally ceased 
in 1929. 31 In a general way, the firm suffered from the failure of Tas 
mania to develop as rapidly as expected, but there were also more par 
ticular setbacks : the cost of establishment exceeded estimates, delivery 
of machinery was delayed and the first limestone quarry opened up 
proved faulty. 32 Almost all the shareholders funds were lost in this 
undertaking. When the works were ultimately sold to Australian 

26. Ibid. 

27. Ibid., Sept. 1928, pp. 397-8. 

28. Ibid., Mar. 1928, pp. 106-7. 

29. Australian Cement Ltd., Directors Report, year ended 30 Nov. 1925. 

30. Capacity estimates given in brackets relate to 1928 and are from Jobson s 
Investment Digest, loc. cit. 

31. See National Portland Cement Ltd., Directors Reports, years ended 
30 June 1923 to 30 June 1928. 

32. Report in Melbourne Herald, 3 Oct. 1928. A press cutting seen at the 
Melbourne Stock Exchange. 


Cement Ltd., payment was made in the latter s shares and amounted to 
only 1/9 in the pound on 100,000 preference shares and 8d. in the 
pound on 279,000 ordinary shares. 33 Another small Tasmanian com 
pany, Tasmanian Cement Pty. Ltd., began production in 1925 at Rail- 
ton in Northern Tasmania, where over 200,000 had been invested in 
plants for cement manufacture and shale oil retorting. 34 However, in 
1924, agreement had been reached with Dorman, Long and Co. Ltd., 
the English firm in charge of the construction of the Sydney Harbour 
Bridge, by which Dorman, Long took over the management of the firm, 
invested a large sum of money in the works , while the firm became 
responsible for the supply of cement for the bridge. 35 The output of 
the firm was not large, reaching about 25,000 tons per annum by 1928. 36 
In that year the firm expanded into a public company, Goliath Port 
land Cement Co. Ltd. and Dorman, Long continued to direct the man 
agement. 37 Capacity of the plant was increased to 135,000 tons by 
1930, 38 and it was the intention of the company to sell a large propor 
tion of this cement on the Melbourne market. 39 

4. Technological Development 

Portland cement came into popular use with the development of 
the rotary kiln about the turn of the century. Subsequent technical 
developments within this industry up to 1930 included a great increase 
in the size of the rotary kilns, a reduction in fuel consumption, mech 
anization of the production process, including quarrying, packing and 
distribution, and the creation of new types of cement for special pur 
poses. 40 These innovations had their origins abroad, but it seems that 
the Australian industry quickly adopted them. The rapid growth of 
the industry in the twenties meant that most of the equipment was 
up to date ; new firms established themselves with new plant while the 
profits of the established firms enabled them to make very adequate 
provision for replacement. That the new equipment purchased was of 
the most modern type was assured by the position of the firms supply 
ing the equipment. This industry was dominated by a few large firms 
which kept a leading position in the development of technology for 
making cement, and provided buyers with designs for new factories 
and the technical knowledge for production. 41 

33. Jobson s Investment Digest, Dec. 1929, p. 731. 

34. Age, 30 July 1925, p. 11. 

35. Industrial Australian & Mining Standard, 30 Oct. 1924, p. 639. It is not 
known how much money was invested by Dorman, Long in the original company in 
1924, but in 1934, out of 255,857 ordinary shares of Goliath, Dorman, Long held 
22,578. (Shareholders List at Melbourne Stock Exchange.) 

36. Prospectus of Goliath Portland Cement Company Ltd., 31/7/1928. 

37. Argus, 17 July 1928, p. 14. 

38. Jobson s Investment Digest, Oct. 1929, p. 555. 

39. Ibid., Sept. 1928, p. 400. 

40. See e.g. Ingar Svennilson, Growth and Stagnation in the European Ecoi* 
omy (United Nations Publication, 1954), p. 156. 

41. Ibid., pp. 156-7. 


Rotary kilns were operated in Australia as early as 1908 by the 
South Australian Portland Cement Co., 42 and it is possible that the 
two main companies in Victoria and New South Wales had them even 
earlier. All further installations were of this type, and the development 
in their size was most marked. The attitude of one of the older com 
panies to technical development can best be shown by this description 
of its works : 43 

A contract has been let by the Australian Portland Cement Co. to the Monier 
Concrete Co. to build four silos at the terminus of the Fyansford railway for 
the storage of the company s cement. Each silo will be 75 feet in height, with 
a diameter of 35 feet, and will have a capacity of 1,500 tons. The cement 
company s packing house will be alongside, and will be equipped with machines 
capable of bagging the cement at the rate of 2% tons per minute. The silos 
will be automatically filled with cement by means of conveyors from the 
works. The cost of the new silos, about 20,000, is only an item in the 
expenditure which the cement company has in view. Its policy has always 
been to keep ahead of the demand, and while the output has increased 
twentyfold in the last eighteen years, the plant has been entirely replaced 
by improved machinery on three occasions within that period, and it is con 
templated by the directors to lay out about 250,000 during the next two 
years in effecting further improvements. 

In the cement industry capital costs per unit of output were always 
high, while labour costs were low, and the ratio between the two was 
further increased by the mechanization of production which was taking 
place in the twenties. 44 

An outstanding development in the industry was the production 
of a quick hardening cement. This new type of cement greatly affected 
the uses to which cement could be put, since in two or three days it 
gave the strength only obtained from ordinary cement in three or four 
weeks. 45 Production began in Australia in the last few years of the 
decade, and brands of cement blossomed with such names as Celerite , 
"Speedite", "Quickardo", "Rapidite" and "Rapidard". 

A distinct advance was made in cement packaging through the 
development of paper bags as an alternative to jute. It was claimed 
that paper bags were cheaper, gave better protection against the weather 
and were more convenient to handle. 46 Production was begun in 1926 
by an Australian company, Bates (A/Asia) Ltd., which used wholly 
Australian raw materials to produce a multi- walled bag * composed of 
five separate walls of tough pliable water-resisting paper bound, glued 
and sewn on top and bottom". 47 

42. Brighton Cement Handbook 1892-1952 (issued by the South Australian 
Portland Cement Co. Ltd.), p. 7. 

43. Age, 7 Jan. 1924, p. 5. 

44. See e.g. the evidence of F. E. Morton, Engineer of Australian Cement, in 
evidence to the Commonwealth Arbitration Court in Amalgamated Engineering 
Union and Others v. Metal Trades Employers Association and Others, 7/8/1929, 
Transcript of Evidence, p. 3808. ". . . we have been spending a great deal of money 
on the works in one way or another. We have been improving them and we find 
that we want fewer men, and that will be more so in the future." 

45. For a general description of the development of quick hardening cement, 
see evidence of G. W. Mitchell to Parliamentary Standing Committee on Public 
Works, op cit., p. 3. 

46. South Australian Portland Cement Co. Ltd., Directors Report, half-year 
ended 30 June 1927. 

47. Advertisement in Adelaide Advertiser, 26 July 1927, p. 17. 


5. Excess Capacity 

The cement industry is one in which excess capacity typically 
arises. Rapid technical improvements have meant a high rate of 
obsolescence for existing equipment, but after amortization old equip 
ment may still be capable of operation because of the very low labour 
costs per unit of output. Technical improvements have increased also 
the size of kilns ; some in Australia had a capacity of over 50,000 tons 
by 1930 and these kilns, of course, required 24 hours a day and seven 
days a week operation for maximum efficiency. In addition, seasonal 
and cyclical fluctuations are important general causes of excess capacity, 
but in Australia the seasonal fluctuations in building are not import 
ant because of the mild winters, while in the twenties excess capacity 
began to develop in a period in which demand was growing. 

However, apart from the technical developments in the industry, 
there were some special factors in Australia which encouraged the 
development of excess capacity. One was the division of the country 
into six separate States, in each of which the economy and economic 
policy were, in some degree, different from the others. Cement factories 
were set up in each of the States, and this was probably warranted by 
the pattern of population and the freight on cement. It meant, how 
ever, that the natural tendency to excess capacity was encouraged in 
six separate places. The establishment of the cement works in each 
State was further encouraged by the preference often given by State 
authorities in their contracts to local factories. For example, in 1926, 
a considerable stir was caused by the allotment of a Victorian contract 
to companies established in New South Wales and Tasmania; it was 
claimed that in retaliation against these States for discriminatory prac 
tices, one-third of the contract should be allotted to a Victorian com 
pany. 48 Again, in 1927, the sewerage committee of the Melbourne and 
Metropolitan Board of Works recommended sharing a contract between 
five tenderers, three of which were interstate. The Board, however, over 
ruled the committee and allocated the contract to the two Victorian 
companies. 49 

It was natural, too, that in each State existing firms should deliber 
ately create excess capacity in order to discourage potential rivals from 
establishing a business there. This was the admitted policy of Aus 
tralian Cement, 50 while in 1923 Kandos hopefully stated that addi 
tional machinery had been installed " giving an output which will meet 
the probable requirements of the State for some considerable time". 51 
The Queensland company expressed the same hope. 52 

Excess capacity was encouraged also by the fact that public ex 
penditure and building construction behaved in a different fashion in 

48. Argus, 27 Oct. 1926, p. 24. 

49. Ibid., 31 Aug. 1927, p. 23. 

50. Australian Cement Ltd., Directors Report, year ended 30 Nov. 1925. 

51. Kandos Cement Co. Ltd., Directors Report, year ended 30 June 1923. 

52. Queensland Cement and Lime Co. Ltd., Annual Report, year ended 31 July 



the various States. For example, building continued at a high rate 
in the final years of the twenties in Sydney. Cement output in New 
South Wales did not reach a peak until 1927-28 and then remained 
practically constant until 1929-30. In South Australia, on the other 
hand, economic difficulties were pronounced after 1926-27, and the 
output of cement of the South Australian Portland Cement Company 
fell steadily from 26,741 tons in 1926-27 to 13,501 tons in 1929-30. 53 

As well as the division of Australia into separate States, the 
optimistic expectations of the local producers led to the provision of 
capacity in excess of the demand. Cement was in short supply for the 
first years of the twenties and, as recent experience in the coal indus 
try has demonstrated, it is easy to over-estimate the size of a shortage. 
Undoubtedly this caused manufacturers to expand capacity beyond 
actual requirements while, at the same time, since plans were based 
also on the rapid rise of demand in the past, even a slowing down in 
this rate would disappoint expectations. Further, as will be shown 
below, the price policy of the existing firms induced new firms to enter 
the industry. 

How great was this excess capacity and at what rate did it develop ? 
Capacity is extremely difficult to define and more difficult to measure 
even where an abundance of statistical material is available. In Aus 
tralia there is no such material, so the treatment of this subject must 
be in general terms. Cement was in short supply for the first few years 
of the decade and manufacturers found it impossible to meet the 
demand. This condition persisted into 1922 and for the next two years 
there appears to have been a rough balance between supply and 
demand, until the possibility of over-production began to appear about 
the end of 1924. 54 In June, 1925, when output was at the rate of 
approximately 600,000 tons per annum, the chairman of Australian 
Cement Ltd. claimed that the plant capacity of Australia could pro 
duce 785,000 tons. 55 By the middle of 1926 the Industrial Australian 
and Mining Standard estimated that capacity had risen to 831,500 tons 
and there were a further 160,000 tons under construction. 56 These 
figures suggest that excess capacity began to develop in the industry 
from about the middle twenties. The problem was not acute as long 
as demand rose quickly, as it did until 1927-28, but growth then 
ceased at the same time as two new companies placed their product on 
the market. It seems probable that by 1930 the industry could have 
produced 1,000,000 tons with ease but the output in 1930-31 was only 
389,000 tons. 

6. Co-operation within the Industry 

Problems of excess capacity in the cement industry throughout the 
world have normally been met by some form of agreement limiting 
competition. The industry in Australia was no exception. Even before 

53. Brighton Cement Handbook, op. cit., p. 14. 

54. See e.g. Argus, 20 Nov. 1924, p. 15. 

55. Industrial Australian and Mining Standard, 4 June 1925, p. 741. 

56. As reported in Jobson s Investment Digest, June 1926, pp. 307-8. 


the beginning of the decade of the twenties the principle of co-opera 
tion by the firms within the industry in fixing prices was firmly estab 
lished. As long as local industry did not have the capacity to meet the 
demands of the market, as was the position before the war, imports were 
the price leader and co-operation was easy. This situation continued 
for the first few years of the twenties. It was not until the end of 
1924, when over-capacity began to appear, that co-operation raised 
problems. The emergence of excess capacity was, in part at least, the 
result of the successful co-operation between the existing firms in 
keeping prices at a high level and thus inducing new firms to enter the 
industry. The manager of the Commonwealth company had to agree 
with a member of the Tariff Board when he stated : What I am put 
ting to you is not original . . . they [i.e. the new companies] came into 
existence because the flowers were blooming too prolifically, so to 
speak. The thing appeared to be too attractive . 57 On the other hand, 
although co-operation encouraged the emergence of excess capacity, 
the excess capacity itself made co-operation all the more necessary for 
the firms involved. 

In New South Wales the relation between price co-operation and 
the entry of a new firm into the industry was quite direct. In this State 
the two producers, the Kandos and Commonwealth companies, were 
faced with a powerful buyer, which, because of the large amounts of 
cement it consumed, was in a position to bargain. This buyer was the 
State Government. At the end of 1920 the Dooley Labor Government 
entered into a contract with the Commonwealth company for the supply 
of cement at the rate of 5/8/- per ton. In 1924, in defence of the 
price, Mr. Dooley claimed that in 1920 cement was almost unprocur 
able, and that the cheapest price on the market was 8/10/- per ton, 
while some was being sold at 10 and 11 per ton. 58 The difficulty con 
cerning price in 1920 was not disputed, but the contract had other 
objectionable features. Delivery did not start until 17 months after 
the contract was made and it then operated for two years, except on 
certain public works w r here it had to be used until the job was 
completed. 59 

With the expiration of this contract in 1924, tenders were called 
for the supply of cement at the rate of 50,000 tons per annum and the 
two existing New South Wales companies submitted almost identical 
tenders. Although some conditions were different, each required a five- 
year contract with adjustment for any wage changes, but the un 
acceptable feature of their tenders was the price. The Commonwealth 
Company s price was 4/11/6 per ton free on rail at Portland, while 
the Kandos Company s price was 4/4/2 free on rail at Kandos. The 
difference between the two prices would be much smaller when allow 
ance is made for the higher freight from Sydney to Kandos, and both 

57. Tariff Board Supplementary Report on Portland Cement, 6 Mar. 1936, 
p. 4. 

58. NSW. Parliamentary Debates, Vol. 97, 3 Sept. 1924, p. 2151. 

59. Statement by R. T. Ball, Minister for Public Works, ibid., p. 2162. 


prices would probably have been a little over 5 a ton delivered in 
Sydney. 60 

The State Government took the view that the tenders were far too 
high and that no real competition was taking place between the two 
companies. It therefore took the unusual step of alloting the contract 
to a company which was formed solely in the hope of obtaining the 
contract and whose main assets were the rights to the raw material. This 
company was Cement Products Ltd., and after obtaining the contract 
it proceeded to float Standard Portland Cement Co. Ltd., with the 
contract as its main inducement to investors, while it sold its assets 
to the new company for 75,000 shares. 61 The contract was for three 
years and was at the price of roughly 3 a ton free on rail at the works 
near Kandos and 4 a ton delivered in Sydney. 62 Allowance was made 
for wage changes, but the price was at least 1 a ton below the tenders 
of the two established New South Wales companies. 

Co-operation between the existing companies continued. The 
Standard Company did not start production until January, 1927, and 
then most of its output was absorbed by the government contract. Sul 
phide Corporation began production in April, 1925, but only at the 
rate of 30,000 tons per annum and output was not expanded for another 
two years, 63 Thus for a Victorian Government contract in 1926 there 
were three tenders, all the same price; 64 and again in 1927 with five 
tenders, prices were equal. 65 However, the outlook for price co-opera 
tion began to look more difficult in 1928 : existing companies had 
expanded capacity, Southern Portland Cement was soon to begin pro 
duction and the Goliath company had been formed in Tasmania with 
eyes on the Melbourne market. With these developments in mind the 
chairman of one of the major companies warned against a price war : 66 

Today we are holding our cement prices at a steady level. The Kandos 
Company is making its price a standard price with concessions for such 
public utilities as roads and is keeping it there. The company will not 
declare a cement price-cutting war. We will keep our prices up. If our com 
petitors force us into a corner, which is unlikely, since there is harmony in 
the cement industry, we shall be in a position to meet that contingency. 

New competitors did, however, accommodate themselves to this 
harmony. In June, 1930, the New South Wales Minister for Local 
Government stated that he had to accept a price from the "Cement 
Association" of 4/2/- per ton f.o.r. at any of the cement works in the 
State, or 4/17/6 delivered in Sydney, irrespective of the origin of the 
cement. 67 When the New South Wales Government contract came up 

60. Ibid., pp. 2208-9. 

61. Standard Portland Cement Co. Ltd. Prospectus, as reported in Jobson s 
Investment Digest, Apr. 1924, p. 152. 

62. R. T. Ball in NSW. Parliamentary Debates, Vol. 97, p. 2211. 

63. Jobson s Investment Digest, Mar. 1926, p. 119. 

64. Argus, 27 Oct. 1926, p. 24. 

65. Ibid., 31 Aug. .1927, p. 23. 

66. Mr. Stewart, Chairman of Kandos Cement Co. Ltd., Sydney Morning 
Herald, 22 Aug. 1928, p. 17. 

67. M. F. Bruxner, NSW. Parliamentary Debates, Vol. 123, p. 6080. "Cement 
Association" were the words used by Bruxner ; for a discussion of this Association, 
see below. 


for renewal, this time at the rate of 65,000 tons per annum, the Stand 
ard company again refused to fall in line. The Sulphide, Southern, 
Commonwealth and Australian companies all tendered the same price, 
but the Standard company tendered a price which was lower in Sydney 
by 4/- to 6/- a ton, and obtained the contract. 68 

By what procedure did the manufacturers reach agreement on 
prices? The only formal merger of interests was between two of the 
three largest producers. In December, 1929, Kandos Cement Co. Ltd. 
and Australian Cement Ltd. combined to form Australian Portland 
Cement Pty. Ltd., as a holding company controlling the two operating 
companies. Until this merger Kandos had been a large supplier of the 
Victorian market, but its profits had been absorbed by the freight and 
handling charges. After the merger, all Victorian orders on the com 
pany were supplied from Geelong. 69 

The formation of an organization of a different kind took place in 
1928 when all the cement manufacturers, except the Swan Company 
in Western Australia, formed The Australian Cement Manufacturers 
Association. According to the memorandum of association, its object 
was "to promote encourage foster develop and protect by lawful 
means the cement industry, and to further and develop the use and 
demand for cement generally". 70 The cement manufacturers strenu 
ously denied that the Association had anything to do with price fixing 
and, after studying its activities in the early thirties, the Tariff Board 
accepted this argument. But the Board found all the evidence of a 
firm agreement including the division of the market between the 
manufacturers in the same proportion as they held before the depres 
sion and it concluded that the only way to reduce the price was to 
lower the tariff and permit import competition. 71 There appears, then, 
to have been little or no formal machinery with which prices were con 
trolled; probably, as one manufacturer claimed, it was a mixture of 
price leadership and "gentlemanly understanding". 72 However, not 
withstanding the Tariff Board s conclusion on the Cement Association, 
the history of the cement industry in the 1920 s gives no reason to 
doubt the general truth of Adam Smith s dictum about meetings of 
business men : 73 

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. 

Canberra University College. 

68. A. E. Buttenshaw, Minister for Public Works, NSW. Parliamentary 
Debates, op. cit., p. 6075. 

69. Sydney Morning Herald, 22 Aug. 1930. 

70. Tariff Board Report on Portland Cement, 22 March 1936, p. 6. 

71. Ibid, passim. 

72. Ibid. Transcript of Evidence, p. 57. Evidence of J. Symonds, General 
Manager of Commonwealth Portland Cement Co. Ltd. 

73. The Wealth of Nations, ed. E. Cannan (2 Vols., Methuen, London, 1925), 
Vol. 1, p. 130. 

1. Data and Method 

The measurement of the relationship between consumers demand 
for various commodity groups and their income, or total expenditure, 
is a comparatively easy matter if satisfactory family budget data are 
given. Furthermore, the results derived from such studies may, with 
certain qualifications, be used in connection with time series to obtain 
demand functions in their general form, i.e. consumption as a function 
of income, own price, other prices and other factors. It is a different 
matter when time series alone are available ; the problem then arises 
how to extract information from the data without overloading them 
by asking for too much and in consequence getting unreliable results. 
Such is the position with regard to Australia. 

In the present study, an attempt is made to construct Australian 
demand functions for four commodity groups among which all con 
sumption expenditure is divided. The groups are those used in the 
officially published retail price indices, viz. Food, Housing, Clothing, 
and Miscellaneous. The present analysis is somewhat in the nature of 
a pilot study, and it is hoped to break consumers expenditure down 
further when adequate expenditure and price data have been obtained. 

One of the difficulties arising in a study of this kind consists in 
finding the best series to indicate income. To simplify matters, total 
consumption expenditure, which is the sum of the outlays on the four 
commodity groups, has been chosen in the first instance. Later on, the 
relationship between income and total outlay, and the possibility of 
introducing income into the demand functions, will be considered. 

The postulated demand functions represent relationships between 
expenditure per head on food, housing, clothing and miscellaneous 
items respectively on one hand, and total expenditure per head, the 
prices of the four groups, and time on the other hand. The influence 
of time represents shifts in demand, or changes which cannot be satis 
factorily explained by movements in income and prices ; such changes 
may be very important and may account for a considerable part of 
the total variations in demand. 

The main basic data are those given in Table IV (p. 19) of 
National Income and Expenditure 1956-57, viz. items 23b, 23a, 23c, and 
all other components of item 23 together respectively. The data refer 
to the nine financial years from 1948-49 to 1956-57. Figures for the 
mean population of financial years, given in the Demography Bulletins, 
have been used to reduce the totals to averages per head. The group 
indices of the " C " Series Retail Price Index for the capital cities, in 
the form given in the "Monthly Review of Business Statistics" 
reduced to base period 1936-39 = 1000 have been used to indicate 
prices. For 1955-56 and 1956-57, two alternative indices for food have 



been published, and both have been used alternatively in the present 
analysis. The index including potatoes and onions was then found to 
give a better fit, though the difference is not large ; all the results given 
here are based on this variant of the index. 

Nine years, of course, represent rather few observations on which 
to base a demand analysis. This is to some extent counterbalanced by 
the fact that real expenditure per head did not increase steadily over 
the period but was subject to quite large fluctuations. This feature, 
which is associated with the dependence of the Australian economy on 
wool prices, may be economically undesirable but presents advantages 
to the econometrician. 

Even so, it is clear that some restrictive assumptions have to be 
made. In the first place, it would be quite unrealistic to expect that, 
with the available material, the best mathematical form of the relation 
ship could be determined. A simple and convenient assumption is that 
of linearity. The demand functions can then be written in the form 

4 (P* \ 

v i = v i +b i (m m) +2 fy I 1 I + ** (i = 1, 2, 3, 4) 

where Vt represents expenditure per head on a commodity group (1: 
food, 2: housing, 3: clothing, 4: miscellaneous) ; m total expenditure 
per head ; pi the price index for the group ; v if m, pi means over the 
period; t time (with mean 0) ; bi, c/ 4 , ck constants. 

This would mean four linear regression equations, each with the 
same six independent variables. The only restrictions on the regression 
coefficients, which are automatically satisfied when least-square methods 

are used, would be that, since 5 ^ = m, 

i l 

44 4 

S &i=l; 2 Cji = 1, 2, 3, 4) ; 2 4 = 0. 
i 1 i = I i l 

An attempt to derive, by multiple regression analysis, six partial 
regression coefficients for each equation from these few observations 
could not be justified. Additional assumptions should therefore be made. 
Before doing this, it is worth while looking at the meaning of the 

Write Wi so that Wi represents the proportion of total outlay 

/ 4 \ 

devoted to each commodity group S Wi 1 I an( j w . J^. i t j s t h en 

\i = I I m 

easily seen that == represents the income-elasticity of demand for, or 
of expenditure on, commodity group i at average level, i.e. at average 
income and average prices and with t = 0. Similarly, represents, 


at average level, the direct price-elasticity of expenditure, = 1 the 
direct-price-elasticity of demand for commodity group i. -=- represents 


the cross price-elasticity of demand or expenditure for commodity 
group i with regard to a price change for group j. Indicating elas- 

Try W/r 

ticities of demand by -=-* and -~~ and their values at average level 

Xi , xi 

by -= and ^_ , we have 
7 Em Ep/ 

__ &i_ Exj, _ _ -i Exj _ c/i 
-^i Epi- -^ >Wi~~~~ v> ^ 
The elasticities of substitution 0$ are defined by the relation 

w,^_ L 
Again denote by <jji the value obtained at average level. Then 


or c = Vi (Wi <T &i + 1), Cji = Vj (Wi vji bi) (j = i) 

The demand functions can thus be written in the form 

V i V,, TTi Wi 5 Vj o-ji (TTJ 1) = Z^m 1 + ^ 

where ^ = ~, m 1 = m S v< ^ (m 1 = 0) 

In this equation, ^ represents the price relative to its average over 
the period (not multiplied by 100 or 1,000 as in index numbers), m 1 is 
an indicator of real total outlay; it is the difference between actual 
total outlay and the amount necessary to purchase average quantities 
at current prices. 

According to the theory of consumers demand, o-^ = v^ and 
S Wj try = 0. But this is not sufficient for the present purpose ; a 

; = i 

simple assumption is needed which will reduce the regression equation 
to one containing two independent variables only. A simple possibility 
would consist in taking, at* average level, all cross elasticities of sub 
stitution as equal, that is to say 

^ = cr (*=1, 2, 3, 4; j^i) 

It follows then that 

(1 Wi) a 
- - 


In particular, we might make one of the following assumptions : 
Either <r 0, and CT^ = 

(I- Mi) 

or o- = 1, and an - 

. __ 
or o- = i, and o-^ = 

The meaning of the assumption o- = is as follows : There is no 
substitution between commodity groups, and a price change influences 
the expenditure pattern only through the income effects, the magnitude 
of which is proportionate to the importance of the group experiencing 
the price change and to the income-elasticity of the group with the 
effect of which one is concerned. If a commodity group rises in price, 
more is spent on it, and outlay on all groups is reduced proportionately 
to their income-elasticities; if the price rise is compensated by higher 
income and total outlay, the monetary expenditure pattern changes 
but the quantities are not affected. All this applies exactly at average 
level only, but approximately at other levels as well. 

The assumption o- = 1, on the other hand, implies that, apart from 
the income effect, the money pattern of expenditure is not affected by 
price changes. If the income effect of a price rise is compensated by 
a corresponding rise in total outlay, the consumption of the commodity 
group rising in price is reduced in real terms, and the consumption 
of other groups increases, so as to leave the distribution of outlay 
constant. The reduction may be brought about partly by smaller quan 
tities of all commodities in the group being bought, partly by sub 
stitution of lower-priced for higher-priced items ; and similarly for an 
increase in consumption. This hypothesis, if satisfied, would be statis 
tically very convenient, for it would mean that prices enter into the 
demand function in an aggregate only and not individually, which 
would simplify the equation. It will, however, be shown that the 
assumption cannot be considered as realistic. 

The assumption a = % is simply a compromise between the two 
extremes. Each of these three assumptions was tested by solving the 
regression equations with the least-square method on its basis. On the 
whole, the model with o- = J was found to be most satisfactory, in the 
sense that it leaves least of the variation in expenditure per head on 
the commodity groups unexplained. The exception is rent, for which 
the model with a- = gives a considerably better fit. 

It was then finally decided to use a mixed model in which 
f or * = 2, j ^ 2 or i^L 2, j = 2 

and thus 0-22 = 

(1 Wz 

There is a sound theoretical justification for the hypothesis. Ex 
penditure on housing, particularly with regard to owner-occupied 


houses, is planned on a long-term basis and cannot be quickly adjusted 
in response to short-term price movements ; hence no appreciable sub 
stitution between housing and other commodity groups is likely in the 
short run. This, however, implies that the change in housing expendi 
ture in response to income changes, or the income-elasticity of demand 
for housing, obtained here refers to short-term effects only. Long-term 
effects of relative prices are included in the trend, i.e. the effect of 
time, and cannot be isolated from other changes over time. 

Having fixed upon the model, it is a simple matter to derive the 
constants l>i and d^ by multiple regression analysis. Since m 1 and t are 
not highly correlated, the effects of income and time can be isolated 
with some confidence. In the case of each commodity group, the intro 
duction of time is found to improve the fit considerably over that 
which is a simple regression on m 1 would give. 

From the results, the effects of price changes, or the price-elas 
ticities of demand, may also be calculated. It must, however, be borne 
in mind that neither direct nor cross price-elasticities are estimated 
independently of the income-elasticities, and the results obtained for 
them are very much influenced by the underlying assumptions made 
for the elasticities of substitution. On the other hand, the income- 
elasticities of demand are, on the whole, little affected by these assump 
tions. This is so because they are, broadly speaking, obtained from 
changes in real income per head, which are relatively large, whilst the 
price-elasticities would be estimated from differentials in price move 
ments, which are comparatively small. 

2. Results Based on Total Expenditure 
The resulting demand functions can be written as follows : 

vi = 75-91 + -1953 (m 288 3) + 36-01 

= 21-93 + -0106 (TO - 288-3) - -81 

= 41-12 + -1959 (m - 288-3) 9 W^fgJ 

149-36 + -5982 (m - 288-3) 25 


Herein Pi = 1,000 for 1936-39 (i = 1, 2, 3, 4) 

t =. for 1952/53 and measured in years, thus ranging from 

4 to -f- 4 over the period studied. 
Vi and m measured in . 
The equations can also be written in another form : 

v l = -1953m 13-56 J - 3-54 - -75 

1,000 1,000 1,000 

=. 0106m- .30 17-93 


= - 5982m - 9 7 - io 84 - 401 

The fact that the constant terms in these equations are all nil, or 
strictly speaking negligible, is accidental. We also have w\ =. 2633, 
w 2 = "0760, wg = -1426, w~4 = -5181. 

These results are interpreted as follows : On the average over the 
period 1948-57, expenditure per head was 288.6s., of which 75. 18s., 
or 26 -3 per cent, went on food; 21. 19s., or 7*6 per cent, on housing; 
41.2s., or 14-3 per cent, on clothing; 149. 7s., or 51-8 per cent, on 
miscellaneous items. At the margin of total outlay, expenditure was 
distributed as follows: 19- 5 per cent on food, I l per cent on housing, 
19-6 per cent on clothing, 59-8 per cent on miscellaneous items. 
As stated above, the figure for housing represents short-term effects 
only. An increase in price of any group brought about a higher 
outlay on that group and a lower outlay on all others. For example, 
an increase in food prices by 265 points, which is 10 per cent of the 
average price index level, implies that 3. 12s. more is spent on food, 
2s. less on housing, 19s. less on clothing and 2. 11s. less on miscel 
laneous items. Furthermore, apart from price and income changes, 
food expenditure tended to decrease by 15s., housing expenditure to 
increase by, clothing expenditure to decrease by 1.3s.6d. and 
miscellaneous expenditure to increase by 17s. 6d. each year. 

At average income and price level, the following values are ob 
tained for the income-elasticities of demand : 


Exi _ _ Ex 2 _ 1A Ex 3 Ex ., .._ 

-= = 1%: ^== = 14 ; -== =. 1 o / ; ^= =. 1 ID. 


Clothing thus appears to have the highest income-elasticity of demand, 
but the demand for miscellaneous items is also elastic, that for food 
is inelastic and that for rent very inelastic, apart from long-term effects 
included in the trend. This is the sort of result one might have expected 
to find ; and indeed, the analysis may merely have as economics and 
economic statistics is often alleged to do started from false premises 
and reached foregone conclusions ! 

















For the average price-elasticities =-^ the following values are obtained : 
. j=l 





As pointed out before, too much weight should not be given to 
these latter results, but if they are correct, the demand for each com 
modity group is inelastic with regard to changes in its price, and that 
for housing particularly so. Any price rise in one group causes outlay 
on each of the other groups to fall. 

In order to assess the reliability of the results obtained here, the 
unexplained portion of the variation in consumption per head for each 
commodity group may be considered, first as a percentage of the 
variation in the dependent variable in the regression the proportion is 
then 1 jR 2 , where R is the multiple correlation coefficient and 
secondly as a percentage of the variation in the original variable Vt 
which still contains the effect of price changes. The results indicate a 
very good fit and are as follows : 

Food Housing Clothing Miscellaneous 

Unexplained variance in 

% of variance in : 

transformed variable 9-29 -98 2-74 1-30 

original variable -22 -27 -82 -09 

Furthermore, it is of interest to consider the effect of alternative 
assumptions upon the results. It goes without saying that the results 
obtained for price-elasticities depend very much upon the assumptions 
made for substitution elasticities; but this does not necessarily apply 
to the results for income-elasticities and trends. In the four models 
studied here, the range within which the results in each case derived 
by multiple regression on the income variable and time vary is as 
follows : 

Food Housing Clothing Miscellaneous 

Income elasticity -57 -14 1-27 1-09 

of demand at to to to to 

average level -74 1-36 1-38 1-15 

Annual change in 

expenditure per UOs.6d. + 4s.0d. fl.6s.6d. + 14s.0d. 

head, other to to to to 

things equal + 8s.6d. + 18s.6d. +fl.8s.0d. 


The resulting income-elasticities of demand for food, clothing and 
miscellaneous items are seen to vary very little. Only for housing, the 
income-elasticity would be sensibly affected by the assumption; but 
using alternative models, the fit would become much worse, since the 
model <Jij 1 would leave 2 21 per cent, and the model v^ = 1 even 
6-47 per cent of the total variation unexplained instead of -27 per cent. 
The model based on cry = would also be inferior with regard to the 
fit, particularly in the clothing group, where 2-37 per cent instead of 
82 per cent of the variance would be unexplained. This justifies the 
retention of the chosen model and the placing of a fair degree of 
reliance upon the numerical results regarding the income effects. The 
results for the trend are not quite so stable, in particular the trend for 
food seems somewhat uncertain; but the trend for housing and mis 
cellaneous items is always positive, that for clothing always negative, 
no matter which assumption is made. 

An arbitrary assumption made with regard to the income-elastici 
ties, combined with the derivation by least squares of the linear trend, 
would also imply a considerably poorer fit. For example, if in addition 

to the assumption ^ =1,1 the assumption -=j - =1 (i = 1, 2, 3, 4) 

1 2 / 

is introduced, the unexplained portion of the variation for housing is 

made almost nine times larger. The assumption * I !/ * ~ ~. 


would not greatly affect the fit for housing and miscellaneous items, but 
the unexplained variation would be nearly doubled for clothing and 
nearly trebled for food. This feature offers further support for the 
thesis that the demand functions obtained here are fundamentally 

3. Relations between Income and Expenditure 

It is easy to transform the equations derived for expenditure per 
head into equations for expenditure by all consumers. If V t represents 
consumption expenditure on each commodity group, M total consump 
tion expenditure (all measured in million) and P population (in 
millions), we have: 

-p(l3-56^f^-3 54 

1,000 1,000 1,000 



P (~ 3 56 fMo - 3 55 rnhn + 4 89 T^n 

\ -iUUU _L,UUU J..UUU 

9 7 j w v 

"vSo- 1 17 ) 


The question now arises: Can M itself be predicted on the basis 
of some indicator for income? H. W. Arndt and B. Cameron suggest 
that it can be done on the basis of non-farm disposable income.* This 
hypothesis should now be examined. 

Total consumption expenditure may be considered as a linear 
function of total disposable income, or of non-farm and of farm dis 
posable income. The validity of this model may be queried on theore 
tical grounds, for it implicitly assumes that prices and population size 
do not affect the decision by the nation how much to save and how 
much to spend altogether. It is, however, a convenient model. There is 
also a practical objection against using such an equation for estimating 
the respective influence of non-farm and farm income ; for the result 
will be heavily influenced by the long-term increase in money income 
over the period, which largely reflects population growth and price 

The second, though not the first, objection is met by estimating 
the regression coefficients from the equation 

M ^N , e 

T = a + 5 r + r 

where / denotes total, N non-farm disposable income. If F stands for 
farm disposable income so that N + F = I, the equation can be written 

M al + IN + c = (a + 6) N + aF + c 

Data for I can be obtained from Table IV (p. 19) of National 
Income and Expenditure 1956-57 by deducting item 13b income 
taxes from total income or outlay. Strictly speaking, estate and gift 
duties should also be deducted, but this is a minor item. Data for N 
represent revised estimates of the figures given in Table I (p. 110) 
of "An Australian Consumption Function". 

Applying the method of least squares to the equation in its first 
form, the finding is that 

= 99768 + _. 07178 

About 95 per cent of the variation in -y- is explained by the 

regression. This means that it is certainly better to use non-farm and 
farm income separately than combined, in order to explain variations 
in consumption expenditure. 

Rewritten, the equation would become 

M = 148-8 + -9259 N -0718 F 

* H. W. Arndt and B. Cameron, "An Australian Consumption Function", 
Economic Record, Vol. 33, No. 64, April 1957. 




This would seem to imply that other things being equal, consumption 
expenditure falls slightly when farm disposable income rises. Since 
this is not plausible and in any case the effect of variations in farm 
disposable income is small, it seems justifiable to replace the last term 
by a constant, obtained by substituting the average value of F over 
the period amounting to 399. The consumption function then assumes 
the form 

M= 120-2+ -9259JV 

This expression may be substituted for M in the equations relating 
Vi to M, P, p lf p 2 , ps, P4 and t . 

It is of interest to see how closely the calculated values for V\, 
Vzt Va and ^4 approximate the actual values. The calculation can be 
made on the basis of (a) actual total consumption expenditure, or 
(b) non-farm disposable income. In either case the price indices as 
given in the Monthly Review of Business Statistics are used, and 
t assumes successively the values 4, 3, . . . . , +4. The results 
are as follows: 


Expenditure on : 





All Groups 

1948/49: Actual 






Calculated (a) 












1949/50: Actual 






Calculated (a) 












1950/51: Actual 






Calculated (a) 












1951/52: Actual 






Calculated (a) 












1952/53: Actual 






Calculated (a) 












1953/54: Actual 






Calculated (a) 












1954/55: Actual 






Calculated (a) 












1955/56: Actual 






Calculated (a) 












1956/57: Actual 






Calculated (a) 













u, The fit seems satisfactory, though of course it cannot be as good 
when based on non-farm disposable income as when total consumption 
expenditure is used. The demand functions thus seem to give a good, 
if broad, description of what has happened to consumption in Aus 
tralia since the immediate post-war years. 

Canberra University College. 

AGRICULTURE 1922-1956* 

1. Introduction 

Since agriculture is such an important sector of the New Zealand 
economy, it is surely surprising that there exist no official or un 
official estimates of net farm incomes for the interwar period, nor of 
net productivity in agriculture for any period at all. This article is 
an attempt to fill this gap in our statistics by presenting some estimates 
of capital, net income, and net output in farming, which were derived 
by the authors as the by-product of a larger study of time-series pro 
duction functions and supply functions for New Zealand agriculture. 
In deriving these estimates, considerable care has been taken to check 
the results by using as many different methods as possible. While, we 
consider, therefore, that they are the best estimates that can at present 
be secured from the available raw data, we are only too well aware of 
their imperfections and it is to be hoped that they will form the basis 
for informed criticism leading eventually to more detailed research 
and improved results. 

Full details of the calculations and of the estimating procedures 
adopted are being published as a separate monograph available from 
the authors on request. In this article we give only the final estimates 
of capital, income, and output together with a very broad indication 
of the methods used. Throughout the tables which follow, all data 
given in real terms have been expressed in 1949/50 prices. The year 
1949/50 was chosen as base year because in New Zealand it was a post 
war year of reasonable internal and external stability, it was free 
from complications such as the 1948 appreciation of the New Zealand 
exchange rate and the 1950/51 wool boom, and lastly it was the year 
in which occurred the latest census of agriculture. 

2. Real Capital Employed in New Zealand Agriculture 

Table I gives the final estimates of real capital divided into live 
stock, plant and machinery, and improvements to land. Little difficulty 
was experienced in deriving the value of livestock but some comments 
are necessary here on the methods used for estimating plant and 
machinery and improvements. 

(a) Plant and Machinery 

The method used was to commence with the depreciated value, in 
1949/50 prices, of the plant and machinery on farms as reported in 

* The Senior Author of this article is Statistician of the New Zealand Meat 
and Wool Boards Economic Service, but the views expressed are personal. Grateful 
acknowledgement must be made however for the advice and encouragement received 
from colleagues in the Economic Service. 





the 1949/50 Census of Agriculture. This base year figure was then 
extended backwards and forwards using a series of real net investment 
in plant and machinery. This in turn was derived, after allowing for 
depreciation, from a gross investment series built up from the official 
statistics of local production and imports of farm plant and machinery 
deflated by a specially constructed index of farm machinery prices. 

Value of Total Real Capital on New Zealand Farms 







000 (1949/50 

















































































































































































(b) Improvements to Land 

This series is derived from the published statistics of the value of 
improvements in the Government valuations of rural counties. These 
have been deflated by a specially constructed index of the cost of 
improvements thus giving the value of improvements at depreciated 
1949/50 replacement cost. 


The rationale underlying this procedure is that it is general 
practice for improvements to be valued at depreciated replacement 
cost, but it must at once be conceded that our method suffers from the 
following imperfections. 1 

First, in periods of rapid change in the prices of primary products, 
when open market land values were rising or falling in sympathy, it 
is likely that the full effect was reflected by Government valuers not 
as it should have been in changes in unimproved value only, but also 
in changes in the value of improvements. For this reason it is likely 
that the published value of improvements is too low in the 1930 period 
and too high for the years since 1951. It is not possible however to 
measure the magnitude of this effect. 

A second difficulty is that the annual valuation figures as published 
are not the result of an annual revaluation of every county. It is more 
likely that at the least each county has been revalued only about once 
every five years. The annual figures can therefore only be relied upon 
to give an accurate estimate of changes in the value of improvements 
for all rural counties, in periods when the rate of investment in 
improvements in all counties is proceeding at the same rate as in the 
counties which are in fact being revalued. This means that the series 
gives a somewhat distorted picture in periods when investment in 
improvements was not proceeding uniformly throughout the country 
or when investment in improvements was in general slowing down or 
speeding up. For these reasons it would be unwise to rely too much 
on the figures as an indicator of annual investment in improvements, 
even though they are quite suitable as an indicator of the general 
trends in the capital employed in the form of improvements. 

3. Factor Incomes in Farming and Net Farm Output 

Our conceptual approach in calculating farm income and pro 
ductivity is that of national income accounting. In this approach 
farming is regarded as a separate industry employing and paying 
factors of production, and also purchasing goods and services from 
other industries, which purchases form some part of the gross output 
of those other industries. In order to arrive then at the net contribution 
made by agriculture to the national income, a deduction from gross 
output must be made for these purchases both when dealing in terms 
of current prices and constant prices. The residual, found after 
making such a deduction, equals the total rewards paid to the factors 
of production whether owned or hired by the farmer. In constant prices 
it represents the true net productivity of agriculture. 

Tables II and III give our completed estimates of income and 
expenses in current prices and in 1949/50 prices. We begin by de 
fining the terms used in these tables. 

1. An excellent appraisal of this whole question of using official valuation 
figures to derive estimates of investment in improvements, is to be found in G. O. 
Gutman: "Investment and Production in Australian Agriculture", Reviezv of 
Marketing and Agricultural Economics, Vol. 23, No. 4, pp. 253-273. 






Oi CO 
g <u co 

^ f 1 

te g {-j 




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o ,jc rH I-H in f~ o rH m it oo m 




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CO m O t- ON 

o^in^rf * 







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(a) Rounded to n 
(b) Provisional es 









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CO * i-H i-H in CO CM CM CM CM 




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12. Total Non Factor Inputs 
13. Net Output 

14. Gross Output 









in in o 2; so t- m o o ON co o 
Tf m m "* co in P-H o CM i> o so 




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12. Total Non Factor Inputs 
13. Net Output 

14. Gross Output 









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1. For all items expressed in current prices we have used the terms 
incomes and expenses; when expressed in 1949/50 prices we have 
used the terms output and input. 

2(a) By Gross Farm Income we mean the total gross receipts at farm 
gate from the sale of farm produce, net of commissions, transport, 
and other selling costs, and after allowing for inter-farm sales. 
It includes an adjustment for the value of changes in livestock 
(b) Gross Farm Output means Gross Farm Income in 1949/50 prices. 

3. Factor Expenses means those amounts paid out by farmers to 
factors of production used in farming, such as wages, rent and 
interest on borrowed capital ; plus amounts paid by way of taxes 
such as rates and land tax 2 but not income tax. 

4(a) Non-Factor Expenses means all expenses paid out by farmers 

other than factor expenses, 
(b) Non-Factor Inputs means non-factor expenses in 1949/50 prices. 

5. Net Farm Income means income available to farmers (before pay 
ment of income tax) and equals gross farm income less the sum 
of factor expenses and non-factor expenses. 

6. Factor Incomes equal the sum of Factor Expenses and Net Farm 
Income, and equals Gross Farm Income minus Non-Factor 

7. Net Output equals Gross Farm Output minus Non-Factor Inputs. 
Our definitions can be summarized in the following two identities : 

Gross Farm Income = Non-Factor Expenses + Factor In- 
(in current prices) comes (i.e. Factor Expenses + 

Net Farm Income). 

Gross Farm Output = Non-Factor Inputs + Net Output, 
(in 1949/50 prices) 

Factor incomes, or the total income arising in agriculture, repre 
sent the contribution made by agriculture to the national income in 
current prices. And net output represents agriculture s real contribu 
tion to the real national income or the net productivity of agriculture. 

We can now review the figures given in Tables II and III. Table II 
gives our estimates of non-factor expenses, factor expenses, and net 
farm income for the years 1921/22 to 1955/56. Table III gives, for 
the same years, our estimates of non-factor inputs and net farm out 
put. These two tables are closely related to each other. Up to and 
including line 11, identical items of expense and input appear on the 
same lines in each table and together they make up the total of non- 
factor expenses and non-factor inputs in line 12. From line 13 on, 
the two tables differ. In Table III we simply give in line 13, net output. 
In Table II total factor incomes are divided into the constituent items 

2. In this respect we follow the current practice of New Zealand Department 
of Statistics in the official estimates of national income. 


making up factor expenses, i.e. wages, interest, rent, rates and land 
tax in lines 14 to 18, and net farm income in line 21. 

In making our estimates the basic data available were as follows : 

(i) The value of farmers incomes and farm wage payments 
calculated from the frequency distributions of incomes given 
in Income Censuses of 1926, 1936 and 1945. 

(ii) The official estimates of net farm income for the post-war 

(iii) The official estimates of gross farm income for the years 

(iv) The official estimates of volume of farm production for the 
years 1922-1956. 

This data was then used in the following way. For those years 
for which income data is available i.e. the census years and the post 
war years it was possible to make an estimate of total farm expenses 
by deducting net farm income from gross farm income. The problem 
then was to estimate farm expenses and net farm income for the 
i nter censal years, given gross farm income for these years. These esti 
mates were derived in two stages. First, for as many categories of 
expenditure as possible, independent estimates of each item were 
calculated either from official sources, e.g. rates and land tax collected, 
or as in the case of fertilizer, from the figures of local factory pro 
duction plus imports. 

For some other items, e.g. fuel used, and repairs and maintenance, 
consumption factors, secured from farm budget studies, were applied 
to the various components of the stock of equipment in use each year. 

In making these estimates of money expenses and real inputs there 
was a considerable degree of interdependence. In some instances data 
on quantities were the more readily available and, after being expressed 
in terms of 1949/50 prices, special price indices were applied to convert 
them into current prices. In other cases the procedure was reversed 
and price indices were used to convert basic data expressed in current 
prices into terms of 1949/50 prices. The end result is the series of 
money expenses given in Table II and of real inputs given in Table III, 
excluding in both cases the item other expenses and other inputs 
in line 11. 

These other expenses consist of the remaining known items of 
farm expenditure for which it was not possible to make direct estimates 
in the manner just described. They consist of the following items : 

(i) Transport costs and distributive margins on those com 
modities such as fertilizer, seeds, requisites, etc., which were 
calculated at ex factory cost or landed cost. 
(ii) Payments to farm contractors, 
(iii) Insurance premiums, accountancy and legal fees, 
(iv) General expenses. 

For the census years and post-war years the total of these other 
expenses could be readily calculated from the identity : 


Other expenses = Gross Farm Income (Net Farm Income and 
Independently Estimated Expenses). There then remained 
the final problem of interpolation for the intercensal years. 

The method adopted was to convert the censal year estimates of 
"other expenses" into 1949/50 prices, using for this purpose a new 
index of the price of farm input. These figures for other real inputs 
were then interpolated arithmetically and the interpolated real figures 
converted back into terms of current prices using the same index of 
prices of farm input. 

Net farm income for each year was then calculated as the differ 
ence between gross farm income and total expenses, and net farm out 
put as the difference between Gross Output and non-factor inputs. 

In view of the rather arbitrary nature of this interpolation pro 
cedure, it was desirable that the results be checked as far as possible, 
against estimates of expenses or of income secured in some other way. 
Though the data available for such checks are not as plentiful or 
informative as we would wish, it has been possible to effect compari 
sons of our results with the results of some prewar sheep farm and 
dairy farm surveys. These comparisons encourage us to believe that 
our methods have not led to very grave error. 

4. Some Observations on the Results 

Some interesting conclusions emerge if we compare the changes 
between 1938/39 and 1955/56 in net farm income and net farm 
output. Such a comparison forms the substance of Table IV which 
shows in summary form the derivation of the net income and net 
output figures from Tables II and III and also gives indices of the 
price of non-factor and factor inputs. The figures for the base year 
1949/50 are also shown. 

This table shows that, between 1938/39 and 1955/56, whereas net 
output only rose by about 12 per cent, net farm income in the latter 
year was more than five times greater than in 1938/39. 3 This disparity 
is much more than can be accounted for alone by changes in the general 
price level ; the reasons for it, as the table shows, are as follows : 

(i) There was a favourable change in the farmers terms of 
trade, the rise in the price level of output being greater 
than the rise in the price level of non-factor inputs, 
(ii) There was a shift in the relative distribution of total factor 
income away from interest and wages paid towards net farm 
income. This resulted from the fall in the incidence of mort 
gage debt due to inflation and repayment of mortgages, and 
from the virtually stationary farm labour force as between 
the two years. 

3. A similar result to that secured in Table IV has been secured by deflating 
the expenditure and income figures from the pre- and post-war sample of dairy 
farms and sheep farms mentioned earlier. This comparison, which is given in the 
monograph, indicates that the increase in real non-factor inputs occurred mainly on 
sheep farms. 


(iii) Real net output did not rise nearly as much as real gross 
output because of the inordinate rise in non-factor inputs. 
This is a matter which calls for some further comment. 

It is possible to think of three considerations, all of them as yet 
immeasurable in their effects, which might be held responsible for the 
large increase in non-factor inputs, most of which it will be noticed 
is in the item "other inputs" which it was not possible to measure 

First, the permanent labour force was virtually the same in 
1955/56 as in 1938/39 and many of the farm operations, e.g. fertilizer 
spreading, which would otherwise have required an increase in the 
farm labour force, have been done to an increasing extent by con 
tractors using their own machinery. There is not a great deal of 
information available about farm expenditure on contractors services 
and for this reason no attempt has been made to estimate them directly. 
They are included in the item other inputs and as such explain part 
of the increase in non-factor inputs. 4 

Secondly, it is possible that some proportion of non-factor inputs, 
in recent years, represents items of a quasi-capital nature (such as 
expenditure involved in bringing land back into full production) which 
farmers have been able to charge against revenue. There is, too, an 
effect arising from the considerable backlog of repairs and maintenance 
on buildings, fences, etc., which had accrued over the late 30 s and 
the war years. The considerable rise in farm incomes dating from 
1950 meant that farmers were in a position to make up for these 
arrears. So that actual spending on repairs and maintenance in recent 
years may well have been in excess of the notional figures we have 
allowed and this excess would form part of "other inputs". It is quite 
conceivable therefore that New Zealand farmers could continue to 
achieve the 1955/56 level of gross output with a lower level of non- 
factor inputs, which of course implies a higher level of net output. 
If the current fall in farm prices causes a fall in farm spending such 
a rise in net output could well be registered in 1958/59. 

The third, and probably most important, factor accounting for 
the rise in non-factor inputs is that, with a stationary labour force, 
increased gross output has been achieved by a very great increase in 
the ratio of fixed and working capital to labour. The relatively small 
increase in net output which has resulted suggests that we may be 
running into diminishing returns to capital but this requires careful 
econometric confirmation. 

But in any event the results suggest that we should look closely 
at the possibility of reversing recent trends by increasing the ratio of 

4. It is of course possible to argue that contract services should really be 
included in factor inputs or at any rate the labour content of those services; but 
apart from the lack of data mentioned above there is the objection that the group 
of firms engaged in contract work perform services for industries other than 
farming just as does say the machinery-repair industry, and there seems therefore 
more justification for treating them as an industry in their own right rather than, 
in some sense, as part of the farm labour force. 


labour to capital. For much of the capital used in farming has a high 
import content and it appears that New Zealand is now entering 
into an era of fairly severe import scarcity just as it is also in the 
middle of an era when the ratio of labour to land and other resources 
has changed considerably in favour of the former. 


New Zealand Meat and Wool Boards Economic Service. 
Canterbury Agricultural College. 


Notes to Table II and III Gross and Net Income and Output 

The following notes give a brief indication of the sources used 
and estimation procedures adopted for each item given in Tables of 
Gross and Net Income and Gross and Net Output. Full details are 
available in the monograph referred to in the main text. 

Tables II and III 

Line 2 Farm Requisites from Import Statistics. 

3 Fertilizer from Industrial Production and Import Statistics. 

4 Lime from Industrial Production Statistics. 

5 Seed Imported from Import Statistics. 

6 Fuel, Oil and Grease expense rates applied to stock of trucks and tractors. 

7 Electricity and Power expense rates applied to stock of milking machines, 

shearing machines, etc. 
8 Repairs and Maintenance expense rates applied to stock of equipment and 


9 Railage and Cartage 1949/50 figure derived from N.Z. Meat and Wool 

Boards Economic Service sheep farm sample and New Zealand 

Statistics Departments Dairy Farm sample other years based on the 

1949/50 figure adjusted by volume of production. 

10 Depreciation Derived from the series of real capital invested in farm 

improvements, plant and machinery. 

11 Other Inputs Interpolated in real terms between census years as described 
in the main text. 

Table II: Gross and Net Income 

Line 14 Wages were interpolated for census years on the basis of an index of 

paid workers combined with the index of farm wage rates. 
15 Interest payments from applying average interest rates to the rural 

mortgage debt and to the total of bank advances to stock and station 

16 Rent paid is the sum of reported rentals received for Crown land plus 

6-5 per cent of the unimproved value of leasehold land. 
17 Rates collected by rural local bodies as officially reported. 
18 Land Tax collected as officially reported. 
21 Net Farm Income for the years 1925/26, 1934/35, 1944/45 from the 

Official Censuses of Income. For 1938/39, 1946/47 to 1955/56 from 

Official National Income Statistics. For other years net farm income 

equals gross farm income minus total expenses. 
22 Gross Farm Income from Official Statistics. 

Table III: Real Gross and Net Output 
Line 13 Line 14 minus line 12. 
14 Derived from the Official Statistics of Volume of Farm Production. 


1. The Basis of the Acceleration Principle 

The period of World War II marks a fundamental shift in the 
formulation of the acceleration principle. We do not here refer to those 
more sophisticated modifications in the direction of a more "flexible 
accelerator", such as the introduction of distributed lags or allow 
ance for unused capacity on the one hand or bottlenecks on the other 
which have been designed to make the accelerator more "realistic". 
Rather, we are concerned with something much more fundamental. In 
particular, we are concerned here with the change from the pre-war 
conception of induced investment as a function of the rate of change 
of consumption to the latter-day view that it is a function of changes 
in income (or output). 

It is worth tracing through this change of ground by economists 
and examining the arguments by which it is justified. In early post- 
Keynesian writings the acceleration principle was conceived to express, 
following J. M. Clark, 1 a relationship between the level of investment 
and the rate of growth of consumption. Thus, to take two examples : 

Carefully stated, it [the acceleration principle] can be made to yield informa 
tion concerning the movements of investment from a knowledge of the move 
ments of consumption. Samuelson. 2 

The Acceleration Principle . . . concerns exclusively the effect of a net increase 
in consumption expenditures upon induced investment expenditures. Hansen.3 

In the post-war period, parallel with the renewed interest of 
economists in problems of economic growth in which sector the 
acceleration relationship is seen as the determinant of a "required" 
rate of investment rather than as a causal explanation of the level of 
investment there has been a virtually unanimous move away from 
this position. Now investment is related to the growth of income, not 
consumption. Thus: 

This error of thinking in terms of a ratio between capital and consumption 
rather than between capital and total output or income is very frequent in 
economic literature. It probably goes back to the idea that consumption is the 
final aim of production and that therefore all capital is used for the production 
of consumer goods. This is true in a stationary society. Domar. 4 
It will be noticed that I have posed the problem in terms of the effect on 
investment of changes in output as a whole (which of course includes invest 
ment) ; not, as has perhaps been more usual, in terms of the effect of changes 
in consumption only. In spite of the apparent circularity in my formulation, it 
seems to me to be the right one. Hicks. 5 

1. "Business Acceleration and the Law of Demand", Journal of Political 
Economy, 1917. 

2. "A Synthesis of the Principle of Acceleration and the Multiplier", Journal 
of Political Economy, Dec. 1939, p. 786. 

3. Fiscal Policy and Business Cycles, New York, 1941, p. 274. 

4. "The Problem of Capital Accumulation", American Economic Review, 
Dec. 1948, p. 789n. 

5. Trade Cycle, Oxford, 1950, p. 38. 



This change of view has been endorsed by Baumol, 6 Goodwin, 7 
and others, as well as by Hansen himself. 8 Let us look at the arguments 
put forward in favour of the new position : 

. . . but what is the meaning of the ratio between the stock of capital and 
that part of its output which is sold to consumers? Surely the whole plant 
and equipment of General Motors is not used for the production of passenger 
automobiles (more correctly only those to be used for non-business purposes), 
while trucks and Diesel engines are produced in mid-air. It hardly makes any 
difference to the management from the point of view of utilization of capital, 
its profitability, investment prospects, etc., whether the capital is used to 
produce consumption goods, materials to be used for further production, or 
investment goods. Domar.9 

The building of houses, for instance, reckons as investment activity; but an 
increase in the demand for new houses induces investment in brickworks, 
sawmills, and glassworks, just in the same way as an increase in the demand 
for cigarettes induces investment in cigarette-making machinery. Hicks. 10 

At first sight, this shift of position appears as little more than a 
minor change in definition, and the arguments for it seem convincing 
enough. However, the change is basic, because it represents a very 
important change of principle. The essence of the acceleration prin 
ciple as an explanation of investment, 11 is that it proceeds from the 
premise that the demand for investment goods is a derived demand. 
From this it follows immediately that the demand for investment goods 
must derive from the demand for final consumption goods, since these 
are the only goods which are bought for their own sake, by definition. 
The demands for all other types of output are themselves derived from 
elsewhere, ultimately from the demand for consumption goods. 

Therefore, if we think of the acceleration relationship as deter 
mining in some sense an equilibrium or "required" rate of investment, 
it is not good enough merely that the rate of investment matches 
changes in output. (Indeed, to insist that it is, is to come perilously 
close to re-asserting Say s Law of which more hereafter.) There must 
also be congruence between the growth of investment and the expan 
sion of consumption. It is basic to the job of the acceleration principle 
that it state this necessary congruence. 

Perhaps the point may best be established by taking an extreme 
example. According to the Domar-Harrod formula for equilibrium 
growth, the "required" rate of growth of investment is given by 

= cur, where a is the marginal propensity to save and a- the 

"capital coefficient". 12 Now consider the limiting case when a = 1. 
Then if, say a = J, the equilibrium rate of growth of investment will 
be, 1 X 25 = -25 or 25 per cent. Now in what sense can the system 

6. Economic Dynamics, New York, 1951, p. 39. 

7. Income, Employment and Public Policy (Essays in Honour of Alvin H 
Hansen), New York, 1948, Part I, Ch. V. 

8. Business Cycles and National Income, New York, 1951, p. 173. 

9. E. D. Domar, he. cit., p. 789. 

10. J. R. Hicks, op. cit., p. 38. 

11. For the present we are ignoring altogether autonomous investment; care 
will be taken of this in Section 4 following. 

12. Vide E. D. Domar, "Expansion and Employment", American Economic 
Review, March 1947, p. 41. 



be said to be in equilibrium when capital goods are being piled up at 
a compound rate of 25 per cent, while consumption remains fixed? 
In what sort of output would this rapidly growing investment be 
embodied? Certainly not in the form of sewing machines or bakers 
ovens, for the demand for clothing and bread is stationary. .Nor could 
the investment be made in equipment for producing sewing machines 
or ovens, nor again in buildings to house such equipment, for the same 
reason. And so on. J. B. Clark has suggested that, in these circum 
stances, there is no reason why the system should not be geared to 
"build more mills that should make more mills for ever". 13 But the 
elementary point remains: who is going to buy such mills, and for 
what purpose? 

The dilemma arises, of course, from the fact that savings (invest 
ment), as Keynes had sternly to remind us, must be embodied in 
physical forms which are technically dated and always involve some 
carrying costs. So long as the rate of interest on money is positive, it 
will never pay a private entrepreneur to store up savings in investment 
goods, the marginal productivity (realizable) of which is zero in virtue 
of the stationary consumer demand. As Dobb has pointed out : 

J. B. Clark s picture . . . can never be actualized, since in the real world 
mills are always specialized to a particular current stream of demand con 
nected with consumption in the near future, and not a stream of demand 
stretching to an infinite future. Hence when consumption changes, the effect 
is transmitted back along the stream of demand to all the intermediate and 
constructional processes connected with it and adapted to it. 14 

This seems clear enough. Nevertheless, we still have to meet the 
argument of the "moderns" that capital goods themselves require 
other capital goods to produce them, and hence that an increase in 
investment will induce (or "require") a further increase in invest 
ment, in the same manner as will an increase in consumption. Now it 
is certain that, if there is an increase in investment, then this primary 
increment of investment will induce a secondary increment of invest 
ment. But how does the primary increment in investment come about 
in the first place ? It is certainly true, as Domar points out, that pro 
duction of trucks requires capital quite as much as does the production 
of cars. But there is a vital distinction between cars and trucks : cars 
are bought for their own sake ; trucks are not ! Hence, an increase in 
the demand for trucks and for capital with which to produce them 
presupposes an increase (or anticipated increase) in the demand 
for goods requiring transportation. Similarly, with Hicks s example: 
additional cigarettes will be bought for their own sake ; but an increase 
in the production of houses (investment) presupposes an increased 
demand for house-room essentially a consumer good. Indeed, if this 
increased demand for house-room, at the consumer level, were not 
forthcoming, the new house-building could not proceed for long. 

13. J. B. Clark s preface to the English translation of Rodbertus Over 
production and Crises, quoted from M. Dobb, Political Economy and Capitalism, 
London, 1937, p. 92. 

14. M. Dobb, op. cit., p. 104. 


2. Investment as a Function of the Rate of Change 
of Consumption 

It will be seen, therefore, that there is merit in both points of view, 
the old and the new. On the one hand, investment is never undertaken 
for its own sake. (We are still abstracting from autonomous invest 
ment.) Ultimately, investment has its justification in increased output 
of consumer goods. On the other hand, an increase in the rate of 
investment, induced by expanding consumption demand, will certainly 
induce further investment outlays in turn. 

Fortunately, it appears possible to combine the requirements of 
both viewpoints. Let us call the immediate investment required (say 
bakers ovens) in the period dt primary investment, and denote it 
by /i. Then, using the notation of the differential operator, viz., 

d n c 

D n C = -r , and taking v as the acceleration coefficient : 
at n 

/! = v^ = vDC. 

Thus, for example, if the consumption of bread were expanding 
linearly such that C = C -j- ~bt, /i would be equal to v & and constant, 
with oven-makers supplying a fixed quantity of ovens in each period. 
Apart from replacement expenditures by bakers and oven-makers, no 
further investment outlays would be indicated. 

However, if consumption (of bread) were expanding at an accel 
erating rate, Zi would also be required to expand so that an increasing 
quantity of ovens could be supplied to bakers. The increment in prim 
ary investment which would be called forth would be : 

D/! = vD 2 C. 

Now this increment in primary investment will require secondary 
investment to sustain it. If we call this second-round investment /2, 

7 2 = 

and DI 2 = 

In turn, any increment in secondary investment will require a tertiary 
investment outlay, so that: 

Z 8 = vDI 2 = v*D*C. 

This process may be continued indefinitely, so that we get an accelera 
tion relationship of the form: 

I = /! + 7 2 + J 3 + . . . + I n + . . . 

= V DC + v*D*C + v*D*C + . . . + v n D n C + (1) 

Thus, we obtain an Accelerator which, like the Multiplier, is given as 
the limiting sum of an infinite series. 15 

15. This is a peculiar-looking series, although it is not an uncommon form 
in certain problems of physics. For the economist, the relationship (1) may 
perhaps best be looked at as a rudimentary input-output form, with each term of 
the series representing successive stages in the production process. If we had 
columns representing consumption and the successive stages of the provision of 
capital equipment (see Table 1 below), the flow through each column would 
depend upon the rate of change in the flow through the preceding column. 


It is clear from (1) that, if consumption is stationary, i.e. if 
dC/dt = 0, then the required investment is zero ; if consumption grows 
linearly, i.e. if dC/dt is constant, the required investment will also be 
constant. An interesting case is that where consumption grows at a 
steady rate such that C = C e rt and hence D n C = r n C, so that : 

1 vrC (1 + vr + v*i* + v*r* + ...) .............. (2) 

If vr ^ 1, then this series is divergent, and hence there would be no 
amount of investment which would satisfy the equilibrium conditions. 
For example, if t> = 4 (& = ^) and r were equal to 25 or 25 per cent, 
there would be no amount of investment which would provide sufficient 
capital to sustain this rate of growth of consumption. The case is 
analogous to the divergent Multiplier when the marginal propensity 
to consume is greater than unity, and may be ruled out as a practical 
possibility. If vr < 1, the r.h.s. of (2) converges, so that: 

7 = -*-- Co6rt 

1 v r 
or generally in terms of the differential operator : 


L ~ 

from (1). 

Thus, we have arrived at a form of the accelerator which explicitly 
relates the level of required or induced investment to changes in 
consumption. Moreover, this formulation meets the point that invest 
ment as well as consumption goods require capital for their produc 
tion; for an increment of investment, which is itself called forth by 
an expansion of consumption, will in turn induce further investment. 
But the causal sequence, in the nature of a chain-reaction, must be 
maintained. Investment, of itself, cannot justify investment; invest 
ment cannot pull itself up by its own bootstraps. Once this condition 
is introduced, we eliminate the circularity which Hicks is constrained 
to recognize in his own formulation. Indeed, given this fundamental 
boundary condition, it can be shown that our form of the acceleration 
relationship is only a particular case of the present day concept of 
the relationship which makes investment a function of the rate of 
change of income. Immediately from (3) : 

I vDI = vDC ...................... (4) 

so that 

I = vDY, 
where Y is income. 16 

Solving (4) for I we get the general solution : 

I = AeV" eV fer*/ 9 DC dt, 

where A is an arbitrary constant and Ae t/v the complementary func 
tion. Moreover, since our particular equation (1) requires that if 

C is constant so that -^ = 0, I = 0, then A must equal zero and we 

have the particular solution : 

16. This result may be obtained directly from (1) by differentiation and then 
subtraction from ( 1 ) . 


/ & */ e-V v DC dt (5) 

which gives us the general functional dependence of I upon -^ 

in more compact form than (I). 17 

3. The Accelerator and Equilibrium Growth 

The basic difference between our form of the accelerator and 
that currently in general use may be illustrated by reference to the 
Harrod-Domar model of equilibrium growth. Consider, for example, 
the consequences for equilibrium growth of a change in the marginal 
propensity to save and, hence, in the rate of expansion of consumption. 
Since A<7= (1 a) AY by definition, any change in the marginal 
propensity to save, a, will alter the relationship between the increment 
of consumption and the increment of income. Although the Harrod- 
Domar conditions are designed to maintain an appropriate relationship 
between investment and increments of income, they do not, in these 
circumstances, achieve the same in respect of the increments of con 

Let us take an arithmetic example in period form. For this 
purpose, we need the accelerator: 

I t V&Ct-i + V*& 2 Ct-2 + V*&*Ct-3 + 

which can be shown to be the particular form of the simple unlagged 
accelerator : 

I t = v (Y t -T t - l ).^ 

In our example, we take the marginal propensity to save as 10 per 
cent and the " capital coefficient" as J (v = 4) over the first five 
periods. This warrants a rate of growth of 2 per cent. In the sixth 
period, the marginal propensity to save is supposed to rise to 20 per 
cent. Hence a new rate of growth of investment of 5 per cent is 

The side of the table to the left of the double line sets out the 
changes of income, investment and consumption appropriate to the 
Harrod-Domar model. It may easily be checked that the required 
relationship between total investment and the increments of income, 
the sine qua non of equilibrium in the model, is maintained throughout, 
This would, on the face of it, confirm Domar s explicit belief that 
changes in the marginal propensity to save and the " capital co 
efficient" are consistent with equilibrium growth. 19 

However, turning to the r.h.s. of the table where our accelerator 
is in action, it may be seen at a glance that the change in the marginal 
propensity to save between the fifth and sixth periods not only ruptures 

17. It will be noticed that the arbitrary constant arising from this integration 
will have merged with the complementary function and hence will also equal zero. 

18. See Appendix where the case of a lagged accelerator is discussed. 

19. "These results were obtained on the assumption that a, the marginal 
propensity to save, and <r, the average productivity of investment, remain constant. 
The reader can see that this assumption is not necessary for the argument, and that 
the whole problem can be easily reworked with variable and <r", E. D. Domar, 
"Expansion and Employment", toe. cit., p. 42. 










Induced Investment 




I 4 &c. 

























































































Figures on the r.h.s. represent the investment which would actually be 

induced, those in italics the investment "required" to satisfy the 

conditions for equilibrium growth. 

equilibrium, but does so explosively. This rupture of equilibrium, it 
will be seen, is brought about because of the distribution of investment 
flows and investment goods capacity. In some sense, a rise in the pro 
pensity to save requires that the structure of production should become 
more "roundabout". Resources have to flow from the lower stages of 
investment goods production to the higher stages. This could only occur 
if two (very unreal) additional conditions were fulfilled: 

(1) Capital goods would have to be of the nature of Professor 
Swan s "mechano sets". 20 It must be possible to transmute 
(say) bakers ovens and capacity for making bakers ovens 
into steel mills and capacity for making steel mills, and so 
on, since the higher stages of production have suddenly to be 
expanded at the expense of the lower stages. 

(2) The initiative to expand investment must come in the indus 
tries furthest removed from the consumption goods indus 
tries, the change in demand for whose products has precipi 
tated the new situation. Incidentally, the investment deci 
sions so taken must be in the opposite direction to those in 
dicated by the change in consumer demand. 

This second point highlights a general operational difficulty 
involved in the Harrod-Domar conception of equilibrium growth, once 

20. T. W. Swan : "Economic Growth and Capital Accumulation", Economic 
Record, November 1956. 


we allow the parameters of the system to change. According to their 
model, a rise in the marginal propensity to save requires that the rate 
of investment should be increased. But a rise in the marginal pro 
pensity to save can only manifest itself (in the market) by a slowing 
down of the rate of growth of consumption and hence the demand for 
consumer goods. The natural reaction of entrepreneurs to this will be 
to reduce their investment outlays, not increase them. The decision to 
reduce investment would, of course, first be taken in the consumption 
goods industries; but this would soon be transmitted back along the 
structure of production. 

It may be objected that these models of equilibrium growth are 
merely ideal statements of conditions which do not claim any causal 
or operational significance. However, both Domar and Harrod tend 
to give them one. Thus, Domar suggests that equilibrium expansion 
may be attainable, if the government were prepared to underwrite the 
appropriate growth of income, or if entrepreneurs themselves were 
prepared to exercise a "kind of collective faith", as Mrs. Robinson 
has described it. Harrod also believes that entrepreneurs may be will 
ing to tread the path of equilibrium growth and to expand their invest 
ments at the required rate, so long as their maturing investments are 
continually justified by an appropriate growth of income. 21 But as our 
arithmetic example shows, an appropriate expansion of income is not 
of itself a sufficient condition for equilibrium expansion. 

Finally, it may be pointed out that our argument of this section 
in no way depends on lags. Introduction of a lagged acceleration 
relationship would of course enormously intensify the difficulties of 
transition from one value of the marginal propensity to save to 

4. Autonomous Investment 

We have argued above that the notion of investment inducing 
further investment presupposes that the primary increment of invest 
ment is itself "justified" by an appropriate expansion of consumption- 
demand. This is not true, by definition, of autonomous investment ; 
and we must therefore take account of this. 

Autonomous investment may be divided into two broad categories : 
(i) that investment which does not have to satisfy the normal com 
mercial canons of profitability, e.g. churches, armaments, and WPA 
projects; and (ii) that investment which, while having to be justified 
by productivity criteria, does not depend upon additional market- 
demand either currently or in the immediate future, e.g. cost-reducing 
innovations, new products which can capture market-demand from 
old products, and long-range investment projects such as dams, irriga 
tion schemes, oil exploration, etc. 

21. Cf. e.g. "The line of output traced by the warranted rate of growth is a 
moving equilibrium, in the sense that it represents the one level of output at which 
producers feel in the upshot that they have done the right thing, and which will 
induce them to continue in the same line of advance . . .", R. F. Harrod, Economic 
Journal, March 1939, p. 22. 


In practice, of course, it may often be difficult to draw a clear-cut 
line between investment which is autonomous and that which is in 
duced. This is perhaps most true in the case of innovations. Many 
innovations only become economical if a large output can be assured 
and consequently their introduction often depends upon some actual 
or anticipated expansion of demand. More generally, the introduction 
of innovations, as well as many other forms of autonomous investment, 
will depend upon the general climate of expectations, and this will 
clearly depend to some extent on the degree in which demand condi 
tions generally are expansive. However, conceptually the distinction 
between autonomous and induced investment is clear enough. 

At all events, the important point for the present discussion is 
that an increase in autonomous investment will induce further invest 
ment in precisely the same way as an increment of consumption. There 
fore, if A is autonomous investment and I n is net investment, then : 
I n A eV v fe-V v D (A + C) dt. 

Perhaps the clearest-cut case of autonomous investment is pure 
replacement expenditure. Moreover, an increment of replacement ex 
penditure will have the same Multiplier and Acceleration effects as an 
increment of consumption or of autonomous investment. Therefore, if 
R is pure replacement expenditure and I g is gross investment : 

I g A + R eV*f er*/D (A + C + R) dt 
and gross income T g will be : 

Y ff = A + C + R et/vfe-^D (A+C + R) dt. ... (6) 

The acceleration relationship set out in (6) is, of course, much 
more cumbrous than the usual formulation; but in extenuation the 
writer may claim for it three important advantages: (i) it clearly 
distinguishes between the dependent and independent variables in the 
relationship, thus avoiding the circularity of the more usual formula 
tion; (ii) this statement of the independent variables has important 
analytical advantages particularly in study of the trade cycle because 
the rates of change of consumption, autonomous investment and re 
placement expenditure are likely to vary as against each other during 
various phases of the cycle ; and (iii) the formulation here given shows 
explicitly that increments of autonomous investment or replacement 
expenditure are not merely additive, but exert a strong leverage on 
total investment in the same way as an increase in consumption. 

5. Conclusion 

The fundamental flaw in the present-day approach to models of 
equilibrium growth and to the Acceleration Principle (which is in 
volved in all these models, directly or indirectly) is the belief that it 
is the growth of income which justifies the required rate of investment. 
This belief comes very close to re-asserting Say s Law. This alleged 
"law", it will be recalled, began from the premise, correct in itself, 


that in the process of production sufficient income will be distributed 
to the factors of production as will be required to purchase the total 
product (since gross-output = gross-income). However, it then pro 
ceeded to commit the non sequitur that therefore "supply creates its 
own demand . This doctrine was attacked at various times by a whole 
host of writers, including Malthus, Sismondi, Marx, Rosa Luxemburg, 
and Hobson. But so long as strong, if not noticeably smooth, capitalist 
expansion continued, Say s Law remained virtually undisputed within 
the academic halls. It was left to Keynes (or perhaps more correctly 
the Great Depression) finally to explode it. Although people may 
receive sufficient income to clear total output, they may not choose to 
spend it. 

It is an interesting commentary upon the way economic truths 
have a way of changing with the state of the markets that, with the 
return of "normal" economic conditions (if war, rebuilding from war, 
and preparation for more war may be called normal human pursuits) , 
economists have started to forget that, ultimately, it is consumption 
which must justify production. The term " under-consumption has 
almost disappeared from economic literature. Now we say that, if only 
savings are spent (invested), there need be no failure of effective 
demand. But can we pile up our savings in investment goods without 
inquiring into the demand for investment goods? Certainly private 
investors are not going to "spend" their savings in this fashion, unless 
there is maintained an effective demand for the products of the 
investment goods so created. To assert otherwise is to go along, at least 
half way, with M. Say; for isn t it to say that a sufficient supply of 
investment goods will create its own sufficient demand? 

Canberra University College. 


Consider the case when there is a one-period lag between an 
increment of consumption and the induced primary investment, a 
one-period lag between an increment in primary investment and the 
corresponding secondary investment outlay, and so on. Then: 

It = V&C t -2 + V 2 A0,_4 + V*&C t - Q + . . . 

= v (0,-! - C t - 2 ) + v* (C t - 2 - 2C t - 3 + CU) 

Using the shift operator E,* we get : 
I t = v Ct_i (1 E~ l ) + i 

r-l (1 - ff- 

tttf-1 (1 #-1) 

* For the algebra of the shift operator, E, see R. D. G. Allen, Mathematical 
Economics, London (1956), Appendix A. 


Hence : 

I t - vE~ l I t + vE-*I t = vCtr-i vE- l C M 
or I t vlti + vlts = vCti v Ct 2 
and It = v (Yti Y t 2) 

which is the usual form of the accelerator with one-period lag. Although 
investment in period t depends upon the change of income between the 
two previous periods, that change in income in turn depends upon the 
movement of consumption over a succession of previous periods. 


The August 1958 issue will contain: 

Investment in Human Capital and Personal Income Distribution Jacob Mincer 

The Demand* for Currency Relative to the Total Money Supply Phillip Cagan 

On the Theory of Optimal Investment Decision J. Hirshleifer 

Making Currency Reserves "Go Round" ,. A. E. Jasay 

On Measuring Economic Growth: A Comment .. . ._ Herbert S. Levine 

Reply G. Warren Nutter 

Rejoinder . ., Herbert S- Levine 

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Vol. 8, No. 30 - - May 1958 

The Liberal Succession Crisis in New Zealand, 1893 R. T. Shannon 

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D. J. Mulvaney 

The Australian Socialist League and the Labour Movement, 1887-1891 . . . . R. J. O Farrell 

The Origin of Robertson s Land Acts . . . ., D. W. A. Baker 

New Zealand, Fiji and the Colonial Office, 1900-2 D. K. Fieldhouse 

Australia s Place in the "Swing to the East", 1788-1810 M. Roe 

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On the first page of the preface of A Contribution to the Theory 
of the Trade Cycle 2 Professor Hicks states, "if the theory which is 
here offered stands up to theoretical criticism, the next stage will be 
the concern of statisticians, econometrists, and (most of all) economic 
historians, who will have to see whether it does prove possible to make 
sense of the facts in the light of these hypotheses". This note is a first 
step in the "next stage", a comparison of Professor Hicks theory of 
investment with post-war investment figures in Australia and the 
United States. The comparison shows that, at least in respect to 
investment behaviour it is "possible to make sense of the facts in the 
light of Professor Hicks hypotheses". It also suggests factors that do 
not support Professor Hicks model as a whole. The model provided a 
good framework for examining investment behaviour; but the exam 
ination suggested substantial modifications to at least one hypothesis 
that Professor Hicks considers important. 

The post-war period was chosen because of a belief that some 
major criticisms of Professor Hicks model have less weight when the 
model is used to explain the behaviour of Western economies since the 
Second World War rather than that in earlier periods. Professor 
Hicks theory of investment can be summarized as follows : investment 
is composed of two parts, one of which, induced investment, is related 
to past changes in output, while the other, autonomous investment, in 
creases by a constant percentage each year. Critics have questioned 
whether the assumption that autonomous investment increases at a 
constant rate is a useful one. Might not fluctuations in the level of 
this type of investment, which is all investment not induced by changes 
in the level of output, also be significant in the trade cycle? 3 This is 
an important criticism, but since the war there has been in both Aus 
tralia and the United States an underlying buoyancy in investment 
that suggests that a part of investment may have increased steadily, 
despite small falls in the level of real output. Thus the theory is more 
likely to be applicable to the post-war period than to earlier periods. 

In order to facilitate comparison with published figures for invest 
ment some slight changes have been made to the theory as set forth 
in A Contribution to the Theory of the Trade Cycle. The most im 
portant of these is that gross figures for investment and income have 

1. I am indebted to Dr. K. A. Blakey for commenting on a draft of this note. 

2. London, Oxford University Press, 1950. 

3. See e.g. A. D. Knox, "On a Theory of the Trade Cycle", Economica, Vol. 17 
(Aug. 1950), pp. 325-326. 



been used, whereas Professor Hicks model is in terms of net invest 
ment and income. This change was made because of the great difficulty 
in distinguishing between replacement and net investment statistics. 
It is supported by the view that, even in theory, it is better not to 
make the distinction. 4 Secondly, in A Contribution to the Theory 
of the Trade Cycle autonomous investment increases at a constant 
geometric rate over time, i.e. the investment equation may be written 

I t = A (c) +Z> (TW-IW) .................. (1) 

(where It is investment and Y t income in year t, t is time, b the acceleration 
coefficient, and A and c parameters relating to autonomous investment.) 

For convenience this has been linearized, so that autonomous invest 
ment increases at a constant arithmetical rate over time, and the 
investment equation is: 

I t = A + I (Yt-i - Y M ) + ct .................. (2) 

Over all but very long periods of time (say over periods under 15 
years) there is no great difference between the two equations. Equa 
tion (2) will be compared with Australian and American investment 
figures. It will be noticed that figures for the United States have been 
taken back closer to the war years than those for Australia. It was 
desired to compare the theory with a relatively free enterprise economy. 
The United States dismantled her war-time controls more quickly than 
did Australia. 

The "White Paper" national income and expenditure estimates 
for Australia are in money terms. The first step is to convert to real 
terms those for gross national product and gross private domestic 
investment. The published figures were deflated by means of a com 
posite index which is a weighted average of the C series retail prices 
and the basic materials and foodstuffs wholesale prices indexes pub 
lished in the Monthly Review of Business Statistics. The C series 
index was given twice the weight, in the average, of the wholesale prices 
index. The figures for the composite index are given in Table I. In 
Table I the deflated figures for gross national product and gross private 
domestic investment less farm stocks are also given. 5 

It can be seen by inspection that to lag investment one year 
behind changes in gross national product is likely to give the best 
results. The multiple correlation coefficient and regression equation for 
investment on time and changes in gross national product (lagged one 
year) were calculated by the classical least squares method. A multiple 
correlation coefficient of -98 was obtained, together with the following 
regression equation: 6 

At first equation (2) seems upheld by the strikingly high value ob- 

4. See e.g. A. D. Knox, op. cit., pp. 321-322. 

5. As farm stocks are greatly influenced by factors outside Australia, it was 
thought better to exclude them from the investment figures. 

6. The figures under the coefficients are the standard errors adjusted for 
degrees of freedom. 


Real Income and Investment, Australia 1947-48 to 1956-57 

Current value figures in millions of pounds deflated by 
the composite index 





Deflated Gross 


Deflated Gross 
Private Domestic 









1949-50 .. 





1950-51 .. 





1951-52 . 










1953-54 .. 
1954-55 .. 
1955-56 .. 





1956-57 .. 





*Base 1946-47= 100. ^ 

f Excluding changes in farm stocks. 

Sources: For 1948-49 and later years the undeflated figures for G.N.P. 
and investment were taken from the 1957 White Paper on National 
Income and Expenditure. For 1947-48 they were taken from the 1956 
White Paper. 15m. was added on to the 1947-48 figure for G.N.P. 
to make it more comparable with those of later years. The composite 
index w r as calculated as described in the text from indexes published 
in the Monthly Review of Business Statistics. 

tained for the multiple correlation coefficient, but examination of the 
regression equation suggests that including "t" has no significant 
effect. 7 If "t" is omitted so that the investment equation becomes 

a correlation coefficient of -97 is obtained together with the regression 

l t = 396-9+ . 00 (Yt-t-Yt-z) 

Thus a modified form of Professor Hicks theory of investment fits 
the facts well in the post-war period in Australia. Two interesting 
points emerge from his comparison with these facts. First there appears 
to have been a large and stable amount of autonomous investment in 
Australia over the period examined, but this investment seems to be 
at a constant, rather than increasing level over time. 8 Secondly the 
acceleration coefficient is much smaller than Professor Hicks assumed. 
A Contribution to the Theory of the Trade Cycle assumes an accelera 
tion coefficient greater than one. Professor Swan has shown that this 
assumption is not necessary to obtain the behaviour shown by the 
model. 9 Nevertheless 61 is a lower value for the acceleration principle 

7. Using assumptions similar to those outlined below when testing the hypo 
thesis that "b" is greater than one, the hypothesis that "c" is equal to zero is accepted 
at the -05 level of significance. 

8. Probably between a quarter and a third of this "autonomous investment" 
was undertaken from motives of replacement, and would not correspond to auto 
nomous investment in Professor Hicks model. 

9. "Progress Report on the Trade Cycle", Economic Record, Vol. XXVI (Dec. 
1950), p. 198. 


than those generally considered plausible. If it is assumed that the 
observations are a random sample from a hypothetical infinite popula 
tion in which, given the values for change in gross national product, 
the values for investment are normally distributed, a student t test 
can be used to test the hypothesis that the acceleration coefficient is 
equal to or greater than one. As would be expected from the size of 
the coefficient and its standard error, at a -01 level of significance the 
test statistic falls well within the area in which the hypothesis is 
rejected. 10 We can safely conclude that in Australia the acceleration 
coefficient was well below unity over the years under observation. 


Real Income and Investment, the United States 1947 to 1957 
Billions of 1947 dollars 


Read Gross 

Change Real Gross 
in Private 
G.N.P. Domestic Investment 

1947 . 





243 9 















1956 . 




Sources : Survey of Current Business, July 1957 and February 1958. 

The United States Department of Commerce publishes in the 
Survey of Current Business figures for the United States for real 
gross national product and real gross private domestic investment. 
These are given in Table II for the years 1947 to 1957. Inspection of 
Table II will show that any lag between change in gross national 
product and investment is less than one year, and is thus not discern 
ible in the published figures. The multiple correlation coefficient and 
the regression equation were again calculated by the least squares 
method. A value of -92 was obtained for the former, together with the 
regression equation 

4.7 1-94.1- 

I t = 29-52 + ;*J (Y t - IW) + J 

If similar assumptions to those made in the Australian case are made, 
whether the acceleration coefficient is significantly less than one, and 
whether the coefficient of "t" is significantly different from zero, can 
be tested using a student t test. At the -01 level of significance both 
the hypotheses that the acceleration coefficient is equal to or greater 
than one and that the coefficient of "t" is zero are rejected. Thus there 

10. This means that the probability of getting a value of -61 for the acceleration 
coefficient is less than -01 if the "true value" is greater than or equal to one. 


is again a somewhat surprisingly low value for the acceleration co 
efficient; but unlike its counterpart in Australia autonomous invest 
ment does increase significantly over time. In general in the American 
case the regression equation is not such a "good fit" as in the Aus 
tralian case. It "explains" 84 per cent of the variance of investment 
as against 96 per cent "explained" by that for Australia. Nevertheless, 
92 is a sufficiently high value of the correlation coefficient to say that 
it is at least "possible to make sense of the facts in the light of 
Professor Hicks hypotheses". 

Apart from the discovery of the degree to which Professor Hicks 
hypotheses fit the facts, two conclusions emerge. The first, that unlike 
its counterparts both in Professor Hicks model and in the United 
States, autonomous investment in Australia has not tended to increase 
with time is the less significant. It could be explained by an unusually 
high level of autonomous investment in the years 1949 to 1951 due to 
the almost unprecedented boom in Australia at that time, or even due 
to backlogs in investment still remaining from the war years. More 
stress should be placed on the second conclusion, that in both Australia 
and the United States the value of the acceleration coefficient is closer 
to one half than to unity, which contradicts the widespread belief 
among advocates of the acceleration coefficient that one is the lowest 
plausible value of the coefficient. 11 Acceleration effects appear to have 
been important in the economies examined, but they may be a less 
destabilizing influence than is believed by supporters of the principle. 

University of New England. 

11. See e.g. D. Hamberg, Economic Growth and Instability (New York, 1956), 
p. 45. 

IN THE SYDNEY MARKET, 1875-1955 1 

The purpose of this article is to present in summary form 2 some 
statistics of security prices and yields in the Sydney market for the 
period 1875-1955. It is believed they may be of use to researchers 

1. These statistics are part of the results of an investigation into security 
prices and yields in the Sydney market which has been carried out with financial 
assistance from the Sydney Stock Exchange, the Life Offices Association for 
Australasia, the Stock Exchange of Melbourne, the Bank of New South Wales and 
the Commercial Banking Company of Sydney Limited. For other results see 
D. McL. Lamberton, Share Price Indices in Australia (Sydney: Law Book Co. 
of Australasia Pty. Ltd., 1958) and "Economic Growth and Stock Prices : The 
Australian Experience", Jour. Bus. Univ. Chicago, xxxi, 3 (July, 1958). The 
statistics now presented for the period 1901-1955 were incorporated in a paper 
entitled "Some Aspects of Security Prices and Yields in the Sydney Market, 1901- 
1955" read before the Statistical Society of New South Wales in March, 1957. 
I should like to acknowledge the assistance of Miss Gwenda Cane, B.Sc., in this 
investigation and thank the firm of T. J. Thompson and Sons for lending their 

2. The monthly and quarterly series from which the annual values shown here 
were computed are available from the author, Department of Economics, University 
of New England. 


working on this period. While long term calculations from economic 
data, especially those involving the use of index number techniques, 
only provide somewhat impressionistic results and the securities market 
to which the data related was, for at least the greater part of the period 
covered, extremely narrow and of minor importance in aggregate capital 
formation, these series may be useful to indicate the broad changes in 
interest rates, local investment experience and the state of business 
confidence. In view of the growing belief that the role of oversea con 
ditions as the initiating factor in fluctuations in the Australian econ 
omy has been unduly emphasized, such series, by virtue of their being 
computed on a monthly and quarterly basis, may also prove of use 
in examining the timing of fluctuations. 

Share Price Indices 

The share price indices are designed as measures of investment 
experience. A chained value ratio formula has been used and the 
indices are intended to show what would have happened to an in 
vestor s funds if, at the beginning of 1875, he had bought all shares 
quoted on the Sydney Stock Exchange, allocating his purchases among 
the individual issues in proportion to their total monetary value, and 
each month by the same criterion redistributed his holdings among all 
quoted shares. No allowance has been made for cash dividend payments, 
brokerage or taxation. 3 

Price data were drawn from the following sources : Sydney Morning 
Herald financial pages, January 1875-September 1882 ; T. J. Thompson and 
Sons monthly Stock and Share Reports, October 1882-December "1903;-* 
Sydney Stock Exchange official sales records, January 1904-June 1936. 
Details of the capitalization of companies were obtained from the Sydney 
Morning Herald financial pages, the Australasian Insurance and Banking 
Record, the Australasian Joint Stock Companies Year Books, the monthly 
Stock and Share Reports of T. J. Thompson and Sons, Jobson s Investment 
Digest, and the Investment Service of the Research & Statistical Bureau 
of the Sydney Stock Exchange. 

The following indices 5 were computed : 

(i) Financial, monthly from January 1875 to June 1936 with base: 
average of the three years ended June 1939 = 100 (Table III 
and Graph 1). 

(ii) Commercial and Industrial, monthly from January 1875 to June 
1936 with base : average of the three years ended June 1939 = 100 
(Table III and Graph 1). 

(iii) Mining, monthly from January 1875 to December 1910 with 
base: average of the year ended June 1898 = 100 (Table III 
and Graph 1). 

3. See Alfred Cowles and Associates, Common-Stock Indexes (Bloomington: 
Principia Press, 1939), pp. 17-24, and D. McL. Lamberton, op. cit., pp. 45-47, for 
a fuller account of the methods employed. 

4. Gaps in this source in August, September, November and December, 1889, 
January and June, 1890, and March, 1897, were filled using the tables published in 
the Australasian Insurance and Banking Record. 

5. The Financial index is comparable with the Banking, Insurance and Trustee 
group index and the Commercial and Industrial index with the All Ordinary 
Shares (excluding financial) index published in Share Price Indices in Australia, 
Appendix 1, and currently computed on a daily basis by the Research & Statistical 
Bureau of the Sydney Stock Exchange. 



Shares included in Price Indices 



Commercial and 



Industrial Index 







five year 

to 1935 


ve year 

to 1935 


five year 

to 1910 








. . 










































































































The number of shares included grew from 7 in the Financial 
group, 5 in the Commercial and Industrial group and 5 in the Mining 
group in 1875 to 8, 10, and 21 in 1901. By 1936 the Financial group 
comprised 11 shares and the Commercial and Industrial group 47 
shares. However, as shown in Table I, new shares were added and old 
ones were deleted. The changing composition of the Commercial and 
Industrial list becomes most noticeable in the early twenties when 
of 40 shares included in 1925 only 11 had survived from 1920. 6 

Monthly high and low prices were recorded for all shares traded 
and this list constituted the population for sampling purposes. The 
sample used then comprised all shares which had sold each month for 
any three years between 1875 and 1936. Resources were inadequate for 
dealing with the large number of shares which remained in the sample 
during the 1920 s so further limitation was necessary. This limitation 
was carried out in random fashion while attempting to give representa 
tion according to size, type of enterprise and capital structure. Allow 
ance made for the relationship between ordinary capital and prefer 
ence and debenture capital partly took account of the debtor-creditor 
position of the companies. 7 The fact that low-priced shares show 
greater fluctuations in price than high-priced shares 8 was also taken 

6. In view of the nature of the indices the changing composition of the shares 
included should be considered, strictly speaking, in terms of total market value 
rather than number of issues. 

7. Cf. R. A. Kessel, "Inflation-Caused Wealth Redistribution: A Test of a 
Hypothesis", American Economic Review, XLVI, 1 (March 1956). 

8. Cf. Z. Szatrowski, "The Relationship between Price Changes and the Price 
Level for Common Stocks", Journal of the American Statistical Association 40 




into account. When all this had been done there remained the problem 
that shares which had traded continuously for a three-year period were 
not average stock exchange securities the average premium on shares 
included was considerably higher than that on shares excluded. So 
that some upward bias was introduced. Especially is this true of the 
mining index. Of more than 600 mining shares traded between 1875 
and 1910 only a few had a market "life" of three years ; in many cases 
the life was less than a year and frequently as short as three months. 
Although inter-company shareholdings were extensive and lead 
to duplication of weights, no adjustments were made. Oversea invest 
ment in Australian companies was not eliminated from the number of 
shares for the value product calculation. Where specific rights to issues 
of other classes of shares or to issues of shares by associated com 
panies were given and traded adjustments were made according to 
the realized value of the rights. 

Ordinary Share Yield 

The share yield shown in Table III and Graph 2 represents the 
arithmetic mean of the yields of all shares for which data were avail- 

Share Price Indices 


Base: Average of three years ended June, 1939 = 100 except 
for mining where average of year ended June, 1898 = 100. 
Sources: January, 1875, to June, 1936, Table 3; July, 1936, 
to December, 1955, D. McL. Lamberton, op. cit., Appendix 1. 



Security Yields 


Yield on ordinary shares is the average of quarterly yields 
while that on bonds is the average of monthly yields. 
Sources: Ordinary shares, Table 3; Bonds, January, 1875, to 
December, 1925, Table 3; January, 1926, to December, 1955, 
Commonwealth Bank of Australia. 

able in the last month of each quarter. The computations relate to the 
end of the month, except from 1914 to 1936 where they are mid-month 
values. The yield on individual shares was computed by expressing 
the dividend paid, or indicated, as a percentage of the price. Because 
of the difficulty of establishing what that dividend was considered to be 
at any time in the past the yield computations in the Stock and Share 
Reports 9 of T. J. Thompson and Sons and the Official Gazette of the 
Sydney Stock Exchange were used as a guide. As the Stock and Share 
Reports were available only from October, 1882, no attempt was made 
to compute yields for earlier months. 

Dividend Rates 

The dividend rate computations in Table II were confined to the 
period for which share yields were available but were not brought 
beyond 1900. They represent the weighted arithmetic mean of the end 

9. Gaps in this source in September and December, 1889, June, 1890, and 
March, 1897, were filled using the tables published in the Australasian Insurance and 
Banking Record. 



Mean Annual Dividend Rates of Companies 
Listed on the Sydney Stock Exchange 

1882 . 


1892 . 


1883 . 



. 9-1 

1884 .. 



. 7-1 

1885 .. 



. 7-1 

1886 .. 



. 7-0 

1887 .. 



. 7-6 

1888 .. 



. 7-7 

1889 .. 



. 8-1 

1890 . 



. 9-2 

1891 .. 


of year ordinary dividend rates of companies listed on the Sydney 
Stock Exchange. The weights employed were the issued ordinary 
capitals of the companies. 

Bond Yield 

The bond yield shown in Table III and Graph 2 was computed 
on the basis of sales deemed to have taken place at mid-month at a 
price equal to the mean of the high and low prices for the month 
adjusted for accrued interest and brokerage charges using the Finan 
cial Publishing Company s Comprehensive Bond Values. Price data, 
obtained from the same sources as the data for the share price indices, 10 
were as follows: 

1875-1887: New South Wales Government Terminable 1874-1902 bearing 
interest at 5 per cent per annum payable 1st January and 
1st July; 

1894-1900 : New South Wales Government Funded Stock 1912 Option bear 
ing interest at 4 per cent per annum payable 10th February and 
10th August; 

1901-1925 : All New South Wales and Commonwealth Government issues 
maturing in more than six months for which price data were 
available. The yield shown is the unweighted arithmetic mean. 

Although few sale prices were recorded after October, 1886, 
market activity did not come to as sudden an end as the yield series 
suggests. The Stock and Share Reports indicated sales without prices 
being recorded in November, 1886, and February, April and June, 
1887. Buyers were present in July, August, September and October, 
1887, throughout 1888, and from January to July and again in 
October, 1889. From April, 1893, until early in 1894, 4 per cent Funded 
Stock was on sale free of charges at all brokers. In November, 1896, 
3 per cent Funded Stock was made available on similar terms. 

The bond yield shown here differs statistically from both the short 
and long yields computed by the Commonwealth Bank of Australia for 
the period after 1925. However, overlapping computations for 1926 
indicated fairly close agreement with the Bank s long yield. 

10. Gaps filled as indicated in (4) above. 

1958 SECURITY PRICES AND YIELDS, 1875-1955 259 


Security Prices and Yields in the Sydney Market 1875-1955 
(Annual Averages) 


Share Prices 



Share Prices 


r inancial 


















































































































































































































































































































































































Nuffield College, Oxford. 




1949-50 TO 1953-54 

There is a general presumption that the poor have more children 
than the rich. 1 Studies have, however, been made in U.S.A., Canada 
and Sweden which tend to indicate that fertility decreases with in 
creasing incomes up to a certain income level only, after which it tends 
to increase again. 2 It appears that this trend applies to New Zealand 
as well. 

New Zealand income tax statistics show tables which relate num 
bers of income tax assessments to income groups and the number of 
children under sixteen in the family of taxpayers. The restriction to 
children under sixteen may slightly bias the results in favour of the 
higher income groups if the trend towards larger families in these 
groups was only of fairly recent origin. However, this limitation on 
our figures does not seriously vitiate the results. Independent evidence 
which takes into account all children tends to confirm the findings 
from income tax figures. It must also be pointed out that income taxa 
tion during the years under review covered the vast majority of all 
income earners and that only an insignificant number of persons with 
children was exempt from making an income tax return. 3 

The following table shows persons returning incomes with four, 
and with five and more children, as a percentage of persons with one 
or more children. Persons without children have been ignored. 


Persons with Four, and with Five and More Children, as percentage 

of all tax returns of Persons with One or More Children,, 

1949-50 to 1953-54 

4 Children 5 + Children 

Income Group Year ended 31st March 


200-400 . 


















400-600 .. ., 
600-800 .. ., 

.. 7- 














800-1000 . . 
1000-2000 . 

. .. 8- 











2000-3000 .. .. 13.0 9-5 13-2 11-3 10-3 5-0 8-1 7-8 7-5 8-1 
3000-4000 .. .. 11.4 11-1 11-1 12-6 9-5 5-5 7-1 5-9 6-9 7-0 
4000+ .. .. 12-4 11-3 12-3 12-8 13-4 7-1 5-9 5-8 6-3 6-0 

Sources : Report on the Income and Income Tax: Statistics of New Zealand, 
Department of Statistics, Wellington. 

1. See United Nations Department of Social Affairs, The Determinants and 
Consequences of Population Trends, pp. 80 and 86. 

2. Ibid., p. 87, footnote 153. 

3. Persons in receipt of incomes exceeding 300 and all persons engaged in 
any trade irrespective of the amount of income earned are required to furnish 


If we take the larger families first (five or more children) we 
find that there is a general tendency for the percentage of families to 
fall as income rises until the 800-1,000 bracket is reached. This is 
quite in line with what one would expect. The 200 to 400 group has 
the largest percentage of families with five or more children. Included 
in this group are probably a fair number of Maori families who have 
very large numbers of children. The general assumption holds here 
that very low incomes and lack of foresight in terms of family planning 
go hand in hand. As income rises and we reach the salaried and lower 
professional classes the size of family falls. 

But when we pass the 1,000 mark the size of families rises again. 
In two years out of five the 2,000 to 3,000 group, a really "high 
income" class, stands second only to the 200-400 "near-pauper" 
group. And the 3,000 to 4,000 group, although lower than the 
2,000-3,000, shows figures in three out of five years which exceed the 
600-2,000 percentages. 

When we come to the family of four we find in two years out of 
five a steady progression: that is, the higher the income the more 
families in that group have four children. In all but two cases, the 
4,000 + income receivers have the largest proportion of four children 

The importance of the trend towards larger families in the higher 
income groups can be seen from the fact that in 1953-54 twenty-nine 
per cent of all children under sixteen (149,751 out of 515,331) came of 
families with incomes exceeding 1,000 p. a. This compares with only 
17-1 per cent of all tax assessments and 24-1 per cent of all tax assess 
ments on persons with children, being on incomes over 1,000. 

There is no reason to assume that the fact of not having included 
taxpayers without children in our comparisons leads to an overstate 
ment of large families in the higher income groups. There are more 
people without children in the lower income groups, but it is impossible 
from the statistics to separate out those who are married without chil 
dren and those who are unmarried. Table II shows the percentage of 
tax assessments for people without children in the various income 


Tax Assessments on Persons Without 
Children in 1954 

Percentage of All Tax Assessments 
Income Group Percentage 


200-400 92-5 

400-600 79-3 

600-800 54-1 

800-1000 42-7 

1000-2000 44-2 

2000-3000 48-1 

3000-4000 46-2 

4000+ . 53-0 


The results of our figures from income tax statistics are cor 
roborated by an independent inquiry which was made by the New 
Zealand Department of Health in 1952. 4 Infants were divided into 
three groups according to the occupation of their fathers. The groups 
of occupations fell roughly into the following categories: Social 
Group I Unskilled workers ; Social Group II Those not in Groups I 
or III; Social Group III Employers and professional people. 

Table III shows the number of children in the different groups 
that were first-born, those that were the second child and those that 
were the third or subsequent child. All figures refer to the last two 
quarters of 1952. 


Births by Order in Certain Social Groups 
(Last two quarters 1952) 

% of Births at Different Parities 
3rd and 












.... 30-5 





.. .. 31-5 









Source : Report on the Medical Statistics of New Zealand, 
1952, Table X. 

The Report from which the above table is taken comments: "It 
is noteworthy that the percentage of third and later children in a 
family is greater than average in both Group I and Group III. It is 
substantially higher in Group III than in Group I. This may be in 
part accounted for by the slightly higher average age of persons in 
Group III. There is no doubt, however, that the restriction on large 
families that is seen in other countries in occupational groups of the 
type found in Group III is not met with here. The most restrained 
section in New Zealand is the middle group." 


Two points may be mentioned to account partially for the trend 
which we have shown to exist in Part I. 

It is well known that occupation and family size are strongly 
correlated. This applies in particular to the difference between urban 
and rural occupations, the rural birth rate being usually higher than 
the urban. 5 New Zealand is no exception. In 1956, for instance, the 
urban birth rate in New Zealand was below the average birth rate for 
Europeans 23-02 compared with 24-67 per 1,000 of mean population 
for the whole of New Zealand. 6 This means that the European birth 
rate in rural areas must be above average. 

4. See Report on the Medical Statistics of New Zealand, 1952, compiled by 
the Department of Health, Wellington, p. x. 

5. United Nations, op. cit., p. 85. 

6. See Monthly Abstract of Statistics, Tables 3 and 5. 


On the other hand, farmers have very high incomes in New Zealand 
and, in fact, constitute the majority of income receivers in the highest 
groups. Table IV shows the percentage of farmers in various income 
groups : 


Percentage of Farmers in Income Groups 
1949-50 and 1953-54 

% of Farmers in 
Income Group 1949-50 1953-54 




400-600 . . . 













. . 1 






4000 + 



Source : Reports on- the Income and Income Tax: 
Statistics of New Zealand. 

The prevalence of farmers amongst the rich in New Zealand may 
account partly for the trend towards large families in the higher 
income brackets. 

The second point which may be worth mentioning is a general 
social one. The whole social atmosphere in New Zealand is favourable 
to family life. Family allowances, free education, free medical services 
and the possibility for children to grow up in an uncrowded environ 
ment where there is scope for development personal and economic 
tend to make family life desirable, not to mention cultural factors like 
the spread of doctrines of natural child birth and emphasis on the 
emotional satisfaction obtained by having and rearing children. 

In such an environment economic considerations may well enter 
into the determination of family size in a highly conscious manner. 
Income receivers below 1,000 feel that a large family cannot be sus 
tained properly, especially if the wife works in order to make up a 
reasonable income, whereas the higher income groups are able to enjoy 
one of the advantages of life which consists, in the existing ethos, in 
having a large family. 

Obviously such statements can be made only very tentatively and 
it is hardly the economist s job to substantiate them. Nevertheless, 
personal observation as well as general considerations tend to lead 
towards some such conclusion. 


If there is substance in the considerations put forward in Part II 
two interesting conclusions emerge: 

Size of family is determined by occupational structure as much as 
by income structure. Thus, if farmers become high income earners the 


birth rate will remain high. On the other hand, if farmers leave the 
land, the birth rate will fall. In terms of general population theory 
this might mean that the hope for a reduction in birth rates in under 
developed countries will have to be centred on occupational changes as 
much as on income changes. If the number of people dwelling on the 
land can be reduced, birth rates may fall, even if incomes do not rise 
spectacularly. Thus industrialisation of backward countries will tend 
to solve several problems simultaneously. 

Another, even more hopeful conclusion for the future of mankind 
can also be drawn. If with advancing civilization a close correlation 
between economic and social prospects for large families and the actual 
size of families can be established as seems to be the case in New 
Zealand, the spectre of over-population to the point of "no standing- 
space seems to be banned. In other words, it is possible to hope that, 
with the growth of civilized living, parents will adjust their families to 
the economic environment in which the children will have to live. An 
even proportional development of productive forces and population 
will then ensue which would eliminate any contradictions between 
population growth and real income. 

University of Canterbury. 


Mr. R. R. Hirst, in his recent article, "Interstate Road Trans 
port", 1 discussed the principles which should be adopted by a regu 
latory authority to ensure economic division of traffic between existing 
transport agencies. He stated that: "Efficiency will be achieved when 
the traffic arising from the existing pattern of industry is divided 
between the sectors of the transport industry so that aggregate costs 
to society . . . are lower than for any other distribution" (p. 276). 

From this he argued that : " If the competing transport agencies 
calculate their charges by applying different percentage mark-ups on 
prime costs an economic division of traffic should develop between the 
competing sectors of the transport industry, providing the charges 
have the same ordering as the long run marginal social costs on which 
they are based. Thus the practice of differential freight rates is com 
patible with an economic division of traffic, providing the charge of a 
low cost producer for a particular unit of traffic does not exceed a less 
efficient competitor s charge for that traffic" (p. 277). 

The validity of the argument is not questioned, but it is necessary 
to point out that it is valid only if division of existing traffic is the sole 
object of transport regulation. There are, however, other economic im 
plications which should receive attention. The most important of these 
is the effect of transport rates on location of transport users, and it will 
be shown that differential freight rates may lead to a distortion of the 

1. Economic Record, November 1956. 


location pattern. Furthermore, the distorting effects of differential 
freight rates are not confined to location, but extend to any other factor 
or factors which, like location, may be substituted for, or are substitut- 
able with, transport. 

So far as location is concerned, a simple example will make the 
point. Differential freight rates mean, presumably " . . . differences in 
rates which are not explainable by cost considerations". 2 To avoid 
discussion of variations in cost, we may borrow Mr. Hirst s assumption 
of a homogeneous distance input or transport unit, a ton-mile. Assume 
that there are two possible locations for a new factory, identical in all 
respects other than transport. Location A is 60 miles from the raw 
material and market centre ; location B 45 miles from the same centre. 
If we assume that rail transport is the lowest cost medium for both 
locations, but that competition for traffic is such that its charge for 
servicing location A is less than the charge for location B, it follows 
that the prospective manufacturer will settle at A. The rail charge is 
still below that for road transport, yet the differential pricing pro 
cedure has resulted in wasting the economy s scarce transport re 
sources. Thus any pricing procedure which results in a charge which 
does not represent the marginal social cost of the resources necessary 
to make the service possible cannot lead to a rational resource pattern. 3 

So far reference has been made only to location, but it is clear that 
the argument can be extended to any factor of production which is 
substitutable at the margin for transport factors. This has been stated 
very clearly by W. Isard : 4 When in a simple economy a farmer with 
a given amount of capital and other resources chooses to apply his 
efforts to cultivating new land on the periphery of the hinterland of 
a growing town rather than at cultivating intensively a more limited 
quantity of old land near the town, in general he anticipates reaping 
greater returns despite the fact that he applies less of his available 
labour to cultivation and more to marketing his harvest. In effect he 
substitutes distance inputs (indirect labour inputs) for direct labour 
inputs. He finds it profitable to do so in the same way that in using 
a plough that he has built, he finds in profitable to substitute services 
of capital goods (indirect labour inputs) for direct labour inputs". 

Since the transport user decides on the combination of direct and 
indirect labour inputs on the basis of their respective prices, any 
deviation from long run marginal social cost pricing will have dis 
torting effects. 

2. D. H. Wallace: "Joint and Overhead Cost and Railway Rate Policy", 
Quarterly Journal of Economics, August 1934, p. 584. 

3. See : R. L. Dewey : "Criteria for the Establishment of an Optimum Trans 
portation System", American Economic Association, Papers and Proceedings, May 
1952, esp. p. 649. Prof. A. G. Pool : "The basis of Transport Charges", Journal of 
the Institute of Transport, Jan. 1955, pp. 45/48. Prof. G. Walker : "New Thinking 
in Transport", ibid., July 1955, pp. 159-65. 

4. "Distance Inputs and the Space Economy, Part 1 : The Conceptual Frame 
work", Quarterly Journal of Economics, May 1951, pp. 190-1. See also more com 
prehensive discussion by the same author in: Location and Space Economy (Massa 
chusetts Institute of Technology and John Wiley & Sons, Inc., N.Y., 1956) esp. 
Chapt. 9. 


Where the price of the transport service is below long run mar 
ginal social cost the transport user will, so far as he is able, substitute 
transport factors for other factors at the margin ; and where the price 
is above long run marginal social cost he will substitute other factors 
for transport factors. In other words, so long as the price of the trans 
port service deviates from long run marginal social cost, he will tend 
to use more or less respectively of the economy s scarce transport 
resources than considerations of economic efficiency would require. 

It is true, of course, that the transport users already mislocated 
as a result of the existing pattern of transport charges will be adversely 
affected by the adoption of any optimum pattern. It is doubtful, how 
ever, whether this is sufficient argument for the continuation of a prac 
tice which will ensure its perpetuation. Rational decisions on location 
and factor use can only be made if they are based on transport charges 
which reflect as accurately as may be possible the (cost of) resources 
used up in providing the service. 

One other short comment on Mr. Hirst s paper. He says that : l As 
a road is a more elaborate structure than a rail track it would be 
reasonable, a priori, to expect the track costs of road vehicles to exceed 
that of rail" (p. 283). 

There is no a priori reason why this should be so, since total track 
costs depend not only on initial construction costs, but also on mainten 
ance costs and the intensity of use. The intensity of use is important 
because neither rail track nor road maintenance costs are a linear func 
tion of the intensity of use since rail tracks and roads deteriorate 
through exposure to the elements whether they are used intensively or 
not. Both rail track and road maintenance costs tend to decline per 
unit of traffic as the permanent way or road is used more intensively. 5 
It is therefore not sufficient to refer only to construction costs, unless 
it is specifically assumed that intensity of use is the same for both 
types of route facilities and that there is no significant difference in 
maintenance costs. Neither assumption is likely to prove very realistic. 


N.S.W. University of Technology. 

5. See: Raymond, Riggs, Sadler: Elements of Railroad Engineering (John 
Wiley & Sons Inc., N.Y., 1947), Part 2, esp. p. 122. A. A. Walters: "Track Costs 
and Motor Taxation", Journal of Industrial Economics, Vol. 2, No. 2 (April 1954). 
H. Kolsen : "How to Pay for the Roads", Australian Quarterly, June 1957. Report 
of Committee of Transport Economic Research Relating to Road and Rail Transport, 
Part I: Road Transport Costs and Road Construction and Maintenance (Australian 
Transport Advisory Council, Melbourne, 1956), p. 58. 



In his note on the above subject, 1 H. D. Pridmore rather slides 
over the problem of explaining the equality of marginal and average 
products at the average product s maximum: e.g. "... the fact that 
the average product is unchanged by the addition of a unit of labour 
is often expressed by saying that the average product is a maximum ?2 
hardly convinces the majority of students. It omits the essential 
"why". Why, for example, does a monetary constancy of average 
product mean that average product is at its maximum whereas a 
momentary constancy of average cost means that average cost is at its 
minimum ? This is a serious question for the student whose mathematics 
are not of a sufficient standard to appreciate the similarity of the 
conditions for maxima and minima. For these students, an approach 
which does not lay such emphasis on momentary constancy of average 
product (average cost) at its maximum (minimum) would seem to be 

I have attempted such an approach below, and it seems as though 
it might have the added advantage of reconciling students to the dis 
concerting fact that schedules of marginal and average products 
(costs), drawn up without any special "cooking", more often than 
not do not give the required equalities at the maxima (minima) of 
the average data. 

r =. quantity of factor of production (output) 3 
OT = average product (average cost) 

m r = marginal product (marginal cost) associated with quan 
tities r and r + 1 of the factor (output). 

The following relationship (which corresponds to Pridmore s equa 
tion (3)) is implicit in these definitions: 

r.a r 


a r ( (r 

m r 

= + * 

r+ 1 
From this it is clear that if ^ 1, then - ^ 1, and vice versa. 

These are Pridmore s propositions 2, 3 and 4, and their converses. In 
addition, they enable one to say something about the relation between 
average and marginal values when the average values change at various 

1. This Journal, Aug. 1957, pp. 265-7. 

2. Ibid. f p. 267. 

3. The same symbols are used for product and for cost, with the definitions for 
the latter being given as bracketed alternatives. 


For the moment confining attention to the case of marginal and 
average product, one might visualize the usual, idealized, average 
product curve as a sort of inverted parabola. It is fairly obvious that 
average product rises at a decreasing rate, reaches a maximum at 
which it ceases rising and commences to fall, and then falls at a pro 
gressively increasing rate. In terms of the above expressions, r + 1 

d r 

starts above one and falls progressively until it is below one. - 

a r 

does exactly the same, which means that marginal product starts above 
average product, converges on it, becomes equal to it, and eventually 
falls below it. The point of equality between marginal and average 

product, - = 1, corresponds to the point at which average product 

d r 

has ceased rising and is about to fall, r + 1 == 1. 

d r 

The same procedure could be followed for average and marginal 
costs, with the obvious difference, of course, that the idealized average 
cost curve is similar to an ordinary, upright, parabola. In this case, 
of course, one is dealing with a minimum for average cost, as opposed 
to the previous maximum for average product. 

It might be pointed out that, in a schedule where discrete units 

are used, the same process occurs, namely that ti progresses from 

d r 

one side of unity to the other. However, the schedule may not contain 
any data which would make this expression exactly unity. This does 
not invalidate the general proposition, that marginal and average 
values are equal at either the maximum or minimum of the average 
value, because this proposition is strictly true only for continuous data. 
However, in practice, provided that the unit of measurement is small 
relative to the total to be measured (whether factors of production or 
output) the deviation from equality will be so slight as hardly to 

University of Cape Town. 

1 S C I E N T I A 

A Review covering All Sciences - 1958 Year Fifty-two 

SCIENTIA is the only review of its type which has a world-wide circulation deals with the 
most recent and fundamental problems of all branches of science can boast among its con 
tributors the most illustrious men of science in the whole world publishes articles in the 
native languages of their authors (English, French, Italian, German, Spanish) Each issue 
includes a Supplement containing the complete French translation of the articles which in the 
text are published in a language other than French. 

SCIENTIA has therefore a very strong appeal to the scientific-minded reader all over the 
world. Full details and a free back copy will be sent by applying to SCIENTIA, ASSO (COMO, 
ITALY), sending Ish. lid., or equivalent amount in other currency, preferably in air-mail 
postage stamps of your country, merely to cover packing and postage. For a number of the 
current year, please send 8sh., or equivalent amount in other currency, which will be 
deducted from the subscription price. Annual Subscription : 4/19/10. 


Sir Lennon Raws, Honorary Life Member of the Economic Society 
of Australia and New Zealand, died in Melbourne on 19 April, 1958. 
Professor Sir Douglas Copland writes: 

Sir Lennon Raws, Colonel W. L. Raws when I first met him in the 
early days of developing the Schools of Economics and Commerce at 
the University of Melbourne, played an important part in promoting 
economic study, in developing the interest of the business world in 
employing university graduates, and in the founding and fostering of 
the Economic Society of Australia and New Zealand. In all this work 
he was one of the pioneers from the business world of Melbourne, and 
therefore an ally of no mean stature to those of us in the academic 
world who sought to chart a new course. He had in an unusual degree 
a combination of the qualities of a genuine interest in and knowledge 
of the contribution to be made to business by those equipped with 
a broader academic training, and a recognition of the significance of 
the study of the economy as a whole in enunciating public policy. 

With this background he contributed much in the early days of 
the School of Commerce in the University of Melbourne, where he was 
a member of the Faculty as well as of the University Council, and 
chairman of its Finance Committee. For me he was a wise counsellor 
and valued friend over many years. He made my task of establishing 
good and effective relations with the commercial world so much the 
easier and more rewarding. This he did in his own right as a man of 
discerning intellect as well as Australian Head of Imperial Chemical 
Industries. When the Economic Society of Australia and New Zealand 
was established in 1924 he gave active support to a new venture that 
was to prosper and contribute much to a wider understanding of the 
working of the Australian economy in expansion and depression alike. 
He was a foundation member of the Editorial Board of the Economic 
Record for its first issue in November 1925, and remained a member 
until his death in 1958. To those of us who participated in the promo 
tion of economic study and research in Australia, Sir Lennon Raws 
will be gratefully remembered as one of the principal pioneers from the 
non-academic world in a venture that might have faltered but for 
the support that he and others with their wider interests from the 
world of commerce could so effectively give. 

The Business Archives Council of Australia (Victorian Branch) 
in conjunction with the Department of Economic History of the Uni 
versity of Melbourne, is arranging a conference on " Australian Busi 
ness History" at the University of Melbourne, October 24-25, 1958. 
Sessions will be chaired and papers given by: Professor Sir Douglas 
Copland, Professor Sir Alexander Fitzgerald, Messrs. H. L. White, 
I. McLaren, S. M. Gilmour, Dr. J. Ginswick, Dr. W. A. Sinclair, Pro 
fessor H. Burton, Professor W. Woodruff, Messrs. G. M. Blainey, N. R.** 
Wills, and Dr. A. Birch. 

During the conference a collection of Australian business records 



will be on display. It is hoped that representatives of both the business 
world and the universities will attend. Inquiries are invited to Pro 
fessor W. Woodruff, Department of Economic History, University of 

The first R. C. Mills Memorial Lecture was given, before an 
audience of some 700, in the Great Hall of the University of Sydney 
on 29th April. The speaker was Dr. Coombs, and his subject "The 
Conditions of Monetary Policy in Australia". With the lecture there 
has been published a memoir, bibliography and portrait of K. C. Mills. 
Copies may be obtained from the Department of Economics, University 
of Sydney; price 5/- for single copies, 4/- for orders of 20 or more, 
postage included in both cases: See "Books Received" for a notice of 
this publication. 


New South Wales: J. R. Wilson, c/o Department of Economics, Uni 
versity of Sydney, Sydney, N.S.W. 

Victoria: D. M. Hocking, Department of Economics, University of 
Melbourne, Carlton, N.3, Victoria. 

Queensland: A. J. Reitsma, Department of Economics, University of 
Queensland, St. Lucia, Brisbane, S.W.6, Queensland. 

South Australia : D. Simmons, Department of Economics, The Univer 
sity, Box 498 D, G.P.O., Adelaide, South Australia. 

Western Australia : W. R. Rogers, 25 Hobbs Avenue, Dalkeith, West 
ern Australia. 

Tasmania: D. E. Kirby, Box 665 E, G.P.O., Hobart, Tasmania. 

Canberra: Dr. W. E. G. Salter, Department of Economics, Australian 
National University, Canberra, A.C.T. 

Auckland : A. D. Brownlie, Economics Department, University College, 
P.O. Box 2553, Auckland, New Zealand. 

Wellington: I. F. E. Wilson, c/o Bowden, Bass & Cox, Public Account 
ants, 328-330 Lambton Quay, Wellington, New Zealand. 

Christchurch: N. L. McBeth, c/o "Press", The Square, Christchurch, 
New Zealand. 

Dunedin : W. A. Poole, University of Otago, Union Street, Dunedin, 
New Zealand. 


Editors: W. J. Busschau, C. S. Richards (Managing Editor), H. M. Robertson 


Mrs. Robinson on the Accumulation of Capital Professor L. M. Lachmann 

Verdere Opmerkings in Verband met Inflasiebestryding in Wes-Europa 

Professor D. G. Franzsen 

African Trade Unionism on the Coppefbelt of Northern Rhodesia, P. K. Lomas 

The Structure of the Cotton Textile Industry in South Africa\ C. Bak 

Some Aspects of South Africa s Foreign Trade in Relation to her Aggregate 

Income, 1910-5%. I. R. Woods 

Reviews* - Recent Publications - Notes 

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Enquiries regarding advertisement tariffs to the Secretary, P.O. Box 5316, Johannesburg. 


Economic and Technical Problems of Australia s Eural Industries. 

By D. B. WILLIAMS. (Melbourne University Press, Carlton, Vic 
toria, 1957.) Pp. 146. 27/6 Aust. 

This book, written by a former Assistant Director of the Bureau 
of Agricultural Economics, is stated to be a brief review" of recent 
economic and technical developments in Australian agriculture. It does 
not purport to be a systematic analysis of Australian agricultural 
policy, though in the foreword the author expresses the hope that it 
may stimulate some more intensive investigations. In few places does 
Dr. Williams go beyond broad description, except where he wishes to 
canvass personal judgments. 

The somewhat random choice of topics for discussion and the 
seemingly disproportionate amount of space allocated to transitory as 
compared with more significant issues suggests that the book might 
essentially represent a sampling of the files passing across the author s 
desk. Such information may throw some light on contemporary agri 
cultural developments, but it is not the stuff of which serious studies 
of agricultural policy are made. 

The introductory chapter, a rather woolly description of the in 
fluences shaping Australian agricultural policy, may unduly discour 
age some readers as it is the most badly written chapter in the book. 
Dr. Williams stands squarely on the side of those who argue that 
Australia should channel increased resources into its primary rather 
than its secondary industries. "The expansion of many non-rural in 
dustries, which cannot compete with imports without undue amounts 
of direct and indirect protection," he says, "involves a cost burden 011 
our rural industries which is the very antithesis of well-directed econ 
omic growth" (p. 3). 

Perhaps the predominant theme in this and the succeeding chapter 
on post-war economic policies is the now well-accepted fact that, in 
Australia, agricultural policy is influenced more by national economic 
objectives such as full employment and balance-of -payments equili 
brium, rather than by specifically agricultural objectives. 

After a heroic attempt to outline the structure of Australian 
agriculture in nine pages, the author moves on to a discussion of price 
and marketing policies. Though this discussion ultimately proceeds on 
a commodity basis, some introductory comments by the author on the 
prevailing method of agricultural pricing by reference to assessed 
production costs are refreshing and will be revealing to some people. 
For instance, Dr. Williams points out that some farm types have been 
excluded from cost analyses, "despite the fact that they represent a 
most significant section of the industry concerned . Moreover he says 
that "changing market conditions tend to influence the way in which 
particular items are included in the cost formula, and to influence the 




negotiations as to how year to year cost movements are to be made" 
(p. 37). And yet people in this country, the Prime Minister included, 
talk about the "objective" and "technically correct" assessment of 
unit production costs. 

Next follow two chapters on land settlement and rural taxation, 
topics which appear to have received a disproportionately large amount 
of attention. The former chapter is largely given over to a discussion 
of problems of Northern Australia. The author reveals that he shares 
with many other Australian agricultural administrators the usually 
unquestioned, but nevertheless unsubstantiated, belief that subdivision 
of rural holdings is a necessary prerequisite to agricultural develop 
ment. In the next chapter recent changes in taxation law affecting rural 
producers are outlined. Williams asserts, without giving any concrete 
evidence, that * taxation allowances have proved to be one of the most 
effective measures adopted by the government to encourage rural 
development" (p. 71). The reviewer would suggest that the exact 
influence of these measures on rural investment is still a moot point. 

Trends in rural investment and borrowing are next examined, and 
the recent tendency of Australian farmers to finance investment out of 
savings is stressed. Williams is an ardent supporter of the established 
B.A.E. view that present bank credit facilities and practices are not 
adjusted to the needs of the rural industries. The succeeding three 
chapters outlining recent developments in the application of new agri 
cultural practices are purely descriptive on a somewhat technical plane. 

A chapter on scientific and advisory services provides the author 
with an opportunity to present some facts about recruitment and 
salary problems in research and extension agencies and also a chance 
to make unfavourable comparisons with the American system. Williams 
implies that effective research is not likely to be done in the universities 
or elsewhere unless it is "co-ordinated". "This", he says, "is being 
achieved to an increasing extent, which is leading inevitably to the 
Commonwealth s assuming a more dominant role in the administration 
of agricultural research" (p. 103). The reviewer s experiences at the 
hands of would-be co-ordinators of research lead him to exactly the 
opposite conclusion to Dr. Williams. 

In the final chapter, Williams discusses contemporary policy issues. 
The author, it appears, is an "agricultural expansionist" with some 
qualifications, though it is possible that his position is explained by 
the date the book went to press. The adverse trends in overseas markets 
coupled with the drought in 1957 have left such a mark on the rural 
industries that it may well be that this book deals with a stage in agri 
cultural policy that is now a matter of history. However, some of the 
significant issues posed by Dr. Williams still remain and are deserving 
of the attention that he suggests. The effects of national wages policy 
and transport costs on the rural industries are two of these. ^ 

The most disturbing thing about this book to the reviewer is not 
the actual text, but what the author reveals inadvertently about the 
assumptions as to the nature of government which he takes for granted. 


Here, in this book, a senior civil servant, whatever the disclaimers in 
his preface, writes about agricultural policy as seen from his desk in 
Canberra. There seems to be no doubt in his mind that it is the adminis 
trators who do and should predominantly shape agricultural policy. 
In his opening sentence, he speaks of "the administrative skill and 
acumen of those responsible for Australian economic policy and after 
numerous references in the intervening pages to * policy makers and 
how they must mould the climate of political and public opinion 
(p. 53), he presents on the last page an even clearer picture of his 
administrative credo. "It is within the context of day-to-day adminis 
trative decisions ... ", he writes, "that leadership in rural policy 
must arise and find expression" (p. 130). It is undoubtedly this belief 
which prompts the author to ascribe much of the developments in 
Australian agriculture since 1951 to administrative acts in Canberra, 
whereas the perspective of history will probably reveal that exogenous 
factors like the price of wool were the real determinants of progress in 
these years. 

The reviewer accepts the fact that agricultural administrators 
must assume certain roles by virtue of being located in a " clientele 
department, and he also agrees that in Australia * we have developed 
a tendency to rely on government activity and to look to governments 
for leadership" (p. 105), but he does not believe that agricultural 
policy is shaped as exclusively by the Canberra planners (to use the 
author s term) as Dr. Wiliams would have us believe. Whatever the 
true picture, the fact that such views are expressed suggests that it 
behoves farmers organizations and legislators to take a more intel 
ligent and more broadly based interest in the formation of Australian 
agricultural policy than they have done in the past. 

University of Sydney. 

Ownership and Control of Australian Companies. By B. L. WHEEL 
WRIGHT. (The Law Book Co. of Australasia Pty. Ltd., Sydney, 
1957.) Pp. xii + 121 + Appendix 85 pp. 42/- Aust. 

Mr. Wheelwright has produced a veritable Who s Who, or, better 
perhaps, a Debrett of Australian companies. Selecting the 102 com 
panies with shareholders funds of 2 millions or more in 1953, the 
author has put each of them on the dissecting table for an inspection 
of their economic gizzards. The conclusions he reaches after his vivisec 
tion are, in the main, similar to those reached by investigators into 
similar phenomena in the U.S.A. and the U.K. 

The book represents an excellent piece of empirical research, ob 
viously carried out with great patience and perseverance. For each 
company (except two which historical accidents made it necessary to 
treat in a slightly different way), information was extracted from the 
annual returns, covering paid-up capital, total number of sharehold 
ings, number of shareholdings less than 1,000, between 1,000 and 


10,000 and the number and names of all shareholdings of 10,000 and 
over, together with the names and amounts of shareholdings less than 
10,000 which appeared to be of interest for control purposes. These 
details, together with the names of directors and the voting power of 
shares for each company, are given in the Appendix, and it is this 
comprehensiveness of basic data which makes the work valuable for 
students of the limited liability company as an Australian economic 

An introductory discussion on the study and its setting is followed 
by an explanation of the basis on which the companies were selected 
and some notes on the source material and method used. Then follows 
an analysis of the data under the headings of Ownership Voting 
Shares, Ownership of Non- Voting Preference Shares, Distribution of 
All Shares, Overseas Interests Large Shareholdings, Control, and 
Director Interests. "Wherever practicable, the results of the analysis are 
related to those of comparable studies in the U.S.A. and the U.K. 

I suppose it is the duty of a reviewer to direct attention to errors 
which are revealed by his perusal of a book. In this case such attention 
is reluctantly drawn to a curious slip in the last line of Table III 
at page 42, where the percentage averages per company of number of 
shareholdings in the categories selected are shown as being different 
from, instead of the same as, the percentages given immediately above 
for all companies. 

Another minor criticism might also be directed at some of the 
information in Table I, on pp. 25-28. Of the 102 companies listed, a 
consolidated figure for shareholders funds is shown as "not available" 
for twenty-four of them. The author points out that this means that no 
such consolidated figure is given in the Sydney Stock Exchange Invest 
ment Service, which was used as the source of this information. How 
ever, in view of the fact that the relevant balance sheets themselves 
were available for these companies (see p. 33), it is submitted that 
reference to them would have allowed the number of "Not Available" 
companies to be reduced somewhat, especially in relation to those 
registered under Victorian company legislation, which provides that a 
holding company shall publish either consolidated financial statements 
or statements for the holding company and each of its subsidiaries. But 
it is freely admitted that the point is not a material one in relation to 
the purpose or scope of the enquiry and does nothing to detract from 
its usefulness and significance. 

University of Melbourne. 

Income and Wealth Series VI. Edited by MILTON GILBERT and RICHARD 
STONE. (Bowes and Bowes, London, 1957.) Pp. xiv + 306. 42/- 

This book contains ten papers presented at the Fourth Conference 
of the International Association for Research in Income and Wealth, 


held at Hindsgavl (Denmark) in 1955. The first three papers relate 
to econometric model-building, and assess the reliability, for economic 
forecasting purposes, of particular models that have been developed 
in the United States, the Netherlands and Norway. Non-mathematicians 
will be grateful to C. F. Christ for the clear description of model-build 
ing procedure which precedes his comparison of the usefulness of nine 
theoretical models constructed in U.S.A. between 1939 and 1955. 
Sceptics of the model-building approach to policy-making will find 
some comfort in the fact that even the best of these models proved to 
be rather less reliable, in forecasting 1952 values, than a naive model 
which assumed no change from the previous year. 

The other two model-building papers, which discuss models 
actually used by government agencies in the Netherlands and Nor 
way, show more encouraging results. The first, by J. Lips and 
D. B. J. Schouten, investigates the reliability of the model used, for 
fiscal policy-making purposes, by the Central Planning Bureau of the 
Netherlands; and the second, by P. J. Bjerve, describes a model used 
for forecasting bank liquidity in Norway as a guide to monetary policy 
in that country. An interesting section of the latter paper shows how 
an econometric model may be constructed on the basis of a system of 
double-entry accounts. 

The second section of the book contains seven papers on income 
distribution. Of these, two (by Dorothy S. Brady and R. Bentzel) are 
mainly concerned with theoretical problems associated with the inter 
pretation of changes in income distribution, and the remainder (by 
K. Bjerke, S. A. Goldberg and Jenny R. Podoluk, H. P. Brown, 
Dorothy Cole and J. E. G. Utting, and 0. Aukrust) analyse various 
aspects of income distribution in particular countries (respectively 
Denmark, Canada, Australia, Cambridgeshire and Norway). 

Australian readers will be particularly interested in H. P. Brown s 
path-breaking analysis of income distribution in Australia, mainly in 
relation to the year 1942-43. Separate size distributions are given for 
that year by sex and age groups, States and grade of occupation 
(employees, proprietors and rentiers). Another table gives size dis 
tributions for adult male employees in four industries in 1938, and 
for Commonwealth public service administrative officers in 1937, and 
1955. In the final and most novel section of his paper Mr. Brown 
develops what he calls "an inferiority index", designed to measure 
the inequality of income distribution by relating a given level of 
income to the average of incomes above that level on the one hand and 
the average of incomes below the given income on the other. This index, 
the author suggests, corresponds to an individual s conception of in 
come inequality, and can be calculated for particular groups or for the 
whole community as well as for individuals. The final table in Mr. 
Brown s paper calculates inferiority indexes for various groups (sex, 
age, State, grade of occupation) in 1942-43, for employees and non- 
employees from 1938-39 to 1942-43, for adult male employees in four 
industries in 1938, and for the Commonwealth public service in 1937 


and 1955. Unfortunately there are several printing errors which tend 
to obscure the sense of the paper, e.g. Table X on p. 219 should read 
Table IX; 1.51 d on p. 219 and p. 220 should read 1.5I d ; 1001 on 
p. 220 should read 100I 7 ; and in Table VI a column of figures repre 
senting the December 1954 size distribution is omitted. 

University of Adelaide. 

An Economic Theory of Democracy. By ANTHONY DOWNS. (Harpers, 
New York, 1957.) Pp. ix + 310. $4.50. 

This important and lucidly written book attempts to work out a 
behaviour rule for governments, comparable to the rules economic 
theory uses in predicting the actions of firms and of consumers. 

Downs constructs a model which posits that parties and voters 
behave rationally, in the economic sense of that term. Parties are 
postulated to be political entrepreneurs. Their motive is self-interest; 
to attain and keep office they will formulate whatever policies they 
believe will maximize support. 

Downs deals with political decision-making where "perfect in 
formation" exists, then considers the effects of uncertainty, and, in 
one of his most suggestive sections, the relation of information costs to 
political behaviour. The book ends with twenty-five allegedly testable 
propositions, derived from the party-motivation, the citizen-rationality 
hypothesis, or both, e.g. "Because nearly every citizen realizes his vote 
is not decisive in each election, the incentive of most citizens to acquire 
information before voting is very small". 

The model, of course, is very restricted, and Downs has to narrow 
down "Democracy" to "government", this again to "party". It 
would be interesting to hear what judges or administrators maximize. 
His treatment of ideologies is unconvincing. 

But this is an important work ; those who have no time to read it 
should at least look at Downs article in the Journal of Political 
Economy, April 1957. 

University of Sydney. 

Sales Taxation. By JOHN F. DUE. (Routledge & Kegan Paul, London, 
1957.) Pp. 396. 40/- stg. 

An up-to-date coverage of sales taxation in the non-communist 
world may not justify many thousand pages but it is a valiant effort 
to use less than 400. The virtues and deficiencies of this volume arise 
from the feat of compression which has been performed. 

The survey of sales taxes in some twenty-seven countries has, if 
one may judge by the Australian section, been admirably performed. 
It gives a quick and clear picture of what is done in each country. The 
remainder of the volume is an all too brief introduction and conclusion. 


Many points are raised in summary form but few are covered ade 
quately. Of Australian interest is the emphasis on sales tax in Federal 
systems as the independent source of revenue for that level of govern 
ment which has not pre-empted income tax. 

Unfortunately sales tax has, of necessity, been so narrowly defined 
that many associated "business" taxes are not referred to retail 
licence fees, pay-roll taxes, stamp duties and (negatively) subsidies. 
The absence of any reference to the U.S.S.R. where, it would appear, 
turnover taxes have been most fully used for a whole range of purposes 
also detracts from the general usefulness of the book. For example 
there is little, if any, reference to the role of sales taxes in guiding 
investment, restraining imports or checking excess profits. 

But (near) pocket compendiums have their role; this is a good one 
and for perhaps half-a-dozen people in Australia, an essential one. 

Australian National University. 

An Economic Survey of Northern Ireland. By K. S. ISLES and NORMAN 
CUTHBERT. (H.M. Stationery Office, Belfast, 1957.) Pp. xxv + 
646. 35/- stg. 

The economy of Northern Ireland is comparable, as regards status, 
with the economy of Tasmania. That is, although isolated geographic 
ally from the rest of the United Kingdom (as Tasmania is from the 
rest of Australia), Northern Ireland possesses the same monetary unit, 
the same tariff structure and virtually the same fiscal arrangements; 
it allows the free migration of persons to and from the rest of the 
United Kingdom and the free transfer of goods and money; and its 
ability to initiate action in the economic field is strictly limited. 

The economy of Northern Ireland is to be regarded, therefore, not 
as a separate entity but as a regional component of the United Kingdom 
economy (just as the Tasmanian economy is to be regarded as a 
regional component of the Australian economy) ; and, accordingly, an 
economic survey of Northern Ireland ought to concentrate on those 
features of the province which distinguish it, economically, from the 
rest of the United Kingdom. 

This is the essence of the approach adopted by the authors of the 
above survey, which was carried out by the Economics Department 
of the Queen s University of Belfast at the request of the government 
of Northern Ireland. As they see it, the two outstanding facts which 
distinguish the economy of the province from that of the rest of the 
United Kingdom are that income per head is persistently lower and 
the level of unemployment persistently higher. Part I of the survey 
the first three chapters is designed to establish these two facts while 
Part II chapters 4 to 17 sets out to explain them. The key chapter 
here is the final one for which the others (covering such topics as 
Export Trade, Transport, Investment, Wages and Interregional Migra 
tion) merely clear the ground. The survey is rounded off by Part III 


which contains three chapters on the policy implications of Parts I 
and II. 

Much of the statistical information which the authors required was 
unavailable and they were consequently obliged to set about collecting 
it for themselves. Details of the methods adopted in this connection 
are set out in a long series of appendices. 

University of Tasmania. 

Economic Backwardness and Economic Growth. By HARVEY LEIBEN- 
STEIN. (John Wiley and Sons, New York, 1957.) Pp. ix + 295. 

Leibenstein propounds a theory to explain both the persistence 
of stagnation and low incomes in backward economies and how develop 
ment may commence in such circumstances. The former he explains in 
terms of a quasi-equilibrium system brought about by the interaction 
of compensating variables, the latter by his concept of dynamic dis 
equilibrium based upon his "minimum-effort" thesis. Forces which 
occur to raise incomes bring into operation other forces which depress 
incomes. For the former to overcome the latter they must be of a 
certain minimum strength. He expands his theory in a stimulating and 
illuminating way, offering interesting explanations of the low agricul 
tural yields, the large amount of underemployment, and the occupa 
tional distribution characteristic of a backward economy. He seeks also 
to explain population as an endogenous variable. It would be a useful 
exercise to compare his approach with the vicious circle thesis of 
Nurkse and others and with Myrdal s strictures on the concept of 
equilibrium in economics. What Leibenstein has to say is also not 
irrelevant to the growth models of Harrod, Domar, and others. He has 
offered us a useful and original approach. 

University of New England. 

Business Cycles and Economic Policy. By ERIK LUNDBERG. (George 
Allen & Unwin, London, 1957.) Pp. xx + 346. 32/- stg. 

With minor changes, this book on economic stabilization policy in 
Sweden in the inter-war period and since 1945, is a translation of 
Professor Lundberg s Konjunkturer och Ekonomisk Politik which was 
first published in 1953. It analyses the ends, means and effectiveness of 
the detailed physical controls and import and investment regulations 
used in the post-war period, and compares them with the more general 
methods of economic policy, particularly monetary and fiscal measures, 
used in the inter-war period. While this involves a detailed study of 
Swedish economic fluctuations and general development over the whole 
period, the basic problems are, of course, by no means peculiarly 
Swedish, and therefore Lundberg s scepticism about the possibility of 
interpreting accurately the effects ex ante as well as ex post of detailed 


economic regulation in peacetime is of wide interest and general 

The book is also an account of the development of economic ideas 
in Sweden where economists have played an active and important part 
in the formulation, rationalisation, and implementation of government 
policy. One of the author s main objects is to show the relation between 
the various economic measures and the relevant economic theory. 

University of Sydney. 

Activity Analysis and the Theory of Economic Equilibrium. By HELEN 
MAKOWER. (Macmillan, London, 1957.) Pp. xiv + 192. 41/6 

This is perhaps the best introduction to activity analysis for the 
non-mathematician which has yet appeared. The book is intended for 
the economist or advanced student familiar with traditional doctrine. 
The author aims to reformulate the theory of value in terms of activity 
analysis. The reader is taken by the hand until, in Chapter 3, he is 
shown the vision of resource allocation as seen by activity analysts. 
Readers will welcome the homespun approach to such esoteric terms as 
the Dual and the Simplex method, as well as the absence of such 
terms as convex polyhedral cone. 

The author intentionally avoids both the detailed mechanics of 
activity analysis and its field of application to practical problems. This 
seems rather a pity, particularly as Chapter 5 sets out very lucidly the 
fundamental principles involved. 

Canberra University College. 

Labor in a Growing Economy. By MELVIN W. REDER, (John Wiley, 
New York, 1957.) Pp. xii + 534. $6.50. 

This is not, as its title might suggest, a book about the labour 
problems of an underdeveloped economy. It is an undergraduate text 
book on labour. The specific effects of growth are emphasized in so 
far as the discussion about labour problems is in the context of 
American history. 

With this minor qualification, let it be said at once that this is 
an excellent textbook, comprehensive in scope and extremely lucid in 
style. It is in four parts. Part I is an introductory survey. Part II deals 
with industrial relations unionism, collective bargaining and govern 
ment regulation. Parts III and IV are concerned with labour economics 
wages and their determination, employment and the labour market, 
income distribution and social security. 

However, unlike most texts on labour, the different parts are 
linked together by an approach which explicitly recognizes and em 
phasizes the inter-relationships between institutional and economic 


phenomena. Numerous cross-references facilitate this integration pro 
cess without being unduly repetitive. 

An outstanding feature of the book is that the sections dealing 
with wage theory are at a low level of abstraction. For example, the 
marginal productivity theory is briefly introduced and only super 
ficially discussed. It is a credit to the author that these chapters should 
be comprehensible to the student without any background in economic 
theory. Nevertheless, it is a pity that the author, who is well qualified 
to indulge in the most complex abstractions, should not have included 
the more difficult pieces of theory in an appendix or two a method 
successfully employed by Samuelson in his Economics. 

This book is, of course, designed for the American market but the 
Australian student (and teacher) will find many of the sections on 
unions, collective bargaining and wage determination extremely useful. 
The discussion questions appended to the chapters should also prove 

University of Melbourne. 

International Monetary Policy. By W. M. SCAMMELL. (Macmillan, 
London, 1957.) Pp. xiv + 402. 60/- Aust. 

More than ten years have now elapsed since the launching of the 
Bretton Woods twins, the I.M.F. and the I.B.R.D. This period is long 
enough to give an indication of their likeliness to fulfil the high hopes 
which attended their birth. This book is an attempt to assess the 
effectiveness of the post-war international payments system of which 
they were to be the keystones. 

After a brief theoretical section dealing with the balance of pay 
ments, exchange rates and alternative systems of adjustment, the 
author recounts the development of plans for post-war economic co 
operation from Article VII of the Lend-Lease Agreement to Bretton 
Woods. He then proceeds to describe the institutions that emerged from 
that conference and to assess the role they have played in the inter 
vening years. The picture of post-war monetary arrangements is 
rounded out by a description of the sterling area, the European Pay 
ments Union and the pattern of world payments in the post-war period. 
The book then ends with a discussion of the dollar problem and various 
proposals for international co-operation in the achievement of full 
employment and the control of inflation. 

On the whole the analysis is reasonably objective but suffers from 
a pronounced British bias in its assessment of the achievements of the 
various institutions. This is particularly apparent in its treatment of 
the I.M.F. which is described as having sunk into obscurity. There is 
insufficient recognition of the efforts the Fund has made to cope with 
its difficulties. For example, the use of the waiver of the 25 per cent 
rule is merely mentioned in a footnote, whereas in fact most drawings 
since 1953 have been larger than 25 per cent of the member s quota. 


More prominence might also have been given to the inauguration of the 
" stand-by arrangement" which is merely described as an interesting 
innovation. Advocacy of fluctuating exchange rates is a recurring 
theme throughout the book without, in the reviewer s opinion, sufficient 
recognition of the case against the extension of this practice. A minor 
criticism is that the account of the differences between the Keynes and 
White plans and the process of synthesizing them is far more detailed 
than required by the average reader. In spite of these criticisms the 
book can be recommended as a valuable review of post-war experience 
in the field of international payments. 


French Banking Structure and Credit Policy. By J. S. G. WILSON. 
(London School of Economics and Political Science, G. Bell & 
Sons, London, 1957.) Pp. vii + 453. 45/- stg. 

The literature in English on the French banking system is scanty. 
We therefore have good reason to be grateful to Mr. Wilson who in 
his new book has attempted to provide not only a comprehensive 
description of French monetary and banking institutions but also a 
review of the conduct of French monetary and banking policy. Our 
thanks are also due to the Houblon-Norman Fund which assisted Mr. 
Wilson to complete his study. 

Authors of studies of this type are confronted with a perpetual 
dilemma. Their ultimate aim is to analyse the operation of the system 
and the conduct of monetary policy. However, unless the institutional 
framework is described in sufficient detail the analysis which follows 
will either be unintelligible or strike the reader as unconvincing dog 
matism weakly sustained by casual empiricism. On the other hand if 
the descriptive material is too detailed, either the reader may fail to 
see the wood for the trees and blame the author for his myopia or the 
analysis may be truncated. 

Mr. Wilson meets this dilemma by dividing his book into two parts. 
Part I, the aim of which is primarily descriptive, deals with the com 
mercial banks, the banques d affaires and other money market institu 
tions. It also contains an interesting account of French banking tech 
niques. In general the author retains French banking terminology, 
providing explanations of the terms where necessary. Since the French 
banking system is complex and the terminology unfamiliar, this part of 
the book is not easy reading. The reader will, however, find the effort 
it demands worth making though it seems possible that a more careful 
use of chapter summaries and diagrams might have facilitated com 
prehension by the reader. 

The second part of the book deals with the Bank of France and 
the conduct of monetary policy from the end of the war until 1956. 
This part of the book struck the reviewer as less successful principally 
because it is not easy, unless one is thoroughly familiar with French 


economic events, to retain a clear picture of the chronology through 
Chapters XII and XIII. Perhaps a more generous use of graphs record 
ing the behaviour of the main economic indicators would have helped ? 
Indeed it is a general (though minor) criticism that some of the longer 
tables would have been simpler to analyse if supporting graphs had 
been provided. 

The book contains a short but useful bibliography and a compre 
hensive index. There is, however, no list of tables or diagrams. 

There can be no doubt that Mr. Wilson has written a careful and 
detailed study which will be deservedly welcomed by economists, 
students of comparative banking systems and bankers. 


N.8.W. University of Technology. 

Europe and the Money Muddle. By ROBERT TRIFFIN. (Yale University 
Press, New Haven, Conn., 1957.) Pp. 351. $5.00. 

Professor Triffin has given us what is undoubtedly the best descrip 
tion and appraisal of the foundation and subsequent evolution and 
experience of the International Monetary Fund and the European 
Payments Union. We are fortunate to be able to benefit from the first 
hand knowledge of someone who himself played a considerable part in 
many of the events he describes. He is to be congratulated also on the 
light-hearted note he brings into the introductory matter the review 
of the book by himself (which may well take the wind out of any other 
reviewer s sails), and his rejoinder to himself, as well as the flippant 
yet useful guide for the cursory reader with which he interlaces the 
table of contents. 

Many will feel that Triffin s opening survey of the world dollar 
problem, in which his attitude is notably more optimistic than that of 
MacDougall, is less successful than the rest of the book. In particular, 
by concentrating upon the United States balance of payments with, 
and loss of gold to, the rest of the world, he is able to argue that the 
world dollar problem had virtually disappeared (as it seemed when 
he wrote in late 1956 and early 1957) ; whereas it may be more accurate 
to say that it was becoming transformed into the more general problem 
of a shortage of both dollars and German marks, and the concentration 
of the world s gold and dollar reserves upon North and Central 
America and Western Germany. 

His second chapter, containing a useful summary of the post-war 
recovery of the economy of Western Europe, stands somewhat apart 
from the rest of the book. For in the remaining chapters he is really 
concerned with world monetary problems. Triffin argues persuasively 
for the relative success achieved by the regional approach of the EPU 
to monetary co-operation (compared with the wider but more idealistic 
approach of the I.M.F.), and for building upon this foundation. But 
the relatively greater growth of Europe s exports to the dollar area 
than to other countries after 1949 does not of itself constitute an 


argument (as he suggests) that the liberalisation of OEEC trade did 
not unduly reduce Europe s exports to the rest of the world. Account 
must surely be taken of the effect of the devaluations of 1949, of the 
U.S. recovery from recession, and of the fact that Europe s exports to 
non-dollar markets which also devalued rose much less than did 
intra-European trade. 

Finally Triffin s far-reaching and imaginative proposals for the 
future development of international monetary arrangements are among 
the most stimulating so far published. They are unlikely to lose their 
relevance and importance in the foreseeable future. 

University of Melbourne. 

Social Security in the British Commonwealth. By RONALD MENDEL 
SOHN. (Athlone Press, London; John de Graff, New York.) 
Pp. xv + 391. 

This book provides a comparative analysis of the social security 
systems of Britain, Canada, Australia and New Zealand. Its coverage 
is not therefore quite as wide as its title suggests and there is no 
reference to the Asian dominions, except for the pertinent remark that 
* it would be wrong to regard social security as a luxury exclusively for 
the industrially advanced countries". The book also bears evidence of 
its origin as a London doctoral thesis in being somewhat orientated 
towards British problems, but this is an advantage rather than other 
wise since during the present century Britain has, to quite a unique 
extent, been the political furnace in which social security devices have 
been tried and tempered before travelling round the world. This is 
true even of devices which originated outside of Britain, such as old 
age pensions which were introduced in some of the Australasian colonies 
before 1900 ; or the concept of a fully integrated social security system 
which New Zealand introduced in 1938 ; or social insurance itself which 
had its origin in continental Europe. 

In the first half of the book the author gives a detailed account of 
the development and organization (circa 1950) of social security in 
each of the four countries. In the second half of the book the various 
systems are compared with respect to such matters as coverage of both 
persons and contingencies ; adequacy and conditions of benefit ; methods 
of finance; and administrative systems, including the place of volun 
tary organizations. This method inevitably lends itself to repetition and 
reiteration, and some space could perhaps have been saved if the author 
had consigned more of his text to the tabular appendix. Nevertheless, 
the book is much more than a dry catalogue of financial provisions and 
administrative arrangements. The author writes well. He has obviously 
reflected deeply on the lessons of the past and has interesting sugges 
tions to make for the future. 

It might be expected that the four countries examined would have 
roughly comparable social security systems in view of their common 


legal and cultural heritage and their relatively high living standards. 
In fact, however, there are quite extraordinary differences among 
them. Britain and New Zealand have fully integrated social security 
systems embracing pensions, short-term benefits and health facilities. 
But both are countries with unitary constitutions. Federalism, although 
its significance is questioned by Dr. Mendelsohn, seems to preclude com 
plete integration in either Australia (where hospitals, workers com 
pensation and residual relief remain with the states), or in Canada 
(where not only these functions, but sickness and medical assistance 
also remain with provincial or local authorities). On the other hand, 
Canada alone of the dominions has followed Britain in relying sub 
stantially on the insurance principle, having adopted it for unemploy 
ment insurance, "with little critical thought about fundamentals just 
about the time when its originator, Great Britain, was abandoning its 
more rigid features" (p. 230). In New Zealand social security is 
financed, in the absence of insurance contributions, largely by a special 
income tax levied on a proportional basis. In Australia finance is now 
provided exclusively by allocations from general taxation revenue. In 
both Australia and New Zealand the means test takes the place of an 
applicant s contribution record as a test of eligibility for benefit ; ap 
parently there is not the same fierce hostility to the means test in the 
dominions as in Britain, with its bitter memories of the old Poor Law. 
Canada, and more particularly, Quebec seems in the past to have relied 
more than other countries on voluntary charitable agencies, but Aus 
tralia is the only country that now uses the voluntary Friendly Society 
as a channel for the payment of medical and hospital benefits. 

In spite of these diversities, there is one common element which 
Dr. Mendelsohn detects in the development of these widely different 
systems during the past half century. It is "the substitution of de 
fined benefits, dependent only on citizenship, for the arbitrariness of 
the Poor Law officer or the handouts of the colonial policeman" (p. 
335). In Britain social insurance performed the valuable historical 
function of making this change politically acceptable, but Dr. Mendel 
sohn considers that the distinction between insurance and assistance 
has lost its point now that membership has become universal and com 
pulsory. It is also administratively costly, and his description of its 
operation is worth quoting : 

National insurance has become a giant industry. The long queues in post 
offices buying stamps to place on cards ; the 25 million separate cards, stamped 
weekly and exchanged annually in quarterly "staggers" ; the 25 million separate 
ledger record sheets at Newcastle, with spaces for 50 years entries; the 
shuttle cards passing from the 997 Ministry of National Insurance local offices 
and the 1424 Ministry of Labour and National Service local offices and back, 
100,000 of them each week in summer and 250,000 in winter; the 29 million 
central index slips; the annual personal statements of account and arrears 
notices to each of the 25 million contributors ; the 64 acres of buildings at 
Newcastle-on-Tyne, with their own railway station and their special fleets 
of buses ... (p. 232). 

On the basis of his comparative study of the four countries, Dr. 
Mendelsohn is able to offer suggestions for the future development of 


their social security systems. He would welcome, and considers inevit 
able, an extension of social services to cover all contingencies and all 
citizens in countries where this has not already happened, e.g. Canada. 
He would like to see the abolition of both the stamped-card system, 
characteristic of social insurance, and of the Means Test, characteristic 
of the Australian and New Zealand systems ; so that any citizen would 
be entitled to benefit on simple proof that he was the victim of a 
defined contingency. Further, he would like to see benefits raised nearer 
to the subsistence level than is at present the case in Britain, but not 
so high as in New Zealand. He recognizes that in spite of administrative 
savings these changes would involve an increase in social security 
expenditure but he observes that, considered as a proportion of 
National Income, this amounted in 1948-49 to little more than 4 per 
cent in Canada, and 5 per cent in Britain and Australia, as compared 
with 9J per cent in New Zealand. For finance he would replace insur 
ance contributions from both employees and employers by a special 
personal income tax collected with ordinary income tax, but paid into 
a special fund. He would like to see the adoption in the Dominions of 
the British system of appeals against the decisions of administrators, 
and also greater participation by local bodies in administration. 
Finally, he would like to see more use made of social case-work methods 
in the handling of supplementary and residual relief in all countries. 

University of Melbourne. 


Monthly. Articles on economic and social topics. A statistical supplement gives information on 
employment, unemployment, wages, consumer prices, etc. Among recent articles have been the 
following : 

"Social Credit Societies": A French Experiment in Africa. 

Immigrants and Canada s Economic Expansion. 

Indigenous Labour in Papua-New Guinea. 

Vocational Rehabilitation in the United States. 

Effects of the European Common Maffcet on Employment and Social Conditions in 


The Co-operative Movement in the British Caribbean. 
Some Aspects of Investment Policy in Underdeveloped Countries. 

A specimen copy of the REVIEW and a catalogue of International Labour Office publi 
cations will be forwarded on application to the International Labour Office, Geneva. 


(Published in English, French and Spanish editions) 



COOMBS, H. C. Conditions of Monetary Policy in Australia. (R. C. Mills Memorial 
Lecture, University of Sydney, 1958.) Pp. 40. 5/- Aust. 

This analysis of Australian central banking experience by the Governor 
of the Commonwealth Bank is a continuation of his discussion of the subject 
in the period up to 1954, which was contained in his E.S. & A. Research Lecture 
of that year. 

This latest lecture covers principally the years 1954 to 1957. In it Dr. Coombs 
discusses such matters as the development of central banking control through 
L.G.S. ratios (coupled with use of Special Accounts), qualitative advances 
control and the problems presented by the growth of non-bank finance, espec 
ially hire purchase finance. 

GOLDBERG, L., and HILL, V. R. The Elements of Accounting. 2nd ed., revised and 
re-set. (Melbourne University Press, Carlton, Victoria, 1958.) Pp. 300. 25/- 

LAMBERTON, D. McL. Share Price Indices in Australia. (Law Book Co. of Aus 
tralasia, Sydney, 1958.) Pp. 114. 42/- Aust. 

LAWTON, G. H. (ed.). Longmans Australian Geographies. (Longmans Green & 
Co., Melbourne, from 1956.) 

A series of booklets, each of 40 pages. 1. The Snowy Mountains Scheme, 
by Robert Coggins. 2. The Hunter Valley, by Alan Tweedie. 3. The Barkly 
Tableland, by Mollie Bayne. 4. The New England Plateau, by Ellis Thorpe. 
5. Indonesia, by Donald Fryer. 6. The Darling Downs, by R. Greenwood. 
7. New Guinea, by John Andrews. 8. The South-West, by J. Gentilli. Probably 
5/3 Aust. each. 

MATHEWS, R., and GRANT, J. McB. Inflation and Company Finance. (Law Book 
Co. of Australasia, Sydney, 1958.) Pp. 179. 42/- Aust. 


ALLARDYCE, CORBIN (ed.). Atomic Power. An Appraisal including Atomic Power 
in Economic Development. (International Series of Monographs on the Econ 
omic Aspects of Nuclear Energy.) (Pergamon Press, London, 1957.) Pp. 151. 
21/- stg. 

This is another "pre-fusion" book, based on the state of research and 
development of over two years ago. However, most economists and laymen can 
congratulate themselves if they are no more than two years behind Sir John 
Cockcroft, Sir Edwin Plowden, Admiral Strauss, and other contributors. The 
editor, who is Adviser in Atomic Energy to the World Bank, introduces the 
subject with a lucid and fascinating assessment of progress made and prospects 
opened up. His collaborators extend the basis of scientific, engineering, and 
economic assumptions for the final analysis. The book is most valuable as an 
approach to the investment problems involved today in the development of 
energy sources in parts of Australia and elsewhere. 

BASU, S. K. A Survey of Contemporary Banking Trends. (The Book Exchange, 
Calcutta, 1957.) Pp. 574. Rs. 16. 

BEACH, E. F. Economic Models An Exposition. (John Wiley & Sons, New York, 

1957.) Pp. 227. $7.50. 
BERLE, A. A. Jr. Tides of Crisis. A Primer of Foreign Relations. (Macmillan, 

London, 1957.) Pp. 328. 34/9 Aust. 

BIEHL, M. Der Obst-, Gemiise- und Gartenbau im Nordosten der Vereinigten 
Staaten von Amerika unter der Konkurrenz subtropischer Landesteile. (Institut 
fur Weltwirtschaft an der Universitat Kiel, Kiel, 1958.) Pp. 173, 25 Schau- 
bilder. Mit Anhang : 77 Tabellen, 6 Blatter u. 3 Schaubilder, D.M. 30. 

BLEEKER, R. J. P. VAN GLINSTRA. Guided Money. (North-Holland Publishing Co., 
Amsterdam, 1956.) Pp. 173. 30/-. 

Dr. Van Glinstra Bleeker complains that fiscal or monetary policies de 
signed to affect the level of aggregate demand are inappropriate to meet situa 
tions in which demand is lacking for only one or more products. He presents 

* Acknowledgment of publications does not guarantee review. 



the thesis that structural maladjustments in the economy would be alleviated 
if consumer expenditure were to be "homed" on to specific products, by the 
creation of a flow of "guided" money to be used only for the purchase of those 
products. Part I of the book is concerned with the justification of such a 
policy (though no rigorous theoretical analysis of its implications is attempted) ; 
Parts II and III discuss its possible domestic and international applications. 

BRECHER, IRVING. Monetary and Fiscal Thought and Policy in Canada, 1&19-39. 
(University of Toronto Press, 1957.) Pp. 337. $5.25. 

The author discusses the views of the various conservative and radical groups 
in Canada on such questions as inflation, central banking, exchange depreciation, 
and budget deficits ; the balancing and co-ordinating, rather than innovating, 
role of the economists; the general question of the inter-relation of economic 
thought and policy; and the development of a new climate of opinion about 
economic stability by 1939. Despite the writing and construction, which are both 
rather clumsy, the book is thorough, and should be of particular interest to 
Australians, who could well do with a similar study of the same period. 

CASE, H. C. M., and WILLIAMS, D. B. Fifty Years of Farm Management. (Uni 
versity of Illinois Press, Urbana, 1957.) Pp. 386. $6.00. 

CHOW, G. C. Demand for Automobiles in the United States. (North-Holland Pub 
lishing Company, Amsterdam, 1957.) Pp. 110. 10 guilders. 

The author tests a number of hypotheses purporting to explain the demand 
for motor-cars in the United States. The best explanation of changes in the 
volume of motor-car sales over the period 1921-1953 is given by a function 
relating sales to an index of the real price of motor-cars of all ages, real dis 
posable income and the stock of motor-cars at the end of the preceding year. 

DUE, J. F. Sales Taxation. (Routledge & Kegan Paul, London, 1957.) Pp. 396. 
40/- stg. 

F.A.O. Program for the I960 World Census of Agriculture. (Food and Agriculture 
Organization of the United Nations, Rome, 1957.) Pp. 77. Price not stated. 

FURNISS, E. S. The Position of the Laborer in a System of Nationalism. A Study 
in the Labor Theories of the Later English Mercantilists. (Kelley & Millman, 
New York, 1957.) Pp. 260. $6.00. 

Furniss s brilliant essay on English attitudes towards labour in the seven 
teenth and eighteenth centuries is an important reference for students of the 
history of economic thought. Not all of its arguments would be accepted without 
qualification today, but on the whole it has weathered the years very well. 
Messrs. Kelley and Millman have done well to include the book in their series 
of reprints of economic classics. 

Only one reservation need be noted. When originally published Furniss s 
work contained a number of bibliographical errors. It would not have been 
possible to correct these in a photographic reprint, such as the present one, but 
the publishers could perhaps have appended their own list of errata. From the 
point of view especially of undergraduate readers, this would have been a very 
useful service. 

FEDERAL RESERVE SYSTEM. Consumer Instalment Credit. Parts I-III. (U.S. 
Government Printing Office, Washington, 1957.) Price not stated. 

GHOSH, ALAK. Indian Economy. Its Nature and Problems. (The World Press 
Private Ltd., Calcutta, 1957.) Pp. 368. Rs. 8.50. 

An analysis "primarily oriented towards growth problems" which is divided 
into eight parts. They deal with the economics of underdevelopment and the 
nature of the Indian economy in the pre-planning period, planning and the 
Indian economy, natural resources and national income, population and agricul 
ture, industry and labour, public finance, banking and currency, and trade, 
exchange and transport. 

HUME, DAVID. Writings on Economics. Edited and introduced by Eugene Rotwein. 
(Thomas Nelson & Sons, Edinburgh, 1955.) Pp. 224. 49/9 Aust. 

This will be the definitive edition of David Hume s economic writings. In 
addition to the famous essays Dr. Rotwein usefully reproduces extracts from 
Hume s correspondence discussing economic topics. The long, intelligent and 
learned introduction makes a new estimate of Hume s distinctive contribution to 
the history of economic thought. This is a beautifully printed and altogether 
satisfying volume, an example of what Hume would have classified as "innocent 


INMAN, P. Labour in the Munitions Industries. (History of the Second World 
War.) (H.M. Stationery Office, London, 1957.) Pp. 461. 35/- stg. 

Wealth. Series VI. (Bowes and Bowes, London, 1957.) Pp. 306. 42/- stg. 

ISLES, K. S., and CUTHBERT, N. An Economic Survey of Northern Ireland. (H.M. 
Stationery Office, Belfast, 1957.) Pp. 646. 35/- stg. 

JOHNSON, CHARLES (ed.). The De Moneta of Nicholas Oresme and English Mint 
Documents. (Thomas Nelson & Sons, Edinburgh, 1956.) Pp. 114. 33/3 Aust. 
This volume of Nelsons Medieval Texts (ed. : Professors V. H. Galbraith 
and R. A. B. Mynors) presents the treatise of the 14th-century Frenchman 
Oresme on the theory of money, and entries relating to coinage extracted from 
13th and 14th century Exchequer MSS. Each part consists of 48 double pages: 
on the left page the Latin text, on the right page Charles Johnson s exact 
translation. The introduction of the volume gives biographical data about 
Oresme, describes the manuscripts, and sketches the early history of English 

KUCHHAL, S. C. Corporation Finance. Principles and Problems. (Chaitanya Pub 
lishing House, Allahabad, 1957.) Pp. 519. Rs. 11/8. 

This book might be called a cyclopaedia of finance. Although it is primarily 
concerned with the Indian scene, which has many interesting characteristics 
such as the managing agency system, substantial references are also made to 
distinctive features of the financial systems of the more developed economies 
of Europe, America and the Pacific. 

LEIBEN STEIN, HARVEY. Economic Backwardness and Economic Growth. (John 
Wiley & Sons, New York, 1957.) Pp. 295. $6.75. 

MAKOWER, HELEN. Activity Analysis and the Theory of Economic Equilibrium. 
(Macmillan, London, 1957.). Pp. 192. 41/6 Aust. 

MATHUR, A. S. and J. S. Trade Union Movement in India. (Chaitanya Publishing 
House, Allahabad, 1957.) Pp. 303. Rs. 10. 

An interesting study of the weak Indian trade union movement. Compulsory 
arbitration is widespread and is criticised. This should interest New Zealand 
readers. The political division of the four main union federations is explained 
and suggestions are made for strengthening trade unions in India by removing 
some of their organizational weaknesses. 

NAIDU, B. V. NARAYANASWAMI, and DATTA, H. K. Fundamentals of Business 
Organisation and Management. 4th ed. (M. Seshachalam & Co., Madras, 
1957.) Pp. 620. Rs. 12. 

NANIWADA, HAPUO. Stoat und Wirtschaft. Grundlegung der Nationaldkonomie als 
der Logik der Bilrgerlichen Gesellschaft. (The Science Council of Japan, Tokyo, 
1957.) Pp. 76. Price not stated. 

OXENFELDT, A. R. Economic Systems in Action. Revised ed. (Rinehart & Co., New 
York, 1957.) Pp. 207. $2.35. 

PHELPS, C. W. Accounts Receivable Financing as a Method of Business Finance. 
(Commercial Credit Company, Baltimore, 1957.) Pp. 65. Price not stated. 

This is a descriptive study of a form of financial assistance provided by 
commercial credit corporations in the United States. Originating early in this 
century, these companies now finance open accounts of business firms to the 
extent of 5 billion dollars annually. The service is used by small and medium 
sized businesses principally but not exclusively. Charges are based on daily 
balances, the institutions thus providing something similar to overdraft facilities 
in Australia. The cost to users is of the order of 10 per cent per annum. These 
institutions also provide accommodation on other bases, so that users have, 
from one source, a range of methods of maintaining and supplementing working 
capital. This is one of a series sponsored by the publisher, from which educa 
tional institutions may obtain copies on application. 

POPPER, KARL R. The Poverty of Historicism. (Routledge & Kegan Paul, London, 
1957.) Pp. 166. 16/- stg. 

This revised reprint from Economica 1944/45 should be compulsory reading 
for model-builders and planners of progress. It is indispensable for the urgent 
task of separating causal structures that can be known, from more ambitious, 
prophetic constructs that can only be sung to the tune "Onward Christian 
Soldiers". In its historical role as philosophy for the rising middle classes 
Economics has inherited too many such hymns. 


SCAMMELL, W. M. International Monetary Policy. (Macmillan, London, 1957.) 
Pp. 402. 60/- Aust. 

SEN, S. R. The Economics of Sir James Steuart. (The London School of Economics 
and Political Science, G. Bell & Sons, London, 1957.) Pp. 207. 25/- net stg. 
Dr. Sen gives a summary and appraisal, supported by extensive quotation, 
of Steuart s leading ideas on economic theory and policy. There is also a short 
biography, a discussion of Steuart s methodology, and a chapter on his role as 
adviser to the East India Company on currency problems in Bengal. Some may 
feel that Dr. Sen is, if anything, a little over-generous in his assessment of 
Steuart s place in the history of economic thought, but this is essentially a 
balanced, fair-minded and very useful book. 

SHENOY, B. R. The Indian Economic Scene Some Aspects. (Presidential Address 
to the Fortieth Annual Conference of the Indian Economic Association, 1957.) 
Pp. 50. Price not stated. 

SINGH, D. BRIGHT. Inflationary Price Trends in India since 1939. (Asia Publishing 
House, Bombay, 1957.) Pp. 284. Rs. 16.50. 

This theoretical and empirical survey first sets out the war-time and post 
war trends, with an account of the distortions caused by war financing and the 
subsequent national and international policies. After a discussion of the effects 
of rising prices on the costs of living, there is an appraisal of the Indian price 
controls and the pricing policy that has emerged. 

SPULBER, NICHOLAS. The Economics of Communist Eastern Europe. (Massachusetts 
Institute of Technology, John Wiley & Sons, New York, 1957.) Pp. 525. $12.50. 
In recent years there has poured forth from the M.I.T. a veritable deluge 
of books all of which we are told will provide us with a penetrating analysis 
of one or other branch of the Social Sciences. Particularly ambitious have been 
those dealing with the changes taking place in the international scene. Professor 
Spulber s book is one of this series. Its purpose is to undertake an examination 
of the economic development of Eastern European countries since 1945. While 
not helping us to understand very much more about the origins of the tremen 
dous forces unleashed in Poland and Hungary in the autumn of 1956 it does 
provide us with a valuable source of economic data. A professional book for 

TOSTLEBE, A. S. Capital in Agriculture. Its Formation and Financing since 1870. 
(Princeton University Press, 1957.) Pp. 232. $6.00. 

This is an attempt to measure the long-term growth of the physical and 
financial assets used in farming in the U.S.A., to relate this growth of capital 
to the growth of the farm labour force and to output, and to discover the deter 
minants of investment and the sources of financing that made them possible. 

UNITED NATIONS. New Sources of Energy and Economic Development. (U.N. 
Department of Economic and Social Affairs, New York, 1957.) Pp. 150. 
9/- stg. 

Part I reviews the stage of development, location, and main uses of power 
from solar, wind, tidal and geothermic sources and the thermal differences in 
sea water. Part II consists of extracts from expert technical reports on the 
method of utilizing each source. Part III is an annotated 30 page bibliography, 
mainly of technical works in the field. Utilization of these new sources of 
energy could be very valuable for underdeveloped countries lacking conventional 
energy resources and where small amounts of power are required over large 
areas for such purposes as irrigation, drainage, food preservation and com 

WILSON, CHARLES. Profit and Power. A Study of England and the Dutch Wars. 
(Longmans, Green & Co., London, 1957.) Pp. 169. 43/6 Aust. 

A very useful factual survey of the course of events and the connection 
between commercial rivalry and war. The description of the economic aspects of 
England and Holland is well done but the conclusion that hostilities ended 
because religion was more important than commercial quarrels is unconvincing. 
Reasoning is sometimes obscured by loose terminology; for example, "Dutch 
technical superiority in economic matters" where "commercial" should be 
substituted for "economic". In naval history there is a similar looseness in the 
author s use of, and excessive fondness for, "strategic", while "strategic" and 
"economic" matters are treated as being distinct, even antithetical, like Profit 
and Power of the title. 


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Consumer Sovereignty and the Rate of Economic Development . . . . . . . . F. D. Holzman 

Wirtschaftswachstum und Zahlungbilanz D. Schmidt 

Una nota critica* sul modello del piano decennale G. C. Carlucci 

Myrdal on Commercial Policy of Underdeveloped Countries G. M. Meier 

Principali caratteristiche strutturali di due economic mediterranee : Spagna e Italia 

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Vol. XXXIV No. 69 



December 1958 

RUSSELL MATHEWS : The Australian Economy, November 1958 . . . . 291 

A. R. BERGSTROM : The New Zealand Economy, 1957-8 . . . . . . 306 


A. R. LOW : The Varied Role of Central Banks . . . . 317 

W. M. CORDEN : Import Restrictions and Tariffs : A New Look at 

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BURGESS CAMERON : New Aspects of Australia s Industrial Structure . . 362 

A. R. HALL : Institutional Investment in Listed Company Securities . . 375 

H. w. ARNDT: The Finance of Public Investment, Australia 

1948/491956/57 390 


A. BARNARD : Wool in the New Zealand Economy A Comment . . . . 412 

B. p. PHILPOTT: Reply 415 

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BEACH, E. F. Economic Models An Exposition 


BOULDING, K. E. Principles of Economic Policy . . J. P. BELSHAW 420 
BUCHANAN, J. M. Public Principles of Public Debt . . W. R. LANE 423 

CASE, H. C. M., and WILLIAMS, D. B. Fifty Years of Farm 

Management M. J. PHILLIPS 419 

DAVIES, R. W. The Development of the Soviet Budgetary System 


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JENNINGS, SIR IVOR. Problems of the New Commonwealth 

W. PREST 425 

MEIER, G .M., and BALDWIN, R. E. Economic Development: 

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THOMAS, BRINLEY (ed.) The Economics of International 

Migration A. R. HALL 422 


October 1958 

Monetary Reform and Monetary Equilibrium Boris P. Pesek 

Economies of Scale in Financial Enterprises Roy J. Hensley 

A Theory of Foreign-Exchange Speculation under a Floating Exchange System . . S. C. Tsiang 
Research Costs and Social Returns : Hybrid Corn and Related Innovations . . . . Zvi Griliches 
An Economic Analysis of Contributions under the Income Tax Laws 

Floyd E. Gillis and Vernon L. Smith 

The Economics of Slavery in the Ante Bettum South : A Comment Douglas F. Dowd 

Reply Alfred H. Conrad and John R. Meyer 

The Corporate Income Tax in the Long Run : A Comment Arnold Zellner 

Reply M. A. Adelman 

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Vol. XXVI, No. 3 - - September 1958 

The Control of Imports : A Case Study W. M. Corden 

The T.U.C. Jurisdictional Dispute Settlement Shirley Lerner 

A Comment on Dr. Zelder s Estimates S. Kaliski 

The Gains from Freer Trade with Europe : An Estimate Harry G. Johnson 

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The Economic Record 

Vol. XXXIV December, 1958 No. 69 


1. The Basic Problem 

As 1958 draws to a close the key factor in the Australian economic 
situation is the balance of payments. The balance of payments is in 
turn predominantly influenced by the price of wool. The budgetary, 
monetary and trade policies which have been adopted since the be 
ginning of the current financial year have been based on the implicit 
hope or belief that Australia s external position would not continue 
to deteriorate during the year, and the growing evidence of an economic 
recovery in the United States has provided some justification for this 
optimism. Nevertheless, most commodity prices have continued to sag. 
When the Australian wool selling season opened at the end of August, 
average prices were some 10 per cent below the closing prices of the 
previous season and more than 20 per cent below the 1957-8 average 
prices. With wool production expected to be 3 per cent down on the 
previous year, and with carryover stocks considerably lower this year, 
the reduction in wool exports could easily exceed 100m. if prices do 
not improve. 

Although the prospects for food exports are somewhat brighter, 
mainly because of the better season, the price outlook for these com 
modities remains uncertain. Any improvement in this direction is in 
any case likely to be offset by a reduction in base metal exports, fol 
lowing the quotas which the U.S. recently imposed on lead and zinc 
imports. A rough indication of trends in export prices and values may 
be obtained by comparing the latest price figures with 1957-8 prices 
and values (Table I). 

In July an official Commonwealth Government survey estimated 
that, if export prices were to show no improvement over 1957-8 figures, 
export incomes would not exceed 750m. in the current year, even with 
favourable seasonal conditions; and assuming little or no change in 
imports, net invisibles and the net capital inflow, it was believed that 
our overseas reserves might be reduced by some 125m. by the end of 
the year. 1 The fall in wool prices and other developments since the 
official estimates, were made suggest that the position is now at least 
50m. worse. Table II indicates that this would imply a fall of perhaps 
175m. in our reserves, which would drop from 525m. to 350m. in the 

1. Professor Cochrane s August estimate of a fall in international reserves of 
100m.-125m., depending on whether the capital inflow is l25m. or 100m., was 
rather more optimistic than the official estimate. See "The Australian Economy, 
July 1958", Economic Record, August 1958, p. 153. 




Trends in Export Values and Prices 


Value of 
(A million 




Price Indexes of Predominant 
(1956-7 = 100) 
1957-8 Sept. 1958 

Wool and Sheepskins . 
Wheat and Flour . . 
Other Grains 










Other Dairy Products . 


Base Metals 
Iron and Steel . . 
Petroleum, Oils 
Vehicles and Parts 
Other . 



* Subject to Revision 

Sources: Treasury Information Bulletin, No. 11 (July 1958) 

Commonwealth Statistician s Monthly Index of Australian Export 

The prospect of a deficit on current account of 300 m. is not one 
to be viewed lightly, especially as it is by no means certain that we shall 
be able to maintain the high rate of capital inflow that has been 
achieved in recent years. Indeed, continued weakness in our balance of 
payments on current account could easily lead to a reversal of the 
capital flow. Even if American recovery should produce the long- 
awaited lift in commodity prices, the prospects for the immediate 
future are rather gloomy. 

Despite a vigorous trade promotion drive, the longer-term outlook 
for exports is not much more encouraging, at least insofar as primary 
products are concerned. The probability of continued marketing dif- 


Australian Balance of Payments Prospects 
(;A million) 




Exports f.o.b 
Imports f.o.b 

.. -718 





Trade Balance . .... 




Net Invisibles 

. 167 



Balance on Current Account 
Capital Inflow 




Change in International Reserves 





ficulties for Australia s exports is underlined by such events as the 
failure of the Commonwealth Trade and Economic Conference, held 
recently at Montreal, to agree on proposals to establish a commodity 
price-stabilization scheme ; the British relaxation of restrictions on 
dollar imports, with its implied threat of greater American competition 
in the U.K. market ; the recent reduction of minimum prices under the 
U.K. meat agreement ; the greater competition which Australian ex 
porters are facing in their traditional markets from European and 
American producers, some of whom are supported by government ex 
port subsidies, price support schemes and dumping devices ; the effects 
on some of our weaker export industries of the European Economic 
Community and the proposed Free Trade Area ; and the intensification 
of import restrictions in New Zealand following the overseas trade 
difficulties experienced by that country. 

A deterioration in the balance of payments, following a fall in 
export prices, is not a new experience for Australia. What is perhaps 
surprising in the current situation is the relative ease with which the 
internal economy has taken the shock. Table III indicates that despite 
the fall in farm incomes, and a rise in unemployment figures in the 
early part of the year, the level of internal activity in 1957-8 did not 
react significantly to the unfavourable external situation. 

It is therefore worth while reviewing the action that has been 
taken to prevent the adverse balance of payments from resulting in 
unnecessary disturbance to the Australian economy, and to consider 
whether the policies that have already been adopted are likely to re 
main effective during the current year. 

In addition to the problem of maintaining internal stability, how 
ever, the question arises as to what action is necessary to arrest the 
adverse trend in the balance of payments ? Moreover, since a high rate 
of development continues to be one of the over-riding objectives of 
Australian policy, it is necessary to ask whether the restoration of 
balance of payments equilibrium will check the impetus to internal 
expansion? Under present circumstances this may be regarded as the 
basic problem of Australian economic policy. Obviously its solution 
depends on finding a means of financing economic development which 
will avoid the continued use of our international reserves. 

2. Recent Trends and Policies 

In reviewing the Government s current economic policy it is 
necessary to turn to the Commonwealth Treasurer s Budget Speech 
for 1958-9 and the annual reports of the Commonwealth Bank and the 
Tariff Board. These documents show that the Government s main con 
cern so far has been to cushion the effects of the external deficit on the 
domestic economy, in the hope that the external position will soon im 
prove. The effect of the 1957-8 Budget was only mildly expansionary 
(see Table V) . Although it provided for substantial tax concessions and 
increased expenditure on social services and payments to the States, it 





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> V; V; C 

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resulted in a larger current surplus than had been achieved in 1956-7, 
and despite increased works expenditure and debt redemption it was 
still possible to reduce Treasury Bills by 10m. during the year. Tax 
concessions doubtless contributed to the rise in private investment and 
consumption expenditure, but the availability of hire-purchase finance 
was probably a more important factor in stimulating consumption. 2 . 
The main impetus to expansion in 1957-8 probably came from cen 
tral banking action. As a result of a Central Bank directive in May 

1957, bank advances had stopped falling in the early part of 1957-8. 
In December 1957 the Central Bank indicated that, in view of the bad 
season and the uncertain economic situation, an increase in bank ad 
vances was now appropriate (except for hire-purchase businesses). To 
facilitate credit expansion and prevent the fall in overseas funds from 
unduly affecting bank liquidity, substantial releases from Special Ac 
count were made during 1958. The effect of these policies is shown in 
Table IV. The substantial increase in bank advances undoubtedly 
helped to sustain the level of domestic spending in 1957-8 in the face 
of falling export incomes. The trading banks are now not likely to have 
serious liquidity problems until the last quarter of the financial year, 
when the end of the export season coincides with heavy taxation pay 
ments. Meanwhile the Central Bank has indicated that, although it is 
worried about the balance of payments situation, its main concern at 
present is with employment, and that it will assist in keeping expen 
diture high enough to maintain employment at a satisfactory level". 3 

The Government s major policy declaration for the year, the 
Treasurer s Budget Speech, also emphasized the need for increased 
expenditure in order that the work force may be kept fully employed, 
and to ensure that the increased production which is expected in 1958-9 
is fully absorbed. Table V indicates the extent of the expansionary 
action contemplated in the Budget. In the discussion which followed 
the Budget Speech there was, surprisingly, almost no recognition of a 
very important technical change which was made in the presentation 
of this year s estimates. In previous years, apart from an overall re 
view, in terms of cash, of the previous year s results, attention was 
always concentrated on the Consolidated Revenue Fund. Although 
some reference was made to proposed Loan Fund and Trust Fund 
transactions, there was no consolidated statement of the budgetary 
prospects. Because of movements in Trust Fund balances it was there 
fore impossible to make an accurate assessment of the probable overall 
effect on the economy of the Government s financial activities. This 
serious deficiency has been repaired in this year s Budget, which for 
the first time presents an overall summary of budget prospects, in terms 
of a cash statement which comprehends the Consolidated Revenue 
Fund, the Loan Fund, and the National Debt Sinking Fund and other 
Trust Funds. One reason for this changed procedure, as Professor 

2. Cf. D. Cochrane, ibid., p. 151. 

3. Commonwealth Bank of Australia, Report for the Year Ended 30th June. 

1958, p. 4. 



Australian Banking Statistics 





Liquid Assets and 
Government Securities 

Special Accounts 




of Deposits 



of Deposits 


1957 March 
1958 March 







Sources: Treasury Information Bulletin, No. 11 (July 1958) 

Commonwealth Statistician s Monthly Bulletin of Australian Banking 

Cochrane has suggested, 4 was probably the Government s concern with 
the large volume of debt which is maturing during the current financial 
year. It is not possible to agree with Professor Cochrane, however, that 
this changed form of presentation has led to confusion over the true 
budgetary position". The true budgetary position can only be ascer 
tained by reference to all the Government s financial activities. This 
involves, first, separating the Government s current transactions from 
its capital transactions; secondly, distinguishing capital transactions 
involving goods and services from capital transactions involving 
changes in indebtedness ; and thirdly, differentiating between changes 
in long-term indebtedness (inscribed stock and bonds) and changes in 
short-term indebtedness (mainly treasury bills). From the information 
given in this year s Budget Speech it is possible to make these dis 
tinctions for the first time, although the form of presentation of the 
relevant information could be improved by eliminating book-keeping 
transfers between Funds. In Table V the figures are rearranged and 
presented in a consolidated statement of the expected financial results 
for 1958-9 (actual results in 1956-7 and 1957-8 are given for compara 
tive purposes). The classification into current and capital transactions 
is still not perfect, because transfers between Trust Funds and other 
Funds are not completely eliminated; but the Table contains all the 
essential information relating to the Government s expected financial 

It will be seen from Table V